_Since 1 March 2018, Regulation (EU) 2017/1991 of the European Parliament and of the Council of 25 October 2017, amending Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on European social entrepreneurship funds (“Amending Regulation”), is applying.
The European Venture Capital Fund (“EuVECA”) and European Social Entrepreneurship Fund (“EuSEF”) were introduced by Regulation (EU) No 345/2013 on European venture capital funds (“EuVECA Regulation”) and Regulation (EU) No 346/2013 on European social entrepreneurship funds (“EuSEF Regulation,” and together with the EuVECA Regulation, the “Regulations”). The Regulations came into force on 22 July 2013. The aim of the Regulations was to make it easier and more attractive for investors to invest, via investment funds, in innovative small and medium-sized enterprises (“SMEs”) and in social undertakings across the European Union. However, EuVECAs and EuSEFs achieved only modest results, as few such investment funds were established. As of the date of this article, there were a total of 137 EuVECAs, only 12 of which are domiciled in Luxembourg, and 7 EuSEFs, not a single one of which is domiciled in Luxembourg. The disappointing results prompted the European Commission to start a review process in 2016 of both regimes. The result is the Amending Regulation, which is intended to deliver the following improvements to the Regulations.
Authorised alternative investment fund managers (“AIFMs”) permitted to manage EuVECAs and EuSEFs
According to the provisions of the Amending Regulation, EuVECAs and EuSEFs may be managed directly by AIFMs authorised according to Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers (“AIFMD”). Prior to the Amending Regulation, only registered AIFMs, as well as AIFMs who became authorised after the initial on-boarding of the EuVECAs or EuSEFs, were allowed to manage EuVECAs and EuSEFs.
Broadening of potential target assets
With regard to EuVECAs, the definition of qualifying portfolio undertakings set out in the EuVECA Regulation only covered SMEs, limiting eligible investments to unlisted companies with no more than 249 employees and either a maximum annual turnover of EUR 50 million or a maximum balance sheet total of EUR 43 million. The Amending Regulation extends the definition of qualifying portfolio undertakings to also include companies with as many as 499 employees (small to mid-capitalisation companies) not admitted to trading on a regulated market or on a multilateral trading facility, and SMEs listed on SME growth markets. The aforementioned criteria applicable to companies and SMEs must only be complied with at the time of the first investment by the EuVECA. The exceptions for qualifying portfolio undertakings as defined in the EuVECA Regulation, however, still apply. A credit institution, for example, remains an ineligible investment.
Regarding EuSEFs, the definition of qualifying portfolio undertakings in the EuSEF Regulation includes the requirement that the undertakings have as their primary objective the achievement of measurable, positive social impacts. The EuSEF Regulation further clarified that the definition of social impact could be met when the qualifying portfolio undertakings provide services or goods to vulnerable, marginalised, disadvantaged or excluded persons. The Amending Regulation broadens the definition of positive social impact, covering undertakings that provide services or goods which generate a social return. This amendment is intended to simplify the regulatory landscape for EuSEFs, and is aimed at facilitating the participation of investors in such funds.
Clarification of own funds requirements
The Amending Regulation defines the minimum amount of capital the manager of an EuVECA or EuSEF must have. Prior to the Amending Regulation, there was no such amount, and a manager was only required to have own funds sufficient to ensure the continuity and proper management of the EuVECA or EuSEF. This led to different interpretations in the various member states of the European Union. In order to develop an appropriate and proportionate own funds requirement for EuVECA or EuSEF managers, and in order to ensure a consistent understanding of those requirements in the European Union, it was decided to provide specific minimum capital and own funds requirements in the Amending Regulation.
Beginning 1 March 2018, the manager of an EuVECA or EuSEF must have a minimum initial capital of EUR 50,000, plus own funds which shall at all times amount to at least one-eighth of the fixed overheads incurred by the manager in the preceding year. In cases where the manager has not yet completed a year of business, the requirement shall amount to one-eighth of the fixed overheads expected in its business plan. Where the value of the EuVECAs or EuSEFs managed by the manager exceeds EUR 250 million, the manager shall provide an additional amount of own funds equal to 0.02% of the amount by which the total value of the EuVECAs or EuSEFs exceeds EUR 250 million.
The aforementioned requirements do not apply to authorised AIFMs, as the AIFMD already provides for similar, albeit not identical, minimum capital requirements. Moreover, the aforementioned requirements are also not applicable to managers in relation to EuVECAs or EuSEFs that were launched prior to 1 March 2018. Those managers, however, must ensure that they are able to justify at all times the sufficiency of their own funds to maintain operational continuity.
Prohibition of fees without performance of supervisory task
The Amending Regulation further clarifies that member states of the European Union are not allowed to impose fees and other charges on EuVECA and EuSEF managers if no supervisory task is required to be performed. Such an explicit prohibition was absent from the Regulations.
Review periods for supervisory authorities
The Amending Regulation now provides for a maximum review period of two months, during which time the competent supervisory authority of the EuVECA or EuSEF – in Luxembourg, the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier - CSSF) – is required to inform the manager whether a fund has been registered as EuVECA or EuSEF. The review period commences after the manager has provided all the necessary documentation to the supervisory authority.
The manager of an EuVECA or EuSEF is obliged to notify the competent supervisory authority of any material changes to the conditions for its initial registration before such changes are implemented. Within one month of receipt of notification of those changes, the supervisory authority must inform the manager if it decides to impose restrictions or reject the changes. The competent authority may extend that period by up to one month. The changes may be implemented if the relevant competent authority does not oppose the changes within the relevant assessment period.
The EuVECA and EuSEF regimes already provide certain advantages over alternative investment funds managed by authorised AIFMs under the AIFMD. There is no requirement to appoint a depositary, and a simplified marketing process applies. Moreover, EuVECAs and EuSEFs benefit from favourable treatment under Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II). Given the EuVECA and EuSEF’s limited success to date, in particular in Luxembourg, it will be interesting to observe what impact the Amending Regulation will have on investment in innovative enterprises and social undertakings across the European Union.