Thu, Aug 15, 2013

New Opt-in Regimes: European Venture Capital and Social Entrepreneurship Funds

On 22 July 2013, the same day that the Alternative Investment Fund Managers Directive (“AIFMD”) regime went live, so too did two new related “opt-in” regimes which seek to make it easier for small and medium enterprises (“SMEs”), and social enterprises to raise money by allowing funds investing in these areas to be marketed more easily across Europe and in such a way reduce tax barriers, promote competition and create economies of scale.

In order to use the European Venture Capital Fund (“EuVECA”) label, small AIFMs (i.e. AIFMD Article 3(2)(b) €500 million sub-threshold firms) will need to demonstrate that 70% of the capital received from investors is invested in the form of equity or quasi-equity instruments (i.e. unsecured with returns based on profits or losses) of the qualifying portfolio undertakings (“QPU”), which:

  • must not be listed on a regulated market at the time of investment;
  • must not be collective investment undertakings;
  • must employ fewer than 250 persons; and
  • have an annual turnover not exceeding €50m; or
  • an annual balance sheet not exceeding €43m. 

To use the European Social Entrepreneurship Funds (“EuSEF”) label the manager will need to show that 70% of the capital received is invested in undertakings whose primary objective is to achieve measurable, positive social impacts including:

  • providing services or goods to vulnerable or marginalized, disadvantaged or excluded persons;
  • employing a method of production of goods or services that embodies its social objective; or
  • providing financial support exclusively to social undertakings involved in the above.

The FCA has published forms to enable sub-threshold AIFMs managing qualifying funds to register as managers of EuVECAs using this application form, or of EuSEFs using this form. In addition, managers will need to complete a separate form to notify the FCA of senior persons who effectively direct the business of the fund, as well as the relevant EuSEF and EuVECA section on the Schedule of AIFs for small registered UK AIFMs

Once the application is made, the FCA will have three months (and an additional three months for incomplete applications), within which to determine whether the manager satisfies the criteria.

The major benefit of the two regimes is that registration will allow firms to market qualifying funds throughout the EEA to professional clients and other expert or sophisticated investors with a €100,000 minimum commitment, under the EuSEF and EuVECA “labels”, as appropriate, while avoiding the more onerous AIFMD requirements (particularly as to capital requirements, depositaries, remuneration, etc).

However, firms will still be required to meet annual reporting and audit obligations, and in this way, responsibilities under the two regimes fall somewhere between those of small authorized AIFMs, and full-scope AIFMs.

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