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CMU: Agreement reached on venture capital rules

The European Commission has announced that it has reached agreement with the Council of the EU and the European Parliament on the proposed Regulation amending the European Venture Capital Funds Regulation (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (EuSEF Regulation). The European Commission proposed an overhaul of the existing EuVECA and EuSEF Regulations in 2016 as part of the CMU Action Plan with the aim of improving access to finance for small and growing companies and social enterprises to promote jobs and growth.

Background

The EuVECA and EuSEF Regulations were adopted in 2013 with the aim of:

1.    bringing together investors and unlisted SMEs (small and medium-sized enterprises) and other mid-range, small or start up companies to deepen the capital pool available for investments in such companies; and

2.    increasing non-bank finance for the economy.

In order to achieve the above aims, the EuVECA and EuSEF Regulations create a capital raising passport for managers authorised to use these labels. The passport constitutes the right to market funds under these labels across the EU. The Regulations were initially limited to smaller operators because this group does not usually have access to the fund raising passport provided under the AIFMD.

It was noted that the EuVECA and EuSEF passports are currently available only to smaller fund operators managing asset portfolios below €500 million and that changes to the Regulations could enhance the effectiveness of the passports by, for example, allowing larger fund managers to establish and market EuVECA and EuSEF funds, reducing the investment threshold in order to attract more investors and expediting cross-border marketing and investment.

As a result, although the Regulations were not due for a general review until July 2017, the Commission decided to bring the date of this review forward and published a consultation paper in 2015 with the aim of revising the EuVECA and EuSEF Regulations at the end of 2016.

The Commission identified six potential issues limiting the broader take up of EuVECA or EuSEF funds, as set out in the consultation paper, as a result of which the Commission sought views on the following:

1.    allowing AIFMs to set up, manage and market EuVECAs and EuSEFs;

2.    the consequences of the portfolio of assets of a EuVECA or a EuSEF manager exceeding the €500 million threshold;

3.    broadening the number of private investors able to invest in EuVECAs and EuSEFs by lowering the minimum investment threshold;

4.    reducing the expense of establishing a EuVECA or a EuSEF;

5.    allowing third country managers to use the EuVECA and EuSEF designations; and

6.    broadening the range of eligible assets available to EuVECAs.  

The proposed Regulation amending the EuVECA and EuSEF Regulations

According to the press releases of the Commission and the Council, the proposed Regulation will open up EuVECA and EuSEF to fund managers of all sizes and will allow a greater range of companies to benefit from EuVECA investment.  It will also improve access of investors to small and growing business and social ventures. Finally, it will make the cross border marketing of EuVECA and EuSEF funds less costly and will simplify registration.

Specifically, the agreement reached:

1.    extends the range of managers eligible to market and manage EuVECA and EuSEF funds to larger fund managers (i.e. those with assets under management of more than €500 million);

2.    expands the ability of EuVECA funds to invest in small mid-caps and small and medium-sized enterprises (SMEs) listed on SME growth markets;

3.    decreases costs by explicitly prohibiting fees imposed by competent authorities of host Member States where no supervisory activity is performed; and simplifies the registration process and determines the minimum capital necessary to become a manager. 

Next Steps

The agreement will now be submitted to EU ambassadors “in the coming days” for endorsement on the Council’s behalf. Then, the Council and the Parliament will be called on to adopt the proposed Regulation without further discussion, and the proposed Regulation will start to apply three months after its entry into force.

This document is for general guidance only. It does not contain definitive advice.