In December 2012, after much debate, agreement was reached by the European Council and Parliament to introduce a new regulation for European Venture Capital Funds positioned outside the scope of the Alternative Investment Fund Managers Directive (AIFMD).
The intention behind the regulation is to create a recognised and trusted model for investors, similar to that now associated with Ucits, while at the same time imposing a number of compliance obligations (albeit fewer and less onerous than under AIFMD).
The regulation will allow EU managers to market EU qualifying venture capital funds to certain EU investors under a new pan-European marketing passport. Successful applicants will be given the title of a “European Venture Capital Fund” (or “EuVECA”). The passport should remove the burden felt by managers who market funds on a pan-European basis, having to comply with 27 different national private placement regimes (at substantial cost and inconvenience).
The pertinent question for the manager is, therefore: will the benefits of being an EuVECA outweigh the costs of complying with the eligibility requirements?
The EuVECA passport criteria differ from those under AIFMD. They allow managers to market not only to investors considered “professional clients” under Markets in Financial Instruments Directive (MiFID), but also certain sophisticated investors who may be deemed “retail” for the purposes of MiFID and AIFMD, provided they make a minimum investment of €100,000 and provide a written statement acknowledging the risks associated with such an investment. The obligation on the manager to assess the investors' experience, knowledge and expertise, which appeared in an earlier draft of the regulation, has been removed. Moreover, investments can also be made by executives or directors of the EuVECA manager in an EuVECA they manage.
The regime is optional and only available to those who do not require authorisation under AIFMD (broadly speaking, those managers whose total assets under management do not exceed €500 million), but venture capital fund managers should be mindful of the benefits an EU passport could bring.
Naturally, there are a number of regulatory obligations to comply with as the price of obtaining a passport. These cover reporting and disclosure obligations, new codes of business, and the scope of permitted investments. But these are arguably light compared with the requirements under AIFMD. For example, there is no requirement for the manager to maintain liquid assets – instead the capital requirement is simply to have sufficient own funds.
Perhaps more importantly, there is no requirement to appoint a depositary for the fund, despite various attempts to include such a requirement at earlier stages.
While the introduction of the EuVECA passport and the broadening of its marketability is to be welcomed, its impact on capital fundraising across the EU is open to debate. Many venture capital investors invest in early stage companies in markets with which they are familiar, that is, their home jurisdiction. As such, it is unclear whether the creation of a single internal market for venture capital firms will provide the expected boost in financing for early stage companies across Europe and address the perceived equity gap at this level.
A plenary vote by the European Parliament is expected this month, which will be followed by formal approval by the council. The regulation is drafted to come into force in parallel with AIFMD from July 22, but it is unclear if this timetable will be met. Regardless of any of its limitations, the move will be welcomed by the industry.
Gawain Hughes is a partner and head of UK investment funds at DLA Piper
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