The revamped EuVECA Regulation – changes and perspectives
The European Parliament and the Council have adopted Regulation 2017/1991 on 25 October 2017. Regulation 2017/1991 amends the EuVECA Regulation and the EuSEF Regulation. The entry into force of the amendments to the EuVECA Regulation and EuSEF Regulation is 1 March 2018. The purpose of this note is to highlight the changes brought by Regulation 2017/1991 to the EuVECA Regulation and try to put those changes (and the EuVECA Regulation generally) into perspective.
The EuVECA Regulation aims primarily at fostering investments into, and facilitating access to finance by, small and medium sized enterprises. It does so through the creation of a label – the EuVECA label – available (initially) to “small managers” managing “qualifying” venture capital funds in exchange for complying with a number of harmonised rules. That label gives access to a European marketing passport wider than that available under the AIFM Directive - i.e., the relevant EuVECA authorised manager may market its EuVECA compliant funds (EuVECA Funds) in Member States of the EU to (i) professional investors or (ii) any investor that (a) (commits to) invest at least EUR100,000 in the relevant fund and (b) confirms in writing its awareness of the risks associated with such investment.
In 2016, the European Commission reviewed the operation of the EuVECA Regulation. The Commission identified that the EuVECA Regulation’s success was “limited by a range of barriers” and noted that the effectiveness of the regulation could be further improved. That is probably an understatement if one looks at the number of EuVECA managers and funds in operation at this date. The following drawbacks to the existing legislation were identified in particular: limitations on the use of the label by “large managers”, limitations on the range of “eligible investments”, diverging interpretation across Member States on own funds and substance requirements and undue administrative barriers and/or marketing costs/fees imposed by host Member States. The European Commission published its proposal for a regulation to amend the EuVECA Regulation in July 2016. Regulation 2017/1991 sources from such proposal.
Relevant changes to the EuVECA Regulation
The key changes brought to the EuVECA Regulation by Regulation 2017/1991 are the following:
- Authorised (full scope) alternative investment fund managers will be able to become registered under the EuVECA Regulation.
Under the EuVECA Regulation as amended by Regulation 2017/1991 (the Revamped EuVECA Regulation), alternative investment fund managers authorised under article 6 of the AIFM Directive (i.e., “full scope AIFMs” or AIFMs) will be able to register as EuVECA Regulation authorised managers (EuVECA Managers). This means that AIFMs will be able to manage funds benefiting from the EuVECA label. In turn, these funds will have access to a broader range of eligible investors and will not be restricted to “professional investors” only, as is otherwise required under the AIFMD marketing passport regime. Whenever an AIFM registered as an EuVECA Manager manages an EuVECA fund, compliance with the provisions of the EuVECA Regulation must be ensured on top of those under the AIFM Directive requirements. This is a positive and tremendous change to the previous regulation.
We expect that a large number of AIFMs that currently have a license to act as external AIFM of private equity/venture capital funds will (and in our view should) seek to extend their licence and become EuVECA registered managers to avail of the EuVECA marketing passport (and, with respect to “third party AIFMs” offer EuVECA management services).
- The types of investments in which a fund managed by an EuVECA Manager can invest is expanded.
Initially, investments were limited to investments into (eligible) SMEs not admitted to trading on a regulated market or multilateral trading facility (Eligible SMEs). That included investment in those SMEs through equity, quasi-equity, loans and other EuVECA funds.
Under the Revamped EuVECA Regulation, the eligible investment universe will now include: (a) Eligible SMEs, (b) small and mid-caps not admitted to trading on a regulated market or multilateral trading facility and (c) SMEs that are listed on an “SME growth market”, i.e., a specific type of multilateral trading facility introduced by MiFID II to ease the access to capital markets by SMEs. The Revamped EuVECA Regulation will also allow managers to continue investing in a portfolio company that was eligible at the time of the initial investment but has ceased to be an SME or small or mid-cap (or that has achieved listing) through follow-on investments. These clarifications and the wider investment universe allowed under the revamped regulation will be welcomed by EuVECA Managers.
- “Own funds requirements” are clarified and harmonised.
The EuVECA Regulation set out rather lose “own funds” requirements, i.e., it requires an EuVECA Manager to have “sufficient own funds” to “maintain operational continuity”. That has led to uncertainty within a number of local regulatory authorities and unexpected adverse consequences, including a number of regulators requiring EuVECA Managers to comply with “own funds” requirements equivalent to a full scope AIFM. This was clearly against the purpose of the regulation.
The Revamped EuVECA Regulation now includes clear own funds requirements. An EuVECA Manager will need to have (i) an initial capital of at least EUR50,000, (ii) own funds that are not less than one eighth of the fixed overheads incurred by the manager during the preceding year and (iii) additional own funds if their assets under management exceed EUR250mio equal to 2bps of the excess over EUR250mio. The discretionary power of local regulatory authorities to assess – and determine – own funds is now limited, increasing legal certainty for (prospective) EuVECA Managers. Own funds must be invested in non-speculative liquid assets or assets readily convertible into cash in the short term.
- Fees and charges, or additional administrative obligations, cannot be imposed by host Member States in the context of the cross-border marketing of an EuVECA Fund.
The Revamped EuVECA Regulation tackles the issue of undue fees and charges (or administrative obligations) imposed by host Member States’ regulatory authorities in the context of the marketing of an EuVECA Fund. The regulation now clearly prohibits host Member States’ competent authorities from imposing on an EuVECA Manager any requirements or administrative procedures in relation to the marketing of EuVECA Funds (including any prior approval requirements) – including fees and other charges.
Albeit the progress made to improve the EuVECA regime is significant, the following two points would deserve in our view consideration in the future by the legislator:
- There is no “management passport” for (non-AIFMs) EuVECA Managers. EuVECA Managers that are not full scope AIFMs do not enjoy any “management passport”. In our view this should mean that those EuVECA Managers will only be able to manage EuVECA Funds which are established in their own jurisdiction. In other terms, a Luxembourg EuVECA Manager that is not a full scope AIFM will only be in a position to act as such for a Luxembourg EuVECA Fund (and should not be able to do so for, e.g., a French EuVECA Fund). This is not necessarily immediately clear from the (Revamped) EuVECA Regulation. We note though that the European Commission is tasked with the review of “the management of [EuVECA Funds] and the appropriateness of introducing changes to the legal framework including the option of a management passport” for those EuVECA Managers. This, a contrario, is a clear indication that there is no management passport for EuVECA Managers that are not also full scope AIFMs.
- There will be a “double layer of supervision” in respect of AIFMs that are also EuVECA Managers and manage (foreign) EuVECA Funds. AIFMs that will become registered as EuVECA Managers will continue to be able to use the “management passport” under AIFMD and will be authorised to manage EuVECA Funds established in other Member States. In that context, the Revamped EuVECA Regulation sets out rules on the allocation of supervisory powers among such type of EuVECA Manager’s home Member State’s regulatory authority and the regulatory authority of the EuVECA Fund. The regulatory authority of the EuVECA Fund will be responsible for supervising the EuVECA Fund’s compliance with the investment policy/eligibility, investors eligibility and transparency requirements under the Revamped EuVECA Regulation. This means that “unregulated funds” will become subject to regulatory scrutiny and supervision by a supervisory authority. And that is notwithstanding that these funds are subject to “indirect regulation” through their EuVECA Manager (and AIFM). We are not convinced that this allocation of supervisory power is the most appropriate way to organise the supervision of EuVECA Funds managed by an EUVECA Manager that is also a full scope AIFM.
To conclude, overall, the changes to the EuVECA Regulation are in our view positive. We are hopeful that the EuEVA label will now enjoy a higher degree of success. In particular, a number of smaller managers that would in the past have set up “de minimis” managers and relied on “private placement regimes” to market their venture capital funds because of the red-tapes in the initial EuVECA Regulation are very likely to seriously consider either setting up their own EuVECA Manager or using the services of a third party AIFM registered as an EuVECA Manager to manage their EuVECA Fund. We also expect that a number of “third party AIFMs” that are authorised to manage private equity/venture capital funds will request their registration as EuVECA Managers to broaden their services offering.
Avocat à la Cour
 Regulation (EU) 2017/1991 amending Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on European social entrepreneurship funds, published in OJ L 293, 10.11.2017, p. 1.
 Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds, published in OJ L 115, 25.4.2013, p. 1.
 Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds, published in OJ L 115, 25.4.2013, p. 18).
 Directive 2011/61/EU on alternative investment fund managers, as amended.
 The rationale for such regulation lies in the entry into force of the AIFM Directive. A number of market participants, as well as internal services within the European institutions, considered that the directive would have the unintended negative effect of either barring smaller venture capital/private equity fund managers from, or else increasing substantially the costs for those managers to, access to the European market.
 European Commission’s “proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on European social entrepreneurship funds”, COM(2016) 461 final.
 In Luxembourg, there are only nine venture capital fund managers registered pursuant to the EuVECA Regulation with the Luxembourg regulatory authority for the financial sector, the Commission de Surveillance du Secteur Financier (the CSSF) since 2013. The French Autorité des Marchés Financiers has approved only three venture capital fund managers pursuant to the EuVECA Regulation.
 I.e., managers that exceed the “de minimis threshold” applicable under the AIFM Directive.
 “qualifying portfolio undertakings” within the meaning of article 3(d) of the EuVECA Regulation.
 In addition, the relevant qualifying portfolio undertaking must be established in a country that (i) is not listed as a Non-Cooperative Country and Territory by FATF and (ii) has signed an agreement with (a) the home Member State of the EuVECA Manager and (b) each other Member State in which the interests in the relevant EuVECA fund are intended to be marketed.
 i.e., an undertaking that employs less than 499 persons.
 Directive 2014/65/EU the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
 With respect to a new EuVECA Manager, this is assessed against the expected fixed overheads as set out in the manager’s business plan.
 Emphasis added.
 Some will take the view that a management passport is not strictly necessary by analogy to the situation of a fund appointing a foreign portfolio manager – with that portfolio manager not having to rely (necessarily) on an EU “management passport”. However, in our view, that analogy cannot be made in the context of the EuVECA Regulation given the specific purpose of such regulation, i.e., to enable the use of an EU wide “label” and marketing passport.