European venture capital funds

KEY POINTS

• The average EU venture capital fund size is approximately €60 million, whereas a similar US fund has more than double that amount. By enabling these EU funds to grow, it should be possible to boost capital contributions to individual companies and enhance their investment impact.
• The regulation aims to boost funds, so that they become larger, and to adopt a more diversified investment strategy, so that they can specialise in sectors such as IT, biotechnology and healthcare. This should result in European companies becoming more competitive worldwide.

EuVECA label

• To register for the EuVECA label and market their funds across the EU, managers of venture capital funds must set up a fund that:
  • invests 70% of the capital it receives from investors in supporting eligible companies, such as young and innovative SMEs;
  • provides equity or quasi-equity finance (i.e. fresh capital) to these companies;
  • does not use leverage (i.e. the fund is not indebted, because it does not invest more capital than is committed by investors).
• The regulation sets out uniform quality criteria for managers of qualifying venture capital funds that wish to use the EuVECA label. These requirements cover everything from the way they organise and conduct themselves, to the manner in which they inform investors about their activities and investment policies.
• These managers must also register in the country where the fund is established and provide annual reports. The country where these funds are located is obliged to ensure all the regulation’s rules are respected.
• As investing in venture capital funds can be risky, the regulation defines who can invest in EuVECA: professional investors and certain other categories, such as high net worth individuals.

Conflicts of interest

• EuVECA managers must detect and prevent any possible conflicts of interest arising from their position and adopt the necessary organisational measures in this regard. The regulation lists the following as potential conflicts of interest:
  • between the manager, the people effectively controlling it or its employees, and the EuVECA;
  • between a EuVECA or its investors, and another EuVECA under the same manager or its investors;
  • between a EuVECA or its investors and other collective investment undertakings under the same manager or its investors.
• If the arrangements made are insufficient and do not ensure that risks of damage to investors’ interests are prevented, the conflicts of interest must be disclosed.
• The European Commission can approve delegated acts to further develop these rules and be more specific regarding conflicts of interest and policies for their prevention.
• Delegated Regulation (EU) 2019/820 supplements Regulation (EU) No 345/2013 with regard to conflicts of interest laying down rules governing:
  • the types of conflicts of interest;
  • the requirement to establish a written conflicts of interest policy and the procedures and measures this policy must include as a minimum;
  • managing conflicts of interest;
  • strategies for the exercise of voting rights to prevent conflicts of interest; and
  • disclosure of conflicts of interest.

Amending legislation

• Regulation (EU) 2017/1991 amends Regulation (EU) No 345/2013 on European venture capital funds and its sister regulation (Regulation (EU) No 346/2013) on European social entrepreneurship funds (see summary), extending the use of the designations ‘EuVECA’ and ‘European social entrepreneurship funds’ to managers of collective investment undertakings¹ authorised under Article 6 of Directive 2011/61/EU (see summary). It also expands the range of eligible companies, and decreases the costs associated with marketing the funds across the EU.
• Regulation (EU) 2019/1156 introduces the following rules and requirements.
  • Rules on publishing national provisions concerning marketing requirements for collective investment undertakings and on marketing communications addressed to investors.
  • Rules on pre-marketing² identical to those laid down in Directive 2011/61/EU (see summary) are introduced into Regulation (EU) No 345/2013. These should enable managers, registered in accordance with the regulation, to target investors by testing their interest in upcoming investment opportunities or strategies through qualifying venture capital funds.
  • A requirement for EuVECA managers to ensure that marketing communications, comprising an invitation to purchase units or shares of an alternative investment fund (AIF), that contain specific information about an AIF, do not contradict the information which is to be disclosed to the investors in accordance with Article 13 of Regulation (EU) No 345/2013.
  • A requirement for the European Securities and Markets Authority to publish on its website, by 2 February 2022, a central database on cross-border marketing of AIFs, listing all AIFs that are marketed in an EU Member State other than their home one, their EuVECA manager, and the Member States in which they are marketed.