Changes for EuVECA and EuSEF funds - will they now be selling like hot cakes?

Background

On 10 November 2017, Regulation (EU) 2017/1991 dated 25 October 2017 was published in the Official Journal of the European Union; three months and twenty days later, it is applicable ("Amending Regulation"). The Amending Regulation amends the Regulation on European Venture Capital Funds ("EuVECA", Regulation (EU) 345/2013) and the Regulation on European Social Entrepreneurship Funds ("EuSEF", Regulation (EU) 346/2013).

In 2013, EuVECA and EuSEF were introduced as fund products that are uniformly regulated throughout Europe. EuVECA-funds focus on the financing of young, small enterprises (venture capital funds), whereas EuSEF-funds invest in social enterprises with innovative solutions for social problems. After having reviewed both regulations in 2016, the EU Commission ascertained that there were only few such funds on the market, but that they could nevertheless be regarded as a success despite the unsatisfying results. The identified deficiencies are to be dealt with by way of the Amending Regulation.

Essential reforms

The Amending Regulation essentially introduces the following reforms for EuVECA and EuSEF:

1. Management company: EuVECA and EuSEF may be managed internally or externally. In the future, the external management may be carried out directly by a management company that is authorised in accordance with the AIFM-Directive and has applied for the management of EuVECA or EuSEF within the framework of its full scope authorisation. Fully authorised fund managers have not been able to do this so far unless they have subsequently obtained full authorisation via the intermediary step of registration.
2. Own funds: For the first time, the management company of the EuVECA fund or EuSEF must have a defined regulatory minimum amount of capital. The authors of the regulation thus deviate from the previously used soft wording "sufficient own funds". The new requirements regarding own funds apply only if the management company is not authorised in accordance with the AIFM-Directive. Otherwise, similar capital requirements are already applicable. In the future, own funds in the amount of 1/8 of the fixed costs incurred in the previous year (if the financial year has not yet fully expired, the fixed costs determined in the business plan are decisive) will have to be continuously maintained, at least EUR 50,000. The lower amount of EUR 30,000 of minimum capital proposed in the course of the regulation procedure was not implemented. An additional amount of own funds equal to 0.02% of the amount by which the value of the managed EuVECA or EuSEF assets exceeds EUR 250 million must be available if the managed fund assets exceed EUR 250 million. Up to 50% of this additional amount of own funds must not be provided if there is a guarantee in the same amount given by a credit institution or an insurance undertaking. The own funds shall either be held in liquid assets or invested in assets that are readily convertible to cash in the short term and do not include speculative positions. Guiding principles for the interpretation of these European provisions on requirements are provided, for example, in the FAQ of the German Federal Financial Supervisory Authority ("BaFin") regarding the investment of own funds pursuant to § 25 (7) German Capital Investment Code (Kapitalanlagegesetzbuch).
3. Target assets: The investment options for EuVECA and EuSEF are expanded in order to increase, for example, economies of scale and competition and to reduce transaction and management costs. EuVECA were allowed to invest their initial investment with regard to the criterion of companies not listed on the stock exchange only in such companies with less than 250 employees and with a maximum annual turnover of EUR 50 million or an annual balance sheet total of no more than EUR 43 million. These criteria are modified in so far as it will be possible for the first time to invest in all companies with a staff of up to 499 employees. The annual turnover or the annual balance sheet total will no longer be relevant in the future. With regard to the type of company, the options are moreover expanded in such a way that also companies listed on the stock exchange may now be financed. Holdings in small and medium-sized enterprises (SMEs) that are included in an SME growth market and whose average market capitalisation based on the listings at the end of the year did not exceed EUR 200 million in the past three calendar years can be acquired. With regard to EuSEF target companies, the expansion of the definition of the positive social impact, which such companies must primarily strive to achieve, is supposed to increase the funding incentive. In the future, it will be sufficient if the target company provides services or goods that offer social returns, meaning social added value achieved through social projects.
4. Registration procedure: Based on the Amending Regulation, a review period of no more than two months will be introduced for the supervisory authority (in Germany the BaFin) for the first time; this review period will commence after the complete application has been submitted. Experience has shown that the relevant procedures at BaFin previously took approximately six months. The double registration of the management company required so far was supposed to be rendered obsolete. In the future, the registration in accordance with the EuVECA or EuSEF Regulation will correspond to the registration according to the AIFM-Directive. In the future, the supervisory authority will have to be notified of all material changes regarding the requirements for registration within one month prior to their implementation. If the supervisory authority does not object to such changes, they may be implemented. If registered managers do not comply with the provisions set out in the EuVECA or EuSEF Regulation, they may be liable to pay compensation. A corresponding legal basis for such claims will be introduced.
5. Marketing costs: The Amending Regulation will put a stop to the practice of individual EU host Member States of charging a fee for the marketing of EuVECA and EuSEF in their territory without providing supervisory measures in this regard.
6. Protection of existing conditions: The new requirements for own funds do not apply to already registered EuVECA or EuSEF management companies with regard to already issued EuVECA and EuSEF. In this respect, the fund manager must nevertheless be able to prove that it has sufficient own funds to maintain operational continuity. If an EuVECA or EuSEF is issued once the new rules have come into force, it may be concluded from the wording that the old funds will not be included when calculating the values that are decisive for the regulatory own funds.
7. Review: The EU Commission shall review, among other things, whether the minimum investment amount of currently EUR 100,000 with regard to non-professional investors is to be reduced, whether a cross-border management passport is useful also for EuVECA and EuSEF and whether the existing definition of marketing is still adequate.

Conclusion

It remains to be seen whether EuVECA and EuSEF will be selling like hot cakes in the future. The funds' incentives and investment options were improved, and the ongoing costs were increased compared to a management company registered in accordance with the AIFM-Directive. Whether the EU marketing passport and the brands EuVECA and EuSEF neutralise these costs must be assessed with regard to the specific individual case.