# EUR-Lex - 52011PC0862 - EN

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# 52011PC0862

**Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on European Social Entrepreneurship Funds /* COM/2011/0862 final - 2011/0418 (COD) */**

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EXPLANATORY MEMORANDUM

1.
CONTEXT OF THE PROPOSAL

The principal aim of this proposal is to
provide support to the market for social businesses by improving the
effectiveness of fundraising by investment funds that target these businesses.

Social businesses[1] are an emerging sector in the
EU. Social businesses are undertakings whose primary objective is to achieve
social impacts, rather than generate profits for shareholders or other
stakeholders. In achieving social impacts, social business seeks to build on
business techniques – including business finance. While the sector is new, it
is characterised by rapid growth. According to the Global Enterprise Monitor
2009 report, between 3% and 7.5% of the workforce in selected EU Member States
were employed in various forms of social businesses.

Social businesses are almost exclusively
SMEs. The social mission of social businesses correlates with a strong focus on
sustainable or inclusive development, and on tackling social challenges across
EU societies: this means that investment in social businesses are likely to
have a greater positive social impact than investment in SMEs more general.
Given some estimates, such as by J. P. Morgan, suggest social investments could
grow rapidly to become a market well in excess of EUR 100 billion, underlining
the potential of this emerging sector.[2]

Ensuring this sector continues to grow and
flourish would therefore be a valuable contribution to meeting the objectives
of the Europe 2020 Strategy.

Social businesses derive significant
proportions of their funding from grants, whether from foundations, individuals
or from the public sector. As businesses, however, their sustainable growth
depends on drawing on a wider range of investments and financing sources. In
this regard, the EU market for investment funds has begun to play a significant
role. A market for investment funds whose main objective is investing in social
businesses has taken shape. In order to distinguish such targeted funds from
social investment funds more widely, these targeted funds are referred to as
social entrepreneurship funds in this proposal. The growth of social
entrepreneurship funds reflects the increasing interest of many investors in
making investments – typically as part of a wider portfolio – that aim to
achieve positive social effects over and above the quest for financial returns.

Evidence on regulatory and market failings
shows two problems are limiting the growth of social entrepreneurship funds.

Firstly, regulatory requirements at EU and
national levels are not tailored to facilitate the raising of capital by these
kinds of funds. Raising capital on a cross border basis is costly and complex
due to the fragmentation of national rules that govern 'private placements[3]' abroad. Compliance with a variety
of national rules governing the activity of 'private placements' to select
investor groups raises the cost of capital for these funds. Also, social
entrepreneurship funds are not flourishing across all Member States, but
currently are geographically uneven in their distribution.

Following consultations with Member States
it is clear such social entrepreneurship funds are in most cases either
governed by the general national rules applicable to private placements or,
alternatively, by special legal provisions that are introduced for venture
capital or private equity. A minority of Member States also has special rules
for wider categories of social investment funds that are also open to retail
investors. These wider social investment funds do not necessarily target their
investments solely towards social businesses. Evidence in the impact assessment
shows that the fragmentation of national rules on social entrepreneurship funds
and a lack of tailoring of such rules to their needs has led to cost burdens and
reduced efficient access to capital markets for such funds. Despite strong
investor interest in social investment strategies, these regulatory burdens
hinder the creation of efficiently sized social entrepreneurship funds (the
average social entrepreneurship fund's assets under management rarely exceed
EUR 20 million).

Secondly, potential investors in social entrepreneurship
funds are faced with a wide range of different social investment propositions,
different levels of information pertaining to social investments, the selection
or screening of social undertakings, and approaches to the measurement of their
social performance. Funds themselves and their target social businesses can
face costs from the existence of overlapping or competing self-regulatory
measures with respect to the issues mentioned above. Confidence and trust in
the eyes of investors are undermined.

These difficulties hamper efficient flows
of capital to social entrepreneurship funds, and thereby the flow of capital to
social undertakings themselves, and constitute a barrier to the development of
a single investment market in this area.

In these circumstances, the Commission, in
the Single Market Act[4] (SMA), undertook to put in train several measures to ensure EU
social businesses can flourish, including by tackling such financing
weaknesses. The current proposal on a European framework for social
entrepreneurship funds is one initiative that delivers on that commitment; it
forms part of the Commission's Social Business Initiative (COM(2011) 682/2),
which aims to tackle wider issues in this sector.

The aim of the proposed Regulation is to
create a legislative framework tailored to the needs of social undertakings,
investors seeking to fund such undertakings, and the specialised investment funds
that seek to mediate between the two. It aims to achieve a high level of
clarity as to the characteristics that distinguish social entrepreneurship
funds from the wider category of alternative investment funds. Only funds that
comply with these characteristics shall be eligible to raise funds by virtue of
the proposed European framework for social entrepreneurship funds.

The proposed Regulation addresses these
problems. It introduces uniform requirements for the managers of collective
investment undertakings that operate under the designation "European
Social Entrepreneurship Fund". It introduces requirements as to the
investment portfolio, investment techniques and eligible undertakings that a
qualifying social entrepreneurship fund may target. It also introduces uniform
rules on which categories of investors a qualifying social entrepreneurship
fund may target and on the internal organisation of the managers that market
such qualifying funds. As managers of collective investment undertakings that operate
under the designation "European Social Entrepreneurship Fund" will be
subject to identical substantive rules across the EU, they will benefit from
uniform requirements for registration and an EU wide passport, which will help
create a level playing field for all participants in the market for the funding
of social entrepreneurs.

The proposed Regulation on European Social
Entrepreneurship Funds (EuSEFs) is complementary to the proposed Regulation [...]
on Venture Capital Funds. Both proposals aim to achieve different goals and
both proposals, if adopted, will coexist as autonomous legal acts in mutual
independence.

Venture capital funds focus on providing
equity finance for SMEs, but typically do not meet the asset-based threshold
that defines the passport available for large fund managers under Directive 2011/61/EC (on Alternative
Investment Fund Managers). While social businesses are also SMEs, and the funds
targeting social business also operate beneath the asset-based thresholds of
Directive 2011/61/EC, the range of eligible financing tools proposed in the
Regulation on European Social Entrepreneurship Funds go beyond equity finance -
the typical instrument for start-up enterprises in the technology sector. Apart
from equity finance social undertakings also have recourse to other forms of
finance, combining public and private sector financing, debt instruments or
small loans. The proposed rules on social entrepreneurship funds therefore
provide for a larger range of qualifying investment tools that are available
for venture capital funds.

In addition, the transparency issues raised
by investments into social businesses are distinct from the general reporting
obligations that are provided in the area of venture capital: investments into
social entrepreneurship target a form of ‘social return’ or positive social
impact. The proposed rules contain special sections that focus on information
pertaining to social impacts, their measurement and the strategies employed to
foster their achievement.

For these reasons, the preferred choice is
that there should be two EU frameworks on venture capital and on social
entrepreneurship that would operate autonomously alongside each other.

Further work should be undertaken to ensure
that the rights assigned by this Regulation to EuSEF managers and the EuSEFs
they manage are not undermined by tax obstacles. Appropriate taxation rules –
though independent from this Regulation – are an important compliment to it and
aid the development of a fully functional market for EuSEFs within the EU. They
could ensure efficient capital flows to EuSEFs and ultimately the qualifying
portfolio undertakings in which the funds invest.

2.
RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES
AND IMPACT ASSESSMENTS
2.1.
Consultation with interested parties

On 13th July 2011, the Commission services
launched a public consultation on possible measures to improve the access of
social businesses to finance by means of investment funds, which closed on 14th
Sept 2011.[5] Contributions received were 67 in total and can be consulted at the
following website:

http://ec.europa.eu/internal_market/consultations/2011/social_investment_funds_en.htm.

In addition, regulators and supervisors
were also consulted via the European Securities Committee (ESC), including
through a questionnaire requesting details on existing national regimes for
social investment funds more widely including on social entrepreneurship funds.

This falls within the wider context of the
Commission's work and consultation on the Single Market Act, where the role of
social businesses and their financing was also identified and explored with
stakeholders and participants in that consultation. Following this the
Commission launched a stand alone Social Business Initiative which offered
further opportunities for discussions with stakeholders including through a
workshop in May 2011.

2.2.
Impact Assessment

In line with its policy on "better
regulation", the Commission conducted an impact assessment on various
policy alternatives.

This analysis identified two key problems:
on the one hand, information made available to investors pertaining to social
undertakings, the investment policies and screening procedures followed by
social entrepreneurship funds and the measurement of social impacts is either
insufficient or not presented in a comparable manner. On the other hand,
regulatory approaches to the fundraising of organisations specialising in investments
in social businesses were not sufficiently tailored to the specific needs of
social entrepreneurship funds.

First, market participants lack confidence
in the information available, are not readily able to identify those funds that
target social businesses, and are not confident in the social impact they can
achieve by investing in such funds. The second problem relates to regulatory
failings: national systems hat govern fundraising outside the open markets
(private placements) are divergent and are not specifically tailored to the
need of social entrepreneurship funds and their managers. This means
cross-border fundraising is complex, marked by regulatory divergences. In the
absence of uniform rules at EU level, social fundraising by social entrepreneurship
funds is likely to remain national.

The analysis thereby identifies three key
objectives: improving the clarity and comparability of investment funds
targeting social businesses; improving tools for assessing and analysing social
impacts; and better reflecting the needs of social entrepreneurship funds in the
rules applying to such funds across the Union.

A wide range of options were examined
against these objectives.

With respect to raising clarity and
comparability of social entrepreneurship funds, the impact assessment explores
different options for facilitating transparency through self-regulation (codes
of conduct), the establishment of an EU label with harmonised and binding
measures to enforce compliance. For improving tools for assessing or analysing social
impacts, different options were examined, ranging from the establishment of
stakeholder fora for discussion to launching further study in how such
assessment tools can be harmonised at EU level. In relation to improving
cross-border fundraising by such funds and the regulatory environment that
governs private placements abroad, options ranged from fostering mutual
recognition between national private placement rules, the use of the venture
capital rules to also foster fundraising by social entrepreneurship funds, the
creation of a bespoke fundraising system for such funds and the creation of a
self-standing European fund framework for such funds.

The impact assessment concluded in favour
of a standalone framework for defining the funds and the rules applying to
them, to facilitate national and cross border fund raising including the
development of a European 'brand' of social entrepreneurship funds supported by
strong transparency measures.

The impact of options, including benefits
and costs for the fund industry, investors, social businesses, society,
supervisors and other stakeholders were assessed. The preferred option was
retained as offering the strongest potential to tackle the identified problems
whilst being proportionate in relation to compliance costs incurred by those
who want to benefit from the new framework.

The comments by the Impact Assessment Board
expressed in their opinion of 18 November 2011 have been taken into account in
the impact assessment report. The wider context for this initiative has been further
clarified by showing how the different initiatives by the Commission in the
field of social business link together to form a coherent strategy. The
analysis of the problems has been further strengthened including a clearer
explanation on the reasons why the initiative on venture capital funds will not
be able to address the problems for social entrepreneurship funds. The
intervention logic and the analysis of the different options, particularly with
respect to possible categories of investors have been further clarified. The
contents of the measures which are envisaged now and those which might be
necessary at a later stage are set out in a clearer fashion. The assessment of
impacts has been improved, including an assessment of the inter-dependence of
measures in terms of their likely effectiveness. Finally, monitoring and
compliance issues have been further clarified.

3.
LEGAL ELEMENTS OF THE PROPOSAL
3.1.
Legal basis

The proposal is based on Article 114 TFEU
as the most appropriate legal base in this field. The proposal aims principally
at improving the reliability and legal certainty of marketing activities
undertaken by operators using the designation "European Social
Entrepreneurship Fund". In pursuing this aim, the proposal introduces
uniform standards concerning the portfolio composition, eligible investment
instruments, and eligible investment targets of collective investment funds
that operate under that designation. The proposal also introduces rules on
investor categories that are considered as eligible to invest in such
investment funds.

A Regulation is considered to be the most
appropriate legal instrument to introduce uniform requirements directed to all
participants in the market for fundraising for social undertakings - investors,
social entrepreneurship funds and the target companies of social
entrepreneurship financing. A Regulation is also considered the most
appropriate instrument to create uniform rules on who can be a social
entrepreneurship fund investor, on who can use the designation "European
Social Entrepreneurship Fund" and on the types of undertakings that can
receive funding from such qualifying funds. Finally, a Regulation is considered
to be the most appropriate instrument to ensure that all participants are
subject to uniform requirements regarding the subscription to "European
Social Entrepreneurship Funds" and the investment
strategies pursued and investment tools used by such funds.

Furthermore, the objectives of this
Regulation relate to the uniform requirements on transparency in relation to
social impacts, including reporting and social performance measurements. For
this purpose, uniform requirements to this effect – e.g. details on how the
information on social performance is presented – are necessary. If the choice
of the precise measures for standardising these requirements was left to the
national legislation of Member States, this would incur the risk that these
requirements diverge from Member State to Member State. This would create
uneven standards in an area which is key for the further development of the
market of investment funds targeting social business. Such uneven standards
would be detrimental to the aim of ensuring this is a market that investors can
trust. Therefore, to boost investors' confidence it is necessary to ensure that
fund managers follow the same rules in this key area.

3.2.
Subsidiarity and proportionality

The proposal essentially aims at creating a
trusted, safe and legally stable marketing environment for the marketing of
"European Social Entrepreneurship Funds". The determination of the
essential characteristics of such a fund, in terms of its portfolio
composition, investment tools, investment targets and eligible investor groups,
can not be left to the discretion of the Member States as this would give rise
to different and inconsistent application of these defining requirements
throughout the EU. Uniform definitions and operating requirements therefore
must play a central role in establishing a set of common rules for the European
market for these funds and their managers. Furthermore, all collective
investment fund managers operating in this market using the designation
"European Social Entrepreneurship Fund" must be subject to the same
organisational, conduct of business and transparency requirements.

In respect of the registration and
supervision of the managers of "European Social Entrepreneurship
Funds" the proposal aims at striking a balance between the need for
effective supervision, the interest of the competent national authorities where
such funds are either domiciled or offered to the eligible categories of
investors and the coordinating role of ESMA. In order to create a seamless
process for supervision, the competent authority in the Member State where the
manager of the qualifying "European Social Entrepreneurship Fund" is
domiciled will verify the registration documents submitted by the applicant
manager and, after having assessed whether the applicant provides sufficient
guarantee of its ability to comply with the requirements of the Regulation,
will register the applicant. In supervising the registered manager, the
competent authority that has registered the manager will cooperate with the
competent authorities in those Member States where the qualifying fund is
marketed. ESMA will maintain a central database listing all registered managers
that are eligible to use the designation European Social Entrepreneurship Fund.

As regards proportionality, the proposal
strikes the appropriate balance between the public interest of promoting the
development of more efficient markets for "European Social
Entrepreneurship Funds" and the cost efficiency of the measures proposed.
In providing for a simple registration system, the proposal has taken full
account of the need to balance safety and reliability associated with the use
of the designation "European Social Entrepreneurship Fund" with the
efficient operation of the market and the cost for its various stakeholders.

3.3.
Compliance with Articles 290 and 291 TFEU

On 23 September 2009, the Commission
adopted proposals for Regulations establishing EBA, EIOPA, and ESMA. In this
respect the Commission wishes to recall the Statements in relation to Articles
290 and 291 TFEU it made at the adoption of the Regulations establishing the
European Supervisory Authorities according to which: "As regards the
process for the adoption of regulatory standards, the Commission emphasises the
unique character of the financial services sector, following from the
Lamfalussy structure and explicitly recognised in Declaration 39 to the TFEU.
However, the Commission has serious doubts whether the restrictions on its role
when adopting delegated acts and implementing measures are in line with
Articles 290 and 291 TFEU."

3.4.
Presentation of the Proposal

Article 1 - Scope

Article 1
delineates the scope of the envisaged Regulation. The Article makes clear that
the designation "European Social Entrepreneurship Fund" (EuSEF) shall
be reserved to those fund managers that comply with a set of uniform quality
criteria that apply to the marketing of their funds across the Union. In this
respect, Article 1 underscores the aim to set out a uniform concept of what
constitutes a EuSEF. This concept is developed in order to ensure the smooth
marketing of such funds across the Union.

Article 2 - Scope of application

Article 2
specifies that this Regulation applies to managers of collective investment
undertakings as defined in Article 3(1)(b) of this Regulation that are
established in the Union and who are subject to registration with the competent
authorities in their home member states in accordance with Article 3 (3) (a) of
Directive 2011/61/EC, provided that they manage portfolios of EuSEFs whose
assets under management in total do not exceed a threshold of EUR 500 million.

Article 3 - Definitions

Article 3
contains essential definitions delineating the scope of application for the
proposed Regulation. Key concepts, such as the EuSEF itself, the EuSEF manager,
the qualifying investment tools and the qualifying investment targets are defined.
Essentially, these definitions aim to draw a clear demarcation line between a
EuSEF and other funds which may pursue similar investment strategies but which
are not targeting social undertakings.

In line with the aim of precisely circumscribing the funds under
this Regulation, Article 3, paragraph 1(a) stipulates that a EuSEF shall
be a fund that dedicates at least 70 percent of its aggregate capital
contributions and uncalled committed capital to investments that are qualifying
portfolio undertakings. This implies that e.g.
operational expenses to be charged to the EuSEF as may be agreed with
investors, must be borne out of the remaining 30
percent of committed capital contributions.

This Regulation takes also the special
characteristics of social undertakings into account. Social undertakings have
the achievement of positive social impact as their principle objective.
Therefore, this Regulation requires that a qualifying portfolio undertaking
should have a measurable and positive social impact, uses its profits to
achieve its primary objective and that it is managed in an accountable and
transparent way. Article 3 also specifies rules and
procedures that must be in place to cover the circumstances in which a
qualifying portfolio undertaking wishes to distribute some its profits to its
owners and shareholders. As explained in the recital, such distributions should
not undermine effective achievement of the undertaking's primary objective.

Taking into account the funding needs of
such undertakings the eligible investment tools are equally defined. These
include equity instruments, debt instruments, investments into other EuSEFs and
long and medium term loans.

Article 4 – Use of the designation
"European Social Entrepreneurship Fund"

Article 4
contains the key principle that only funds that comply with the uniform
criteria laid down by this Regulation are eligible to use the designation
"European Social Entrepreneurship Fund" to market EuSEFs across the
Union.

Article 5 – Portfolio composition

Article 5
contains detailed provision on the portfolio composition that characterises a
EuSEF. In this respect, Article 5 contains uniform rules on the investment
targets for EuSEF, eligible investment tools, rules on the limits by which a
EuSEF manager can increase its exposure. In order to allow EuSEFs a certain
degree of flexibility in their investment and liquidity management, other investments are permitted within a maximum threshold not
exceeding 30 percent of aggregate capital contributions and uncalled capital
investments that does not need to constitute qualifying investments.

Article 6 – Eligible investors

Article 6
contains detailed provisions on the investors eligible to invest in EuSEFs:
according to this Article, the EuSEFs may only be marketed to investors
recognised as professional investors in Directive 2004/39/EC. Marketing to other investors such as certain high-net worth
individuals is only allowed if they commit a minimum 'ticket' of EUR 100 000 to
the fund and if certain procedures are followed by the fund manager so that the
fund manager is reasonably assured that these other investors are capable of making their own investment decisions and understanding
the risks involved.

Article 7 – Rules of conduct

Article 7
contains general principles governing the behaviour of a EuSEF manager, notably
in the conduct of its activities and its relationship to investors.

Article 8 – Conflicts of interest

Article 8
contains rules for the handling of conflicts of interest by the EuSEF manager.
These rules also require the manager to have the necessary organisational and
administrative arrangements in place to ensure a proper handling of conflicts
of interest.

Article 9 – Measurement of positive
social impacts

Article 9
requires EuSEF managers to have the necessary procedures in place in order to
measure and monitor the positive social impacts the qualifying portfolio
undertakings are committed to achieve.

Article 10 - Organisational requirements

Article 10 requires that a EuSEF manager maintains adequate human and technical
resources as well as sufficient own funds as are necessary for the proper
management of EuSEFs.

Article 11 – Valuation

Article 11
addresses the valuation of the assets of a EuSEF. Rules on this should be laid
down in the statutory documents of each EuSEF.

Article 12 - Annual reports

Article 12
contains rules on annual reports EuSEF managers should prepare in relation to
the EuSEF they manage. The report shall describe the composition of the
portfolio of the fund and the activities of the past year. It shall also
contain information regarding the social impact achieved by the investment
policy of the fund.

Article 13 - Disclosure to investors

Article 13 contains certain key disclosure requirements that are incumbent on a
EuSEF manager in relation to its investors. These requirements contain
pre-contractual general disclosure obligations in relation to the investment
strategy and the objectives of the EuSEF, information on costs and associated
charges, and the risk/reward profile of the investment proposed by the EuSEF. Such
requirements also include information about the way the remuneration of the
EuSEF manager is calculated. At the same time, these requirements aim to ensure
transparency in relation to the specific nature of EuSEFs, particularly as
regards the positive social outcome which shall be achieved by the investment
policy.

Article 14 – Supervision

Article 14
in order to ensure that the competent authority of the home Member State will
be able to supervise compliance of the EuSEF manager with the uniform
requirements set out in this Regulation; the EuSEF manager shall inform the
competent authority of its intention to market EuSEFs under the designation
"European Social Entrepreneurship Fund." The manager shall also
provide the necessary information including about the arrangements to comply
with this Regulation and the funds he intends to market. Once the competent
authority is satisfied that the required information is complete and that the
arrangements are suitable to comply with the requirements set out in this
Regulation, it shall register the EuSEF manager. This registration shall be valid
across the entire Union and allows the EuSEF manager to market EuSEFs under the
designation "European Social Entrepreneurship Fund".

Article 15 – Update of information

Article 15 contains
rules on circumstances when information supplied to the competent authority in
the home Member State needs to be updated.

Article 16 - Cross-border notifications

Article 16
describes the cross-border notification process between the competent
supervisory authorities that is triggered by the registration of the EuSEF
manager.

Article 17 – ESMA database

Article 17
entrusts ESMA with the task to maintain a central database listing all EuSEFs
that are registered across the Union.

Article 18 – Supervision by competent
authority

Article 18 stipulates that the competent
authority of the home Member State supervises the requirements of this
Regulation.

Article 19 – Supervisory powers

Article 19
specifies a list of supervisory powers that competent authorities shall have at
their disposal to ensure compliance with the uniform criteria contained in the
Regulation.

Article 20 – Sanctions

Article 20
contains provisions on sanctions to ensure proper enforcement of the requirements
of this Regulation.

Article 21 – Breach of key provisions

Article 21
specifies that the breach of key provisions of this Regulation such as on
portfolio composition, the eligible investors and the use of the designation
"European Social Entrepreneurship Fund" should be sanctioned by the
prohibition of the use of the designation and the removal of the EuSEF manager
of the register.

Article 22 – Supervisory cooperation

Article 22
contains rules on the exchange of supervisory information between the competent
authorities in the home and host Member States and ESMA.

Article 23 - Professional secrecy

Article 23
contains provisions on the requisite level of professional secrecy that should
apply to all relevant national authorities and to the European Securities and
Markets Regulator (ESMA).

Article 24 – Conditions for empowerment

Article 24
sets out the conditions under which the Commission is empowered to adopt
delegated acts.

Article 25 - Review

Article 25
contains clauses on the review of the proposed Regulation and possible
Commission proposals to modify the latter.

4.
BUDGETARY IMPLICATION

There are no budgetary implications.

2011/0418 (COD)

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL

on European Social Entrepreneurship Funds

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE
COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the
European Commission,

After transmission of the draft legislative
act to the national Parliaments,

Having regard to the opinion of the
European Central Bank,[6]

Having regard to the opinion of the
European Economic and Social Committee,[7]

Acting in accordance with the ordinary
legislative procedure,

Whereas:

(1)
Increasingly, as investors also pursue social
goals and are not only seeking financial returns, a social investment market
has been emerging in the Union, comprised in part by investment funds targeting
social undertakings. Such investment funds provide funding to social
undertakings which are acting as drivers of social change by offering
innovative solutions to social problems and making a valuable contribution to
meeting the objectives of the Europe 2020 Strategy.

(2)
It is necessary to lay down a common framework
of rules regarding the use of the designation "European Social
Entrepreneurship Fund", in particular on the composition of the portfolio
of funds that operate under this designation, their eligible investment
targets, the investment tools they may employ and the categories of investors
that are eligible to invest in such funds by uniform rules in the Union. In the
absence of such a common framework, there is a risk that Member States take
diverging measures at national level having a direct negative impact on, and
creating obstacles to, the good functioning of the internal market, since funds
that wish to operate across the Union would be subject to different rules in
different Member States. Moreover, diverging quality requirements on portfolio
composition, investment targets and eligible investors could lead to different
levels of investor protection and generate confusion as to the investment
proposition associated with a European Social Entrepreneurship Fund (EuSEF).
Investors should, furthermore, be able to compare the investment propositions
of different EuSEFs. It is necessary to remove significant obstacles to
cross-border fundraising by EuSEFs and to avoid distortions of competition
between those funds, and to prevent any further likely obstacles to trade and
significant distortions of competition from arising in the future.
Consequently, the appropriate legal basis is Article 114 TFEU, as interpreted
in accordance with the consistent case law of the Court of Justice of the
European Union.

(3)
It is necessary to adopt a Regulation
establishing uniform rules applicable to EuSEFs and imposing corresponding
obligations on their managers in all Member States that wish to raise capital
across the Union using the designation "European Social Entrepreneurship
Fund". These requirements should ensure the confidence of investors that
wish to invest in such funds.

(4)
Defining the quality requirements for the use of
the designation "European Social Entrepreneurship Fund" in the form
of a Regulation should ensure that those requirements will be directly
applicable to the managers of collective investment undertakings that raise
funds using this designation. This would ensure uniform conditions for the use
of this designation by preventing diverging national requirements as a result
of the transposition of a Directive. This Regulation would entail that managers
of collective investment undertakings that use this designation would need to
follow the same rules in all of the Union, which would also boost confidence of
investors that wish to invest in funds that focus on social undertakings. A
Regulation would also reduce regulatory complexity and the manager's cost of
compliance with often divergent national rules governing such funds, especially
for those managers that want to raise capital on a cross-border basis. A
Regulation should also contribute to eliminating competitive distortions.

(5)
In order to clarify the relationship between
this Regulation and generally applicable Union rules on collective investment
undertakings and their managers, it is necessary to establish that this
Regulation should only apply to managers of collective investment undertakings
other than UCITS in accordance with Article 1 of Directive 2009/65/EC of the
European Parliament and of the Council of 13 July 2009 on the coordination of
laws, regulations, and adminstrative provisions, relating to undertakings for
collective investment in transferable securities (UCITS)[8] and who are established in the
Union and are registered with the competent authority in their home Member
State in accordance with Directive 2011/61/EC of the European Parliament and of
the Council of 8 June 20011 on
Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC
and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.[9] Furthermore, this Regulation should only apply to managers who
manage portfolios of EuSEFs whose assets under management in total do not
exceed a threshold of EUR 500 million. In order to make the calculation of this
threshold operational, the power to adopt acts in accordance with Article 290
of the Treaty on the Functioning of the European Union should be delegated to
the Commission in respect of specifying the calculation of this threshold. When
exercising this empowerment, the Commission should, in order to ensure
consistency in rules on collective investment undertakings, take into account
measures adopted by the Commission in accordance with point (a) of Article 3
(6) of Directive 2011/61/EC.

(6)
Where managers of collective investment
undertakings do not wish to use the designation "European Social
Entrepreneurship Fund" then this Regulation does not apply. In those
cases, existing national rules and general Union rules should continue to apply.

(7)
This Regulation should establish uniform rules
on the nature of EuSEFs, notably on the portfolio undertakings into which the
EuSEFs are to be permitted to invest, and the investment instruments to be used.
In order to ensure the necessary clarity and certainty this Regulation should also
lay down uniform criteria to identify social undertakings as eligible
qualifying portfolio undertakings. Social undertakings have the achievement of
positive social impact as their principle objective rather than maximising
their profits. Therefore, this Regulation should require that a qualifying
portfolio undertaking should have the achievement of a measurable and positive
social impact as its focus; that it uses its profits to achieve its primary
objective and that it be managed in an accountable and transparent way. For the,
in general, exceptional cases, in which a qualifying portfolio undertaking
wishes to distribute profits to shareholders and owners, the qualifying
portfolio undertaking should have predefined procedures and rules on how
profits are distributed to shareholders and owners. Those rules should specify
that distribution of profits does not undermine the primary social objective.

(8)
Social undertakings include a large range of undertakings,
taking various legal forms, that provide social services or goods to vulnerable
or marginalised persons. Such services include access to housing, healthcare,
assistance for elderly or disabled persons, child care, access to employment
and training as well as dependency management. Social undertakings also include
undertakings that employ a method of production of goods or services with a
social objective, but whose activities may be outside the realm of the
provision of social goods or services. Those activities include social and
professional integration by means of access to employment for people
disadvantaged in particular by insufficient qualifications or social or
professional problems leading to exclusion and marginalisation.

(9)
Taking into account the specific funding needs
of social undertakings, it is necessary to achieve clarity regarding the types
of instruments a EuSEF should use for such funding. Therefore, this Regulation should
lay down uniform rules on the eligible instruments to be used by a EuSEF when
making investments, which include equity instruments, debt instruments,
investments into other EuSEFs and short and medium term loans.

(10)
To maintain the necessary flexibility in its
investment portfolio, EuSEFs may also invest in other assets than qualifying investments
to the extent that these investments do not exceed the limits set by this
Regulation for non-qualifying investments. Short term holdings such as cash and
cash equivalents should not be taken into account for the calculation of the
limits set for non-qualifying investments in this Regulation.

(11)
In order to ensure that the designation
"European Social Entrepreneurship Fund" is reliable and easily
recognisable for investors across the Union this Regulation should establish
that only EuSEF managers which comply with the uniform quality criteria as set
out in this Regulation should be eligible to use this designation when
marketing EuSEFs across the Union.

(12)
In order to ensure that EuSEFs have a distinct
and identifiable profile which is suited to their purpose, there should be
uniform rules on the composition of the portfolio and on the investment
techniques which are permitted for such funds.

(13)
In order to ensure that EuSEFs do not contribute
to the development of systemic risks, and so as to ensure that such funds
concentrate, in their investment activities, on supporting qualifying portfolio
companies, borrowing or leverage at the level of the fund should not be
permitted. However, in order to permit the fund to cover
extraordinary liquidity needs that might arise between the call of committed
capital from investors and the actual reception of the capital in its accounts,
short-term borrowing should be allowed.

(14)
In order to ensure that EuSEFs are marketed to
investors who have the knowledge, experience and capacity to take on the risks
these funds carry, and in order to maintain investor confidence and trust in
EuSEF, certain specific safeguards should be laid down. Therefore, EuSEFs
should in general only be marketed to investors who are professional clients or
who can be treated as professional clients under Directive 2004/39/EC of the
European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives
85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and
of the Council and repealing Council Directive 93/22/EEC.[10]
However, in order to have a sufficiently broad investor base for investments
into EuSEFs it is also desirable that certain other investors have access to
these funds, including high net worth individuals. For those other investors,
specific safeguards should be laid down in order to ensure that EuSEFs are only
marketed to investors that have the appropriate profile for making such
investments. These safeguards exclude marketing through the use of periodic
savings plans.

(15)
To ensure that only EuSEF managers who fulfil
uniform quality criteria as regards their behaviour in the market use the
designation "European Social Entrepreneurship Fund", this Regulation should
establish rules on the conduct of business and the relationship of the EuSEF
manager to its investors. For the same reason, this Regulation should also lay
down uniform conditions concerning the handling of conflicts of interest by
such managers. These rules should also require the manager to have the
necessary organisational and administrative arrangements in place to ensure a
proper handling of conflicts of interest.

(16)
The creation of positive social impacts in
addition to the generation of financial returns for investors is a key
characteristic of investment funds targeting social undertakings, one which
distinguishes them from other types of investment funds. This Regulation should
therefore require that the EuSEF managers put in place procedures for
monitoring and measuring the positive social impacts which are to be achieved
by investment into qualifying portfolio undertakings.

(17)
In order to ensure the integrity of the
designation "European Social Entrepreneurship Fund", this Regulation
should also contain quality criteria as regards the organisation of a EuSEF
manager. Therefore, this Regulation should lay down uniform, proportionate
requirements for the need to maintain adequate technical and human resources as
well as sufficient own funds for the proper management of EuSEFs.

(18)
It is necessary for the purpose of investor
protection to ensure that EuSEFs assets are properly evaluated. Therefore the
statutory document of the EuSEF should contain rules on the valuation of
assets. This should ensure the integrity and the transparency of the valuation.

(19)
In order to ensure that EuSEF managers which
make use of the designation "European Social Entrepreneurship Funds"
give sufficient account of their activities, uniform rules on annual reports
should be established.

(20)
To ensure the integrity of the designation
"European Social Entrepreneurship Fund" in the eyes of investors, it
is necessary that the designation only be used by fund managers who are fully
transparent as to their investment policy and their investment targets. This
Regulation should therefore set out uniform rules on disclosure requirements
that are incumbent on a EuSEF manager in relation to his investors. These requirements include those elements that are specific to investments
into social undertakings, so that greater consistency and comparability of such
information may be achieved. This includes information about the criteria and
the procedures which are used to select particular qualifying portfolio
undertakings as investment targets. This also includes information about the
positive social impact to be achieved by the investment policy and how this should
be monitored and assessed. To ensure the necessary confidence and the trust of
investors in such investments, this further includes information about the assets
of the EuSEF which are not invested into qualifying portfolio undertakings and
how these are selected.

(21)
In order to ensure effective supervision of the
uniform requirements contained in this Regulation, the competent authority of
the home Member State should supervise compliance of the EuSEF manager with the
uniform requirements set out in this Regulation. To this effect, the EuSEF
manager who wishes to market his funds under the designation "European
Social Entrepreneurship Fund" should inform the competent authority of his
home Member State of this intention. The competent authority should register
the fund manager if all necessary information has been provided and if there
are suitable arrangements to comply with the requirements of this Regulation are
in place. This registration should be valid across the entire Union.

(22)
In order to ensure effective supervision of
compliance with the uniform criteria set out, this Regulation should contain
rules on the circumstances under which information supplied to the competent
authority in the home Member State needs to be updated.

(23)
For the effective supervision of the
requirements laid down, this Regulation should also establish a process for
cross-border notifications between the competent supervisory authorities, to be
triggered by the registration of the EuSEF manager in its home Member State.

(24)
In order to maintain transparent conditions for
the marketing of EuSEF managers across the Union, the European Securities and
Markets Authority (ESMA) should be entrusted with maintaining a central
database listing all EuSEFs that are registered in accordance with this
Regulation.

(25)
In order to ensure the effective supervision of
the uniform criteria established, this Regulation should contain a list of
supervisory powers that competent authorities shall have at their disposal.

(26)
In order to ensure proper enforcement, this
Regulation should contain sanctions for the breach of its key provisions, namely
the rules on portfolio composition, on safeguards relating to the identity of
eligible investors, and on the use of the designation "European Social
Entrepreneurship Fund" only by registered EuSEF managers. It should be
established that a breach of these key provisions entails the prohibition of
the use of the designation and the removal of the fund manager from the
register.

(27)
Supervisory information should be exchanged
between the competent authorities in the home and host Member States and ESMA.

(28)
Effective regulatory cooperation among the
entities tasked with supervising compliance with the uniform criteria set out
in this Regulation requires that a high level of professional secrecy should
apply to all relevant national authorities and to ESMA.

(29)
Technical standards in financial services should
ensure consistent harmonisation and a high level of supervision across the
Union. As a body with highly specialised expertise, it would be efficient and
appropriate to entrust ESMA with the elaboration of draft implementing
technical standards where these do not involve policy choices, for submission
to the Commission.

(30)
The Commission should be empowered to adopt
implementing technical standards by means of implementing acts pursuant to
Article 291 of the Treaty on the Functioning of the European Union and in
accordance with Article 15 of Regulation (EU) No 1095/2010 of the European
Parliament and the Council of 24 November 2010 establishing a European
Supervisory Authority (European Securities and Markets Authority) amending
Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC.[11] ESMA should be entrusted with
drafting implementing technical standards for the format and method of the
notification procedure in Article 16.

(31)
In order to specify the requirements set out in
this Regulation, the power to adopt acts in accordance with Article 290 of the
Treaty on the Functioning of the European Union should be delegated to the
Commission in respect of specifying the methods to be used to for calculating
and monitoring the threshold as referred to in this Regulation, specifying the
details for the identification of qualifying portfolio undertakings, the types
of conflicts of interests EuSEF managers need to avoid and the steps to be
taken in that respect, the details of the procedures to measure the social impacts
to be achieved by the qualifying portfolio undertakings and details for the
specification of transparency requirements. It is of particular importance that
the Commission carry out appropriate consultations during its preparatory work,
including at expert level. This work should also take into account self
regulatory initiatives and codes of conduct.

(32)
The Commission, when preparing and drawing up
delegated acts, should ensure a simultaneous, timely and appropriate
transmission of relevant documents to the European Parliament and to the
Council.

(33)
At the latest four years after the date on which
this Regulation becomes applicable a review of this
Regulation should be carried out in order to take account of the development of
the market of EuSEFs. On the basis of the review, the Commission should submit a report to the European Parliament and the Council
accompanied, if appropriate, by legislative changes.

(34)
This Regulation respects fundamental rights and
observes the principles recognised in particular by the Charter of Fundamental
Rights of the European Union, including the right to respect for private and
family life and the freedom to conduct a business.

(35)
Directive 95/46 of the European Parliament and
of the Council of 24 October 1995 on the protection of individuals with regard
to the processing of personal data and on the free movement of such data[12] governs the processing of
personal data carried out in the Member States in the context of this
Regulation and under the supervision of the Member States competent
authorities, in particular the public independent authorities designated by the
Member States. Regulation (EU) No 45/2001 of the European Parliament and of the
Council of 18 December 2000 on the protection of individuals with regard to the
processing of personal data[13]
by the EU institutions and bodies and on the free movement of such data,
governs the processing of personal data carried out by ESMA within the
framework of this Regulation and under the supervision of the European Data
Protection Supervisor.

(36)
The objective of this Regulation, namely to
develop a an Internal Market for EuSEFs by laying down a framework for the
registration of EuSEF managers facilitating the marketing of EuSEFs throughout
the Union, can only be achieved at Union level. The Union may adopt measures in
accordance with the principle of subsidiarity as set out in Article 5 of the
Treaty on the European Union. In accordance with the principle of
proportionality, as set in that Article, this Regulation does not go beyond
what is necessary in order to achieve that objective,

HAVE ADOPTED THIS REGULATION:

CHAPTER I
SUBJECT MATTER, SCOPE AND DEFINITIONS

Article 1

This Regulation lays down uniform
requirements for those managers of collective investment undertakings who wish
to use the designation "European Social Entrepreneurship Fund" (EuSEF)
and the conditions for the marketing of collective investment undertakings
under this designation in the Union, thereby contributing to the smooth
functioning of the internal market.

This Regulation also lays down uniform rules
for the marketing of EuSEF managers to eligible investors across the Union, for
the portfolio composition of EuSEFs, for the eligible investment instruments
and techniques, as well as on the organisation, transparency and conduct of
EuSEF managers that market EuSEFs across the Union.

Article 2

1.
This Regulation applies to managers of
collective investment undertakings as defined in point (b) of Article 3 (1) who
are established in the Union and are subject to registration with the competent
authorities of their home Member State in accordance with point (a) of Article
3 (3) of Directive 2011/61/EC, provided that these managers manage portfolios
of EuSEFs whose assets under management in total do not exceed a threshold of
EUR 500 million or, in the Member States where the Euro is not the official
currency, the corresponding value in the national currency on the date of the
entry into force of this Regulation.

2.
In calculating the threshold referred to in paragraph
1 managers of collective investment undertakings who manage funds other than
EuSEFs will not need to aggregate the assets managed in these other funds.

3.
The Commission shall be empowered to adopt delegated
acts in accordance with Article 24 specifying the methods for calculating the
threshold as referred in paragraph 1 of this Article and for monitoring
compliance with this threshold on an ongoing basis.

Article 3

1.
For the purposes of this Regulation, the
following definitions shall apply:

(a)
'European Social Entrepreneurship Fund' (EuSEF)
means a collective investment undertaking that invests at least 70 percent of
its aggregate capital contributions and uncalled committed capital in assets
that are qualifying investments;

(b)
'collective investment undertaking' means an
undertaking which raises capital from a number of investors with a view to
investing it in accordance with a defined investment policy for the benefit of
those investors and which does not require authorisation pursuant to Article 5
of Directive 2009/65/EC;

(c)
'qualifying investments' means any of the following
instruments:

(i)      an equity instrument that is:

–
issued by a qualifying portfolio undertaking and
acquired directly by the EuSEF from the qualifying portfolio undertaking or

–
issued by a qualifying portfolio undertaking in
exchange for an equity security issued by the qualifying portfolio undertaking
or

–
issued by an undertaking of which the qualifying
portfolio undertaking is a majority-owned subsidiary and which is acquired by
the EuSEF in exchange for an equity instrument issued by the qualifying
portfolio undertaking;

(ii)      securitised and un-securitised debt
instruments, issued by a qualifying portfolio undertaking;

(iii)     units or shares of one or several
other EuSEFs;

(iv)     medium to long term loans granted to
qualifying portfolio undertakings by the EuSEF;

(v)     any other type of participation in a
qualifying portfolio undertaking.

(d)
'qualifying portfolio undertaking' means an
undertaking that, at the time of an investment by the EuSEF, is not listed on a
regulated market as defined in point (14) of Article 4 (1) of Directive
2004/39/EC, which either has an annual turnover not exceeding EUR 50 million,
or an annual balance sheet total not exceeding EUR 43 million, which is not
itself a collective investment undertaking and which:

(i)      has the achievement of measurable,
positive social impacts as a primary objective in accordance with its articles
of association, statutes or any other statutory document establishing the business,
where:

–
the undertaking provides services or goods to
vulnerable or marginalised persons; or

–
the undertaking employs a method of production
of goods or services that embodies its social objective;

(ii)      uses its profits to achieve its
primary objective instead of distributing profits and has in place predefined
procedures and rules for any circumstances in which profits are distributed to
shareholders and owners;

(iii)     is managed in an accountable and
transparent way, in particular by involving workers, customers and stakeholders
affected by its business activities.

(e)
'equity' means ownership interest in an
undertaking, represented by the shares or other form of participation in the
capital of the qualifying portfolio undertaking issued to the investors;

(f)
'marketing' means a direct or indirect offering
or placement at the initiative of the EuSEF manager or on behalf of that
manager of units or shares of a EuSEF it manages to or with investors domiciled
or with a registered office in the Union;

(g)
'committed capital' means any commitment
pursuant to which a person is obligated to acquire an interest in the EuSEF or
make capital contributions to the EuSEF;

(h)
'EuSEF manager' means a legal person whose
regular business is managing at least one EuSEF;

(i)
'home Member State' means the Member State where
the EuSEF manager is established or has its registered office;

(j)
'host Member State' means the Member State,
other than the home Member State, where the EuSEF manager markets EuSEFs in
accordance with this Regulation.

(k)
'competent authority' means the national
authority which the home Member State designates, by law or regulation, to
undertake the registration of managers of collective investment undertakings as
referred to in Article 2 (1).

2.
The Commission shall be empowered to adopt
delegated acts in accordance with Article 24 specifying the types of services
or goods and the methods of production of services or goods that embody a
social objective referred to in point (i) of paragraph 1 (d) of this Article taking
into account the different kinds of qualifying portfolio undertakings and those
circumstances in which profits can be distributed to owners and investors.

CHAPTER II
CONDITIONS FOR THE USE OF THE DESIGNATION "EUROPEAN SOCIAL
ENTREPRENEURSHIP FUND"

Article 4

EuSEF managers who comply with the
requirements set out in this Chapter shall be entitled to use the designation
"European Social Entrepreneurship Fund" in relation to the marketing
of EuSEFs across the Union.

Article 5

1.
EuSEF managers shall ensure that, when acquiring
assets other than qualifying investments no more than 30 percent of the EuSEF's
aggregate capital contributions and uncalled committed capital is used for the
acquisition of assets other than qualifying investments; short term holdings in
cash and cash equivalents shall not be taken into account for calculating this
limit.

2.
EuSEF managers shall not borrow, issue debt
obligations, provide guarantees, at the level of the EuSEF, nor employ any
method, at the level of the EuSEF, by which the exposure of the fund will be
increased, whether through borrowing of cash or securities, the engagement into
derivative positions or by any other means.

3.
The prohibition set out in paragraph 2 shall not
apply to borrowing for a non-renewable term of no longer than 120 calendar days
to provide liquidity between a call for and receipt of committed capital from
investors .

Article 6

EuSEF managers shall market the units and
shares of the EuSEFs under management exclusively to investors which are
considered to be professional clients in accordance of Section I of Annex II of
Directive 2004/39/EC, or may, on request, be treated as professional clients in
accordance with Section II of Annex II of Directive 2004/39/EC, or to other
investors where:

(a)
those other investors commit to invest a minimum
of EUR 100.000;

(b)
those other investors state in writing, in a
separate document from the contract that is concluded for the commitment to
invest, that they are aware of the risks associated with the envisaged
commitment;

(c)
the EuSEF manager undertakes an assessment of
the expertise, experience and knowledge of the investor, without presuming that
the investor has the market knowledge and experience of those listed in Section
I of Annex II of Directive 2004/39/EC;

(d)
the EuSEF manager is reasonably assured, in
light of the nature of the commitment envisaged, that the investor is capable
of making his own investment decisions and understanding the risks involved,
and that a commitment of this kind is appropriate for such an investor;

(e)
the EuSEF manager confirms in writing that he
has undertaken the assessment referred to in point (c) and has reached the
conclusion referred to in point (d).

Article 7

EuSEF managers shall, in relation to the
EuSEF they manage:

(a)
act with due skill, care and diligence in
conducting their activities;

(b)
apply appropriate policies and procedures for
preventing malpractices that might be reasonably expected to affect the
interests of investors and the qualifying portfolio undertakings;

(c)
conduct of their business activities so as to
promote the best interests of the EuSEFs they manage, the investors in those
EuSEFs, and the integrity of the market;

(d)
apply a high level of diligence in the selection
and ongoing monitoring of investments in qualifying portfolio undertakings;

(e)
possess adequate knowledge and understanding of
the qualifying portfolio undertakings they invest in.

Article 8

1.
EuSEF managers shall identify and avoid
conflicts of interest and, where they cannot be avoided, manage and monitor
and, in accordance with paragraph 4, disclose, those conflicts of interest in
order to prevent them from adversely affecting the interests of the EuSEFs and
their investors and to ensure that the EuSEFs they manage are fairly treated.

2.
EuSEF managers shall identify in particular
those conflicts of interest that may arise between

(a)
EuSEF managers, those persons who effectively
conduct the business of the EuSEF manager, employees or any person who directly
or indirectly controls or is controlled by the EuSEF manager, and the EuSEF
managed by the EuSEF manager or the investors in those EuSEFs;

(b)
a EuSEF or the investors in that EuSEF, and
another EuSEF managed by that EuSEF manager, or the investors in that other
EuSEF.

3.
EuSEF managers shall maintain and operate
effective organisational and administrative arrangements in order to comply
with the requirements laid down in paragraph 1 and 2.

4.
Disclosures of conflicts of interest as referred
to in paragraph 1 shall be provided, where organisational arrangements made by
the EuSEF manager to identify, prevent, manage and monitor conflicts of
interest are not sufficient to ensure, with reasonable confidence, that risks
of damage to investors’ interests will be prevented. EuSEF managers shall
clearly disclose the general nature or sources of conflicts of interest to the
investors before undertaking business on their behalf.

5.
The Commission shall be empowered to adopt
delegated acts in accordance with Article 24 specifying:

(a)
the types of conflicts of interest as referred
to in paragraph 2 of this Article;

(b)
the steps EuSEF Managers are expected to take,
in terms of structures and organisational and administrative procedures, in
order to identify, prevent, manage, monitor and disclose conflicts of interest.

Article 9

1.
EuSEF managers shall employ for each EuSEF they
manage procedures to measure and monitor the extent to which the qualifying portfolio
undertakings, in which the EuSEF invests, achieve the positive social impact
that they are committed to.

2.
The Commission shall be empowered to adopt
delegated acts in accordance with Article 24 specifying the details of the
procedures referred in paragraph 1 of this Article, in relation to different
qualifying portfolio undertakings.

Article 10

At all times, EuSEF managers shall have
sufficient own funds and use adequate and appropriate human and technical
resources as are necessary for the proper management of EuSEFs.

Article 11

Rules for the valuation of assets shall be
laid down in the statutory documents of the EuSEF.

Article 12

1.
EuSEF managers shall make available an annual
report to the competent authority of the home Member State for each EuSEF under
management no later than 6 months following the end of the financial year. The
report shall describe the composition of the portfolio of the EuSEF and the
activities of the past year. It shall contain the audited financial accounts
for the EuSEF. It shall be produced in accordance with existing reporting
standards and the terms agreed between the EuSEF manager and the investors.
EuSEF managers shall provide the report to investors on request. EuSEF managers
and investors may agree additional disclosures amongst themselves.

2.
The annual report shall at least include the
following elements:

(a)
details, as appropriate, of the overall social
outcomes achieved by the investment policy and the method used to measure these
outcomes;

(b)
a statement of any divestments in relation to
qualifying portfolio undertakings that have occurred;

(c)
a description of whether divestments in relation
to the other assets of the EuSEF which are not invested into qualifying
portfolio undertakings occurred on the basis of the criteria as referred to in
point (e) of Article 13 (1);

(d)
a summary of the activities the EuSEF manager
has undertaken in relation to the qualifying portfolio undertakings as referred
to in point (k) of Article 13(1).

3.
Where the EuSEF manager is required to make
public an annual financial report in accordance with Article 4 of Directive
2004/109/EC of the European Parliament and Council[14] in relation to the EuSEF the
information referred to in paragraph 1 and 2 of this Article may be provided
either separately or as an additional part of the annual financial report.

Article 13

1.
EuSEF managers shall inform their investors prior
to their investment decision at least about the following elements:

(a)
the identity of the EuSEF manager and of any
other service providers contracted by the EuSEF manager in relation to their
management, and a description of their duties;

(b)
a description of the investment strategy and
objectives of the EuSEF, including a description of the types of the qualifying
portfolio undertakings and the process and criteria which are used for
identifying them, the investment techniques it may employ, and any applicable
investment restrictions;

(c)
the positive social impact being targeted by the
investment policy of the EuSEF, including where relevant, projections of such
outcomes as may be reasonable, and information on past performance in this area;

(d)
the methodologies to be used to measure social impacts;

(e)
a description of the assets other than
qualifying portfolio undertakings and the process and the criteria which are
used for selecting these assets unless they are cash or cash equivalents;

(f)
a description of the risk profile of the EuSEF
and any risks associated with the assets in which the fund may invest or the investment
techniques that may be employed;

(g)
a description of the EuSEF’s valuation procedure
and of the pricing methodology for valuing assets, including the methods used
for valuing qualifying portfolio undertakings;

(h)
a description of all fees, charges and expenses
and of the maximum amounts thereof which are directly or indirectly borne by
investors;

(i)
a description of how the remuneration of the
EuSEF manager is calculated;

(j)
where available, the historical financial
performance of the EuSEF;

(k)
the business support services and the other
support activities the EuSEF manager is providing or arranging through third
parties in order to facilitate the development, growth or in some other respect
the on-going operations of the qualifying portfolio undertakings in which the
EuSEF invests, or, where these services or activities are not provided, an
explanation of that fact;

(l)
a description of the procedures by which the
EuSEF may change its investment strategy or investment policy, or both.

2.
All of the information referred to in paragraph
1 shall be fair, clear and not misleading. It shall be kept up-to-date and
reviewed regularly.

3.
Where the EuSEF manager is required to publish a
prospectus in accordance with Directive 2003/71/EC of the European Parliament
and the Council[15]
or in accordance with national law in relation to the EuSEF, the information
referred to in paragraph 1 of this Article may be provided either separately or
as a part of the prospectus.

4.
The Commission shall be empowered to adopt
delegated acts in accordance with Article 24 specifying:

(a)
the content of the information referred to in
point (b) to (e) and (k) of paragraph 1 of this Article;

(b)
how the information as referred to in point (b)
to (e) and (k) of paragraph 1 of this Article can be presented in a uniform way
in order to ensure the highest possible level of comparability.

CHAPTER III
SUPERVISION AND ADMINISTRATIVE COOPERATION

Article 14

1.
EuSEF managers who intend to use of the
designation "European Social Entrepreneurship Fund" for the marketing
of their EuSEF shall inform the competent authority of their home Member State
of this intention and shall provide the following information:

(a)
the identity of the persons who effectively
conduct the business of managing EuSEFs;

(b)
the identity of the EuSEFs whose units or shares
shall be marketed and their investment strategies;

(c)
information on the arrangements made for
complying with the requirements of Chapter II;

(d)
a list of Member States where the EuSEF manager
intends to market each EuSEF.

2.
The competent authority of the home Member State
shall only register the EuSEF manager if it is satisfied that the following
conditions are met:

(a)
the information required referred to in paragraph
1 is complete;

(b)
the arrangements notified according to in point (c)
of paragraph 1 are suitable in order to comply with the requirements of Chapter
II.

3.
The registration shall be valid for the entire
territory of the Union and shall allow EuSEF managers to market EuSEFs under
the designation "European Social Entrepreneurship Funds" throughout
the Union.

Article 15

The EuSEF manager shall update the information
provided to the competent authority of the home Member State where the EuSEF manager intends:

(a)
to market a new EuSEF;

(b)
to market an existing EuSEF in a Member State
not mentioned in the list referred to in point (d) of Article 14 (1).

Article 16

1.
Immediately after the registration of a EuSEF
manager, the authority of the home Member State shall notify the fact that the
EuSEF manager is registered to the Member States indicated in accordance with point
(d) of Article 14 (1) of this Regulation and to ESMA.

2.
The host Member States indicated in accordance
with point (d) of Article 14 (1) of this Regulation shall not impose, on the
EuSEF manager registered in accordance with Article 14, any requirements or
administrative procedures in relation to the marketing of its EuSEFs, nor shall
they require any approval of the marketing prior to its commencement.

3.
In order to ensure uniform application of this
article, ESMA shall develop draft implementing technical standards to determine
the format of the notification.

4.
ESMA shall submit those draft implementing
technical standards to the Commission by [insert date].

5.
Power is conferred on the Commission to adopt
the implementing technical standards referred to in paragraph 3 in accordance
with the procedure laid down in Article 15 of Regulation (EU) No 1095/2010.[16]

Article 17

ESMA shall maintain a central database,
publicly accessible on the internet, listing all EuSEF managers registered in
the Union in accordance with this Regulation.

Article 18

The competent authority of the home Member
State shall supervise compliance with the requirements set out in this
Regulation.

Article 19

Competent authorities shall, in conformity
with national law, have all supervisory and investigatory powers that are
necessary for the exercise of their functions. They shall have in particular
the power to:

(a)
request access to any document in any form, and
to receive or take a copy of it thereof;

(b)
require the EuSEF manager to provide information
without delay;

(c)
require information from any person related to
the activities of the EuSEF manager or the EuSEF;

(d)
carry out on site inspections with or without
prior announcements;

(e)
take appropriate measures to ensure that a EuSEF
manager continues to comply with the requirements of this Regulation;

(f)
issue an order to ensure that a EuSEF manager
complies with the requirements of this Regulation and desists from a repetition
of any conduct that may consist of a breach of this Regulation.

Article 20

1.
Member States shall lay down the rules on
administrative measures and sanctions applicable to breaches of the provisions
of this Regulation and shall take all measures necessary to ensure that they
are implemented. The measures and sanctions provided for shall be effective,
proportionate and dissuasive.

2.
By [24 months after entry into force of this
Regulation] the Member States shall notify the rules referred to in paragraph 1
to the Commission and ESMA. They shall notify the Commission and ESMA without
delay of any subsequent amendment thereto.

Article 21

1.
The competent authority of the home Member State
shall take the appropriate measures referred to in paragraph 2 where EuSEF
managers:

(a)
fail to comply with the requirements that apply
to the portfolio composition in accordance with Article 5;

(b)
fail to market the EuSEF to eligible investors
in accordance to Article 6;

(c)
use the designation "European Social
Entrepreneurship Fund" without being registered with the competent
authority of their home Member State in accordance with Article 14.

2.
In the cases referred to in paragraph 1 the
competent authority of the home Member State shall take the following measures,
as appropriate:

(a)
prohibit the use of the designation
"European Social Entrepreneurship Fund" for the marketing of one or
more EuSEFs of the EuSEF manager;

(b)
remove the EuSEF manager from the register.

3.
The competent authorities of the home Member
State shall inform the competent authorities of the host Member States
indicated in accordance with point (d) of Article 14 (1) of the removal of the
EuSEF manager from the register referred to in point (b) of paragraph 1 of this
Article.

4.
The right to market one or more EuSEFs under the
designation "European Social Entrepreneurship Funds" in the Union
expires with immediate effect from the date of the decision of the competent
authority referred to in points (a) or (b) of paragraph 2.

Article 22

1.
Competent authorities and ESMA shall cooperate
with each other whenever necessary for the purpose of carrying out their
respective duties under this Regulation.

2.
They shall exchange all information and
documentation necessary to identify and remedy breaches to this Regulation.

Article 23

1.
All persons who work or who have worked for the
competent authorities or ESMA, as well as auditors and experts instructed by
the competent authorities and ESMA, are bound by the obligation of professional
secrecy. No confidential information which those persons receive in the course
of their duties shall be divulged to any person or authority whatsoever, save
in summary or aggregate form such that EuSEF managers and EuSEFs cannot be
individually identified, without prejudice to cases covered by criminal law and
proceedings under this Regulation.

2.
The competent authorities of the Member States
or ESMA shall not be prevented from exchanging information in accordance with
this Regulation or other Union law applicable to EuSEF Managers and EuSEFs.

3.
Where competent authorities and ESMA receive
confidential information in accordance with paragraph 1, they may use it only
in the course of their duties and for the purpose of administrative and
judicial proceedings.

CHAPTER IV
TRANSITIONAL AND FINAL PROVISIONS

Article 24

1.
The power to adopt delegated acts is conferred
on the Commission subject to the conditions set outin this Article.

2.
The delegation of power referred to in Articles 2
(3), 3 (2), 8 (5), 9 (2) and 13 (4) shall be conferred on the Commission for a
period of four years for a period of four years from the date of entering into
force of this Regulation. The Commission shall draw up a report in respect of
the delegation of powers not later than nine months before the end of the four
year period. The delegation of power shall be tacitly extended for periods of
an identical duration, unless the European Parliament or the Council opposes
such extension not later than three months before the end of each period.

3.
The delegation of powers referred to Articles 2
(3), 3 (2), 8 (5), 9 (2) and 13 (4)may be revoked at any time by the European
Parliament or by the Council. A decision of revocation shall put an end to the
delegation of the power specified in that decision. It shall take effect the
day following the publication of the decision in the Official Journal of the
European Union or at a later date specified therein. It shall not affect the
validity of any delegated acts already in force.

4.
As soon as it adopts a delegated act, the
Commission shall notify it simultaneously to the European Parliament and to the
Council.

5.
A delegated act shall enter into force only if
no objection has been expressed either by the European Parliament or the
Council within a period of 2 months of notification of that act to the European
Parliament and the Council or if, before the expiry of that period, the
European Parliament and the Council have both informed the Commission that they
will not object. That period shall be extended by 2 months at the initiative of
the European Parliament or the Council.

Article 25

1.
At the latest four years after the date of
application of this Regulation, the Commission shall review this Regulation.
The review shall include a general survey of the functioning of the rules in
this Regulation and the experience acquired in applying them, including:

(a)
the extent to which the designation
"European Social Entrepreneurship Fund" has been used by EuSEF
managers in different Member States, whether domestically or on a cross border
basis;

(b)
the use of the different qualifying investments
by EuSEFs and how this has impacted the development of social undertakings
across the Union;

(c)
the practical application of the criteria for
identifying qualifying portfolio undertakings and the impact of this on the
development of social undertakings across the Union;

(d)
the scope of this Regulation, including the
threshold of EUR 500 million.

2.
After consulting ESMA the Commission shall submit
a report to the European Parliament and the Council accompanied, if
appropriate, by a legislative proposal.

Article 26

This Regulation shall enter into force on
the twentieth day following that of its publication in the Official Journal
of the European Union. It shall apply from the 22 July 2013, except for
Articles 2 (3), 3 (2), 8 (5), 9 (2) and 13 (4), which shall apply from the date
of entry into force of the Regulation.

This
Regulation shall be binding in its entirety and directly applicable in all
Member States.

Done at Brussels,

For the European Parliament                       For
the Council

The President                                                 The
President

[1]               These are referred to as social undertakings in the
legal text for reasons of clarity as to their form. They are also referred to
as social enterprises. These different terms should be interpreted as being
interchangeable in most contexts.

[2]               See
J.P.Morgan,Impact Investments: An Emerging Asset Class, 2011.

[3]               Private placements can be described as the sale of
securities to a relatively small number of select investors as a way of
raising capital. Investors involved in private placements are usually large
banks, mutual funds, insurance companies and pension funds. Private placement
is the opposite of a public issue, in which securities are made available for
sale on the open market.

[4]               http://ec.europa.eu/internal_market/smact/docs/20110413-communication_en.pdf

[5]               See http://ec.europa.eu/internal_market/investment/social_investment_funds_en.htm.

[6]               OJ C ...p...

[7]               OJ C , , p. .

[8]               OJ L 302, 17.11.2009, p.32.

[9]               OJ L 174, 1.7.2011, p.1.

[10]             OJ L 145, 30.4.2004, p. 1.

[11]             OJ L 331, 15.12.2010, p. 84.

[12]             OJ L 281, 23.11.1995 p. 31.

[13]             OJ L 8, 12.1.2001, p. 1.

[14]             OJ L 390, 31.12.2004, p. 38.

[15]             OJ L 345, 31.12.2003, p. 64.

[16]             OJ L 331, 15.12.2010, p.84.