07 December 2011

Commission proposal for a Regulation on European Venture Capital Funds

The proposal sets out a new "European Venture Capital Fund" label and includes new measures to allow venture capitalists to market their funds across the EU and grow while using a single set of rules.

Every fund using the label will have to prove that a high percentage of investments (70 per cent of the capital received from investors) are spent in supporting young and innovative companies. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger. Bigger venture capital funds mean more capital for individual companies giving them the ability to specialise in particular sectors such as information technology, biotech or life-science. This in turn should help SMEs to have a more competitive edge in the global marketplace.

The proposal lays down a uniform "single rule book" governing the marketing of funds under the designation "European Venture Capital Funds". A "European Venture Capital Fund" is defined by three essential requirements:

1. It invests 70 per cent of the capital committed by its sponsors in SMEs;
2. it provides equity or quasi-equity finance to these SMEs (i.e. 'fresh capital'); and
3. it does not use leverage (i.e. the fund does not invest more capital than that committed by investors so is not indebted). All funds that operate under this designation must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The "single rule book" will ensure investors know exactly what they get when they invest in European Venture Capital Funds.

The proposal creates a uniform approach for the categories of investors which are eligible to commit capital to a "European Venture Capital Fund". Eligible investors will be professional investors as defined in the 2004 Markets in Financial Instruments Directive and certain other traditional venture capital investors (such as high net-worth individuals or business angels). The uniform rules on venture capital investors will make sure that marketing can be tailor-made to the needs of these investor categories.

The Regulation will provide all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU. This is a marked improvement over the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive, as the existing passport provided under AIFMD is only applicable to managers whose assets under management are above a threshold of €500 million. In addition, the rules of the AIFMD create a legal framework typically aimed at hedge funds and private equity firms, and are less suitable for the typical venture capital fund which would get a tailor-made regime.

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