The EuVECA Regulations and EuSEF Regulations allow for the marketing of qualifying venture capital funds and qualifying social entrepreneurship funds to investors throughout the EEA member states by way of marketing passports.
The passports are similar to those provided under AIFMD, with the following main differences:
- the passports allow for marketing to professional investors, but also to other investors provided they have investedat least €100,000 and have given certain undertakings as to suitability;
- the passports are only available to funds which satisfy certain specific investment criteria, aimed at ensuring they are only used by genuine venture capital or social impact funds;
- EuVECA and EuSEF are both opt-in regimes, there is no need for managers to comply with them unless they choose to do so and register as such;
- the compliance requirements imposed on managers as a result of adopting the EuVECA or EuSEF badge are much more light touch than those applying under AIFMD; and
- they are currently only available to managers which are too small to meet the AIFMD threshold tests.
Despite these seemingly attractive regimes, both EuVECA and EuSEF have seen a very low uptake. On 14 July 2016, the European Commission published a legislative proposal to amend the EuVECA and EuSEF Regulations (the Amending Regulations), which follows several stakeholder consultations carried out over the last year and represents an attempt to identify the factors inhibiting the development of these regimes. The proposal seeks to increase investment into venture capital and social projects and so achieve the Commission’s aim of establishing a Capital Markets Union (CMU).
The proposed amendments
The main amendments in the proposed Amending Regulations are to:
- allow AIFMD-authorised managers to use the EuVECA and EuSEF designations for relevant funds (i.e. removing the restriction which currently limits the regime to those underneath the AIFMD threshold);
- expand the range of qualifying investments permitted under the EuVECA Regulation to allow investment in small mid-cap and small and medium sized enterprises listed on SME growth markets. The definition of qualifying undertakings will also be altered to allow investments into undertakings that have up to 499 employees; and
- prohibit regulatory authorities of host Member States from imposing fees and other charges relating to cross-border marketing of EuVECA and EuSEF funds.
Despite calls from some stakeholders during the consultation stages, the Amended Regulations rejected calls to reduce the minimum €100,000
investment threshold for non-professional investors. There are also currently no proposals in the Amended Regulation to extend the EuVECA or EuSEF passports to third countries.
The European Council issued a compromise text on 22 September 2016. There are few substantive changes proposed in this text, although unhelpfully it does leave some more room for the charging of fees for passporting by Member States which would charge equivalent fees for the supervision of domestic funds.
Osborne Clarke’s view
The Amending Regulations are a welcome improvement from the Commission, and represent a positive and necessary step forward for venturecapital and social impact funds.
SMEs are of central importance to the CMU, but are often hampered by lack of available financing. The broader definition of qualifying undertakings (raised to 499 from 250 employees) is a sensible move that should help facilitate growth in these markets. The concurrently published impact assessment estimates that the prohibition on gold plating will save a total of €32million per fund over a five year period, removing the inconsistent, and often unfair, fees charged across Member States.
The Commission’s rejection of calls to lower the investment threshold for non-professional investors also seems sensible, if only to limit the need for increased investor protections (such as a depository and diversification rules) which would have been contrary to the endeavour of reducing regulation and ensuring easier access to finance.
Whether the UK retains use of these passports subsequent to Brexit will be of key concern to many UK based fund managers and investors. The Amendment Regulations do not touch on the issue of extending the EuVECA or EuSEF passports to third countries, but the process for doing so is likely to follow the impact assessments which ESMA is undertaking in the context of AIFMD.