At the same time as the arrival of the Alternative Investment Fund Managers’ Directive (AIFMD), an alternative, lighter touch, regime for venture capital fund managers known as EUVECA was also introduced. The intention of EU legislators was a noble one, as they recognized the positive impact venture capital fund managers can have on small businesses in need of capital for growth. However, the number of managers using the regime has been low, and this can be attributed to two issues in particular. First, the criteria to be met in order to qualify for the regime were narrowly defined. For example, 70% of the assets of a fund subject to EUVECA have to be invested in companies that meet the “SME” test, being companies with (1) fewer than 250 employees and (2) a turnover of €50 million or less or an annual balance sheet total of no more than €43 million. The second barrier to entry is that it is only available to EU fund managers that are below the assets under management (AUM) threshold for full compliance with the AIFMD, which broadly speaking for an unlevered fund is €500 million. So larger managers have been excluded up until now and have had to market venture funds under the AIFMD. Thankfully the low take-up was noted, and work has been ongoing to try to iron out the issues. At the end of last week, new legislation was published with a number of positive changes.
Most importantly, the narrow definition of a qualifying investment has been broadened to unlisted entities with less than 500 employees, and SMEs listed on an SME growth market if their market capitalization is under €200 million. It has also been clarified that follow-on investments resulting in an existing qualifying investment ceasing to meet the criteria are permitted and will not result in such qualifying investment becoming non-qualifying.
Larger managers above the AIFMD threshold will now be able to register a fund under EUVECA if a sufficient amount of the fund's target acquisitions fit within the definitions above. Some managers may wonder why they would do this given they could just market under an AIFMD passport, but EUVECA funds can be marketed to sophisticated retail investors as long as they invest more than €100,000. However, the manager will remain subject to the provisions of AIFMD, including the requirement to appoint a depositary.
The new rules also include a ban on local member state regulators charging fees for managers to market in their jurisdiction (a practice that, although widespread, has been questioned since the introduction of EU marketing passports). The preamble to the amendments even states that these types of fees impede the free flow of capital and undermine the principles of the internal market. For managers marketing funds under the AIFMD who are still having to comply with requests for fees and additional requirements imposed by certain member states, this further strengthens the argument that these practices should end.
There are now guaranteed turnaround times of two months for new manager registrations, one month for adding a new fund to an existing registration, and clarity on regulatory capital. The change to regulatory capital requirements could mean an increase for certain managers, as previously it has been a matter for local regulators to set. Going forward, the level for all EUVECA managers will be the greater of (1) one-eighth of fixed annual overheads from the previous year, and (2) €50,000. Although, once a manager’s AUM exceeds €250 million, this amount will increase accordingly.
These amendments to the EUVECA regulation were published last week in the EU Official Journal, and will have direct effect in all member states as of 1 March 2018. It is worthwhile for any fund manager considering a venture or small cap fund to look more closely at EUVECA, given the potential benefits when compared to a fully AIFMD compliant offering.
Gregory BarclayPartnerChair, Singapore Office