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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The information contained in this Newsletter is of a general nature and does not constitute legal advice