May 2013
corporate & commercial LAW
EU REGULATIONS 345/2013 AND 346/2013 on european venture capital
funds and european social entrepReneurship funds
EU REGULATIONS 345/2013 AND 346/2013 on European venture capital
funds and European social entrepreneurship funds.
1.
Introduction.
2.
European venture capital funds.
2.1.
Scope of application.
2.2.
Qualifying funds.
2.3.
Regulatory requirements and marketing of EuVECAs.
2.3.1.
Distribution.
2.3.2.
Conduct rules.
2.3.3.
Delegation of functions.
2.3.4.
Conflicts of interest.
2.3.5.
Own funds and resources.
2.3.6.
Valuation of assets.
2.3.7.
Annual report.
2.3.8.
Information to investors.
2.4.
Registration and distribution.
3.
european social entrepReneurship funds.
4.
entry into force.
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1. introduction
On 25 April, the Official Journal of the European Union published
the new EU regulations relating to European venture capital funds
(EuVECA) and European social entrepreneurship funds (EuSEF)
(345/2013 and 346/2013, respectively). The creation of these new
schemes forms part of several legislative acts adopted in
preparation for the implementing date of EU Directive 2011/61 on
Alternative Investment Fund Managers (AIFMD) on 22 July 2013.
Alternative Investment Funds (AIF) are defined in the AIFMD as
those not subject to the UCITS Directive (2009/65). Thus, from 22
July onwards, all collective investment schemes will fall into
one of those categories.
Notwithstanding this, the AIFMD does not cover all possible AIFs.
There is a certain space of inapplicability for fund managers
falling within the exemption of article 3.2.b), i.e., those
managing portfolios of AIFs whose total managed assets do not
exceed the threshold of EUR 500 million when the portfolios of
AIFs consist of unleveraged AIFs with no redemption rights for
the five years following the initial investment date in each AIF.
The AIFMD only establishes certain basic registration and
information requirements for the AIF managers in this situation,
which are then excluded from the remaining provisions. This
creates greater flexibility in many aspects, but it also excludes
the AIFs from the scope of the highly desirable “EU passport”,
which allows marketing in any Member State with roughly no
further requirements.
These two new regulations aim to establish rules for the
management and marketing of two specific types of the
AIFMD-excluded AIFs, so that, among others, they may access the
EU passport.
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2. european venture capital funds
2.1. Scope of application
The EuVECA Regulation is applicable to all managers of AIFs
meeting the following criteria:
1. They are established in the EU;
2. They fall within the exemption of article 3.2.b) of the AIFMD
due to the type and amount of portfolios managed (i.e., not
exceeding EUR 500 million, which are unleveraged and with no
redemption rights for the first five years after the initial
investment);
3. They are subject to the minimum registration requirements in
their home Member State as established in the AIFMD for those
case to which the exemption applies; and
4. They manage portfolios of “qualifying” venture capital funds.
2.2. Qualifying funds
In order to be considered “qualifying” and, therefore, use the
label
European venture capital fund, an entity must invest
at least 70% of its aggregate capital (including capital
contributions and uncalled committed capital) in undertakings
meeting the following criteria (“Qualifying Undertakings”):
1. They are not admitted to trading on a regulated market;
2. They employ fewer than 250 people;
3. Their annual turnover does not exceed EUR 50 million, or their
annual balance sheet does not amount to more than EUR 43 million;
4. They are not a collective investment undertaking (with the
exception of other EuVECAs);
5. They are not credit institutions, investment firms, insurance
undertakings, financial holding companies or mixed-activity
holding companies; and
6. They are established in the EU, or in any third country not
listed as non-cooperative by the FATF which has signed an
agreement on tax matters between the manager’s home Member State
and the Member States in which the shares are to be marketed.
Furthermore, an investment in this type of undertaking must be
carried out through one of the following methods:
1. Equity or
quasi-equity instruments (e.g. profit-share loans)
issued by the Qualifying Undertaking or by an undertaking which
owns a majority share in the Qualifying Undertaking;
2. Secured or unsecured loans granted to a Qualifying Undertaking
in which the EuVECA already holds qualifying investments,
provided no more than 30% of the aggregate capital contributions
and uncalled committed capital is used for the loans;
3. Shares of Qualifying Undertakings acquired from existing
shareholders of that undertaking; or
4. Shares in other EuVECAs, provided these funds have invested no
more than 10% of their aggregate capital contributions and
uncalled committed capital in other EuVECAs.
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2.3. Regulatory requirements and marketing of EuVECAs
Regulation 345/2013 sets out several mandatory obligations for
managers of venture capital entities wishing to use the EuVECA
label.
2.3.1. Distribution
Distribution of EuVECA is restricted to investors considered as
professional clients in accordance with the MiFID rules.
Investors not considered professionals may invest, provided they
make a commitment of at least EUR 100,000 and declare in a
separate written document that they are aware of the risks
inherent to such a commitment.
2.3.2. Conduct rules
The EuVECA Regulation only makes a general reference to the
obligations that managers of EuVECAs must observe, such as:
1. Acting with honesty, fairness and diligence;
2. Applying adequate policies to prevent malpractice in relation
to investors and Qualifying Undertakings;
3. Promoting the best interests of the funds they manage and
their investors and preserving market integrity;
4. Acting with a high level of diligence in the selection and
supervision of the investments;
5. Possessing sufficient knowledge and understanding of the
undertakings;
6. Treating investors fairly and avoiding preferential treatment
of any investor, except where this is disclosed in the fund’s
regulation or constitutional documents.
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2.3.3. Delegation of functions
The manager’s functions may be delegated, provided that the
manager’s position is neither undermined, nor becomes a
letter-box entity. Under no circumstances will the manager’s
liability to investors be affected by the delegation.
2.3.4. Conflicts of interest
EuVECA managers must detect and prevent any possible conflicts of
interest arising from their position and adopt the necessary
organizational measures in this regard. In particular, the
regulation refers to the following as potential conflicts of
interest: (i) between the manager, the persons effectively
controlling it or its employees, and the EuVECA; (ii) between an
EuVECA or its investors, and other EuVECA under the same manager
or its investors; (iii) between an EuVECA or its investors and
other collective investment undertaking under the same manager or
its investors. If the measures adopted were not reasonably
sufficient to ensure the prevention, the conflicts of interests
will have to be disclosed.
The Commission has the faculty to approve delegated acts to
develop these rules and be more specific regarding conflicts of
interest and the policies for their prevention.
2.3.5. Own funds and resources
The Regulation sets out a general obligation to maintain
sufficient and adequate own funds and human and technical
resources, although failing to provide further details.
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2.3.6. Valuation of assets
Rules on the valuation of assets must be established in the
fund’s regulation and constitutional documents. These must ensure
a sound, transparent procedure for the valuation of the assets.
2.3.7. Annual report
Managers must prepare an annual report to be made available to
the competent authority describing the portfolio’s composition
and the audited annual accounts.
2.3.8. Information to investors
Before making any investment decisions, the manager must, at a
minimum, provide investors with information on the following,
without prejudice to any other applicable rules:
1. Identity of the manager and any other services providers
engaged for management purposes;
2. Own funds and a statement from the manager regarding the
reason these are considered sufficient;
3. Description of the investment strategy and objectives;
4. Risk profile;
5. Valuation procedure of the fund and the portfolio assets;
6. The manager’s remuneration;
7. Description of costs and their maximum amount;
8. Historical financial performance, if available;
9. Description of the support services rendered to the portfolio
undertakings, if any; and
10. Procedure for amending the investment strategy.
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2.4. Registration and distribution
Managers interested in distributing funds under the EuVECA label
must provide their home Member State’s regulator with the
following:
1. Identity of the persons who effectively manage the EuVECA;
2. Name of the EuVECAs to be marketed and their investment
strategies;
3. Information on the compliance measures adopted for the
abovementioned obligations;
4. List of Member States where the EuVECAs are to be marketed;
and
5. List of Member States where the manager has established or
intends to establish an EuVECA.
Once the registration has been completed, the home State
regulator may be informed of new EuVECAs to be marketed, or new
Member States where the marketing of existing EuVECAs is to
commence.
In all cases, the regulatory authorities of the manager’s home
Member State are responsible for supervising the activity and
notifying the authorities of other Member States where the
EuVECAs are to be marketed and ESMA. For this task, the
authorities hold the faculties set out in their domestic law and
will be assisted where necessary by the supervisory authorities
of the Member States in which the EuVECAs are marketed.
Following the notification, all Member States must accept the
marketing of the relevant EuVECA in their territory with no
further requirements.
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3. european social entrepReneurship funds
EuSEFs fall under the scope of Regulation 346/2013, which is
closely related to EuVECA Regulation 345/2013. EuSEFs are AIFs
with ethical investment goals based on socially responsible
criteria.
The regulations concerning EuSEFs are identical to those
previously discussed pertaining to EuVECAs, except as regards the
qualifying investments. As in the previous case, the EuSEFs
Regulation only applies to AIF managers managing EuSEFs and
falling within the exemption of article 3.2.b) of the AIFMD,
located in the EU and subject to registration by the competent
authority of the home Member State.
To be considered “qualifying” and, therefore, entitled to use the
label
European social entrepreneurship fund, an entity must
invest at least 70% of its aggregate capital (including capital
contributions and uncalled committed capital) in undertakings
meeting the following criteria:
1. They are not admitted to trading on a regulated market;
2. Their principal objective is to achieve a positive and
measurable social impact, as set out in its constitutional
documents, and where the undertakings in which it invests: (i)
provide services or goods to vulnerable or marginalised,
disadvantaged or excluded persons; (ii) employs a method of
production of goods or services that embodies its social
objective; or (iii) provides financial support exclusively to
social undertakings, as defined above.
3. Profits are primarily allocated to achieving the primary
social objective;
4. They are managed in an accountable, transparent way, in
particular by involving employees, clients and shareholders
affected by the business activities; and
5. They are established in the EU, or in any third country not
listed as non-cooperative by the FATF and which has signed an
agreement on tax matters between the manager’s home Member State
and the Member States in which its shares are to be marketed.
As mentioned above, the valid forms of investment, as well as the
rules on conduct, registration and cross-border marketing of
EuSEFs are identical to those pertaining to EuVECAs.
The only particularities relate to the measurement and disclosure
of the social impact of their activity. In particular, EuSEF
managers must establish procedures to verify the extent to which
the undertakings in which they invest achieve their social
objectives in one or more of the following sectors:
1. Employment and labour markets;
2. Rules and rights regarding working conditions;
3. Social inclusion and protection of particular groups;
4. Equality of treatment, opportunities and non-discrimination;
5. Public health and safety; and
6. Access to social protection, health and education and the
corresponding effects.
In addition to the standard content, the annual report of EuSEFs
must include a statement on the investment’s overall social
impact. Furthermore, the information for potential investors must
include the EuSEF’s social impact objectives and the methods
implemented for their calculation.
4. entry into force
Both regulations will commence their application on the same date
the AIFMD finishes its implementing period, i.e., on 22 July
2013.
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