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AIFM - 23. Venture Capital Initiative

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Proposed new European rules for venture capital funds

The European Commission launched a consultation on new European rules for venture capital funds on 15 June 2011. According to the consultation document1, the Commission intends to overcome the fragmentation of venture capital markets along national lines to enable venture capital funds to raise capital freely throughout the European Union and thereby improve small and medium enterprises’ (SMEs) access to finance2.

Although the aim of the Directive differs from the aim of the venture capital initiative, there is obviously a substantial overlap between the two. While venture capital funds meet the criteria of AIFs pursuant to Art. 1(a) of the Directive, it is assumed in the consultation document that they will in most cases not meet the thresholds of Art. 3(2) of the Directive and will therefore be exempt from the Directive. The consultation document recognizes that it would be disproportionate to require venture capital fund managers to opt-in and comply with the strict requirements of the Directive in exchange for a marketing passport.

Commission proposal for a regulation

On 7 December 2011, following the results of the consultation, the Commission released its proposal for a regulation in relation to venture capital3. The key proposals are:

  1. a uniform single rule book regulating the marketing of venture capital funds operating under a newly created "European Venture Capital Funds" designation (see below). Instead of having to comply with 27 national laws, the funds which qualify under this label will be supervised under uniform rules and quality standards.
  2. the creation of a "European Venture Capital Funds" label, which will apply to a fund which satisfies the following requirements4:
  3. the fund must invest at least 70% of its aggregate capital contributions and uncalled committed capital in qualifying investments (defined below); and
  4. the fund must not use leverage: it may not borrow, issue debt obligations or provide guarantees (certain short-term borrowing is permitted).

Qualifying investments are equity or quasi equity instruments issued by a qualifying portfolio, that is, an undertaking which is not listed on a regulated market, which employs fewer than 250 persons, and has an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million, and which is not itself a collective investment undertaking.

  1. Managers of European Venture Capital Funds must satisfy the following requirements5:
  2. they must be established in the European Union and registered with the competent authority of their home member state; and
  3. they may not manage more than €500 million of assets for qualifying venture capital funds.
  4. Managers of funds wishing to qualify under the European Venture Capital Funds label will need to register in the country where they are established. They will be subject to rules covering conduct of business, conflict of interests6 and the information that must be provided to investors about the manager's activities and investment policies. Disclosure requirements relating to investment strategy and objectives along with communication of the valuation of assets and annual report are also suggested by the proposal in order to ensure access to relevant information for investors7. Under the proposal, the competent authority in the Member State where the manager is established remains responsible for making sure these rules are complied with8.
  5. Only professional investors may invest in European Venture Capital Funds given the risk associated with such investments.

Accordingly, investors eligible to commit capital to a fund operating under the European Venture Capital Funds label will be9:

  1. professional clients as defined in the Markets in Financial Instruments Directive (including those who may be treated as such on request); and
  2. high net-worth individuals if they commit a minimum investment of €100,000 and provided that compliance procedures are carried out by fund managers to ensure that investors are able to make their own investment decisions and understand the risks involved.
  3. In return for complying with all the aforementioned requirements, the proposal creates a European marketing passport making it possible for managers to market funds operating under the European Venture Capital Funds label to eligible investors (under the Directive, only managers whose assets under management are above a threshold of €500 million can use a passport).

Next steps

The Commission's proposal will now be examined by the European Parliament and the Council under the co-decision procedure.

Footnotes: 1. The consultation document is available at: http://ec.europa.eu/internal_market/consultations/docs/2011/venture_capital/consultation_paper_en.pdf.

2. For exemptions from the Directive which are applicable in case an AIF acquires SMEs, please see Restrictions on private equity (and similar) funds

3. The proposed regulation is available at: http://ec.europa.eu/internal_market/investment/docs/venture_capital/act_en.pdf

4. According to Article 3 of the proposal

5. According to Article 2 of the proposal

6. According to Article 7 and 8 of the proposal

7. According to Article 10, 11, and 12 of the proposal

8. According to Article 13 of the proposal

9. According to Article 6 of the proposal

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