Venture Capital Funds

The EU Commission has published a proposal relating to venture capital funds. The latter are recognised as valuable sources of equity finance, particularly for small and medium-sized enterprises and start ups which may find traditional bank financing difficult.

Currently there are no specific EU rules relating to fund-raising by venture capital fund managers (a survey shows that the proportion of cross-border fund raising has for the last four years reached only 12%) so the proposal could be regarded as the venture capital equivalent of UCITS IV (for retail funds) and the AIFMD (for non-UCITS funds). Although the latter creates the concept of a passport, it is not available to those fund managers whose aggregate AuM is under €500M (whilst the latter can opt-in to the AIFMD to take advantage of the passport, the price would be full compliance with the AIFMD – Regulatory Roundup 32 includes a brief summary).

The proposal sets out uniform requirements for the managers of a fund(s) which can be designated as a European Venture Capital Fund and the marketing of such collectives. As suggested above, it will be a requirement that the total AuM does not exceed a threshold of €500M.

The conditions for the use of the designation ‘European Venture Capital Fund’ are set out in Articles 4 to 12 of the proposal and include the requirement that at least 70% of the fund’s aggregate capital contributions and uncalled committed capital is used to invest in ‘qualifying investments’. The latter are defined in Article 3(d) and in brief means an undertaking that is not listed on a regulated market; employs fewer than 250 persons; and with an annual turnover not exceeding €50M or an annual balance sheet total not exceeding €43M, and which itself is not a collective.

Article 6 requires marketing to be restricted to ‘professional clients’ (as defined in MiFID, which in turn is reflected in COBS 3.5) or to those investors where the requirements in Article 6 (a) to (e) are met e.g. a minimum investment of €100K.

Managers who intend to use the designation ‘European Venture Capital Fund’ must register with their competent authority, specifying which Member States they intend marketing into. Once the competent authority (“immediately after registration” according to Article 15) notifies both ESMA and those Member States then the latter cannot impose any requirements or administrative procedures in relation to the marketing of the qualifying funds and nor can they require any approval of the marketing prior to its commencement.

The proposal now passes to the European Parliament and the Council for negotiation and adoption. A Commission press release suggests that the new rules could be in place by the end of 2012.