Brussels, 08/07/2016 (Agence Europe) - On Wednesday 13 July, the European Commission will unveil draft legislation to boost the venture capital markets.
It says the two European venture capital (EuVECA) regulations of 2013 have not had enough of an impact, viz Regulation 345/2013 and Regulation 346/2013 on social entrepreneurship funds (EuSEF). The two regulations create their own labels, which give access to a European passport.
Since entry into force of the regulations, national authorities have registered 34 EuVECA aiming to raise capital of around €1.3 billion, explained the European Commission in a pubic consultation. There are some six EuSEF, which aim to raise €6 billion. The Commission feels there is room for improvement for EuVECA, and that the result is “clearly unsatisfactory” for EuSEF.
In a telephone interview with this newsletter on Friday 8 July, Michael Collins, deputy director general of Invest Europe, which represents the venture capital industry, said that the two regulations were voluntary and relatively recent and there were therefore structural reasons for the sector not seeing the boost that the Commission was hoping for. But he said that the experience of those who had taken advantage of the regulation had been broadly positive.
Some members of Invest Europe, however, have had problems because the regulation says it is enough to register in the host country and then the passport gives the possibility of providing services throughout the EU, but many countries have introduced barriers, the biggest one being taxing registration charges. In some countries therefore, there is a financial burden of several thousand euros that has to be paid before the passport can be used. This acts as a brake, explained Collins. Invest Europe, which has complained to the European Commission and the European Financial Markets Authority (ESMA) about this, says that the practice should be investigated to see whether it violates European legislation. The Commission agrees with us, he added, noting that the future changes to the regulation will make it absolutely explicit that these financial charges cannot be levied.
In order to obtain the European passport for venture capital funds, there are three main requirements, namely investing 70% of capital subscribed to by clients in SMEs. The definition of an SME is too rigid and prescriptive, notes Invest Europe. An SEM has to employ fewer than 250 members of staff and have an annual turnover of below €50 million. Michael Collins said he was confident that the Commission would provide a degree of flexibility in this connection.
The public consultation held by the Commission looked at other aspects, such as the question of which managers may sell EuVECA and EuSEF funds. Managers of venture capital funds managing portfolios worth more than €500 million are covered by the directive on alternative investment funds. A recent ESMA consultation showed that managers authorised to operate under this directive would like to also be able to manage and sell EuVECA or EuSEF. The Commission feels that targeted amendments to these two regulations could make this possible. The European Commission also wonders what to do when funds covered by the regulations exceed the €500 million threshold.
The Commission is wondering whether to raise the minimum for each investor, which currently stands at €100,000. In its response to the public consultation, Bundesbank says that it might be preferable to set a relative rather than absolute threshold, for example in terms of a percentage of an investor's total portfolio. The Dutch finance minister opposes any reduction of the threshold, but the Czech finance ministry doesn't think this is one of the major obstacles to expansion of EuVECA and EuSEF. The British Treasury thinks it is important that investors can diversify their risks. Invest Europe would prefer to keep the minimum investment at €100,000.
The potential impact of Brexit. Finally, the changes the Commission might make in favour of non-EU venture capital managers may be especially important with a possible Brexit in mind, Collins admitted. The third country regime will be important if the UK no longer has access to the single market, and this will depend on what type of relationship it will negotiate with the EU.
Another fear, relayed recently by Bloomberg, is that the European Investment Fund, part of the EIB entity, would suspend its involvement in British venture capital funds. According to Bloomberg's figures, between 2011 and 2015, the EIF put €2.3 billion in 144 British venture capital companies, 37% of the venture capital raised in the United Kingdom over this period. Collins said: “In the short term, the EIB group said clearly nothing changes, as the UK is still a member state (…) but of course there is a question about the long term.” (Original version in French by Elodie Lamer)