EU venture capital fund regulation gets green light

EU venture capital fund regulation gets green light


Author: Oliver Brookshaw

The European Parliament and Council has approved a new proposed Regulation for managers of European Venture Capital Funds (EuVECA).

It will allow venture capital fund managers to market EU qualifying funds to certain EU investors in the form of a "marketing passport".  It is less burdensome than the Alternative Investment Fund Managers Directive (AIFMD), which will improve an entirely new regulatory regime on private equity, hedge and venture capital fund managers.

It is envisaged that the Regulation will come into force on 22 July 2013 to coincide with the implementation of AIFMD.

What will the Regulation do?

  • Make it easier for venture capital funds to raise capital across Europe from certain types of investors.
  • Enable fund managers to market qualifying funds in all EU member states without having to comply with national offering and marketing rules (the "marketing passport").
  • Provide a "lighter-touch regime" than the AIFMD, as some of those more onerous provisions will not apply, for example: the fund manager need not maintain a certain level of liquid assets.  Under the Regulation, the capital requirement is simply to have sufficient own funds; there is no need for a separate depositary to be appointed in relation to the fund.

The Regulation is not compulsory.  If a fund manager does not wish to use the EuVECA designation, then it does not have to comply with the Regulation.  A fund manager may, in any event, be subject to the AIFMD regime and can elect for a voluntary application of that regime and acquire an EU marketing passport on that basis.

Who is eligible for EuVECA?

  • The new regime is open to managers of unleveraged closed-ended funds whose total assets under management do not exceed 500m euros.  These managers are exempt from the "full" AIFMD regime but are still subject to the "light" AIFMD regime.
  • The manager must be registered by the competent authority of its home member state.
  • The manager must be established in a EU member state.

EuVECA is not intended as an alternative to, or means of escaping, the mandatory application of AIFMD.

Conditions to be met by a fund:

  • Must be a "collective investment undertaking" that qualifies as an alternative investment fund (AIF)
  • Must be established in a EU member state
  • "Intends to invest" at least 70% of its aggregate capital contributions and uncalled committed capital in "qualifying investments"
  • Must never invest more than 30% of aggregate fund commitments in acquiring assets that are not "qualifying investments".

A "qualifying investment" is an equity or quasi-equity instrument issued by "qualifying portfolio undertakings" - principally including SMEs - defined as an unlisted organisation with fewer than 250 employees and an annual turnover not exceeding 50m euros or a balance sheet of less than 43m euros.

What are the benefits of EuVECA over AIFMD?

The diversity of rules in EU member states has resulted in increased costs for raising venture capital funds across the EU.

This has led to low levels of investment in such funds and a consequent diminishment of their potential to general growth in the EU economy.  This new regime addresses the issues and complements AIFMD so that smaller funds can enhance their access to capital.

In adopting EuVECA status, fund managers will reduce the costs they incur in raising capital across the EU.  They will not have to comply with the full requirements of the AIFMD and will have simplified compliance procedures.  Marketing venture capital funds across the EU will also be easier, as there will be no need to comply with the national laws of each individual member state.