New EU Fundraising Rules: Boosting Venture Capital for SMEs and Easing Access to Credit

December 14, 2011

Access to finance is essential to enhance the competitiveness and growth potential of small- and medium-size enterprises (SMEs). In the context of the current crisis, marked by a fall in lending to the real economy, it is increasingly difficult for SMEs to access loans. For this reason the European Commission has developed an EU Action Plan to promote better access to finance for SMEs, which includes increasing financial support from the EU budget and the European Investment Bank. The plan also includes a proposal for a regulation setting uniform rules for the marketing of venture capital funds.

According to the European Commission, this new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation “European Venture Capital Fund” across the EU. No longer will they have to meet complicated requirements that are different in every MemberState. Through the introduction of a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger. As such:

  • The proposal lays down a uniform “single rule book” governing the marketing of funds under the designation “European Venture Capital Funds.” A “European Venture Capital Fund” is defined by three essential requirements:

  1. It invests 70 percent of the capital committed by its sponsors in SMEs;
  2. It provides equity or quasi-equity finance to these SMEs; and
  3. It does not use leverage.

All funds that operate under this designation must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The “single rule book” will ensure investors know exactly what they get when they invest in European Venture Capital Funds.

  • The proposal aims at creating a uniform approach for the categories of investors who are eligible to commit capital to a European Venture Capital Fund. Eligible investors will be professional investors as defined in the 2004 Markets in Financial Instruments Directive (MiFID) and certain other traditional venture capital investors (such as high-net-worth individuals or business angels). The uniform rules on venture capital investors should ensure that marketing can be tailor-made to the needs of these investor categories.
  • The regulation will provide all managers of qualifying venture capital funds with a European marketing passport, allowing access to eligible investors across the EU. This is a marked improvement over the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive (AIFMD), because the existing passport provided under AIFMD is applicable only to managers whose assets under management are above a threshold of €500 million.

The proposal on venture capital now passes to the European Parliament and the Council (Member States) for negotiation and adoption under the codecision procedure.