Introduction

The European Union (EU) has developed a package of new Funds rules that are expected to come into force across the EU on 22 July 2013. The package is in three parts:

The Alternative Investment Fund Managers Directive (AIFMD). A lot of ink has been spilt over the development and implementation of the AIFMD. Our own briefing is available here;

The proposed:

The ECVF Regulation and the ESEF Regulation (the Regulations) will be "directly applicable": as a result, when they come into force, they will automatically become part of the law of the EU and each of its Member States. The Member States will not need to do anything to make this happen, and they cannot do anything to prevent it.

The European Venture Capital Funds Regulation

The EVCF Regulation will allow the manager of a qualifying venture capital fund to add the 'EuVECA' label to the fund, and market it anywhere in the EU under a set of common European passporting rules. Before it can do this, the manager must be able to show that:

  • It is established in the EU and registered in its home Member State;
  • It manages a portfolio of qualifying venture capital funds; and
  • Its total assets under management do not exceed €500million.

For these purposes:

  • A "qualifying venture capital fund" is a fund that (i) is a collective investment undertaking; (ii) intends to invest at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are qualifying investments; (iii) does not use more than 30% of its aggregate capital contributions and uncalled committed capital to acquire non-qualifying investments; and (iv) is established in the European Union;
  • A "collective investment undertaking" is a fund which (i) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (ii) does not require authorisation under the Undertakings for Collective Investment in Transferable Securities Directive;
  • "Qualifying investments" are equity, or quasi-equity instruments; secured or unsecured loans granted by the qualifying venture capital fund to a qualifying portfolio undertaking; shares of a qualifying portfolio undertaking; and units or shares in other qualifying venture capital funds, provided (in each case) that certain tests are met; and
  • "Qualifying portfolio undertaking" means an undertaking that (i) is not admitted to trading on a regulated market or multilateral trading facility; (ii) employs less than 250 people; (iii) has an annual turnover not exceeding €50 million, or an annual balance sheet total not exceeding €43 million; and (iv) is not a collective investment undertaking, a credit institution, an investment firm or an insurer.

Uniform Rules

To prevent the development of systemic risks, and maintain a minimum standard of quality and investor protection, EuVECA managers:

  • Are prohibited from using leverage at fund level;
  • May only borrow, issue debt obligations or provide guarantees if the borrowings, debt obligations or guarantees are covered by uncalled commitments;
  • May only market their funds to "per se" or "elective" professional clients, and to those who are willing to invest at least €100,000 and have confirmed in writing that they are aware of the risks associated with their investment;
  • Must act honestly, fairly and with due skill, care and diligence;
  • Must have appropriate systems and controls in place to prevent malpractice that can reasonably be expected to affect the interests of investors;
  • Must conduct their business activities in a way that promotes the best interests of the funds they manage, their investors and the integrity of the market;
  • Must have adequate knowledge and understanding of the undertakings in which they invest;
  • Must treat their investors fairly;
  • Must ensure that no investor obtains preferential treatment, unless that treatment is disclosed in the rules or instruments of incorporation of the fund;
  • Must not delegate functions to third parties to such an extent that it becomes a mere "letter-box" entity;
  • Must identify and, wherever possible, avoid conflicts of interest. Where this is not possible, the manager must manage, monitor and disclose conflicts of interest appropriately to prevent them adversely affecting the fund and investors' interests;
  • Must have sufficient own funds, and use adequate and appropriate technical and human resources as necessary for the proper management of the funds it manages; and
  • Must give their regulators and investors prescribed information at regular intervals.

(Other rules may also apply).

Registration

A manager which intends to use the 'EuVECA' designation and/or market an EuVECA fund using the passport created by the EVCF Regulation must register with the regulator in its home Member State. To complete registration, the regulators will need:

  • The names of the people who will effectively conduct the business of managing the qualifying venture capital funds;
  • Information about the funds the manager is proposing to market, and the funds' investment strategies;
  • The names of the European Member States where the manager intends to market each fund and where the manager has established, or intends to establish a fund.

Registration is valid for the entire European Union.

Should I register?

Registration is voluntary. If a manager and its fund are registered, the manager will be able to use the 'EuVECA' designation when it markets the fund. It will also be able to market the fund more easily across the EU than would otherwise have been the case. However, registration comes at a cost – the manager and its fund will be subject to a light touch regulatory regime, when regulation might otherwise have been avoided. Regulation necessarily brings compliance cost – and risk: if the manager breaches the requirements of the EVCF Regulation it may be fined or sanctioned in some other way. The manager's investment and other freedoms will also be curtailed. The extent to which each of these things matters will vary from manager to manager and fund to fund. Registration is certainly not a "no brainer".

Even if registration is completed, and the manager and fund are entitled to use the 'EuVECA' designation and European marketing passport, it is still possible that local financial promotion and other rules will apply in some European Member States, at least initially. Registration, compliance and marketing may not therefore be quite as straightforward as a manager might otherwise have expected.

European Social Entrepreneurship Funds

The ESEF Regulation will allow the manager of a qualifying social entrepreneurship fund to add the "EuSEF" label to the fund, and market it anywhere in the EU under a set of common European passporting rules.

The requirements of the ESEF Regulation are almost identical to those of the EVCF Regulation, save that the manager must:

  • Be able to show that it manages a portfolio of qualifying social entrepreneurship funds (instead of a portfolio of qualifying venture capital funds); and
  • Have clear and transparent procedures and indicators in place to measure the extent to which the qualifying portfolio undertakings in which they invest achieve the positive social impact to which they are committed.

For these purposes:

  • A "qualifying social entrepreneurship fund" is a fund that (i) is a collective investment undertaking; (ii) intends to invest at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are qualifying investments; (iii) does not use more than 30% of its aggregate capital contributions and uncalled committed capital to acquire non-qualifying investments; and (iv) is established in the European Union;
  • A "collective investment undertaking" is a fund which (i) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (ii) does not require authorisation under the Undertakings for Collective Investment in Transferable Securities Directive;
  • "Qualifying investments" are equity, or quasi-equity instruments issued by a qualifying portfolio undertaking; securitised and unsecuritised debt instruments issued by, and secured and unsecured loans granted by, a qualifying portfolio undertaking; and units or shares in other qualifying social entrepreneurship funds, provided (in each case) that certain tests are met; and
  • "Qualifying portfolio undertaking" means an undertaking that (i) is not admitted to trading on a regulated market or multilateral trading facility; (ii) has the achievement of measurable, positive social impacts as its primary objective in accordance with its articles of association or other rules; (iii) provides services or goods to vulnerable, marginalised, disadvantaged or excluded persons, or employs a method of production of goods or services that embodies its social objective or provides financial support exclusively to social undertakings; (iv) uses its profits primarily to achieve its social objectives; (v) is managed in an accountable and transparent way, in particular by involving workers, customers and stakeholders affected by its business activities;
  • "Clear and transparent procedures" and "indicators" may include subjects such as: employment and labour markets, standards and rights related to job quality, social inclusion and protection of particular groups; equal treatment, equal opportunities and non-discrimination; public health and safety; and access to social protection and health and educational systems.

Next Steps

The Regulations have been approved by the European Parliament and the European Council of Ministers. They will come into force on the twentieth day after their publication in the Official Journal of the European Union, and form part of European law from 22 July 2013.