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Venture capital funds and social entrepreneurship funds

Venture capital funds and social entrepreneurship funds

Inception date: 22 July 2013
Presentation

On 7 December 2011, the European Commission (EC) published two proposals for regulations, aimed at establishing a common framework for European venture capital funds and European social entrepreneurship funds in order to help SMEs obtain financing via such funds. 

Common rules applicable to venture capital funds and social entrepreneurship funds:
  • Creation of a European label for European venture capital funds and European social entrepreneurship funds with 3 essential definition criteria: (1) The fund must invest at least 70% of the capital contributed by its clients in SMEs; (2) It must provide funding to these SMEs (Small and Medium Enterprises) in the form of equity or quasi-equity; and (3) It must not use leverage for the fund (i.e. the capital it invests must not exceed the capital committed by investors). 
  • The two documents only apply to managers of collective investment undertakings other than UCITS (Undertakings for Collective Investment in Transferable Securities) in accordance with Directive 2009/65/EC (UCITS IV) established and registered in the European Union.
  • Threshold for assets under management: The document only applies to fund managers whose assets under management do not exceed €500 million. 
  • Eligible investors: Professional investors within the meaning of MiFID (Markets in Financial Instruments Directive) and certain other traditional venture capital investors (such as high net worth individuals or business angels) if they undertake to invest at least 100,000 Euros in the fund, and if the fund managers comply with certain procedures giving them reasonable assurance that these investors are capable of making their own investment decisions and understanding the risks involved.
  • European Passport: Making it possible to market such funds with eligible investors throughout the EU (European Union). 
  • No obligation to use a depositary: The initiative makes no mention of a depositary, which seems to be a regression on the current French model and on the AIFM* Directive concerning investor protection. 
  • No organisational rules, risk management rules or precise valuation rules. Only five major principles have been laid down for fund managers:  (1) They must be competent and diligent in their activities, (2) Implement policies and procedures to avoid bad practices, (3) Act in the interest of the fund and clients while respecting market integrity, (4) Exercise due diligence in the selection of companies and their management within the portfolio, (5) Have an appropriate level of knowledge.

* AIFM: Alternative Investment Fund Managers

Reference documents: 

Regulation 345/2013 on European Venture Capital Funds and Regulation 346/2013 on European Social Entrepreneurship Funds

Links:  click here.

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Marie Claire de Saint Exupéry Senior Advisor Public Affairs SGSS
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