On 30 May 2017, the European Commission published a press release announcing that it had reached agreement with the Council of the EU and the European Parliament as regards the proposed regulation to:
- extend the scope of managers eligible to set up and manage European venture capital funds (EuVECA funds) and European social entrepreneurship funds (EuSEF funds);
- extend the scope of companies that can be invested in by EuVECA funds; and
- make cross border marketing of funds easier and cheaper.
In this article we provide a brief recap on EuVECA and EuSEF funds before considering the political agreement and the likely next steps.
What are EuVECA and EuSEF funds?
The EuVECA Regulation and the EuSEF Regulation (together, the Regulations) came into effect across Europe on 22 July 2013. The original aim was to create new opportunities for market participants to raise and invest capital in innovative small and medium-sized enterprises (SMEs) and social undertakings throughout Europe.
The EuVECA regulation covers a sub-category of alternative investment funds that focus on start-ups and early stage companies, whereas the EuSEF regulation covers alternative investment funds that focus on social enterprises. These are companies that are set up with the explicit aim of making a positive social impact and addressing social objectives, rather than only maximising profit. While these enterprises often receive public support, private investment via funds is a key element of their growth.
For a fund to qualify as a EuVECA or EuSEF, it must:
- meet the definition of an alternative investment fund;
- intend to invest at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are qualifying investments;
- not use more than 30% of its aggregate capital contributions and uncalled committed capital to acquire non-qualifying investments; and
- be established in the EU (both the fund and the manager).
“Qualifying investments” are equity, or quasi-equity instruments, secured or unsecured loans granted to a “qualifying portfolio undertaking”, shares of a qualifying portfolio undertaking and units or shares in other EuVECAs or EuSEFs (as applicable).
For EuVECAs, a “qualifying portfolio undertaking” includes a company that:
- is not admitted to trading on a regulated market;
- employs less than 250 people;
- has an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million;
- is not a collective investment undertaking, a credit institution, an investment firm or an insurer; and
- is established in the EU or a country with a cooperation arrangement.
For EuSEFs, a “qualifying portfolio undertaking” includes a company that:
- is not admitted to trading on a regulated market;
- is managed in an accountable and transparent way, in particular by involving workers, customers and stakeholders affected by its business activities;
- is established in the EU or a country with a cooperation arrangement; and
- has the achievement of measurable, positive social impacts as its primary objective where the undertaking:
- provides services or goods to vulnerable or marginalised, disadvantaged or excluded persons;
- employs a method of production of goods or services that embodies its social objective; or
provides financial support.
EuSEF and EuVECA managers
Registering as a EuSEF or EuVECA manager allows firms to market qualifying funds throughout the EU to certain categories of investors under the EuSEF and EuVECA ‘label’, namely:
- MiFID professional clients;
- High-net-worth individuals, if they commit a minimum of €100,000 and state in writing that they are aware of the risks associated with the investment; and
- executives, directors and employees involved in the management of the funds.
Registration as a EuSEF or EuVECA manager is only available to managers that:
- are established in the EU;
- are registered by their home state regulator; and
- have assets under management below the threshold in Article 3(2)(b) of AIFMD (i.e., managing unleveraged portfolios of less than EUR 500m with a minimum 5 year lock-in).
Why is the European Commission keen to revise the Regulations?
These Regulations each contain a provision for a review by the European Commission after two years but the Commission brought this forward as the rules have clearly not been functioning as expected – the uptake in the new fund types has been minimal. From September 2015 until January 2016, the Commission consulted the industry on the way the existing rules had been functioning and on 14 July 2016, adopted a proposal for a new regulation that would amend the Regulations. Key proposals included:
- confirmation that AIFMs authorised under AIFMD could use “EuVECA” and “EuSEF” labels when marketing such funds provided the funds have been registered and the manager complies with the Regulations;
- redefining the definition of “qualifying portfolio undertaking” in the EuVECA Regulation by permitting investment in either:
- unlisted undertakings which employ up to 499 persons (rather than 250 people as before); or
- SMEs listed on a SME growth market;
- requiring level 2 measures to be developed to determine whether a EuSEF or EuVECA AIFM has sufficient levels of capital; and
- streamlining the registration process and prohibiting competent authorities of host member states from imposing fees and other charges relating to cross-border marketing of EuVECA and EuSEF funds.
On 16 December 2016, the Council of the EU published a press release confirming that it had agreed its negotiating stance on the Commission’s proposal and that it would be ready to start talks with the European Parliament, once Parliament had agreed its stance.
What is the European Parliament’s position?
On 22 March 2017, the European Parliament published a press release confirming that its Economic and Monetary Affairs Committee (ECON) MEPs supported the European Commission’s 2016 proposals on scope and cross-border marketing. In addition, the Parliament also adopted some targeted amendments to the Commission proposal with the aim of facilitating investment in EuSEF funds. These amendments sought to:
- broaden the definition of ‘positive social impact of the qualifying investment’ from social impact on marginalised and vulnerable groups“” to “services and goods generating social return“;
- reduce the minimum investment in EuSEF from €100,000 to €50,000 to remove the barrier for smaller investors; and
- set the initial capital requirement for both fund types at €30,000 with own funds always being required to amount to at least one eighth of the fixed costs from the preceding year.
The ECON MEPs also adopted a mandate to open trilogue negotiations with the Council and European Commission in order to reach political agreement on the text of the amending Regulation.
What are the next steps?
On 30 May 2017, the European Commission published a press release announcing that it had reached agreement with the Council of the EU and the European Parliament and that the agreed regulation would:
- extend the range of managers eligible to market and manage EuVECA and EuSEF funds to larger fund managers (that is, those with assets under management of more than EUR500 million);
- expand the ability of EuVECA funds to invest in small mid-caps and SMEs listed on SME growth markets;
- decrease costs by explicitly prohibiting fees imposed by competent authorities of host member states where no supervisory activity is performed; and
- simplify the registration process and determine the minimum capital necessary to become a manager.
A Council press release explains that 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.