In the December 2012 issue of our e-zine we reported the announcement on 7 December 2012, that the Council of the EU and the European Parliament had reached political agreement on a proposed Regulation for European Venture Capital Funds (“EVCFs”) [link to December e-zine]
On the same day, political agreement was also reached on a proposed regulation for European Social Entrepreneurship Funds (“EuSEFS”). The two proposed Regulations are complementary but the range of eligible financing tools proposed in the EuSEF Regulation is wider than those available for venture capital funds.
The aim of the proposed EuSEF Regulation is to provide support to the market for social businesses by improving the effectiveness of fundraising by investment funds that target these businesses. The key elements of the proposed Regulation provide for an EU brand for EuSEFs and the introduction of a European marketing passport. Qualifying EuSEFS are collective investment undertakings which invest at least 70% of their aggregate capital contributions and uncalled committed capital in “Qualifying Investments”.
Qualifying investments include:
- Equity instruments that are:- Issued by a qualifying portfolio undertaking (“QPU”) and acquired directly by the qualifying EUSEF from the QPU- Issued by a QPU or an undertaking which holds a majority stake in the QPU acquired by the qualifying EuSEF in exchange for an equity instrument issued by the QPU
- Securitised and unsecuritised debt instruments issued by a QPU
- Shares or units in one or several EuSEFS
- Medium to long term loans granted to QPUs
- Any other type of participation in QPUs
A QPU is regarded as a social business that must at the time of investment be a SME (but not a collective investment undertaking) and must not be listed on a regulated market. It must have as a primary objective the achievement of measureable social impacts and use its profits to achieve its primary objective instead of distributing profits. As is the case of the proposed EVCF Regulations the EuSEF regime will be available to managers of collective investment undertakings established in the EU falling below the €500 million AIFMD threshold.
The manager of a EuSEF must be a legal person whose regular business is managing at least one “qualifying” European fund, established in the EU and subject to registration under AIFMD. Managers registered under the EuSEF Regulations will have passporting rights to raise capital throughout Europe into qualifying funds and to invest freely in SMEs situated throughout the EU. EuSEFS may not use leverage and may only be marketed to professional type investors. All EuSEFS must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements).