Last reviewed 23 February 2012
by Henrietta Clarke
A strategy to promote better access to finance for Europe’s 23 million SMEs was proposed by the European Commission in December 2011. It includes increasing financial support from the EU budget and the European Investment Bank, as well as a proposed regulation setting uniform rules for the marketing of venture capital funds. The new regulation would make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. Once a set of requirements is met, all qualifying fund managers could raise capital under the designation “European Venture Capital Fund” across the EU, rather than having to meet complicated requirements that are different in every EU country. By introducing a single rulebook, venture capital funds would be able to attract more capital commitments and grow.
Venture capital for SMEs
Venture capital, which provides early finance to start-ups, forms an important source of long-term investment in young and innovative small businesses. However, the average European venture capital fund is small and far beneath the optimal size necessary for a diversified investment strategy to make a meaningful capital contribution to individual companies, and thereby produce real impact. So SMEs continue to depend on short-term bank loans. Economic studies show that young start-ups that benefit from equity investors fare better than those who have to rely on debt. Also, as loans are not always easy to access, venture capital offers an alternative source of finance to allow SMEs to invest and grow.
A uniform single rulebook
The diversity of rules in different Member States means that venture capital managers can face high costs and red tape in raising funds across the EU.
The new regulation proposes a uniform single rulebook governing the marketing of funds under the designation European Venture Capital Funds. A fund can earn this designation if it fulfils the following three requirements.
It invests 70% of the capital committed by its sponsors in unlisted SMEs.
It provides equity or quasi-equity finance to these SMEs (in other words fresh capital).
It does not use leverage (the fund does not invest more capital than that committed by investors, so it is not indebted).
The home Member State regulator will only register funds that comply with the essential requirements of the framework. All funds that operate under this designation must abide by uniform rules and quality standards when they raise capital across the EU. Investors will know exactly what they get when they invest in European Venture Capital Funds.
A uniform approach for the categories of investors
Investors eligible to commit capital to a European Venture Capital Fund will be professional investors as defined in the 2004 Markets in Financial Instruments Directive. It will also include certain other traditional venture capital investors, such as high net-worth individuals or business angels (a private investor who provides both finance and business expertise to an investee company).
A European marketing passport
All managers of qualifying venture capital funds will be provided with a European marketing passport allowing access to eligible investors across the EU. This improves the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive under which the existing passport is only applicable to managers whose assets under management are above a threshold of €500 million.