Amending the EuSEF and EuVECA Regulations - European Commission publishes its proposals

Background to the Proposal

European Social Entrepreneurship Funds (EuSEFs) and European Venture Capital Funds (EuVECAs) came into being on 22 July 2013, when the EuSEF and EuVECA Regulations (together, the Regulations) became effective across the EU.

The aim of the new vehicles was to create new opportunities for market participants to raise and invest capital in innovative small and medium-sized enterprises (SMEs) and social undertakings throughout Europe. While EuVECAs are intended to support young and innovative companies, EuSEFs focus on enterprises whose aim is to achieve positive social impact.

(See here for a summary of the key elements of the EuSEF Regulation and here for a summary of those of the EuVECA Regulation.)

Uptake, however, was disappointing. Although the Regulations contained provision for a review after two years, the European Commission (the Commission) brought the review forward, since the rules were clearly not functioning as well as had been expected. As part of this process, between September 2015 and January 2016, the Commission ran a public consultation (see here for elexica’s summary).

The Commission’s review identified a number of factors holding back the development of EuSEFs and EuVECAs, in particular:

• the rules that govern the way such funds invest in assets
• the way the managers run such funds
• how the Regulations interact with other existing investment fund laws, and
• the requirements with which EuSEFs and EuVECAs must comply in order to benefit from the available marketing passport.

The outcome of the review is the Commission’s proposal for a new Regulation (the Proposal), to amend the existing regimes with a view to unlocking investment in growing and entrepreneurial businesses in the EU.

What changes does the Proposal set out?

Among its key provisions, the Proposal:

• Confirms that AIFMs authorised under the AIFMD which manage portfolios of qualifying funds can use the "EuVECA" and "EuSEF" designations when marketing those funds in the EU. The AIFM would have to register the EuVECA and EuSEF funds and comply with specific provisions under the respective Regulation, in particular:
  • the 30% threshold for non-qualifying investments
  • the rules on eligible investors
  • specific disclosures to investors and notifications.

AIFMs managing EuSEF funds will also have to comply with the provisions setting out procedures to measure the extent to which the undertakings in which the EuSEF invests achieve measurable positive social impacts.

• Redefines the definition of a "qualifying portfolio undertaking" in the EuVECA Regulation by permitting investment in either:
  • unlisted undertakings which employ up to 499 persons (rather than 250 people as before), or
  • SMEs listed on a SME growth market.

The Proposal also permits follow-on investments in qualifying portfolio undertakings, provided the undertaking met the necessary criteria at the time of the EuVECA’s first investment.

• Requires ESMA to develop level 2 measures specifying how to determine whether a EuSEF or EuVECA manager has sufficient own funds. The methodologies must:
  • distinguish between internally and externally managed EuSEFs and EuVECAs
  • take into account the manager’s size and internal organisation, and
  • ensure that the amounts constituting sufficient own funds do not exceed the amounts laid down in Article 9 of AIFMD.
• Streamlines the registration process by (a) providing that the competent authority of the home Member State must inform a manager as to whether it has been registered no later than two months after it has submitted all necessary information and (b) seeking to avoid duplicative registration processes under the Regulations and under AIFMD.
• Lays down registration conditions for EuVECA and EuSEF funds by AIFMs authorised under AIFMD. The proposal allows EuVECA and EuSEF funds to be registered by such AIFMs in a Member State other than that in which the AIFM is authorised.
• Provides that competent national authorities may not impose fees or other charges in relation to crossborder marketing of EuVECA and EuSEF funds.
• Ensures that ESMA’s central database includes information concerning all managers of EuVECA and EuSEF funds and the funds that they market.

Next steps

The Commission’s proposals will now be reviewed by the European Parliament (the EP) and the Council of the EU (the Council), which will consider what changes, if any, they wish to see to the Proposal.

When the EP and Council have each decided their preferred positions, they and the Commission will join in trilogue negotiations in order to reach political agreement.

The approved Level 1 text would then be formally voted on in a plenary session of the EP and subsequently endorsed by the Council before being translated into the official languages of the EU and, in due course, published in the Official Journal.

The EuSEF and EuVECA Regulations would then be re-evaluated four years after the agreed amendments take effect. This evaluation will focus on the following questions:

• Are the modified frameworks attractive for AIFMD-authorised managers to market EuVECA and EuSEF funds?
• Have the regimes contributed to an increase in assets under management in EuVECA and EuSEF funds, and more broadly to assets invested in venture capital and social impact companies?
• Have the modified qualifying portfolio undertaking criteria increased the capital raised, and investments undertaken, by EuVECA funds?
• Have the explicit provisions on the prohibition for host Member States to impose fees and sufficient own funds decreased administration and marketing costs for EuVECA and EuSEF funds?