EUROPEAN COMMISSION 
Brussels, 7.12.2011 
SEC(2011) 1515 final 
  
COMMISSION STAFF WORKING PAPER 
IMPACT ASSESSMENT 
Accompanying the document 
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE 
COUNCIL 
on European Venture Capital Funds 
{COM(2011) 860 final} 
{SEC(2011) 1516 final}  
 
  
Table of contents 
1 INTRODUCTION.......................................................................................................5 
2 PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED 
PARTIES.....................................................................................................................6 
2.1 Related initiatives ..............................................................................................7 
2.2 Wider context ....................................................................................................9 2.3 Consultation of inte rested parties......................................................................9 
2.4 Impact Assessment Steering Group and IAB..................................................10 2.5 The IAB meeting and follow-up measures......................................................10 
3 KEY CHARACTERISTICS OF THE EUROPEAN SME SECTOR.......................11 
3.1 Structural issues behind the lack of equity financing......................................12 
3.2 Venture capital funds are more SM E-centred than other alternative 
investment funds..............................................................................................13 
4 KEY CHARACTERISTICS OF THE EUROPEAN VENTURE CAPITAL 
INDUSTRY...............................................................................................................13 
4.1 Venture capital funds re main a niche sector ...................................................13 
4.2 Venture capital activities are concentrated in eight EU Member States .........15 4.3 A significant venture capital industry correlates with competitiveness..........15 4.4 There is little cross-border fund-raising in the venture capital sector.............15 4.5 Traditional venture capital investors ...............................................................16 
4.6 The impact of the financial crisis on venture capital funds.............................16 
5 PROBLEM DEFINITION.........................................................................................16 
5.1 Problem drivers ...............................................................................................16 
5.1.1 Driver 1: Regulatory fragmentation ..................................................16 5.1.2 Driver 2: Raising venture capital funds abroad involves 
several procedural steps that are not necessary when raising capital domes tically...........................................................................20 
5.1.3 Driver 3: Raising venture capital funds abroad involves costs 
that are not incurred when raising capital domestically....................21 
5.1.4 Driver 4: Several jurisdiction apply prospectus rules to 
venture capital offerings....................................................................21 
5.1.5 Driver 5: Several jurisdictions require local registration and a 
local distribution presence.................................................................22 
5.1.6 Driver 6: The wider ecosystem in which innovative 
companies operate is underdeveloped...............................................23 
5.2 Problems..........................................................................................................25 
 
 25.2.1 Investor's preference in the EU is skewed against venture 
capital ................................................................................................25 
5.2.2 EU venture capital funds are below the optimum size......................26 5.2.3 The inadequate SME 'financing mix'.................................................27 
5.3 Baseline scenario.............................................................................................28 5.4 The EU's right to act and justification.............................................................30 
6 OBJECTIVES ...........................................................................................................31 
6.1 General objective – make European SMEs more competitive in a 
global marketplace...........................................................................................31 
6.2 Specific objective – Create a Europ ean system for the cross-border 
fundraising of venture capital funds................................................................32 
6.3 Operational objectives.....................................................................................32 
6.3.1 Establish a  notion of what constitutes a qualifying 'venture 
capital fund' .......................................................................................32 
6.3.2 Create a common regulatory approach governing qualifying 
'venture capital funds' and their managers.........................................32 
6.3.3 Create a network of administrative cooperation for the 
effective introduction and supervision of managers of European qualifying venture capital funds........................................33 
7 OPTIONS ..................................................................................................................34 
7.1 Options on the content and scope of a European framework for 
venture capital funds .......................................................................................34 
7.2 Presentation of options on portfolio composition ...........................................34 
7.2.1 Option 1: Flexible scope....................................................................35 7.2.2 Option 2: Intermediate scope.............................................................35 7.2.3 Option 3: Strict scope ........................................................................36 
7.3 Summary of Options on portfolio composition:..............................................36 7.4 Analysis of options on portfolio composition .................................................36 
7.4.1 Operational objective 1: Establishment of a notion of 
'qualifying venture capital fund' ........................................................37 
7.4.2 Operational objective 2: Co mmon regulatory approach to 
'qualifying venture capital funds'.......................................................39 
7.4.3 Operational objective 3: Regulatory cooperation..............................40 7.4.4 Overall comparison of options on portfolio composition..................41 
7.5 Summary of impacts: portfolio composition...................................................41 7.6 Presentation of options on eligible investors...................................................42 
7.6.1 Option 1: Mifid investors ..................................................................42 7.6.2 Option 2: Traditional venture capital investors.................................42 
 
 37.6.3 Option 3: Broad scope.......................................................................42 
7.7 Summary of Options concerning eligible investors: .......................................42 7.8 Analysis of the options on eligible investors...................................................43 
7.8.1 Operational objective 1: Establishment of a notion of 
'qualifying venture capital fund' ........................................................43 
7.8.2 Operational objective 2: Co mmon regulatory approach to 
qualifying venture capital funds ........................................................43 
7.8.3 Operational objective 3: Regulatory cooperation..............................44 7.8.4 Overall comparison of options on eligible investors.........................45 
7.9 Summary of impacts: eligible investors ..........................................................45 7.10 Presentation of procedural options  on the legal form of a European 
framework for venture capital funds ...............................................................45 
7.10.1 Option 1 – A new venture capital passport within the AIFMD ........45 7.10.2 Option 2 - Lower the thresholds of AIFMD......................................47 7.10.3 Option 3 – Create special rules for venture capital as part of 
the implementing provisions of AIFMD 'level 2'..............................48 
7.10.4 Option 4 – Light touch venture capital passport as a stand-
alone instrument ................................................................................48 
7.10.5 Option 5 – Administrative network to enforce mutual 
recognition.........................................................................................50 
7.11 Summary of procedural options: .....................................................................51 7.12 Analysis of the procedural options..................................................................52 
7.12.1 Operational objective 1: Establishment of a uniform notion of 
'qualifying venture capital fund’........................................................52 
7.12.2 Operational objective 2: Create a common regulatory 
approach for qualifying venture capital funds...................................54 
7.12.3 Operational objective 3: Create a network of administrative 
cooperation for the supervision of qualifying venture capital funds 56 
7.13 Summary of impacts: procedural options........................................................56 
8 COMPARISON OF OPTIONS  AND POLICY CHOICE........................................58 
8.1 Overall summary of procedural and substantive options ................................58 
8.2 Presentation of most promising co mbinations between procedural and 
substantive options ..........................................................................................58 
8.3 Analysis of combined options .........................................................................59 
8.3.1 Impact on venture capital flows – anticipated re-allocation 
effects ................................................................................................59 
8.3.2 Economies of scale ............................................................................61 8.3.3 Impact on existing national rules governing venture capital 
funds ..................................................................................................62 
 
 48.3.4 Impact on the geographic location of venture capital activities........62 
8.3.5 Shift in the SME 'financing mix' .......................................................63 8.3.6 Impact on European competitiveness................................................63 8.3.7 Impact on jobs ...................................................................................64 
8.4 Overview of costs and benefits of combined options......................................64 8.5 Policy choice and its key features ...................................................................65 
8.5.1 Enforcement provisions.....................................................................66 
8.6 Risks and synergies .........................................................................................67 8.7 Compliance costs.............................................................................................69 8.8 Administrative burden.....................................................................................72 
9 MONITORING AND COMPLIANCE.....................................................................73 
ANNEXES ....................................................................................................................... .... 
 
 5 
This report commits only the Commission's services involved in its preparation and does not 
prejudge the final form of any decision to be taken by the Commission.  
1 INTRODUCTION  
Venture capital funds are operators th at provide mostly equity finance1 to companies that 
are generally very small, in the initial stages  of their corporate development, but often 
innovative and demonstrating a strong potentia l for growth and expansion. In the EU, 
venture capital funding displays high potential be nefits for the development of small- and 
medium-sized enterprises (SMEs)2. As this impact assesment will demonstrate3, SMEs 
that rely on venture capital financing fare bette r than those that receive no venture capital 
backing. Venture capital financing, coupled w ith a stable legal environment seems a 
recipe conducive to boosting growth, jobs and innovation.  
Moreover, SMEs backed by venture capital can create high-quality jobs, as venture 
capital supports the creation of innovative busin esses whose growth exceeds growth in 
more traditional sectors. According to recent research, an increase in venture capital 
investments is associated with an increase in GDP, and the impact of early-stage funding of SMEs has an even more pronounced impact.
4 Supporting venture capital can thereby 
drive the real economy.  
Today, raising funds for venture capital finance remains at sub-optimal levels. This lack 
of size has negative repercussions on the optim al allocation of resources. The relatively 
small sizes of European venture capital funds  prevents the emergence of economies of 
scale. These economies are, in turn, a prer equsite for the specialisation necessary to 
operate a successful venture capital fund5 .  
In order to remedy the lack of venture capital funding in Europe, the Commission has 
consistently pursued policy measures to build  a more integrated and effective European 
market for venture capital6. Success so far has been limited.7  
                                                 
1 See Annex I: Definitions  
2 SMEs are defined in the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and 
medium-sized enterpri ses (OJ L 124/36, 20.5.2003)  
3 The impact of venture capital financing on innovation and the growth of firms is documented in a series of academic 
papers that are described in Annex XII.   
4 Th. MEYER, "Venture Cap ital Adds Economic Spice", D eutsche Bank Research, September 14, 2010  
5 Communication from the Commission on Removing obstacles to cross-border in vestments by venture capital funds 
COM( 2007) 853 final, 21.12.2007) 
6 Commission summary report 2009: Cross-border venture capital in the European Union:  
http://ec.europa.eu/enterprise/newsroom/cf /itemlongdetail.cfm?item_id=4053&tpa_id=127&lang=en  
 
7 See Annex II: Overview of past acti ons and initiatives in relation to SME acce ss to finance and venture capital funds.  
 
 6The Europe 2020 Strategy8 and the Innovation Union9 brought new impetus to efforts at 
consolidating Europe's venture capital i ndustry. Supported by the European Council of 
February 2011 which called for removing the remaining regulatory obstacles to cross 
border venture capital, the Commission committed itself, in the Single Market Act10 
(SMA), to ensure that by 2012 venture capital funds legally established in any Member State should be able to raise capital from  eligible investors throughout the EU. In 
addition, Member States were invited to ensure  that inconcistencies in tax treatment [of 
venture capital investments] do not lead to  double taxation which would hamper cross-
border venture capital investments.
11  
The focus of this impact assessment is on th e appropriate regulatory measures that could 
be adopted to create a bigger role for Europe 's venture capital operators, provide deeper 
capital pools for venture capital funds, allow ve nture capital funds to expand assets under 
management and thus make such funds in to a more important financing tool for 
innovative start-up companies. In pursuing this  aim, this impact assessment will focus on 
rules govering the 'private placement' of funds  to potential investors. In line with the 
approach adopted in the Small Business Act, issues related to the taxation of venture 
capital investments will have to be addressed separately.  
2 PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
This impact assessment draws on the results of a series of previous work relating to the 
fragmentation of markets for venture capital funds and the lack of equity finance for 
European SMEs. The key elements of this previous work are briefly summarised in this chapter.  
The 1998 Commission Communication on a Risk  Capital Action Plan (RCAP)  
recognised the importance of creating a European risk capital market.
12 Venture capital 
was seen as an essential part of this endeavour. The final 2003 report on RCAP indicated 
areas of further improvement.13 In 2007, the Commission encouraged Member States to 
ensure the mutual recognition of their existing national frameworks governing the marketing of venture capital funds a nd create a common understanding of what 
constitutes a venture capital funds and who should be the investors eligible to invest in such funds.
14. As will be explained below, in Me mber States that have not adopted 
specific rules on venture capital funds, fundraisi ng for such ventures is governed by rules 
                                                 
8 http://ec.europa.eu/europe2020/index_en.htm , 3 March 2010  
9 http://ec.europa.eu/research/innova tion-union/index_en.cfm?pg=keydocs  6 October 2010  
10 http://ec.europa.eu/internal_marke t/smact/docs/20110413-communication_en.pdf 13 April 2011  
11 See Review of the "Small Business Act" Europe, p.11 http://ec.europa.eu/enterprise /policies/sme/small-business-
act/files/sba_review_en.pdf , 23 February 2011 and also Annex III: Summary  of cross-border tax problems of venture 
capital funds  
12 Risk capital cover three types of financing: (i) informal investment by business angels, (ii) venture capital and (iii) 
stock markets specialized in SMEs and high growth companies.  
13 RCAP Final report 2003: http://ec.europa.eu/internal_market/securities/riskcapital/index_en.htm  
14 Commission Communication December 2007, Removing obstacl es to cross-border investments by VC funds : 
http://ec.europa.eu/enterprise/new sroom/cf/itemlongdetail.cfm?item_id=2033   
 
 7on 'private placement'. However, when assessing the situation three years on, the 
Commission found that Member States  had made very little progress.15 The approach 
based on mutual recognition of heterogeneous  national rules covering the marketing of 
venture capital funds did not produce a uniform  approach to the fundraising of venture 
capital operators.   
In parallel, an impact assessment on 'private placement' rules16 examined regulatory 
barriers that impeded cross-border fundraising operations of venture capital funds17. The 
impact assessment report concluded that there was a prima facie  case for action at EU 
level and these conclusions subsequently fed into the Commission proposal of April 
2009 for a Directive on Alternative Investment Fund Managers (AIFMD).18  
The AIFMD, adopted by the co-legislators in  July 2011, covers all types of alternative 
investment funds, a notion which also cove rs venture capital funds. However the AIFMD 
distinguishes between managers with assets below and above a €500 million threshold. Managers whose aggregate assets under mana gement are above € 500 million are subject 
to the stringent reporting and operational requirements set out in the AIFMD. In exchange for compliance, these managers bene fit from a European passport that ensures 
they can market and manage funds on cross-border basis.  
Managers below this threshold are subject to only a set of minimum rules but also do not 
benefit from the passport, unless they opt-in to the more stringent set of rules governing 
activities above the threshold. According to the latest estimates of the European Private 
Equity and Venture Capital Association (EVCA), in 2011, 98% of European venture 
capital fund managers manage a portfolio of  funds that would be beneath the € 500 
million threshold set out in the AIFMD
19.  
2.1 Related initiatives20   
The European Union supports risk financing (i ncluding via venture capital) of SME. This 
includes commitments to financing through public venture capital facilities (under the 
Competitiveness and Innovation Framework Programme 2007-2013, its successor the Business Competitiveness and SME Progr amme 2014-2020 as well as forthcoming 
Horizon 2020), and the development of ‘fund-of -funds’ structures by the EIB. This type 
of public financing is meant to provide an  incentive to private investors to finance 
projects along with public contributions in firm s and in areas that have been proven to 
suffer from a market failure. 
                                                
 
15 Summary report December 2009: Cross-border venture capital in the European Union 
http://ec.europa.eu/enterprise/newsroom/cf /itemlongdetail.cfm?item_id=4053&tpa_id=127&lang=en   
16 Annex IV: Summary of the impact assessment on Private Placement  
17 Prior to 2009, non-uniform funds was a group of investment funds like hedge funds, private equity, real estate funds 
etc. that were not subjected to any European investment  fund regulatory framework, unlike the so called UCITS funds 
that are covered by the European regulatory framework since 1985.  
18 The AIFMD was formally adopted in June 2011 (2011/61/EU).  
19 Source: European Private Equity and Ventur e Capital Association (EVCA) estimates 2011  
20 See Annex V: Related initiatives: (i) Risk Capital Guidelin es, (ii) Financial instruments and (iii) Action plan for 
SMEs access to finance  
 
 8These financing structures, be they establishe d at EU or national level need to comply 
with rules on State Aid. To guide Member Stat es in the best way on how to make use of 
such financing structures and how to grant support to innovative SMEs in the early stages of development, the Commission, in 2006
21, adopted State Aid Guidelines on Risk 
Capital. These Guidelines were amended in 201022.  
A further commitment to establish an deeper  EU market for venture capital came with 
the Commission adoption of the Europe 2020 Stra tegy. This strategy restated the need to 
engage in targeted regulatory action to impr ove SMEs' access to financing, in particular 
by addressing barriers that hinder the flow of venture capital financing by means of 
dedicated investment funds. The Februa ry 2011 European Council endorsed this 
approach calling for the removal of remaini ng regulatory obstacles to cross border flows 
of venture capital. As a result, the Commi ssion's Single Market Act (SMA) announced an 
initiative to ensure that venture capital funds established in any Member State can raise 
capital throughout the European Union.    The development of an EU venture capital fund framework is therefore an essential 
element for the success of any public financing. Its existence would directly be able to 
leverage the public financing structures - g earing up the impact of public money. Recent 
study findings suggest that: " the impact of governmental VC  appeared to be positive for 
the early stage firms. This finding is in line with the pattern of specialization of public 
sector VCs and suggests that, if public-sector VCs are to make direct investments in 
investee firms, these investments are more effective if they focus on very young entrepreneurial firms. It is in this stage that the firms have difficulties in finding alternative sources of financing for their (innovative) projects, and public sector VC 
seems to be alleviating their financing constraints".
23 
 
Moreover, Commission is at the same time putting forward SME Financing Action Plan 
to address SMEs' problems in access to finan ce. This action plan will be adopted by the 
Commission on 7 December 2011 and its aim is to address a variety of problems that SMEs face when accessing finance. In partic ular it identifies opportunities to continue 
work to build on the venture capital fund fr amework and explore further with Member 
States solutions to the tax problems which may hinder the cross-border investments of such funds. 
Other regulatory steps are envisaged to eas e burdens on SMEs and to facilitate their 
access to investment markets: ensuring pr oportionality in transparency, reporting and 
listing requirements, and raising the visibility  of SMEs on exchanges. Other steps being 
examined include facilitating access to loans.  All these steps can be expected to 
complement the proposals for a new VC fund framework, by ensuring a rich balance of 
financing sources and easier transitions for SMEs between financing sources as they 
grow. 
                                                
 
21 http://eur-lex.europa.eu/LexUriServ/Lex UriServ.do?uri=CELEX:52006XC0818(01):EN:NOT  
22 http://eur-lex.europa.eu/LexUriServ/Lex UriServ.do?uri=CELEX:52010XC1207(02):EN:NOT  
23 Venture capital: policy lessons from the VICO project, September 30, 2011, www.vicoproject.org  
 
 92.2 Wider context 
This initiative aims to form an integral part of "Europe 2020 Strategy" (including its 
more focused Flagship Initiative on the Innovation Union, see box below). With this Strategy the Commission committed itself to: " Making an efficient European venture 
capital market a reality, thereby greatly fa cilitating direct business access to capital 
markets and exploring incentives for private sector funds that make financing available 
for start-up companies, and for innovative SMEs" in order to focus on delivering Europe 
2020's objectives
24. 
 Box 1: Related initiatives in the Europe 2020 Strategy  
Flagship Initiative: "Innovation Union"  : To improve framework conditions  for business to innovate (i.e. 
create the single EU Patent and a specialised Patent Court, modernise the framework of copyright and 
trademarks, improve access of SMEs to Intellectual Pr operty Protection, speed up setting of interoperable 
standards; improve access to capital and make full use of demand side policies, e.g. through public 
procurement and smart regulation); 
Flagship Initiative: "An industrial po licy for the globalisation era": To improve the business environment, 
especially for SMEs, including through reducing the transaction costs of doing business in Europe, the 
promotion of clusters and improvi ng affordable access to finance; 
2.3 Consultation of interested parties  
On 15 June 2011, the Commission services launched a public consultation25 on the core 
elements of a possible European framewor k for venture capital funds. The consultation 
closed on 10 August 2011. Forty eight answ ers have been received: 38 from 
organisations, including representative bodies  from across the banking and securities 
sectors, asset managers and investors' repr esentatives, two from citizens and eight from 
public authorities. All contributions can  be consulted on the following website: 
http://ec.europa.eu/internal_market/consultations/2011/venture_capital_en.htm . The 
replies received in this consultation are reflected in the content of this report.26 
  Box 2: Brief summary of replies to the pub lic consultation on European venture capital 
framework 
The large majority of respondents believe that European rules governing the fundraising of venture capital 
funds would facilitate the cross border activities of  these funds. Respondents favour rules on fundraising 
across national borders that are flexible and avoid, to the extent possible, any additional burden to the 
managers of venture capital funds, potential investors or target companies of venture capital investment. 
Respondents believe that the new rules should be volunt ary and open to all fund operators that want to 
raise capital in their country of establishment and in other Member States.  A preference was expressed for 
a simple system based on prior registration in the Member State where the fund is established.  Venture 
capital fund managers shall be free to decide, dependi ng on their fundraising strategy, whether to use the 
EU rules on cross-border fundraising or whether they wanted to raise funds domestically in compliance 
                                                 
24 Europe 2020 strategy objectives: (i) Smart growth – de veloping an economy based on knowledge and innovation (ii) 
Sustainable growth – promoting a more resource efficient,  greener and more competitive economy and (iii) Inclusive 
growth – fostering a high-employment economy deliv ering economic, social and territorial cohesion.  
25 http://ec.europa.eu/internal_marke t/investment/venture_capital_en.htm  
26 See Annex VI: Feedback statement: Su mmary of responses to the European Commission public consultation on the 
European venture capital framework  
 
 10with their national private placement rules. Respondent s pleaded in favour of a registration process and 
reporting requirements would be simple, relevant a nd not create any substantial administrative cost. 
As regards their form of incorporation, venture capita l funds should be allowed to adopt any of the legal 
forms traditionally used in the Member States.   
The new EU rules should specify  minimum requirements on operati ng conditions (organisational 
requirements / rules of conducts) for venture capital ma nagers. However, most respondents highlight that 
these requirements should be principle-based and pr oportionate to the venture capital fund size and human 
and infrastructure resources.  
Many categories of venture capital fund investors (busin ess angels, family offices and wealthy individuals) 
fall outside of the MIFID definition of professional investor.  Most respondents favour that the new EU 
rules would include these investors into the scope of eligible investors.   
Venture capital funds need flexibility regarding the forms of financing that venture capital managers may 
use. However, in order to fully meet the intende d policy goals, venture capital fund managers should be 
obliged to invest a significant proportion of the cap ital received from investor s into SMEs. Respondents 
therefore favour a compulsory minimum investment percentage threshold (more than 50%) that should be 
invested in SMEs. 
The majority of respondents believe that new European rules for venture capital should be introduced in 
the form of a stand-alone legisla tive initiative.  Most respondents disa gree with creation a 'lighter' EU 
marketing passport for venture capital fund managers within the AIFM Directive itself.  
2.4 Impact Assessment Steering Group and IAB 
An Impact Assessment Steering Group was established in May 2011. Colleagues from 
Directorates General Competition, Economic and Financial Affairs, Enterprise and Industry, Health and Consumer Protection, Inte rnal Market and Services, Research and 
Development, Taxation and Customs Union, the Secretariat General and the Legal 
Service participated in the discussions.  The Group met three times ahead of the 
finalisation of this report. The group met on 11 May 2011, 18 July 2011, and 16 September 2011. Minutes of the last mee ting of the IASG that took place on 16 
September 2011 are attached.    
2.5 The IAB meeting and follow-up measures  
 
The IAB meeting took place on 19 October 2011 and the IAB issued its opinion on 21 
October 2011. Significant changes were made s ubsequent to this opinion and the report 
was resubmitted to the IAB on 31 October 2011. To take account of the IAB's opinion, 
the new version of this impact assessment introduces:  – more evidence on regulatory fragmentation as  a driver for the comparatively small 
size of the average European venture capital fund;  
– an overview of various regulatory and compliance costs associated with this 
fragmentation;  
– an overview of how new EU rules would imp act the eight Member States that have 
introduced rules on venture capital, as compar ed to the 21 Member States that have no 
such rules;  
– more information on the wider ecosystem in which venture capital funds operate, as 
well as risks and synergies that result from related regulatory initiatives;    
 
 11– an in-depth analysis of two sets of th ree substantive options (on venture capital 
investment portfolios and on eligible investors);  
– a separate analysis of three procedural  options on how to implement the chosen 
approach;  
– a separate analysis of two other procedur al options which do not necessarily base 
themselves on the chosen approach (e.g., lowering of AIFMD thresholds or an 
approach based solely on mutual rec ognition can be achieved without a common 
regulatory approach to venture capital funds);  
– an overall view of how substantive and proce dural options are combined to justify the 
chosen approach, and  
– more detailed analysis of the risks for the c hosen approach that result from the parallel 
evolution of the regulatory framework in other fields (prudential supervision); 
–  More details on the methodology on how the success of the chosen approach will be 
monitored and evaluated.   
The IAB issued its final opinion on 11 N ovember 2011 which contained additional 
suggestions to improve the impact assessment report. Changes following these suggestions were introduced in the final impact assessment report and include:  
Analysis and problems:  (i) Box 3, section 5.1.1 contains a brief description of process 
involved when a venture capital fund wants to ra ise capital in several Member States (ii) 
Section 5.1.6 contains further explanations on why regulatory fragmentation causes low 
levels of funds raised by venture capital funds in the EU. 
Intervention logic and stakeholders' views:  (i) Sections 7.4, 7.8, 7.12 and 8.3 links the 
discussion of options back to specific problem s, (ii) Box 4, Section 8.5 introduces a clear 
description of the features of preferred op tion followed, in Section 8.5.& by an outline of 
the enforcement approach , (iii) stakeholders ' views have been integrated, especially 
those of Member States' authorities, in sections 7.4.1, 7.8.3, 7.12.2 and 8.7. 
Assessment of impacts : (i) Box 4 in Section 8.6 contains explanations as to the 
coherence of the proposed measures with other measures to promote SMEs and, in Section 5.1.6 addresses linkages to issues of taxation, (ii) Section 8.4 contains a summary 
table specifying costs and benefits associat ed with the short-listed options and (iii) 
Sections 8.7 and 8.8 provide more informa tion on compliance costs and administrative 
burdens associated with the preferred option. . 
Monitoring and compliance: (i) More info on how cross- border cooperation will  be 
implemented and how the regulation will be en forced, (ii) clarification as to whether 
indicators could be the sources of admini strative burden and (iii) clarification of 
arrangements for evaluation and its timing in accordance with future decision making 
process have all been incorporated in section 9. 
3 K
EY CHARACTERISTICS OF THE EUROPEAN SME  SECTOR  
Today, there are 23 million SMEs in the European Union. SMEs are seen as the key 
drivers for economic growth and the creati on of jobs in the European Union. SMEs 
 
 12account for nearly 99% of all European businesses.  SMEs provide around 90 million 
jobs (2/3 of all private sector jobs) and contribute to entrepreneurship and innovation. 
SMEs are critical to the development of  the European economy. However, as the 
Innovation Union Flagship Initiative [citation]  stresses, one of the most serious 
impediments preventing SMEs from deployi ng their full innovation and growth potential 
is the absence of appropriate forms of long-term (equity) finance.  
3.1 Structural issues behind the lack of equity financing 
The primary reason for SMEs lack of access to finance, and in particular its lack of 
equity capital, is the lack of information pertaining to innovative start-up SMEs as an asset class. As knowledge about these companies, their strategies and their prospects is more difficult to research, potential inve stors face higher transaction costs when 
investing in SMEs as compared to more ma ture assets.  Transaction costs are indeed 
mostly due to difficulties in gathering reliable information on the business prospects of a particular SME and the absence of financial intermeidaires that can perform a valuable 
screening function. This leads to a wide spread risk aversion among potential venture 
capital investors.   
The existence of a general financing gap creates an environment in which innovative 
undertakings are also prone to having a less th an optimal financing structure. This, in 
turn, will make it difficult for undertakings to  create and capture the value of their new 
and/or innovative idea. A theory put forward in late 1980s’
27 predicted that firms with 
highly specific assets and low amounts of equity relative to debt will suffer from poor 
performance.   A more recent study builds on this concept28 and empirically confirms its 
thesis. The study provides evidence which show s a correlation between firms’ lack of 
equity capital and its poor, sub-optimal perfor mance or even failure. Concretely, it finds 
that as the misalignment between a start-up firm’s capital structure and its asset specificity increases, the firm is more lik ely to exit/fail to capture its idea or to 
experience lower profitability. 
To remedy this information and equity gap, venture capital operators can act as 
intermediaries between the supply and demand of capital resources and, through specialisation, facilitate the flow of appropriate capital to SMEs.
29Indeed, the classical 
'venture capitalist' business model aims to decrease the information gap between investors and enterpreneures and/or SMEs and can play a crucial role in reducing the 
                                                
 
27 Williamson, Oliver E. 1988. “Corporate Finance and Co rporate Governance,” Journal of Finance 43(3): 567-591 - 
Williamson argues that firms engaged in pr ojects requiring highly specific assets ar e more likely to be financed with 
equity. He suggests that a firm’s financia l structure is akin to a governance struct ure and predicts that a firm’s equity 
ratio will be positively correlated with asset specificity.  
28 A. Robb and R. Seamans, 2011. Entrepreneurial Fi nance and Performance: A Transaction Cost Economics 
Approach  
29 See also EVCA Survey (2002) on the function and value of VC investments in early stage and expansion stage 
companies, where some 95% of the companies replying to th e survey stated that, without venture capital investment, 
they could not have existed or would ha ve developed more slowly and where al most 60% of respondents said that the 
company would not exist today without the contribution of venture capital. http://www.evca.eu/uploadedFiles/Home /Knowledge_Center/EVCA_Research/E conomical_Impact/EconomicImpacto
fVentureCapital.pdf   
 
 13equity financing gap that currently pl agues young, innovative and high-growth start-up 
firms.30  
3.2 Venture capital funds are more SME- centred than other alternative 
investment funds 
Although the overall financing role of venture capital for SME is still very small (in 
Europe, venture capital accounts for 2% of  SME financing, see Section 3.1. below), 
venture capital funds are significantly more SME-centric than the wider population of 
alternative investment funds. As table 9 (A nnex X) shows, the target companies of 
venture capital funds are almost exclusivel y SMEs. Since 2009 the SME percentage in a 
venture capital fund's portfolio has been stable at 98%.       
4 KEY CHARACTERISTICS OF THE EUROPEAN VENTURE CAPITAL INDUSTRY31 
4.1 Venture capital funds remain a niche sector 
Despite years of policy initiatives that prom ote venture capital (see above), compared to 
other sectors of the European investment funds industry, venture capital remains a niche 
sector. As chart 1 demonstrates, the venture cap ital sector in Europe is small compared to 
the broader sector of 'private equity'. Within  the broad range of private equity investors, 
venture capitalists account for between 10 a nd 15%, depending on the chosen year of 
reference.  As at the end of 2010 there were about 1,500 private equity managers 
headquartered in the European Union. In a ggregate, these managers accounted for € 500 
billion of assets under management.32 Exactly 10% of this amount, approximately € 50 
billion, can be attributed to the venture capital funds.  
Chart 1: Private equity and venture ca pital fundraising and investments (2003-
2010) 
                                                 
30 Chan, Y.S., 1983., On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market 
with Imperfect Information. J ournal of Finance 38, 5, 1543-1568  
31 See Annex VIII, IX and X on VC business model,  on forms of SME financing and on Venture capital 
key facts and figures (fundraising, investments, performance) 
32 European VC industry is relatively small with its € 50 billion of capital under management compared to European 
UCITS and non-UCITS assets unde r management that at the end of 2010 reached € 8 trillion (€ 6 tr UCITS and € 2 tr 
non-UCITS). Global hedge funds assets under management are about € 2.5 trillion, with aobut € 400 billion in Europe.  
 
 1427 2872112
80 80
1820
691117
864 329374771 72
54
2443
8101217
6 74 3
020406080100120
2003 2004 2005 2006 2007 2008 2009 2010€ billion
Funds Raised PE and VC Funds Raised VC Investments PE and VC Inv estments VC 
Source: EVCA, own calculations 
Venture capital funds remain a niche player  in the fund industry largely on account of 
their focus on SMEs at the very riskiest stag e of their development.  Due to their focus 
on small and innovative SMEs, it is often cha llenging for venture capital funds to create 
returns that would mobilise average investors'  interest. Venture capital funds invest in 
order to provide equity start-up capital for a new but uncertain technology or business idea. A typical private equity fund, on the other hand, is much more diversified and consists in investments in more established and commercially successful companies. Private equity focuses on companies in a later stage of their development, in 
restructuring and in buyouts of established s uppliers. A private equity investment thus 
entails a higher return and a lower risk than an investment in venture capital.  
The steep rise and success of certain private equity fund strategies, such as leveraged 
buy-outs, during last decade did not help to boost the attractiveness of venture capital funds' attractiveness (see chart 1).  In addition, European venture capital funds 
consistently generate lower returns than European or US buy-out funds (chart 2).  
Chart 2: Performance of venture capital vs. private equity 
1 YR 3 YR 5 YR 10 YR 20 YR
ALL  VEN T URE EUROPE 17.36 -4.26 -1.57 -3.78 0.29
USA* 17.94 0.62 1.16 -6.59 21.08
ALL  BU YOUT S EUROPE 20.87 -4.48 6.02 8.39 11.91
USA* 26.26 1.16 2.35 -0.25 7.49
ALL  PE EUROPE 20.66 -4.34 4.33 4.59 9.32
USA* 23.83 1.82 2.67 -1.68 10.63INVESTMENT HORIZON RETURNS FOR PERIOD ENDING 31ST DECEMBER 2010
* Data for US is up to 30th Sept 2010
Source: Thomson Reuters 
As a result, the past decade has seen less investment flow towards European venture 
capital funds. In consequence, venture capital fund managers are experiencing 
difficulties in attracting investors' interest in new venture capital funds. While this trend 
will have certainly produced negative effect s on already underperforming venture capital 
 
 15funds, it also represents a serious challenge to the prospects of newly launched venture 
capital funds. Furthermore, existing vent ure capital funds, on account of the lower 
returns associated with venture capital, may be tempted to shift their investment focus 
toward investments in more developed undert akings at a much later stage in their 
business cycles.   
4.2 Venture capital activities are concentrated in eight EU Member States 
Venture capital activities are not homogenously  spread across the European Union.  
Around 90% of all venture capital fund manage rs are concentrated in eight Member 
States (UK, Germany Sweden, Denmark, Finl and Netherlands, France and Spain all have 
venture capital assets under managemnt in ex cess of € 1.5 billion). As table 1 (Annex X) 
demonstrates, funds managed and managers domiciled in these jurisdictions account for roughly 90% of all venture capital assets managed by funds. 
4.3 A significant venture capital industry correlates with competitiveness  
As chart 3 shows, there is a correlation between venture capital investments and the 
competitive ranking of countries.  Six out of  the eight countries for which chart 4 
indicates significant venture capital activity (in terms of capital committed and capital under management) also score among the top 10 in the WEF Global Competitiveness Index (Finland, Denmark, Germany, the Neth erlands, Sweden, and UK). Innovation and 
the provision of venture capital are, to a not insignificant extent, correlated.  
Chart 3: World Economic Forum (WEF) Global Competitiveness Index 2011 
GCI 
Rank GCI sub-
index innovation  Country Related top 10 country assessment on GCI sub-index – innovation 
3 2  Sweden has been placing significant emphasis on creating the conditions for innovation-led 
growth. Sweden has developed a very sophis ticated business culture and is one of the 
world’s leading innovators. 
4 4 Finland  Finland is one of the innova tion powerhouses in Europe. 
6 5 Germany Germany’s business sector is highly sophisticated, especially when it comes to production 
processes and distribution channels, and Ge rman companies are among the most innovative 
in the world, spending heavily on R&D and displaying a strong capacity for innovation—traits that are complemented by the country’s  well-developed ability to absorb the latest 
technologies at the firm level. These attribut es allow Germany to benefit greatly from its 
significant market size, which is based on bot h its large domestic market and its strong 
exports. 
7 9 Netherlands Dutch businesses are highly sophisticated and innovative, and the country is rapidly and 
aggressively harnessing new technol ogies for productivity improvements. 
8 8 Denmark Danish workforce has the skills  needed to reach high levels of technological adoption and 
innovation. 
10 12 UK The United Kingdom continues to have sophis ticated and innovative businesses that are 
highly adept at harnessing the latest t echnologies for productivity improvements and 
operating in a very large market (it is ranked 6th for market size). 
4.4 There is little cross-border fund-raising in the venture capital sector 
As indicated in table 12 (Annex X), the rate of cross-border fundraising, in the field of 
venture capital, is low. In the period 2007- 2010, funds raised outside a venture capital 
fund's home jurisdiction only accounted for 12% of funds raised in the venture capital 
sector (€ 2.5 billion). This contrasts with the situation in private equity, where around 20% of capital raised originates with invest ors in other jurisdicitons than the country 
where the funds are domiciled. For further de tails of fundraising geography for venture 
capital and private equity, reference is made to table 12, Annex X. 
 
 164.5 Traditional venture capital investors 
Traditional investors in venture capital compri se entrepreneurs, family offices, angel 
investors, member of the management teams,  industry sector experts, venture capital 
experts, finance sector experts and wealthy i ndividuals (for the relative contributions of 
these investor groups, reference is made to table 3, Annex X).  
Traditional venture capital investors play an important part in fundraising especially for 
early stage venture capital funds. Their role and importance is expected to even increase in response to the newly introduced prudentia l rules for banks and insurance companies. 
These new provisions require banks and insu rance companies to set aside additional 
regulatory capital once they invest in venture capital funds (see also section on risk). For 
example, under the Basel II rules, national s upervisors may decide to apply a 150% or 
higher risk weight reflecting the higher risks a ssociated with some other assets, such as 
venture capital investments. 
4.6 The impact of the financial crisis on venture capital funds 
Compared to the peak time for venture capital activity, when € 17 billion were invested 
in 7.500 SMEs (2006), the investment rate has declined to € 3 billion in 2010, a year in 
which only 2.800 SMEs benefited from venture capital funding (see table 9b, Annex X).  
However, chart 4 illustrates that the venture capital sector has consistently suffered from 
a fund-raising deficit, especially when compar ed to private equity. This was true before 
the financial crisis of 2007/2008, during the crisis  and thereafter. The crisis revealed the 
vulnerability of the venture capital funds s ector, which seems to recover much more 
slowly than their private equity peers.  
 Chart 4: Fund-raising by European private equity and venture capital in 2003-2010  
020406080100120
2003 2004 2005 2006 2007 2008 2009 2010Funds Raised PE and VC (€ billion)
Funds Raised VC (€ billion)
 
5 PROBLEM DEFINITION  
5.1 Problem drivers 
5.1.1 Driver 1: Regulatory fragmentation    
Compared with competing global centres of  high-tech and innovation, most notably the 
United States, the European venture capital i ndustry is fragmented and dispersed. This 
fragmentation and dispersion leads to a percep tible investor's reluctance against investing 
 
 17in venture capital funds. This, in turn, prev ents venture capital funds from reaching or 
approximating more optimal fund sizes. Chart 5 summarises the main features of national 
laws and regulations that apply to the pr ivate placement of investments in 'venture 
capital' funds.   
Chart 5: Regulatory systems governing the activity of venture capital in Europe 
Member 
State Law Qualifying fund portfolio  Qualifying 
investment 
instruments  Qualifying 
investment 
targets  Geographic 
location of 
targets  Eligible 
investo
rs Tax 
treatment  
1. Austria
 MiFiG No rules  Equity (not exceeding 49% of shares in target and € 1.5 million/year)
 No investments in energy and financial service companies
 2/3 of portfolio must be invested in Austrian development areas
 No rules 
 Capital gains tax exemption
 
2. Germany
 WKBG  70% of fund's total assets invested in equity issued by unlisted target 
 Equity  Unlisted company with less than € 20 Mio equity and less than 10 years of existence 
 Only targets with registered office in Germany
 No rules
 Exemption from trade tax – deemed incompatible with EU state aid rules 
 
3. Estonia
   60% of fund's total assets invested in equity issued by unlisted target
 Equity  Unlisted company
 No limitations  No rules
 No rules  
FCPR à procédure allege
 50% of fund's total asset invested in equity issued by unlisted companies shares /units of investment funds invested in unlisted companies (FoF), 15% in shareholder accounts (“avances en compte courant d’associé”)
 Equity 
Quasi equity  
Convertible bonds
 
Shares or units
 Unlisted companies
 No limitation  Institutional
 Tax incentives for eligible investors
 
FCPR contractuels 
 Equity and convertible bonds convertibles  issued by unlisted entities,  shares /units of investment funds invested in unlisted companies
 Equity 
Quasi-equity  
Convertible bonds
 
Shares or units
 
Derivatives financial instruments
 Unlisted companies
 No limitation   Institutional
 No rules  
FCPR 50% of fund's total asset invested in equity and convertible bonds  issued by unlisted or listed companies or shares /units of investment funds invested in unlisted companies
 
15% in Shareholder accounts (“avances en compte courant d’associé”) 
 Equity 
Quasi equity  
Convertible bonds
 
Shares or units
 Unlisted company for 50% at least of the assets under management included unlisted companies and for 20 % max.  of the assets under management (only small capitalization less than 150 millions euros)
 Companies established in EU
 Retail  Tax incentives for eligible investors
 4.  France
 
FCPI 60% invested in financial instruments  issued by Equity
 
Quasi equity  Unlisted 
company for Companies 
established in Retail  Tax 
incentives 
 
 18unlisted or listed, 
innovative companies  
15% in Shareholder accounts (“avances en compte courant d’associé”)
 Bonds (i.e. convertible bonds)
 
  40% at least of the assets under management
 
Listed companies for 20% max of the assets under management (only small capitalization of less than € 150 million)
 EU for eligible investors
 
FIP 60% invested in financial instruments  issued by unlisted companies, 20% of which in companies less than 8 years old 
 
15% in Shareholder accounts (“avances en compte courant d’associé”) 
 Equity 
Quasi-equity  
Bonds (i.e. convertible bonds)
 Unlisted company for 40% at least of the assets under management
 
Listed companies for 20% max of the assets under management (only small capitalization less than 150 millions euros)
 Only SMEs that have activities in at least one French region
 Retail  Tax incentives for eligible investors
 
5. Italy
 Financial Act
 75% of fund's total assets in seed, start-up, early stage or expansion phase of unlisted companies
 Equity Unlisted companies established for less than 36 months with turnover less than € 50 million/year
 Companies established in the EU
 No rules 
 Tax incentives for qualifying funds
 
6. Portugal
   50% of fund's total assets in unlisted companies
 Equity, credit, guarantees
 Listed and unlisted companies with high appreciation potential 
 No limitations  No rules
   
7. Slovenia Ventur
e capital companies Act (2007) At least 50% of fund 
portfolio invested in SMEs and further 30% in private equity or mezzanine capital Equity, quasi-
equity; convertible loans, guarantees and mezzanine capital Unlisted SMEs No limitations Minimu
m investment by investor is € 50.000 SL based 
VC firms have 0% corporate income tax  
8. Spain
   30% of fund's total assets in equity, 30% in participating loans, no more than ¼ in one entity
 Equity, quasi-equity
 Some exceptions allowing investments also in listed companies
 No limitations  Simplified system for private placements for investments exceeding € 500.000  
   
9. UK
   Target must be listed on LSE or other EU stock exchange Equity and 
loans in 70/30 ratio, investment Listed 
companies only with less than  £ 15 Mio in assets 50% of 
target's activities in UK (as of    Iincome 
and capital gains tax advantages 
 
 19limit of £ 10 
Mio/company and not more 
than 250 employees  2010 also 
activities outside UK on a UK 
natural person tax payer  
Source: Replies to the Commission public consultation on th e new European regime for vent ure capital funds, Commission 
desk research MifiG - Mittelstandsfinanzierungsgesetz 
WKBG  - German Venture Capital Act - Wagniskapitalbeteiligungsgesetz 
FCPR  - Fonds Communs de Placement à Risques 
FCPI  - Fonds Communs de Placement dans l'innovation  
FIP - Fonds Communs de Placement de Proximité (special  form of FCPR that invest in regional SMEs) 
  
All 18 Member States not listed in this table do not even have a dedicated legal 
framework on venture capital and therefore apply general rules on company law and 
prospectus obligations to funds that wish to execute 'private placements'33 of venture 
capital.  This causes additional cost and complications (see below).     
Box 3: Description of venture capita l funds' cross-border fundraising process 
Venture capital fund managers undert aking cross-border placement of ve nture capital funds have three 
broad areas of processes to go through. 
 
(i) Pre-marketing/pre-placement phase  
At the very beginning of any cross-border fundraising activity, the manager must decide on the number 
and identity of the other countries in which investors are to be sought . Due to the fact  that there are 
different private placement regimes in different Member States and the absence of e ffective private 
placement regimes in certain Member States it is not a straight-forward decision. Ma nagers usually need to 
obtain legal advice and undert ake due diligence about each target country 's applicable rules. The cost of 
this advice is described in Section 5.1.2. As a result of these preliminary investigations, managers typically 
will refrain from offering their f unds in some Member States. 
 
(ii) Compliance with other Member States' marketing/placement rules  
Compliance with the relevant marke ting or placement rules in several Member States' can entail a wide 
range of actions. The main areas of regulatory co mpliance are various national requirements on prior 
authorisation, registration of managers and/or funds, the licensing of managers and the separate 
registration of fund ve hicles (this usually requires a setting up of parallel fund structures in those Member 
States), provision of disclosure documents and re porting requirements, and other rules applying to 
distributors or intermediaries, e.g. on ensuring marketing only to relevant qualified investors within the 
jurisdiction in question. Compliance will in some cases entail some restructuring of the overall offer and its 
documents (the cost for offering prospectuses are specified in Section 5.1.4); especially in relation to those 
Member States with more prescriptive and restric tive rules vis-à-vis forei gn fund marketing/placement. 
Cost associated with marketing and pl acement are specified in Section 5.1.5. 
 
(ii) On-going management of compliance with Member States' placement rules and evaluation of potential 
new placement countries/opportunities  
On a daily basis, fund managers need to manage a ll their parallel vehicles set up for purposes of cross-
border placement to investors in othe r Member States. The due diligence of host Member States' rules and 
regulations does not end with successf ul placement of funds in these count ries, but has to continue on an 
ongoing basis to ensure smooth operation of the pa rallel structures in several jurisdictions.  
 
                                                 
33 Private placement is widely understood as marketing/sale of (i n this case) units or shares in investment funds to a 
small or limited number of usually professional investors.   Private placement is the opposite to raising capital from 
public/issuing shares on public markets.  
 
 205.1.2 Driver 2: Raising venture capital funds abroad involves several procedural steps 
that are not necessary when raising capital domestically 
As a consequence of regulatory fragmentation and the need to comply with several sets 
of rules governing both venture capital and private placements, the procedural steps necessary to raise venture capital are mo re complex as the number of targeted 
jurisdictions increases. Raising funds from pot ential investors across several jurisdictions 
involves the following steps:  
First the fund sponsor identifies the countries in which it wishes to approach investors. 
According to the experienced legal advisors to the industry, marketing would usually comprise around 5 to 7 countries in the EU, sometimes more. 
Second, the fund sponsor would engage legal c ounsel for each target country in order to 
address questions on national 'private placement' systems, license and authorisation requirements that may be in place.  The cost of  such a survey of different national private 
placement regimes is difficult to estimate
34. Generally, the costs of a major law firm 
experienced in advising on fundraising in rela tion to small venture capital funds charges 
around € 1000 per jurisdiction for a mere update of their pre-existing advice on national 'private placement' systems, license and aut horization requirements . As soon as more in-
depth advice is required legal advice costs may rise considerably.  
Generally, the costs of a major law firm e xperienced in raising funds for small funds 
charges around € 1000 per jurisdiction for a mere update of their pre-existing documentation. As soon as more in-depth advi ce is required legal advice costs may rise 
considerably.  
Third, the sponsor will then decide whether th e outcome of legal advice justifies further 
pursuit of fundraising in the chosen jurisd ictions. According to the outcome of the 
survey, the sponsor may:    
– Refrain from approaching investors in certain countries, or 
– Comply with private placement rules or – where the private placement rules are not 
available or cannot be met in practice - meet prospectus registration requirements and  
– If additional licensing requirements apply to  local fundraising (distribution) activity: 
engage a licensed 'placement agent' or apply for authorization to engage in distribution activities in every host country.  
In the latter case, typical licensing cost per jurisdiction can vary from € 20.000 up to € 
40.000
35.  The fund sponsor will only incur these additional licensing costs, once he has 
ascertained that there is sufficient investor interest in that country.     
                                                 
34 EVCA, Position Statement of 9 August 2011, p. 6.  
35 EVCA Legal Advisor's response of 25 October to Commission's questions.  
 
 215.1.3 Driver 3: Raising venture capital f unds abroad involves costs that are not 
incurred when raising capital domestically 
Respondents to the public consultation noted that the costs related to adapt legal 
documentation (i.e. 'securities legends') to the requirements of different national private placement rules may amount to € 500 to € 1,000 for each jurisdiction targeted by a 
venture capital sponsor.  If the venture capita l fund sponsor wanted to raise capital across 
the EU, these costs would rise from € 13,500 to € 27,000 for the entire European Union. 
Furthermore, these examples only relate to the cost inherent in updating pre-existing legal documentation; costs multiply exponentially  as soon as more in-depth legal advice 
becomes necessary.  
Costs arise even before a venture capital ma nager commences the actual marketing of its 
venture capital fund in other Member States.  In order to ensure compliance with the 
various legal requirement that apply either to managing and marketing of venture capital 
funds or, in the absence of specific legislati on, to the 'private placement' of investment 
opportunities, the fund manager needs to undertake 'due diligence' ensuring proper 
identification of all applicable rules and requirements. This is often a cumbersome 
process, as rules on private placement are not harmonized in the EU (cf. chart 7, above).  
In the absence of harmonization, Member States and their regulatory authorities take 
different views on whether interests in limited pa rtnerships (which is the typical structure 
use for venture capital funds) qualify as secu rities or not and hence are covered by the 
Prospectus Directive. This also means that ex emptions from prospectus requirements, i.e. 
the private placement exceptions in the Prosp ectus Directive, are not applied in many 
Member States.  
The costs of legal surveys naturally multiply in  line with the number of Member States to 
be covered by the intended cross-border mark eting. In addition, market participants 
reported that, due to national laws bei ng unclear and leaving space for various 
interpretations in a significant number of  cases, the legal advice obtained was not 
conclusive. According to respondents to the public consultation, even experienced legal advisors often came to opposite conclusions in assessing particular private placement rules in a specific Member State. In other cas es the legal advice was to obtain a definite 
opinion or 'ruling' from the national regulat ory authorities, a process which may again 
take several months. In such cases, potentia l offers are usually not marketed in the 
jurisdiction for which conclusive advice could not be obtained.   
It is therefore difficult to make general statem ents on the costs that will accrue in case: (i) 
extensive legal advice is sought from a local  law when a venture capital fund first wants 
to start marketing in a given jurisdiction or (ii) specific advice is sought on a particular 
fund structure that becomes necessary to satis fy the requests of non-domestic investors or 
(iii) legal expertise obtained previously has to be renewed in case domestic legislation 
has substantially changed when compared to previous fund-raising.  But it is safe to state that the cost for often complex legal res earch will by far exceed the cost of legal 
documentation specified above.   
5.1.4 Driver 4: Several jurisdiction apply prospectus rules to venture capital offerings 
Major costs are associated with national pros pectus requirements. In evaluating whether 
or not to allow the marketing of a particular  venture capital fund in their territories, the 
relevant authorities in many Member St ates often demand submission of a full 
 
 22prospectus, especially in case no specific 'ventu re capital' regime is available. This full 
prospectus needs to be approved by the re levant financial regulator. A prospectus 
approved by a regulator in one Member State ca nnot necessarily be used for marketing of 
a venture capital fund in another Member State.  This is because, venture capital funds are 
often structured as limited partnerships and interests in limited partnerships are considered as financial instruments covered by MiFid rules only in some Member States 
but not all (e.g. Germany does not consider inte rest in limited partnerships as financial 
instruments and hence has its own national pr ospectus regime for closed ended funds 
organized as limited partnerships). A prospectus registration in Germany, in case private placement or venture capital requirements cannot be met, would costs around EUR 
40.000.  
Venture capital funds not covered by the na rrow venture capital exemptions from the 
'private placement' rules that apply in Germany
36 (see Chart 7, above), will have to 
submit a securities sales prospectus either  under the Securities Sales Prospectus Act 
("WpPG") (in case the fund is structured as a corporation) or the Sales Prospectus Act 
("VerkPG") (in case the fund is structured as a limited partnership). This documentation 
also needs to be approved by BaFin, the financial regulator37.  Prospectus requirements 
and prior approvals have also been identif ied for Austria, Belgium, the Netherlands, 
France, Sweden and the United Kingdom38. Costs are especially relevant when the 
private placement is designed to appeal to a limited group of specialised target investors.  
5.1.5 Driver 5: Several jurisdictions require local registration and a local distribution 
presence 
Additional costs result from the procedural st eps that a venture capital fund incurs when 
actual fundraising commences. As mentioned above , these costs are linked to the need to 
undergo registration and notification requireme nts with the competent regulators in the 
Host Member States or the need to adapt offer documents for relevant distributors or 
intermediaries in different Member States. Th e system of prior notifications, licenses or 
authorisations is particularly complex and cos tly in the Member States that have neither 
venture capital rules nor rules pertaining to private placements.     
Many Member States require that a local a nd licensed placement agent (i.e. a financial 
institution) is employed when a venture capita l fund is marketed in their territories. 
Alternatively, the venture capital manager itsel f has to obtain a license qualifying him as 
a placement agent. Obtaining this license is costly and burdensome. Often it is 
impossible for a fund manager to obtain su ch a license because he has no local 
establishment.  
Moreover, stakeholders point to additional co mplexity that is associated with local 
licensing arrangements. In relation to clos ed-ended funds, the MiFiD rules on financial 
instruments” are often interpreted in differe nt ways in different Member States. This 
causes additional obstacles for so-called closed-ended funds, which are typically 
                                                 
36 The conditions attached to the German WKBG rules are so strict that no venture capital fund has yet 
availed itself of this scheme, see EVCA, Position Statement, 9 August 2011, p. 41.     
37 EVCA, Position Statement of 9 August 2011, p. 40.  
38 EVCA, Position Statement of 9 August 2011, pp. 24-46.  
 
 23organized as limited partnerships. While some countries consider such limited 
partnerships as "financial instruments" accord ing to Annex I, Secti on C of MiFiD, others 
do not share this approach.  This divergen ce of approach leads some countries to 
consider the offering of investments in clos ed-ended funds as in investment service, 
subject to authorization, while others do not.  
For example, when a closed-ended fund origin ating in a country which does not consider 
offering limited partnerships as an investment  service (e.g., Germany) is marketed in a 
country that considers these offerings as  an investment service (e.g., France), an 
additional MiFid authorization in the country of destination becomes necessary. In these 
circumstances, the host country would refuse to recognize the lawful marketing of the 
limited partnership in the home country. Quite to the contrary, the manager now has to 
establish a physical presence in the host country  and this local office is then required to 
obtain a marketing authorization for the host country39.   
The costs for obtaining a license for engaging in  distribution activities are in the range of 
€ 20.000 to 40.00040. There would, of course, be additi onal costs of maintaining the local 
office, which may vary from jurisdiction to jurisdiction.   
Stakeholders consider that annual costs for maintaining a regulated “MiFID office”, for 
example in the United Kingdom, would be at least in the range of € 25.000 per year. This figure does not including costs for personnel
41.        
The 2007 Expert group report on removing obstacles to cross-border investments by 
venture capital funds estimated that the co st managing four parallel fund structures 
necessary to raise funds in three different ju risdictions exceeded 0.4% of the total capital 
committed to this fund. This leve l of cost has a significant impact, especially on a smaller 
fund's overall performance record.  
5.1.6 Driver 6: The wider ecosystem in wh ich innovative companies operate is 
underdeveloped 
The extent to which increased availability of  venture capital financing will generate gains 
for Europe's competitiveness and other wider benefits depends on the evolution of other 
factors that influence the venture (risk) capital market ecosystem.  Developing fully integrated risk capital mark ets was recognized already in the RCAP in 
1998 as an essential precondition to ensure j ob creation in the EU. Venture Capital Funds 
are one of the three major providers of risk  capital (equity financing) to high-growth 
potential SMEs. Other providers are business angels and stock markets specialized in 
SME. Since SMEs are the key drivers behind future growth and jobs, they need to have access to the appropriate long-term financing at  all stages of their development.  Risk 
capital plays a particularly important role in the early stages of a SME's lifecycle.  
                                                
 
39 Example supplied by an EVCA legal advisor on 25 October 2011.  
40 Estimates provided by an EVCA legal advisor on 25 October 2011.   
41 Estimates provided by an EVCA legal advisor on 25 October 2011.   
 
 24The RCAP identified number of requirements for well functioning Risk Capital Markets 
that need to be simultaneously met so th at the provision of risk capital can develop 
further.  The RCAP identified six categories of barriers that impede a well-functioning 
risk capital markets in the EU: (i) fragmenta tion of stock markets ; (ii) institutional and 
regulatory barriers, (iii) taxation, (iv) wea knesses of high-tech small businesses, (v) 
human resources and (vi) cultural barriers. The RCAP also showed how interlinked these barriers can be, stressing that a coordinated effort at EU as well as Member States level 
in tackling the barriers was the only way by wh ich the EU can succeed in creating a fully 
functioning and efficient risk capital market.   Empirical evidence confirms this.
42 A significant body of research and studies has 
analyzed the different factors. While th is work has shown strong interconnections 
between the different factors, it has also show n that specific issues can be addressed in 
isolation, although the cumulative impact of the different measures aimed at establishing a fully functioning risk capital market will be vital.  Based on this research, it appears 
that there is no one single factor that will act as a driver for a more successful venture capital financing.  Progress requires incremental steps across a range of fields. 
Regulatory fragmentation with respect to  the markets for fund-raising (private 
placements) is therefore but one element in  the overall ecosystem in which venture 
capital funds and the companies they inve st in will develop. Many of the barriers 
identified in the RCAP have already b een addressed and corresponding measures 
implemented
43, though not all. This patchy approach  has been necessary for practical 
reasons, but creates a dis-equilibrium, in which theoretically possible increases in the volume of venture (risk) capital funding are not achieved due to the incomplete nature of 
measures already adopted. Amongst the outst anding areas where work remains to be 
done, regulatory barriers preventing efficient cross-border fundraising  stands out.
44 
Other barriers or inefficiencies may emerge with time as risk capital markets integrate and adjust to the new regulatory conditions.   Further analysis and assessments will be valuab le in the future. In this regard, the Single 
Market Act (SMA) has provided already an updated assessment of the current situation 
and remaining barriers and relevant factors that should improved in order to further 
improve the cumulative impact of measures  already taken on risk capital provision to 
SMEs..   For example, on the supply side, measures to  ensure better SME access to public capital 
markets are being considered. Listings of SMEs and IPOs should be made less 
burdensome. Better listing conditions will also make SMEs more attractive targets for 
                                                
 
42 See Annex XI and XII 
43 Final report on the implementation of the RCAP, 2003, 
http://eur-lex.europa.eu/LexUriServ/L exUriServ.do?uri=COM:2003:0654:FIN:EN:PDF   
By end of 2003, the RCAP reported progress on measures incl uded in the RCAP as well as in the Financial services 
action plan (FSAP) including among others: (i) Directive on pros pectuses to facilitate risk capital exits via IPOs, (ii) 
Directive on supplementary pension funds was expected to increase provision of risk capital by this industry, (iii) 
endorsement of International Accounti ng Standards to improve transparency of reporting to investors, etc.  
44Commission Communication implementing the Community  Lisbon Programme, COM (2006) 349, identified 
regulatory fragmentation as an area that needs to be addre ssed in order to create a better environment for risk capital,  
http://eur-lex.europa.eu/LexUriServ/L exUriServ.do?uri=COM:2006:0349:FIN:en:PDF  
 
 25venture capital funds, as listings prepare a successful exit strategy. On the demand side, 
entrepreneurs' knowledge about the benefits  and opportunities of venture capital backing 
needs to be improved. The business advice elements inherent in the venture capital fund business model deserve greater emphasis.   In addition, delicate issues of national ta x laws and the issue of double taxation of cross-
border venture capital investments  would have to be addressed at the appropriate 
moment whilst also assessing the risk fo r double non-taxation of such investments. 
Stakeholders have pointed out that the fiscal  treatment of cross-border capital investment 
flows would need to be addressed once vent ure capital funds had greater opportunities to 
raise capital in different jurisdictions. Especi ally from the investor's perspective, the 
issue of double taxation of investment returns,  both at the level of the fund and at the 
level of the non-domestic investor , would need to be addressed
45. Nevertheless, 
stakeholders point to the fact that a pr econdition for any action on double taxation is the 
creation of a regulatory environment where cross-border fundraising becomes a realistic 
and attractive option for venture capital operators46.   
 The above mentioned problem drivers have led to a series of features which characterize 
certain shortcoming in the European market for venture capital funds.     
5.2 Problems 
5.2.1 Investor's preference in the EU is skewed against venture capital 
Europe dedicates insufficient funds towa rd the financing of innovative start-up 
industries. While the United States, in the period from 2003-2010, raised approximately € 131 billion into venture capital funds, Europ ean venture capital funds only managed to 
raise € 28 billion in this period
47.   On the other hand, US fund’s average investment per 
company amounted to € 1.5 million (2002) rising to € 4 million by 2009, while the 
European average remained at € 1 million throughout this period. Early (seed capital) stage investments per company, in the US, we re stable at € 3 million per company, while 
they amounted to € 0.5 in Europe
48.    
Investor's preference for private equity – to the detriment of venture capital – can further 
be illustrated by comparing the overall amounts dedicated to private equity financing 
with the narrower sub-category of funds that  are channelled toward venture capital. In 
the reference period 2003-2010, funds dedicated  to venture capital amounted to € 64 
billion out of a total of € 437 billion invested  in the wider field of private equity.  
Venture capital thus accounted for only 14.6% of  the joint pool – with private equity 
accounting for 85.4%. Chart 4 shows that, in every single year, funds raised by private equity far exceed those raised by venture capital.  
                                                
 
45 EVCA, Position Statemen t, 9 August 2011, p. 31 
46 EVCA, Position Statemen t, 9 August 2011, p. 31  
47The data source used for this comparison, Dow Jones Vent ureSource, is different than the one used when showing 
only European fundraising and investments (EVCA).  
48 Annex XI, box 1.  
 
 26As long as this bias in favour of private equity -- a sector that invests in mature 
companies and organises leveraged buy-out s -- persists, available funds are not 
channelled to where they are most needed: to provide equity finance to seed and start-up 
ventures that are at the make-or-break phase in their corporate development. The lack of 
financial resources that are currently directed towards venture capital is responsible for the inefficient size of the average European VCF and their ensuing comparatively low capital investments per target company.  
In consequence, venture capital, at this stag e, plays a minor role in the financing of 
SMEs. As chart 5 illustrates, SMEs depend pr imarily on bank loans.  Bank loans account 
for more than 80% of SME finance. Only 2% of SME finance is supplied by venture 
capital funds. The corresponding figure for the United States is 14%.  
Chart 6: Sources of financing for EU-based SMEs 
792411742212
0 1 02 03 04 05 06 07 08 09 0BanksLeasing/renting companiesPublic institutions supportin investîmesPrivate investorsPrivate financing companies (other than banks)Venture capital companiesOtherDK/NA
%  
Source: OECD 2006  
These findings are particularly striking in li ght of the fact that many SMEs, since the 
financial crisis of 2008 and 2009, had to pay much higher interest rates for bank loans.49 
Moreover, as a consequence of the financ ial crisis of 2008 and 2009, the provision and 
extension of credit lines by banks to SMEs has decreased significantly, so SMEs' search 
and demand for other alternative sources of finance has become pressing.50  Still, venture 
capital, for want of sufficient capital resources, has not been able to step into this obvious 
gap.   
5.2.2 EU venture capital funds are below the optimum size  
The average size of a European venture capita l fund is significantly beneath the optimal 
size for this type of funding instrument.  As  indicated in table 2b (annex X), the average 
United States venture capital fund (VCF) has 280 million in assets under management, the average European VCF size is around €60 million.  The Average European size is 
thus far below the optimum efficient size for a VCF, which a recent Ernst & Young study 
                                                
 
49 According to the latest European Central Bank (ECB) surv ey where more than 50% of the sampled euro area SMEs 
reported increases in interest rates charged by banks and overall tightening of credit standards for bank loans to SMEs  
50 In the latest survey (09/2010 – 02/2011) carried out by the European Central Bank (ECB) and developed together 
with the European Commission on the access to finance of SMEs in the Euro area, ar ound 15% of SMEs surveyed 
quoted "access to finance" as their most pressing problem a nd this has not changed compared to previous surveys. 
http://www.ecb.europa.eu/pub/pdf/other/accesstofinan cesmallmediumsizedenterprises201104en.pdf?b704f6b228e071b
ea9507d7569412805  
 
 27puts at not less than € 230 million.  The study further argues that optimal specialisation 
can be achieved with funds in the range of € 230 to 380 million.  
Chart 7: Amount of venture capital funds  raised in Europe vs the US (2003-2010) 
0510152025303540
2003 2004 2005 2006 2007 2008 2009USD billion
020406080100120140160180200
Number of funds
EU Funds Raised VC US Funds Raised VC N° of EU funds N° of US funds 
Source:  Ernst & Young, "Back to basics, Global ve nture capital insights and trends report 2010"  
As mentioned above, this situation is also borne out when assessed from the perspective 
of the overall portfolio of venture capital f unds managed by a particular fund manager. 
According to the latest figures available fr om the European Private Equity and Venture 
Capital Association (EVCA), 98% of Europ ean venture capital fund managers manage a 
portfolio of funds that would be beneat h the € 500 million threshold set out in the 
Directive on Alternative Investment Fund Managers (AIFMD)51.  
  
5.2.3 The inadequate SME 'financing mix' 
The key variable that determines the success of  failure of a SME is not merely the overall 
amount of finance that is avaliable but the composition of its 'financing mix'.  Typically, 
a European SMEs financing structure can be characterized by its equity to debt ratio. 
This ratio differs according to whic h stage of its 'lifecycle' the SME52 finds itself. But the 
debt/equity ratio should, in principle, be skew ed in favour of a high equity percentage as 
empirical studies demonstrate that a high leve l of equity investment, combined with a 
stable legal framework, provides the best  financing structure for start-up SMEs53.  
Empirical studies show that start-up compan ies backed by venture capital financing fare 
better than those that rely on other, less st able, sources of financing.  The superior 
efficiency of VC-backed firms is due, first and foremost, to the rigorous screening and 
monitoring that VCF apply to their investme nt targets. On average, VC-backed firms 
tend to be more profitable than those w ho do not receive VC-backing (VC-backing can 
increase relative profitability by 21 to 35%54).  The relatively low rate of equity capital 
raised by VCF is therefore detrimental to the emergence of efficient market entrants.  
                                                 
51 Source: European Private Equity and Ventur e Capital Association (EVCA) estimates 2011  
52 Source: European Venture Capital Association (EVCA), quot ed in Ruis, A., van Stel, A ., Tsamis A., Verhoeven W., 
and Whittle M., Cyclicality of SMEs finance , DG Entreprise and Industry, 2009.  
53 See Studies cited in Annex XII.   
54 See Annex XII, Study by Chemmanur et. Al, CES 08- 16 June 2008.  
 
 28According to a study conducted in late 1980s’55, firms with low amount of equity 
investment (relative to debt financing) ar e prone to suffer from poor performance. A 
more recent study56 confirms the superior performan ce of equity-backed ventures. This 
study finds that, on average, start-ups with higher levels of equity investors perform 
better than those that rely on high levels of de bt. The lack of equity financing in Europe 
therefore constitutes a serious impediment to the faster development of innovative firms.  
 
 
Problem Tree:  
 
 
 
5.3 Baseline scenario  
Should the problems described in previous chap ter persist it is reasonable to assume that 
the following situation for the key stakeholders and the European economy would remain unchanged. 
                                                
 
55 Williamson, Oliver E. 1988. “Corporate Finance and Co rporate Governance,” Journal of Finance 43(3): 567-591 - 
Williamson argues that firms engaged in pr ojects requiring highly specific assets ar e more likely to be financed with 
equity. He suggests that a firm’s financia l structure is akin to a governance struct ure and predicts that a firm’s equity 
ratio will be positively correlated with asset specificity.  
56 A. Robb and R. Seamans, 2011. Entrepreneurial Fi nance and Performance: A Transaction Cost Economics 
Approach  Inefficient cross-border VC fundrai sing : is complex and costly  and VC fund managers face: 
 (i) multiple procedures and  
(ii) extra costs not incurred on the domes tic market related especially to  
(iv) compliance with prospectus rules and with  
iv)  requirements of local presence and registration   
Problems
ImpactsUntapped Single Market  gains from venture capital financing: 
(i) Economic gain: GDP growth, innovation 
(ii) Social benefit: job creation 
(iii) Environmental: innovation 1. Regulatory fragmentation: 9 MS with different 
VC national laws & 18 MS with no specific VC regime:  
(i) Qualifying fund portfolio 
(ii) Qualifying investment instruments (iii) Qualifying investment targets (iv) Eligible investors
  
 
Problem 
Drivers 
SMEs 
• Inadequate SME 
financing mix Investors  
• Restricted Investor's 
preference in the EU is skewed against venture capital 
 VCF 
• EU venture capital 
funds are below the optimum size 
  
Wider ‘ecosystem’ 
2. stock market fragmentation  
3.taxation 
4.low investment readiness of portfolio firms 
5. human resources 
6. cultural barriers 
Out of Scope
 
 29 
Venture capital fund managers  
The current system discourages smaller ve nture capital fund managers from raising 
capital on a European basis. Capital sources remain confined to national investors – for venture capital funds domiciled in smaller Member  States this will lead to an often very 
narrow investor base. Funds that operate in su ch Member States do not, therefore, benefit 
from access to a large, liquid and integrated financial market and wil face difficulties in 
reaching economies of scale. In order for a venture capital fund manager to engage in 
cross-border marketing in the EU, it need s to go through a cumbersome and costly 
process including: identification of the suitabl e regime for potential investors, creation of 
complex parallel fund-raising structures, subm ission and approval of sales prospectuses, 
foreign registrations or authorisations, the es tablishment of a local distribution office and 
on-going regulatory compliance processes involving a multitude of host Member States
57. 
Such formalities may effectively skew the cost  benefit analysis against seeking capital 
beyond the venture capital fund's home jurisdiction. This makes it indeed hard for managers to achieve sufficient economies of scale, which results in too many small funds with a suboptimal size of assets under management and, in consequence, sub-optimal supply of capital that can be supplied per investment/company. The scale of the inneficiencies caused by the fragmented regul atory framework is difficult to capture and 
quantify, however the anectdal evidence cited in  Section 5.4. indicates that the cost and 
complexity of fund-raising in multiple juri sdictions often outweighs what a small fund 
operator can afford, both in relation to financial and personnel resources.  
As a consequence of fragmentation, various  inefficiences can be observed in the 
European venture capital market: (i) Ventur e capital activity, both in terms of asset 
management, fundraising and fund domiciles rema ins concentrated in four big Member 
States plus the Netherlands and the three Nord ic countries; (ii) European venture capital 
funds operate with half of the capital commitments of their US counterparts (Section 
5.2.); (iii) as European venture capital funds  aggregate annual capital commitments of 
only around 15% of those aggregatred by their US  counterparts, the majority of them will 
ocntinue to operate below the optimum size fo r a long time in the future; (iv) European 
venture capital funds must satisfy the needs of more SMEs than their US counterparts 
with only half of the capital commitments , average size of financing provided per 
company/investment is therefore more thin ly spread; (v) growth and innovation potential 
is lost as investoir’s capital remains dir ected toward less innovative and growth-inducing 
fund activities (e.g., private equity and buy-outs) ; and (vi) the equity-base of European 
SMEs will remain low in relation to less stqble debt financing. 
Funds' investors
 
The complex and costly marketing conditions  for venture capital funds may lead to a 
decision of smaller fund managers to avoid offering their investments in more than one jurisdiction. The potentially interested investor s in these markets, as a consequence, face 
a more restricted choice of foreign investme nt propositions. As with fund managers, this 
is especially detrimental to investors in smaller countries, not least because venture capital activity, both in terms of assets under management and domicile of managers, is 
                                                
 
57 See EVCA reply to Commission consultation of 15 June 2011 and Feedback statement summary. 
 
 30essentially concentrated in eight out of 27 Member States. Lower capital inflows, in turn, 
lead to less opportunities for specialisation  and diversificaton of a venture capital fund’s investment portfolio. Furthermore, the limited amount of supply side opportunities 
reduces competition among fund managers. Le ss competition impacts investors who may 
be faced with higher placement transaction fees.   
SMEs
 
SMEs have fewer alternative sources of capital to draw on. Instead of being able to select 
from a larger pool of competing, sufficiently capitalised and highly specialized venture capital funds that operate internationally to  achieve size and economies of scale, SMEs 
have a narrower selection of more domestically oriented, less capitalised and therefore less specialized venture capital funds. This decreases the bargaining power of SMEs, 
makes them more dependent on local ventur e capital funds, which may lack both capital 
and expertise to make a significant imp act both on equity endowment and business 
expertise provided to the target company. This leads to higher cost of finance, and lower value-added support for the commercial devel opment of the funded target company. Less 
funding opportunities decreases the innovation capacity that SMEs can build on.  National authorities
 
 Prior to allowing a private placement by a ve nture capital fund, national supervisors have 
to make comprehensive assessments of the foreign venture capital fund, its managers and 
the regulatory requirement with which it complies. Often the detailed requirements that currently apply various jurisdictions (See Section 5.4.) cannot be met and the venture 
capital fund manager might be reluctant to ch ange or adjust its business strategy to 
achieve compliance with the rules applicable  in various host countries (i.e., create a 
parallel structure, or even local presence, in various jurisdictions in order to be able to 
market its investment strategy to local i nvestors). All the compliance costs incurred by 
both the venture capital fund manager are s unk costs and documentation or structures 
created for one jurisdiction cannot be reused for others. 
European Economy
 
Without any overhaul of the existing dispar ate regulatory frameworks governing venture 
capital throughout Europe, the supply of seed  and start-up capital provided by venture 
capital funds to SMEs remains below efficient scale and the European economy is deprived of the potential benef its of an increased supply of venture capital to European 
start-ups. Growth, employment, efficiency of markets, innovation and competitiveness 
will suffer as a consequence. Improving the conditions for efficient venture capital 
allocation in European economy would lead to – (i) deeper capital markets enabling 
savings of professional and institutional investors to flow more efficiently to a more interesting variety of investments (ii) redu ced transaction costs and increased market 
liquidity, (iii) a more diversified and i nnovative financial system and (iv) more 
opportunities to pool risk.   
5.4 The EU's right to act and justification  
According to the principle of subsidiarity laid down in Article 5(3) of the Treaty, action 
at EU level should be taken only when the aims envisaged cannot be achieved 
 
 31sufficiently by Member States alone and can th erefore, by reason of the scale or effects 
of the proposed action, be better achieved by the EU.  
An approach based on action by Member States  has already been tested and failed to 
achieve the intended goal.  As mentioned above, the Commission in 200758 proposed an 
approach based on the mutual recognition, be tween Member States, of their respective 
venture capital funds, so as to allow cross- border placements with investors in their 
respective territories.  
However, a report in December 200959 concluded that mutual recognition of the 
regulatory requirements imposed on venture cap ital operators had not contributed to a 
reduction of the fragmentation of venture cap ital markets in the EU. Furthermore, as 
shown in this impact assessment, the fragmentation of the operating rules for venture capital funds persists. Indeed, due to the fact that special rules for venture capital funds 
in the different Member States (see Char t 6, above) have taken rather different 
approaches, this regulatory fragmenation has arguably worsened.  Therefore, targeted 
action at  European level is necessary to establish a common understanding of what constitutes a venture capital fund and on the conditions under which such an entity can 
raise capital in different jurisdictions across the European Union.  
The principle of proportionality, as articulat ed by Article 5(4) of the Treaty, will be 
respected. The proposed rules will attempt to  introdsuce the least possible regulatry 
burden possible, without, however, sacrificing e ssential rules that aim to safeguard that 
capital committed to venture capital operators is channelled to the intended beneficiaries: innovative SMEs in the early phases of their entrepreneurial and commercial development.   
6 O
BJECTIVES  
6.1 General objective – make European SMEs more competitive in a global 
marketplace 
The overarching objective is to make Europ ean industries more competitive in a global 
marketplace.  Europe is not short of ideas a nd innovators.  It is in the area of start-up 
financing and entrepreneurship where Eur ope is lagging behind. Good ideas - take the 
example of the Internet - are often conceived in Europe but brought to commercial fruition in the United States.  It is notewor thy that most successful internet business 
ventures have been born in an environment that is able to merge conceptual brilliance with the necessary financing tools.  It is interesting to note that Silicon Valley, despite the emergence of competing centres of tec hnological excellence, remains by far the most 
successful breeding ground for high-tech and latte rly 'social media' start-ups.  This is on 
account of the confluence of technological savvy and the appropriate start-up venture 
capital financing that characterises this technology cluster.   
                                                
 
58 Communication from the Commission on Removing obstacles to cross-border in vestments by venture capital funds , 
http://eur-lex.europa.eu/LexUriServ/L exUriServ.do?uri=COM:2007:0853:FIN:en:PDF  
59 Summary report 2009: Cross-border venture capital in the European Union 
rhttp://ec.europa.eu/enterprise/newsroom/cf /itemlongdetail.cfm?item_id=4053&tpa_id=127&lang=en  
 
 32The problem for Europe is not a lack of technological innovation. Start-up financing to 
innovative enterprises must thus be radically improved, so that Europe can finally merge 
its technological expertise with the requisite financing tools.  
6.2 Specific objective – Create a Euro pean system for the cross-border 
fundraising of venture capital funds 
Venture capital is the tool of choice for star t-up companies.  Early-stage entrepreneurs 
need the stability of equity finance in prefer ence over loans or other debt instruments.  
Venture capital combines stable capital co mmitments with entrepreneurial advice. 
Venture capital funds can act both as capital provider and business adviser.  
This form of risk-sharing and entrepreneuria l involvement is absent in all alternative 
forms of finance that may otherwise be channe lled toward start-up companies.  This deep 
involvement in the early business developm ent can also not be achieved by means of 
specific SME "stock exchanges", as trading on exchanges intervenes at a later -- and 
more mature -- stage in a venture capital co mpany's lifecycle. As mentioned above, these 
approaches are complementary to venture capital funding but cannot replace it. Venture 
capital financing is therefore deemed the be st tool to increase the amount of start-up 
financing available to European innovators in a rapid, yet sustainable manner.  
The proposed course of action therefore focu ses on the development of efficient capital 
markets for dedicated venture capital funds . The preferred policy choice for boosting 
venture capital funds is to increase the depth and liquidity of their capital base. In line 
with the underlying principles of the Internal Market, this choice can best be implemented by opening up cross-border fundr aising opportunities for those funds that 
specialise in venture capital financing.  
6.3 Operational objectives 
6.3.1 Establish a  notion of what constitutes a qualifying 'venture capital fund' 
In order to enhance the capital base av ailable to venture capital funds, a common 
understanding of the concept of 'venture cap ital' becomes necessary.  A key building 
block of any future action in this area mu st therefore consist in developing a common 
approach to delineate venture capital funds from  other alternative investment funds that 
engage in a broader range of investment strategies. The first operational goal of a proposed initiative will therefore consist in defining the core elements, in terms of 
financial instruments, investment targets a nd portfolio composition, which differentiate a 
venture capital fund from the broader populati on of alternative investment funds. Other 
aspects, such as the absence of leverage or a preference for specific investment tools 
(such as equity and quasi-equity instruments issued by the target companies) may also play a role in defining the essential featur es of a qualifying of 'venture capital fund'.  
6.3.2 Create a common regulatory approach go verning qualifying 'venture capital 
funds' and their managers 
Once the notion of 'venture capital fund' is  delineated with the requisite level of 
precision, the second operational objective will consist in providing a regulatory 
framework that attaches tangible advantages to managers who can demonstrate that their 
venture capital funds and their own operati onal infrastructures comply with this 
definition. Such advantages could consist in the creation of uniform rules for the 
 
 33marketing of qualifying venture capital funds a nd a common approach in respect of those 
investors that are eligible to invest in such qualifying funds. Should cross-border 
marketing opportunities lead to more effi cient European venture capital funds, the 
common notion of 'venture capital fund' ma y also serve as a suitable "point of 
attachment" to further explore, together w ith the Member States, those taxation issues, 
which may have an impact on cross-border fundraising by venture capital funds.     
6.3.3 Create a network of administrative cooperation for the effective introduction and 
supervision of managers of European qualifying venture capital funds     
An essential operational plank for the practi cal enforcement of cross-border fundraising 
is the institution of a framework of administrative cooperation in overseeing and enforcing the new marketing 'passport'.  Th e importance of an effective framework of 
regulatory cooperation between the national authorities that need to oversee and enforce the new rules governing cross-border activitie s of venture capital fund managers cannot 
be overestimated.  It is on the effectiveness of cross-border administrative cooperation that the ultimate success or failure of a European approach to venture capital depends.   
Objective tree: 
 Operational Create a European system for the cross-border fundraising of venture 
capital funds that will: 
Improve legal clarity and simplify cross-border VCF fundraisings 
Decrease costs for cross-border VCF fundraising Improve investors' portfolio diversifications  
Facilitate SMEs equity financ ing and reduce financing costs 
Harmonize VCF operations to reach critical mass General 
Specific 
Establish a notion of 
what constitutes a 
qualifying VCF  Create a common 
regulatory approach 
governing European 
qualifying VCF Create a network 
of administrative 
cooperation for 
qualifying VCF 
operation Europe 2020 Strategy & Innovation Union 2010 & Single Market Act 
Support job creation, Develop econom ic growth, Facilitate innovation 
Make European SMEs more competitive in a global marketplace 
 
 347 OPTIONS  
This impact assessment will analyse several op tions that appear suitable to achieve the 
above-mentioned aims.  A differentiation w ill be made between substantive policy 
options  and options concerning the legal form  of their implementation.  
With respect to substantive policy options, th is impact assessment will consider how to 
best define the essential features that char acterise a venture capital fund that will be the 
subject matter of targeted alleviations in respect to their cross-border marketing.   
The options on legal form will assess whethe r these special rules should be embedded 
into the directive on alternative investment fund managers (AIFMD), be promulgated as 'level 2' when implementing the AIFMD, be achieved with a targeted stand-alone legal 
instrument or be achieved by a legal inst rument detailing the conditions of 'mutual 
recognition' between national approaches govern ing venture capital or, in the absence of 
such approaches, 'private placements'.    
7.1 Options on the content and scope of  a European framework for venture 
capital funds 
The fist key building block of any options designing the appropriate venture capital 
framework is the definition of the investme nt strategy and portfolio composition that 
would characterise and differentiate a ventur e capital fund from other forms of collective 
investment funds. Options therefore re volve around the appropriate portfolio 
composition  that would be deemed to characterise a venture capital fund.  
The second building block relates to the choice of the eligible investors. Existing national 
rules generally restrict investments in vent ure capital funds to institutional, professional 
or other financially sophisticated investors. This is largely justified by the intrinsically 
risky nature of venture capital activities. Opti ons in this building block therefore revolve 
around the issue to which types of investors  a European venture capital fund should be 
marketed.  
7.2 Presentation of options on portfolio composition 
The following three key building blocks will be  used to define the precise contours of 
what constitutes a European venture capital fund:  
INVESTMENT TARGETS  INVESTMENT INSTRUMENTS PORTFOLIO COMPOSITION  
In line with the impact assessment's 
stress on the absence of appropriate long-term investments in the early stages of start-up companies, the qualifying investment target will be defined as: 1. A company th at fulfills the 
following criteria: (i) it employs fewer than 250 persons and (ii) which have an annual turnover not exceeding EUR 50 million, and/or (iii) an annual balance sheet total not exceeding EUR 43 million.
60 
mall , AND In line with the impact asse ssment's previous sections on 
the important role that equity investments play as a stable source of start-up financing (Sections 3.1 and 5.3), the qualifying investment instruments will be defined as equity and quasi-equity.  Equity and quasi-equity instruments best embody the long-term commitment  that 
is best suited to bring a business venture to fruition. For the purposes of this analysis 'equity' is defined as an ownership interest in an undertaking, represented by the shares or other form of par ticipation in the capital of the 
target company, issued to th e investors. Quasi-equity is An essential policy choice 
needs to be made in relation to the percentage of the aggregate capital contributions and uncalled committed capital that need to be invested in qualifying investment instruments issued by qualifying target companies. Three options on this matter will be assessed as to their 
                                                 
60 These criteria are inspired by the SME definiti on contained in Commission R ecommendation concerning the 
definition of micro, small and medi um-sized enterprises of 6 May 2003. 
 
 352. A company that is  unlisted if it is 
not listed on a regulated market as defined in Article 4(1)(14) of Directive 2004/39/EC.   defined as any instrument, whose return is predominantly 
based on the profits or losses of the qualifying portfolio undertaking and which is unsecured in the event of default. In this manner, quasi-equity displays a risk and reward profile which is closely correlated to that of equity.  suitability to achieve the 
operational objectives enumerated in the previous section 
These three building blocks are selected with  a view to defining the notion of a venture 
capital fund with a high level of detail, thereby allowing a clear distinction between 
venture capital funds and other alternative inve stment funds. In order to fully develop the 
benefit of a venture capital system for the in tended investment targets, the selection of 
the portfolio composition is crucial. In relati on to the percentage of the aggregate capital 
contributions that must be invested in qua lifying investment targets, three options are 
analysed:   
7.2.1 Option 1: Flexible scope  
This option would require that a qualifying venture capital fund (VCF) invests at least 
50% percent of its aggregate capital contribu tions in qualfying target undertakings. The 
investment tools available to a venture capital fund would comprise investment in 
equities or quasi-equity securities that ar e directly issued by the qualifying target 
company.   
It is important to clarify that the ventur e capital fund has to acquire these instruments 
directly from the issuing unlisted SME. Direct  acquisition is an essential safeguard as it 
aims to differentiate venture capital funds from the broader category of alternative investment fund (which predominantly trade in issued securities on secondary markets). 
However, in order to allow venture capital funds a high degree of flexibility in their 
investment and liquidity management, seconda ry trading in equity and other financial 
instruments would be permitted, as long as such investments do not exceed the maximum 
threshold of 50% that does not need to be invested in qualifying investments. 
The 50 % ratio of qualifying investments is insp ired by the 50% threshold  that applies to 
venture capital funds that are eligible  for participation in the Co mmmissi on's 
Competetivenes and Innovation Framework Programme (CIP) that aims to support 
innovation and growth of SMEs. The 50% thre shold establishes an initial link between 
the venture capital fund and the promotion of  innovative SMEs, but is less strict than, 
e.g., the other criteria contained in the framework programe or the thresholds in the Commission's guidelines on risk capital investments
61.   
7.2.2 Option 2: Intermediate scope  
In this option, the qualifying venture capital f und needs to invest 70% of its aggregate 
capital contributions into equity or quasi-e quity issued by qualifying target undertakings. 
The 70% threshold is inspired by one of the criteria according to which venture capital funds may be eligible for state aid that is  established in the Community guidelines on 
State aid to promote risk capital investments: " The risk capital measure must provide at 
least 70 % of its total budget in the form  of equity and quasi-equity investment 
instruments into target SMEs. In assessi ng the nature of such instruments, the 
Commission will have regard to the economic substance of the instrument rather than to 
                                                
 
61 OJ C 194/2, 18.8.2006  
 
 36its name and the qualification attributed to it by the investors. In particular, the 
Commission will take into account the degree of risk in the target company's venture borne by the investor, the potential losses bor ne by the investor, the predominance of 
profit-dependent remuneration versus fixed remuneration, and the level of subordination 
of the investor in the event of the company's bankruptcy
62".  
However, compared to the aforementioned Community guidelines, the remaining 30% of 
aggregate capital contributions are not subject to any investment limitations. 
7.2.3 Option 3: Strict scope  
This option is designed in the same manner as the preceding ones, except that the 
percentage that needs to be invested in equity or quasi-equity issued by target companies is 90 percent. This high percentage reflect s the UCITS approach according to which a 
UCITS funds may invest up to 10 percent of its assets in instruments that are not eligible 
assets as enumerated in the UCITS Directive
63.  The choice of a rather high percentage 
for qualifying investments also reflects the po licy choice of the US Securities regulator 
(SEC) when implementing the venture capital exemption contained in section 203(1) of 
the Securities and Exchange Act64.          
7.3 Summary of Options on portfolio composition: 
OPTION QUALIFYING 
INVESTMENTS (% OF COMMITTED CAPITAL) TARGET 
UNDERTAKING INVESTMENT 
INSTRUMENTS NON-QUALIFYING 
INVESTMENTS (AS % OF COMMITTED CAPITAL) 
1 -Flexible  > 50% in target 
undertakings Unlisted SME Equity or quasi-equity, directly 
acquired from issuer 50% in secondary trading or 
other instruments of choice 
2- Intermediate  > 70% in target 
undertakings Unlisted SME Equity or quasi-equity, directly 
acquired from issuer  30% in secondary trading or 
other instruments of choice 
3 - Strict  > 90% in target 
undertakings Unlisted SME Equity or quasi-equiy, directly 
acquired from issuer 10% in secondary trading or 
other instruments of choice 
 
7.4 Analysis of options on portfolio composition 
Below, the three substantive options will be assessed in terms of their effectiveness, 
coherence and efficiency in attaining the above-mentioned operational objectives. Options on the portfolio composition of vent ure capital funds would directly address 
regulatory fragmentation that currently prev ails with respect to the composition of a 
qualifying venture capital fund's portfolio, qualifying investment instruments and 
qualifying investment targets. Harmonisation of the appropriate portfolio composition, 
the eligible investment instruments and the e ligible target companies serves to address 
                                                
 
62 Risk Capital Guidelines, at Section 4.3.3. 
63 Cf. Article 50(2)(a) of Directive 2009/65/EC, OJ L 302/32, 17.11.2009 
64 The SEC rules stipulate that a venture capital fund must inve st at least 80% of aggregate capital contributions must 
be invested in qualifying investments. Qualifying investments are defined as investments in equity issued by a 
qualifying portfolio company that is acquired directly by the fund. A qualifying portfolio company is defined as a 
company that is not traded on an exchange and is not itself an investment company. Further details of the SEC rules details are described in Annex VII.
   
 
 37confusion and legal uncertainty that ventur e capital investors, venture capital funds as 
well as SMEs encounter in a fragmented regulatory environment. 
7.4.1 Operational objective 1: Establishment of a notion of 'qualifying venture capital 
fund' 
The aim behind this operational objective is to provide a common definition of the 
essential elements that constitute a qualif ying venture capital fund. The aim behind this 
definition is to precisely circumscribe th e scope of a favourable European regulatory 
framework that attaches tangible advantag es only to those qualifying venture capital 
funds that can demonstrate compliance with this definition. Such advantages could consist in the creation of a registration- based cross-border marketing permit and a 
common approach to those investors that are eligible to invest in such cross-border vehicles. Should cross-border marketing opport unities lead to more efficient and bigger 
European venture capital funds, the common no tion of 'venture capital fund' may also 
serve as good starting point for further explori ng with Member States solutions to those 
taxation issues that may have an impact on cross-border fundraising of such funds.    
In light of these aims, a key concern is that  the European venture capital framework must 
really achieve its aim of channelling funds to  innovative start-up ventures and not emerge 
as a tool to circumvent the stringent re quirements contained in the AIFMD.  This 
ambition is most clearly expressed in the following stakeholder comment by the 
European Venture Fund Inve stors Network (EVFIN): " As such, they (EVFIN members) 
believe that the EU initiative in question w ill serve a very useful purpose in terms of 
defining venture capital as a separate asset class, helping to improve the understanding and transparency of this sector still unfamiliar to many institutional investors as well as 
SMEs ." 
A key concern therefore was to make a vent ure capital fund sufficiently distinct from 
other alternative investment funds. Making this  distinction is essential in justifying the 
different regulatory framework that will govern qualifying venture capital funds.   
The issue is particularly relevant as the principal aim of a European framework for 
venture capital funds would be to provide a venture capital fund manager with cross-
border marketing and fundraising opportunities without
 the need to comply with the full 
set of operational, disclosure and risk mana gement rules contained in the AIFMD. A key 
requirement of a common approach to vent ure capital funds is that the qualifying fund 
has an investment portfolio that is clearly distinct form that of an alternative investment fund.   
In this respect, Option 3 would appear most suitable to create a clear and distinct notion 
of the essential elements that constitute a European venture capital fund. As the amount 
of non-qualifying investments is confined  to a 10% ratio of aggregate capital 
contributions or committed capital, this option is  best placed to foster the emergence of a 
'venture capital brand' – not unlike th e UCITS framework, where non-eligible 
investments are also confined to a 10% ma ximum threshold. A fund that allocates 90% 
of its aggregate capital contributions to equity or quasi-equity investments in qualifying target companies embodies a 'pure' venture capital approach and will be recognised as 
such by potential investors.   
Indeed, many stakeholders that took part in the consultation stress the need to develop a 
clear definition of a venture capital fund, especi ally in order to distinguish this from a 
 
 38private equity fund. Most prominent am ong the criteria discussed in the public 
consultation was the introduction of a compulso ry investment percentage in favour of 
qualifying SMEs. Sixteen stakeholders (inc luding seven industry organisations, the 
industry federation EVCA and six public author ities) spoke in support of a rule that a 
majority  (50% as a minimum) of the aggregate capital contributed to a venture capital 
fund should be invested in qualifying SMEs. F our Member States that favour of a high 
compulsory investment percentage do not have specific venture capital framework in 
place, another Member State supports this rule  because its own national regulation reflect 
the same approach and the sixth Member State supports this rule despite the fact that its 
specific national law requires a higher percentage of capital being allocated to SMEs.  Option 2 would equally offer a relatively hi gh level of confidence that the qualifying 
venture capital fund essentially pursues a strategy dedicated to funding high-potential 
SMEs. Again, the long-term commitment is ensured by the requirement that 70% of 
capital raises is channelled toward investments that are in equity or quasi-equity that is 
directly issued by the SME. Especially the requirement of that the participation is 
'directly' purchased from the SME issuer, ensures that investments are sufficiently 
channelled to the early start-up, seed and e xpansion phases of the target SMEs.  A 70% 
threshold -- although less strict than the 90% variant -- appears ultimately more conducive to developing a successful and realis tic notion of a European venture capital 
fund. The lower threshold might well be co mpensated by the fact that the venture 
capital's success in raising capital with inve stors is higher once the manager enjoys a 
somewhat larger discretion as to the compos ition of the fund's portfolio. Therefore, take-
up of the funding scheme seems greater if the threshold is inferior to 90%.   The argument for an intermediate threshol d is also borne out by comparing existing 
Member States venture capital frameworks (cf. chart 5) which contain mandatory 
investment targets in favour of unlisted SM Es within a range of 50-75%.  Without any 
reasonable flexibility, there is a risk that few funds would be interested to make use of 
the new EU framework. The costs of complyi ng with an ambitious 90% threshold might 
outweigh the benefits of the purer approach.  
While some adaptations will always be necessary to comply with a single EU approach 
to the definition of what constitutes a ventur e capital fund, the intermediary approach is 
closer to the national requirements that prev ail in the eight Member States that have 
adopted rules governing the activities of vent ure capital funds.  An approach based on a 
70% target therefore promises a higher immediate take-up
 than one based on a 90% 
target. A higher initial take-up is more c onducive to establishing a common notion of 
venture capital funds than a somewhat ‘idealis tic’ target of 90% (w hich would oblige all 
but the most pure breed venture capital funds to alter their investment strategies).       
A certain preference for the intermediary approach can also be gleaned from the 
stakeholder consultation. While 28% of respondents to the public consultation were against any thresholds on the portfolio of i nvestments a venture capital funds can engage 
into, a narrow majority of 35% favour a threshold ensuring that more than
 50% of 
venture capital fund's investments pertain to SMEs. The rationale given is that there 
should be a safeguard that a high percentage of the aggregate capital raised by or pledged 
to a venture capital fund should be invested in qualifying undertakings.    
Option 1, on the other hand, would offer a rath er low guarantee that a clear distinction 
between venture capital, on the one hand, and ot her alternative investment strategies, on 
the other hand, emerges. While it could be argued that this option enhances the fund 
 
 39manager's discretion in raising capital and presenting its investment proposition, a 50% 
threshold appears less conducive to create a clear European notion of what constitutes a venture capital fund. This option would not pr ovide potential investors with a clear idea 
of the business strategy that stands behi nd the fund. This hesitation on the "venture 
capital" credentials of the fund might act as a considerable break in investor's willingness 
to entrust capital to the fund, especially as this entrustment entails a commitment not to 
redeem the investment for a considerable  period of time (on average seven to ten 
years
65). In this respect, limiting investment possibilities, within the 50% quota, would 
not fundamentally change the perceived lack  of investor's willingness to commit capital 
to a venture capital fund.  
In conclusion, Option 3 appears to offer the highest likelihood that a distinct European 
brand of 'venture capital fund' would emerge . However, Option 2 displays a series of 
features which allows a reasonable expectati on that a European notion will emerge, while 
allowing a venture capital fund manager suffici ent flexibility in the composition of its 
investment portfolio. A higher level of flexibility  is deemed essential to ensure that fund 
managers actually take up the opportunity offe red by a European framework dedicated to 
venture capital fundraising. Option 1, on the othe r hand, appears to offer an insufficient 
likelihood that the intended outcome is achieved.     
7.4.2 Operational objective 2: Common regul atory approach to 'qualifying venture 
capital funds'  
In this respect, there is a risk that Option 1 proves too permissive with respect to a fund's 
investment portfolio, therefore raising the sp ectre of "circumvention" and lack of focus 
on the core objectives of a venture capital f und. A threshold of 50% of aggregate capital 
contributions to be invested in equity or quasi-equity issued by qualifying target 
undertakings leaves open the possibility that 50% of the fund's aggregate capital, at any given time in its lifespan, is invested in buy-out transactions or secondary trading 
activities that are commonly associated with private equity operators. Also, a 50% rule would set aside considerable resources for the fund to invest in derivatives, thereby 
introducing levels of leverage that are not  commonly associated with equity-based 
venture capital investments.  Finally, a 50/50 appr oach carries with it as high risk that the 
rules will be circumvented by alternative i nvestment funds that do not pursue a true 
venture capital strategy. The risk of re gulatory arbitrage and free-riding by non-
qualifying funds also arises.    
Also, a 50% threshold would act as an inventiv e to deal with venture capital financing as 
one of many
 strategic objectives of a fund manager. This lack of focus on venture capital 
activity would not allow the fund to equi p itself with the necessary personnel and 
material resources to fulfil the non-financial advisory and support functions associated with the operation of a genuine venture cap ital fund.  A 50% threshold is therefore 
considered to diffuse to underpin a common European regulatory approach to venture 
capital.   
A credible expectation therefore emerges th at the 70% threshold (Option 2) is more 
suitable to create incentives for a business focus on true venture capital operations.  A 
common approach to regulating venture capita l therefore requires rules on investment 
                                                
 
65 Venture capital funds are constructed as investment ve hicles with usually a limite d lifespan amounting  to, on 
average, not more than seven to ten years.  
 
 40portfolio, which are ambitious enough to provide  an incentive that a fund focuses also on 
the business development and advisory func tions commonly associated with venture 
capital funds66. Also the core focus on selecting pr omising start-up companies would be 
lost if selecting and advising such entities w ould no longer be the principal focus of the 
venture capital fund67.      
Naturally, Option 3 scores highest in respect  of avoiding "circumvention" or regulatory 
arbitrage in relation to the new European regulatory framework dedicated to qualifying 
venture capital funds. It is also the Option th at best ensures continued focus on the core 
selection and advisory role that a venture capital fund plays in the business development 
of a target undertaking.  
7.4.3 Operational objective 3: Regulatory cooperation 
Option 1, the 50/50 approach between qualif ying and non-qualifying assets, would raise 
practical issues in enforcing the new appr oach to cross-border activities engaged in by 
venture capital funds: Member States authorities,  who need to cooperate in enforcing the 
practical modalities governing fund-raising in th eir respective territories, would need to 
trust the identity and business strategy behi nd a venture capital fund.  A 50/50 approach 
might give rise to suspicions that the f und, operating as a venture capital fund in its home 
Member State, is masking a private equity  strategy and using cross-border marketing 
opportunities to essentially raise capital for its private equity branch. This strategy might 
be perceived as a circumvention of the stri cter passport requirements contained in the 
AIFMD.  As mentioned above, a 50/50 rule leaves scope for leverage and it is commonly understood that reporting and supervision of leve rage ratios is one of the core objectives 
of the AIFMD
68. Host Member States might theref ore be prone to requiring additional 
information on the fund, its leverage ratio and its investment strategy.    
On the other hand, its does not appear that Option 2 will encounter insuperable obstacles 
in its enforcement. As long as there is a common approach in respect to portfolio 
thresholds, home and host Member State aut horities can cooperate with relative ease in 
determining that the qualifying fund, at all tim es, complies with the European portfolio 
requirements. An additional advantage facilitating ease of enforcement is that the thresholds will be calculated as a percentage of aggregate capital contributions and not as 
a percentage of the assets managed by th e fund. This method of calculation facilitates 
enforcement of the rules on the portfolio co mposition considerably: all the fund manager 
is obliged to verify is that, immediately after the acquisition of any asset other than 
qualifying investments, the qualifying venture capital fund holds no more than 30 percent 
of the fund's aggregate capital contributions in non-qualifying assets.     
It will be significantly more challenging to enforce Option 3, as the high percentage of 
aggregate capital contributions that must be  invested in qualifying assets may give 
                                                
 
66 As mentioned above, venture capital is generally associ ated with financing of young and newly established 
undertakings to which it provides equity  investments. As the venture capital fund receives an equity stake in the 
target undertaking, it becomes a partner in  the business. Also, its equity stake exposes the investor to the full risk 
of the undertaking's success.  
67 Cf. Annex XII: "a key economic role of US venture capital is  the allocation of financial and managerial resources to 
help grow firms that will have a dramatic impact on productivity in the economy".    
68 Article 25 AIFMD.  
 
 41frequent rise to some borderline cases where regulators will have verify whether a certain 
venture fund remains within the prescribed limits or not. Experience shows that higher 
thresholds lead to more scrutiny when non-qualifying investments are envisaged. It is also to be expected that, with a high ta rget for qualifying investments, a single non-
qualifying investment may cause a fund to breach the investment targets
69. In these 
circumstances, the fund has little flexibility in its investment mix and might therefore be 
inclined to breach the target, in the hope that the excess will be temporary and will go 
unnoticed. This possibility will then lead to high levels of suspicion in cross-border 
enforcement70.   
7.4.4 Overall comparison of options on portfolio composition  
In conclusion, Option 3 appears to offer the highest likelihood that a distinct European 
brand for 'venture capital funds' would emerge . It is also the option must suitable to 
underpin a common, as well as coherent, appr oach to venture capital. Option 1 would 
score lowest on these points, while Option 2 reflects an intermediary approach.  
Option 2 would not pose major difficulties with respect to its enforcement by the relevant 
national home and host authorities, while Option 1 might well give rise to suspicions as to the ‘true’ marketing objectives that a 50/50 fund pursues in a host Member State. 
Option 3 might also give rise to a very hi gh number of 'borderline' cases, where funds 
'oscillate' around the threshold for non-qualifyi ng investments for significant periods in 
any given calendar year. These 'oscillators' require significant resources to supervise.  
A choice will therefore have to be made between the 'pure' approach, as embodied in 
Option 3, and the slightly more flexible appr oach in Option 2.  In light of its higher 
likelihood of take-up by the relevant indus tries and its better score on practical 
enforcement, a preference is given to Option 2.     
7.5 Summary of impacts: portfolio composition  
Effectiveness Efficiency  Options/Objectives 
Create notion of 
qualifying venture 
capital fund Ensure common 
regulatory approach 
to qualifying 
venture capital 
funds Facilitate 
regulatory 
cooperation  Practical 
feasibility  
Baseline 0 0 0 0 
1. Flexible scope -- - -- -- 
2.  Intermediate scope + + + ++ 
3. Strict scope ++ ++ + -- 
                                                 
69 This is because a single non-qualifying investment  might lead to the fund exceeding the threshold 
(especially as capital commitments in closed ended funds will not increase over the lifetime of a fund).  
70 These concerns are borne out by the debate on th e AIFMD threshold and the different views expressed 
as to when a fund's exceeding the threshold is of temporary or permanent nature, see ESMA 
Consultation Paper on possible implementing measures of the Alternative Fund Manager's Directive,  Section III, 13 July 2011, available at: http://www.esma.europa.eu/index. php?page=consultation_details&id=185
. 
    
 
 42“++” strongly positive, “+” positive, “—“strongly nega tive, “-” negative, “=” marginal/neutral, “?” 
uncertain, and “n.a.” not applicable.   
7.6 Presentation of options on eligible investors 
7.6.1 Option 1: Mifid investors 
According to this option only professional inve stor as defined in Markets in Financial 
Instruments Directive (Mifid) would be eligib le to invest in qualifying venture capital 
funds.  
7.6.2 Option 2: Traditional venture capital investors   
According to this option only professional inve stors as defined in Markets in Financial 
Instruments Directive (Mifid) and certain inve stors traditionally associated with venture 
capital investments would be eligible to invest in qualifying venture capital funds. 
Traditional investors in venture capital compri se entrepreneurs, family offices, angel 
investors, member of the management team s, industry sector experts, venture capital 
experts, finance sector experts, wealthy individuals.  
This approach would be similar to that of  the AIFMD regarding the scope of eligible 
investors. As such, the AIFMD marketing pa ssport allows funds to be offered only to 
professional investors (as defined in Mifid, Annex II). In addition, the AIFMD gives the 
possibility to national regulators to allow retail distribution on their territory subject to their national rules (but without granting a passport for these funds).   
This option aims to reflect the current prac tice in the venture capital market. Since the 
list of investors that traditionally invest in venture capital goes beyond the professional 
investors mentioned in Mifid, this option w ould include two important safeguards aimed 
at avoiding mis-selling of venture capital funds to unsuitable investors: 
(a) a first safeguard would be to requi re those investors a minimum initial 
investment ("entry ticket") of at leas t 100.000 €, in line with the exemption in 
Article 3(2) (c) and (d) of the Prospectus Directive (as amended by Directive 2010/73/EU), and 
(b) a second safeguard would be to require the manager to conduct an assessment of 
the ability of the investor to apprise the risks involved in the investment in the 
venture capital fund. This should take the form of a signed certificate stating that the investor is eligible and acknowledge  the risks embedded in the investment. 
In addition, flawed assessments would lead  to the invalidity of the subscription 
and compensation claims. 
7.6.3 Option 3: Broad scope  
This option would be the one of the UCITS Di rective, which is an investment vehicle 
open to all kinds of investors, irrespective of an entry ticket or an assessment of the 
investors' ability to appraise investment risks. 
7.7 Summary of Options concerning eligible investors:  
OPTION 1 
MIFID INVESTORS OPTION 2  
TRADITIONAL VC INVESTORS  OPTION 3 
BROAD SCOPE  
 
 43Professional investors 
as defined in MiFID Professional investors as defined in MiFID, entrepreneurs, 
family offices, angel investors, member of the management teams, industry sector experts, venture capital experts, finance sector experts, wealthy individuals.  All types of investors mentoned under 
traditional investors, includsing retail investors 
7.8 Analysis of the options on eligible investors 
Below, the three substantive options will be assessed in terms of their effectiveness, 
coherence and efficiency in attaining the above-mentioned operational objectives. Options on the eligible investors of ventur e capital funds are directly linked to the 
problem of regulatory fragmentation that prevails  also in this area. As is the case with 
respect to options on portfolio composition, a uniform approach in relation to eligible 
investors would remove another obstacle that investors, venture capital funds as well as 
SMEs encounter in the existing environment. 
7.8.1 Operational objective 1: Establishment of a notion of 'qualifying venture capital 
fund' 
All three options would score neutral on th is point. The development of a European 
notion of a 'venture capital fund' does not depend on the investors eligible to invest in such a vehicle. As mentioned above, this notion is linked to the intrinsic qualities of the fund, its portfolio composition and its invest ment strategy. Once these elements allow a 
clear distinction between venture capital funds and other types of alternative investment 
funds, it is irrelevant whether the cross-border placements are limited to professional investors, traditional venture capital investors or accessible to retail investors.  
7.8.2 Operational objective 2: Common regulatory approach to qualifying venture 
capital funds  
Option 3 would allow retail investors to have access to venture capital investment 
strategies that are currently, in most Member  States, reserved to professional investors 
(see chart 7, above). Such a choice would imply that the EU new venture capital 
framework would need to include provi sions ensuring a very high level of 
transparency/disclosure as regards the nature of the proposed investment policies as well as very effective protections (in terms of organisation/conduct of business by management companies, safekeeping of the assets, etc).  
Rules included in the UCITS Directive could be extended for that purpose although they 
may not always be adapted to the specific nature of venture capital investment. For 
instance, UCITS have to invest in highly liquid financial instruments. This allows 
investors to redeem/repurchase their shares often on a daily basis. Venture capital investments, on the other hand, are normally not as liquid (as VC funds stay invested in 
target companies for between 7 to 10 years). A whole set of adapted investor protection 
rules would therefore need to be designed for the purpose of the venture capital regime. 
This would not be conducive for the imme diate development of a common approach, 
more likely it would further complicate such an endeavour.    
Option 3 would have two additional consequen ces. Firstly, it would create a precedent as 
it would open a part of the alternative inve stment fund industry to retail investors. 
Second, it would render the rules applicable to  venture capital funds much less flexible 
and attractive to their managers -- as the cost s of complying with the different provisions 
aimed at protecting investors would be ve ry high. The advantage of the new venture 
capital regime compared to the AIFM Directive would be largely neutralised. 
 
 44A more balanced approach between the type of eligible investors on the one hand and the 
obligations to be imposed on venture capital f unds managers on the other is needed. This 
pleads in favour of options 1 or 2.  In re spect of operational objective 2, there is no 
discernable difference between these two options.   
7.8.3 Operational objective 3: Regulatory cooperation 
Option 3 potentially gives venture capital funds  access to a larger pool of capital, as it 
includes the reserves of retail investors. On the other hand, regulatory cooperation in 
supervising cross-border placements to reta il investors is, on account of the increased 
importance of investor protection rules, rath er more complex than the supervision of 
placements to professional, or adequately assessed, investors.  
Regulatory cooperation would be easier to achieve if Options 1 or 2 were chosen.  Option 2 is, however, preferable to Option 1 as it would increase the scope of eligible 
investors beyond those mentioned in Mifid, without causing additional burdens with 
respect to regulatory cooperation.  As the ch art below shows, funds raised by venture 
capital operators from investors other than MiFID professionals, in 2011, were about 5% 
for family offices, 10% for private indivi duals, 3% for other asset managers, which 
amounts to 18% of the aggregate capital committed to venture capital funds.  
Option 2 is also the option that is largel y supported by the responses received to the 
public consultation. 59% of respondents (i ncluding 6 out of 7 positions of public 
authorities) favoured a scope of eligible investors that exceeds the definition of 
professional investors in Mifid. The only Me mber State that was against extending the 
class of eligible investors beyond the scope of those mentioned in Mifid feared that this 
would create a "lighter" venture capital fund that  could allow uniform funds to be offered 
to all retail investors in their jurisdiction. Th is concern is, however, addressed by the fact 
that the uniform venture capital fund will onl y be accessible to the uniform category of 
eligible investors. Only 6% of replies favour ed an approach on eligible investors that 
reflects Mifid.  In this respect, stakeholders clarified that: …" the MIFID definition of 
professional investors would exclude many categories of institutional and individual 
investors who are currently part of venture capital investor base. Indeed, professional clients as currently defined under MiFID is designed to identify individuals who 
regularly trade in listed securities or are experts in the trading of listed securities (and derivatives based on these securities). This de finition is not coherent with venture capital 
investment which is a long term investment and can not be characterized by short-term, 
high-volume transactions. Any proposed restrictions would have a negative impact on the amounts invested in venture capital f unds or would dissuade small and mid sized 
venture capital funds from opting into the new regime …". 
 Traditional venture capital investors play an important part in fundraising especially for early stage venture capital funds. Their role and importance is expected to even increase in response to the newly introduced prudentia l rules for banks and insurance companies. 
These new provisions require banks and insu rance companies to set aside additional 
regulatory capital with respect to the amount of  assets invested into private equity or 
venture capital funds
71. Although the impact of these new provisions is yet to be seen, it 
                                                 
71 One of the risks potentially endangering the success of the proposal resides in the potential 
consequences of recent changes in the prudentia l framework for insurance companies and banks 
resulting from  solvency and capital requirements.  According to the Basel III rules, national 
 
 45is of utmost importance to ensure that any future regulatory framework aimed to increase 
size and liquidity of venture capital markets to the benefit of SMEs, is responsive and 
sensitive to the underlying realities and practices of the venture capital industry.  
7.8.4 Overall comparison of options on eligible investors  
In conclusion, Option 3 appears most difficult to implement in terms of a common 
approach. Also, on account of the high level of investor protection necessary when a 
broad scope of eligible investors is targ eted, regulatory cooperation would be most 
difficult to implement in practice.  As Option 2 allows for a broader investor base to have access to venture capital funds, without, on th e other hand, entailing additional burden in 
relation to the intensity of regulatory cooperation, this option appears more efficient.     
7.9 Summary of impacts: eligible investors 
Effectiveness Efficiency  Options/Objectives 
Create notion of 
qualifying venture 
capital fund Ensure common 
regulatory approach 
to qualifying 
venture capital 
funds Facilitate 
regulatory 
cooperation  Practical 
feasibility  
Baseline 0 0 0 0 
1. Mifid investors  = + + + 
2. Traditional VC 
investors = + + ++ 
3. Broad scope = -- -- -- 
“++” strongly positive, “+” positive, “—“strongly nega tive, “-” negative, “=” marginal/neutral, “?” 
uncertain, and “n.a.” not applicable. 
 
7.10 Presentation of procedural options on the legal form of a European 
framework for venture capital funds 
7.10.1  Option 1 – A new venture capital passport within the AIFMD  
As a consequence of regulatory fragmentation and the need to comply with several sets 
of rules governing both venture capital and private placements, the procedural steps necessary to raise venture capital are mo re complex as the number of targeted 
jurisdictions increases. Raising funds from pot ential investors across several jurisdictions 
involves the following  
A first policy option to achieve the European venture capital passport would be to 
enlarge the scope of the passport provisions currently contained in the Directive on Alternative Investment Fund Managers (A IFMD, Directive 2011/61/EC) to incorporate 
'venture capital funds' as defined in the amending directive.   
                                                                                                                                                
 
supervisors may decide to apply a 150% or higher ri sk weight reflecting the higher risks associated 
with some other assets, such as venture capital. In light of the potential impacts, the Commission shall oversee a  study on the impact of the proposed prudential rules on SME financing. This effort should involve EBA and EIOPA.  
 
 46This option would leave intact the current thresholds of application of Directive 
2011/61/EC – the latter applies to fund managers whose aggregate assets under management exceed a threshold of € 500 m illion – but introduce special provisions in 
favour of 'qualifying' venture capital funds  (qualifying funds would be defined in 
accordance with one of the substantive choices described above) that are registered in a 
European jurisdiction in the relevant chapters governing the operation of the passports foreseen in Directive 2011/61/EC.   
7.10.1.1  Registration-based model 
In the modified AIFMD, the envisaged Eur opean venture capital fund passport should be 
available to a qualifying manager on the basis of a simple registration in the EU Member State of his establishment. But the EU pass port would be available to the managers of 
qualifying venture capital funds only to the extent
 that they market qualifying funds 
across different territories in the European Union. In order to ensure coherence between the new venture capital passport and the remai nder of the prudential provisions contained 
in the AIFMD, the proposed passport would, in an initial phase, only apply to qualifying 
venture capital fund managers whose assets under management in total do not exceed the AIFMD's € 500 million threshold.   
For all of their other funds, whose aggr egate assets under management exceed € 500 
million (calculated separately from the asse ts managed by the qualifying venture capital 
fund), the venture capital fund manager would need to comply with the AIFMD.    
Triggered by a simple registration in the qualifying fund's Home Member State, the 
'qualifying' venture capital fund (as defined in  the substantive option) will be able to 
market its qualifying funds (those that comply with the relevant investment percentages) 
in all the Member States designated in th is registration. Preference is given to a 
registration as a registration, as opposed to a formal authorisation procedure, becomes 
valid as soon as the Home Member State has verified that the registrant is a venture 
capital fund that fulfils the criteria set out  in the proposed instrument.  The overall 
effectiveness is further enhanced by the fact that the registration submitted by the venture capital fund manager can designate both
 the Home Member State and up to 26 Host 
Member States.   
Registration in the Home Member State has important legal consequences which would 
need to be set out in the modified AIFMD. Most importantly, registration shall entitle the qualifying fund manager to market its qualifyi ng funds in all Member States that are 
indicated in the Home Member State registra tion. This can be, as stated above, both the 
Home Member State of the qualifying venture capital fund and a variety of Host Member 
States.  
7.10.1.2  Carve-outs from substantial provisions of the AIFMD 
In order to align the reporting obligations under the registration-based venture capital 
passport with the business model of the vent ure capital sector, the AIFMD would need to 
create a set of 'light' version on operating conditions and reporting obligations that would only apply to qualifying venture capital funds.  
Certain carve-outs from the general principl es governing the behaviour of a alternative 
fund manager, notably in the conduct of its ac tivities and in its relationship to investors, 
rules on the handling of conflic ts of interest, organisational requirements in terms of 
 
 47adequate human and technical resources, ru les on the valuation of a qualifying venture 
capital fund's assets and the provisions on annual reports would have to be inserted into 
the AIFMD.   
In addition, certain modified disclosure requirements that are incumbent on a qualifying 
fund in relation to its investors would have to be introduced into the AIFMD. Notably, 
the AIFMD would have to be supplemented to  contain special and tailor made rules on 
disclosure obligations on the qualifying f und's investment strategy and objectives, 
investment instruments used by the funds in formation on cost and associated charges, 
and the risk/reward profile of the investment proposed by a qualifying fund.   
7.10.1.3  Special enforcement provisions 
Seamless enforcement of the criteria a pplying to both qualifying managers and 
qualifying funds is necessary to safeguard the credibility of the new passport. The 
AIFMD will therefore have to contain special  rules on the conditions in which the Home 
Member State is obliged  to withdraw the European passport foreseen in this Regulation. 
It is important to note that the Home Member State must continually supervise compliance of the qualifying venture capital f und manager, notably with the substantive 
requirements that relate to the composition of its portfolio, the eligible investment instruments and the eligible target companies.  
Once, material non-compliance is ascertained, it is incumbent on the Home Member 
State to withdraw the benefit of the European  passport from the manager in relation to all 
its qualifying funds and inform the relevant Ho st Member States (those indicated in the 
registration) accordingly. To avoid regulat ory ambiguity, the AIFMD would have to 
stipulate that, upon withdrawal, the benefits  of the passport will cease with immediate 
effect. 
The AIFMD would also have to be modi fied introducing detailed provisions on the 
requisite cross-border notification proce ss between the competent Home and Host 
Member States; these provisions would only apply only to the supervision of venture 
capital funds. These notifications are triggere d by the registration of a qualifying venture 
capital fund. The process and lega l effects of these mutual notifications are conceived 
and legally structured in line with the prin ciples of Article 93 of Directive 2009/65/EC 
(UCITS). 
To ensure the effective supervision of  qualifying venture capital funds and their 
managers, the AIFMD would need to contain a separate chapter whereby the competent 
authorities in the Member States would be  equipped with the necessary supervisory 
powers and will contain provisions on the ad ministrative cooperation between the Home 
and Host Member States affected by the marketing of the qualifying venture capital 
funds. 
7.10.2  Option 2 - Lower the thresholds of AIFMD 
A further policy option would be to lower – or entirely abolish -- the above-mentioned 
thresholds in Directive 2011/61.  That would entail that small funds – most venture capital funds and their managers manage less than € 500 million in assets – would benefit 
from the passport. This benefit would, howev er, come at the price of full compliance 
with all substantive provisions of Directive 2011/61.    
 
 48As this option would rely on a general lowe ring of the AIFMD thresholds so that all 
managers whose funds aggregate less than € 500 million in assets under management would be included in the AIFMD, there would be no need to further delineate the scope of a 'qualifying' venture capital fund. Op tion 2 would therefore not require the 
substantive definition of a qualifying 'venture  capital' fund. It would also not need to 
determine who would be eligible investors, because the definition of Article 4(1)(gg) AIFMD would apply.   
Furthermore, as the general passport of the AIFMD would apply to all 'smaller' funds 
whose aggregate assets under management would not exceed € 500 million, there would 
be no need for tailor-made rules on general operating principles and regulatory cooperation in enforcing the passport.    
7.10.3  Option 3 – Create special rules for ventu re capital as part of the implementing 
provisions of AIFMD 'level 2' 
An alternative approach would consist in modulating the implementing provisions that 
are necessary to make the AIFMD operational in order to take into account the 'special case' of venture capital funds.  Essentially, this option would leave intact the current 
'level 1' AIFMD framework, but would cater to  the special situation of venture capital 
funds when providing for the measures of implementation.  
In a first step, and in analogy to the current  process of implementing the AIFMD, advice 
would be sought from ESMA on whether a tailo r-made set of rules should be created to 
promote cross-border fundraising by qualif ying venture capital fund managers who 
operate below the € 500 threshold of the AIFMD.  
Should ESMA conclude that the special situation of venture capital funds requires tailor-
made rules creating a European fund-raising passport without the need of full compliance 
with the AIFMD, the corresponding rules would be codified at level 2. These rules would 
then form part of the implementation of the AIFMD.  In substance, this approach would 
aim to create a European marketing passpor t for venture capital companies by tailoring 
the requisite 'level 2' provisions to exempt  venture capital funds who wish to obtain a 
fundraising passport from certain substantive provisions in the AIFMD.   
In line with the approach followed in Opti on 1, qualifying venture capital funds would be 
exempted from AIFMD's requirements that ar e perceived as either too onerous or to 
costly for a venture capital fund to comply with (e.g., minimum capital requirements, the 
need for a permanent depositary, regular valuation of all assets or rules on delegation).       
7.10.4  Option 4 – Light touch venture capital passport as a stand-alone instrument 
A further option would be to introduce the ' light' version of the European passport by 
means of a stand-alone instrument that  would not amend Directive 2011/61/EC but 
would exist alongside this Directive.  
7.10.4.1  Registration-based model 
The envisaged European venture capital fund passport should be available to a qualifying 
manager on the basis of a simple regist ration in the EU Member State of his 
establishment. The EU passport is available to the managers of qualifying venture capital funds only to the extent that they market qualifying funds across different territories in 
the European Union.  
 
 49In order to ensure coherence between the regulatory approaches of the AIFMD and the 
new instrument, the proposed stand-alone in strument would, in an initial phase, only 
apply to managers who operate beneath the € 500 million threshold.  It is envisaged that 
the Commission receives a mandate to review the scope and, if necessary, modify the 
relevant threshold. 
Triggered by a simple registration in the qualifying fund's Home Member State, the 
'qualifying' venture capital fund (as defined in  the substantive option) will be able to 
market its qualifying funds (those that comply with the relevant investment percentages) 
in all the Member States designated in this registration. For the reasons set out in Option 
1, preference is given to a registration that becomes valid as soon as the Home Member 
State has verified that the registrant is a venture capital fund that fulfils the criteria set 
out in the proposed instrument.  The overall e ffectiveness is further enhanced by the fact 
that the registration submitted by the venture capital fund manager can designate both  the 
Home Member State and up to 26 Host Member States.   
Registration in the Home Member State has important legal consequences which are set 
out in the proposed stand-alone instrument. Most importantly, registration shall entitle the qualifying fund manager to market its qualif ying funds in all Member States that are 
indicated in the Home Member State registra tion. This can be, as stated above, both the 
Home Member State of the qualifying venture capital fund and a variety of Host Member 
States.  
Fund managers who comply with the criteria set out in the new instrument would be 
entitled to market all funds that qualify usi ng the designation "European Venture capital 
fund".  
7.10.4.2  An autonomous set of rules governing operating conditions   
In line with the 'stand-alone' approach (i n clear demarcation to the AIFMD), the 
proposed instrument would also contain re porting obligations incumbent on the venture 
capital fund manager in relation to the qua lifying venture capital funds vis-à-vis the 
competent authority in its Home Member State.  
Underlining the stand-alone nature of the proposed instrument, the instrument will 
contain general principles governing the behaviour of a qualifying venture capital 
manager, notably in the conduct of its activities and in its relationship to investors, rules on the handling of conflicts of interest, orga nisational requirements in terms of adequate 
human and technical resources, rules on the valuation of a qualifying venture capital 
fund's assets and the customary provisions on annual reports.   
In addition, the instrument would contain cer tain key disclosure requirements that are 
incumbent on a qualifying fund in relation to its investors: these requirements shall contain pre-contractual disclosure oblig ations on the qualifying fund's investment 
strategy and objectives, investment instrume nts used by the funds information on cost 
and associated charges, and the risk/rewar d profile of the investment proposed by a 
qualifying fund.   
7.10.4.3  Special enforcement provisions 
Seamless enforcement of the criteria a pplying to both qualifying managers and 
qualifying funds is necessary to safeguard  the credibility of the new designation 
 
 50"European Venture Capital Fund". The propos ed rules would therefore specify the 
conditions in which the Home Member State is obliged  to withdraw the European 
passport. It is important to note that the Ho me Member State must continually supervise 
compliance of the qualifying venture capital f und manager, notably with the substantive 
requirements that relate to the composition of its portfolio, the eligible investment instruments and the eligible target companies.  
Once, material non-compliance is ascertained, it is incumbent on the Home Member 
State to withdraw the benefit of the European  passport from the manager in relation to all 
its qualifying funds and inform the relevant Ho st Member States (those indicated in the 
registration) accordingly. To avoid regulat ory ambiguity, the proposed rules should 
stipulate that, upon withdrawal, the benefits  of the passport will cease with immediate 
effect. 
The proposed instrument would contain deta iled provisions on the requisite cross-border 
notification process between the competen t Home and Host Member States. These 
notifications are triggered by the registration of a qualifying venture capital fund in accordance with the proposed Regulation. The pr ocess and legal effects of these mutual 
notifications are conceived and legally structured in line with the principles of Article 93 of Directive 2009/65/EC (UCITS). 
To ensure the effective supervision of  qualifying venture capital funds and their 
managers, the proposed rules would equip th e competent authorities with the necessary 
supervisory powers and will contain provi sions on the administrative cooperation 
between the Home and Host Member States affected by the marketing of the qualifying 
venture capital funds. 
7.10.5  Option 5 – Administrative network to enforce mutual recognition  
A further option would be to create a sta nd-alone instrument covering the mutual 
recognition of lawfully registered venture capital or private placement funds. The main difference between Options 4 and 5 would be that the stand-alone instrument would be 
based on embedding the legal principle of 'mutual recognition' into a binding legal 
framework. Administrative cooperation among national regulators would ensure that 
funds that are lawfully registered as ventur e capital or private operators in one Member 
State could offer share or other participati ons in their funds to a group of pre-defined 
eligible 'professional' investors in other jurisdictions.  These jurisdictions would not require compliance with additional formalities and authorisations, such as prior approvals of offer documentation, a sales prospectus or  a local distribution presence (conditions as 
described in Section 5.4., above).    
7.10.5.1  Registration-based system 
In order to facilitate mutual recognition of e ither the national rules pertaining to venture 
capital funds (cf. chart 7) or, in their abse nce, the rules on private placements, the Host 
Member State in which the qualifying fund (w hich could be a venture capital fund or 
other entity undertaking private placements for investments in SMEs) is legally established would process a registration of the fund and then inform all Host Member 
States designated in that registration that the qualifying fund is legally registered in its territory. Mutual recognition of a lawful regi stration should be available to a manager on 
the basis of a simple registration as either  a 'venture capital' manager or a 'private 
 
 51placement' operator (see section on scope of  mutual recognition, below) in the EU 
Member State of his establishment.   
In order to ensure coherence between the regulatory approaches of the AIFMD and the 
new instrument, the proposed stand-alone in strument would, in an initial phase, only 
apply to managers who operate beneath the € 500 million threshold.  It is envisaged that 
the Commission receives a mandate to review the scope and, if necessary, modify the 
relevant threshold. 
Triggered by a simple registration in the qualifying fund's Home Member State, the 
registered manager would be able to market its funds in all the Member States designated 
in this registration. Form that moment of registration onwards, Home and Host Member 
States would cooperate in enforcing th e mutual recognition of national private 
placements in their respective territories.  
7.10.5.2  Scope of mutual recognition 
The principle of mutual recognition could e ither extend to venture capital funds or all 
private placement vehicles that operate below the € 500 million threshold. In the former case, the stand-alone instrument would, apart from the administrative cooperation 
arrangements underpinning mutual recognition, contain a set of uniform criteria that 
define a qualifying 'venture capital' fund. These criteria would correspond to those identified in the substantive options above and would notably comprise an obligatory 
investment percentage in favour of unlisted SM Es. In that variant, only funds that prove 
compliance with these criteria may benefit from the principle of mutual recognition and administrative infrastructure that will be es tablished among national regulators to enforce 
the mutual recognition of lawfully execu ted private placements by qualifying venture 
capital funds.   
7.10.5.3  Special rules on enforcing mutual recognition 
The proposed instrument would contain deta iled provisions on the requisite cross-border 
notification process between the competen t Home and Host Member States. These 
notifications are triggered by the registration of a fund. The process and legal effects of 
these mutual notifications are conceived and le gally structured in line with the principles 
of Article 93 of Directive 2009/65/EC (UCITS). 
To ensure the effective supervision of regi stered funds and their managers, the proposed 
rules would equip the competent authorities with the necessary supervisory powers and 
will contain provisions on the administrativ e cooperation between the Home and Host 
Member States affected. 
7.11 Summary of procedural options:  
OPTION SCOPE LIMITED TO QUALIFYING 
VENTURE CAPITAL FUNDS  LEGISLATIVE TECHNIQUE 
1 –Venture capital 
passport within the AIFMD  Limited to qualifying funds Review of AI FMD, intorduction of special rules on 
regulatory cooperation and intr oductions of specific "carve-
outs" from the AIFMD's operational rules to provide passport to 'qualifying' venture capital funds without full compliance with AIFMD.  
2- Lower the thresholds of AIFMD  All funds with assets below € 500 
million  Review of AIFMD to modify the applicable thresholds 
without any further substantive changes to the rules of the 
 
 52AIFMD.  
3 – Special rules for 
venture capital at level 2 of AIFMD  Limited to qualifying funds, as 
defined at level 2 of the AIFMD   Implementing rules at level 2.  Advice will be sought from 
ESMA on how to cater to the special situation of venture capital funds. If ESMA advises on a tailor-made approach for such funds, the corresponding rules would be codified at 
level 2, when implementing the AIFMD.   
4- Venture capital passport as stand-alone instrument Limited to qualifying funds Creation of a sta nd-alone legal instrument containing rules 
on qualifying vneture capital funds, regulatory cooperation for their effective supervis on and tailor-made operational 
rules different from those in the AIFMD 
5- Mutual recognition  Either limited to qualifying venture 
capital funds or applicable to all lafully offered private placements by registered funds.  Creation of a stand-alone lega l instrument containing rules 
on regulatory cooperation for the effective supervison of the mutual recognition of lawfully registered venture capital or private placement providers.  
7.12 Analysis of the procedural options 
Below, five options will be assessed in terms of their effectiveness, coherence and 
efficiency in attaining the operational objectives. Procedural options relate to the different legislative tools or vehicles that might be used for addressing the substantive 
options already noted.  These procedural op tions form a second building block, in that 
different procedural options have different costs and benefits for addressing the problems 
that investors, venture capital funds as well as SMEs encounter in the current fragmented operating environment.   
7.12.1  Operational objective 1: Establishment of  a uniform notion of 'qualifying venture 
capital fund’  
A core feature of a European common EU defi nition of venture capital is the fact that a 
common regulatory approach can be attached  to this definition. The common definition, 
in the instant case, serves to determine the ki nd of fund vehicle that will benefit from a   
passport exempting foreign fundraising activitie s both from both national rules on private 
placements that apply in various host countri es and from the rules contained in the 
AIFMD (Options 1 and 4
).  A qualifying European venture capital fund should, once the 
common regulatory approach becomes a pplicable upon registration, no longer be 
burdened with administrative costs that ve nture capital fund managers currently face 
when operating in several Member States (setting up parallel fund structures, multiple 
and overlapping reporting obligations, etc.).  
Most importantly, the costs related to star ting up a new fund in each jurisdiction where 
placements are envisaged, as well as costs related to maintenance of parallel fund infrastructures (for a duration of of ten 10 years) would be eliminated.
72 The European 
passport would also increase legal certainty  for venture capital fund managers that 
engage in cross-border placements. Both Op tions 1 and 4, by defining clear contours of 
what constitutes a venture capital fund, w ould allow for a reduction in the above-
mentioned costs linked to obtaining legal advice for multi-jurisdictional fundraising.   
                                                 
72 See Expert group report on removing obstacles to cross-border investments of venture capital funds, 
chapter 4.1 showing an example of the costs associated with maintaining parallel fund structures in several Member States.  
 
 53The advantage of Option 4  over Option 1 resides in the fact that this Option would 
achieve the benefits associated with opti on 1 without creating interference with the 
current rules as contained in the AIFMD.   When compared with Option 1, Option 4 
displays a series of further advantages. Du e to the fact that Option 4 would grant a 
specific venture capital passport to qualifying managers by means of an autonomous instrument, the intended beneficiaries of this  instrument can be narrowly circumscribed 
and therefore effectively supervised. Therefor e, other operators who may wish to obtain 
the passport, such as private equity, real esta te funds or other closed-ended vehicles that 
invest in real property are not covered by the scope of a stand-alone instrument. The 
stand-alone approach allows for a significant reduction of the potential for circumvention.  
Option 2
, on the other hand, would include all alte rnative investment funds that operate 
below € 500 million into the scope of the AI FMD by lowering or entirely abolishing the 
applicable thresholds. The drawback with th is approach would be that it would make 
compliance with all the provisions of the AI FMD obligatory on all alternative investment 
funds and thus comprise all 'small' funds , including venture capital funds, within the 
scope of the AIFMD.  This option would not define the contours of what makes a 
European venture capital fund distinct from other alternative investment funds that 
operate beneath the thresholds. Essentially, a regulatory framework designed for fund managers whose aggregate assets exceed € 500 million and who are highly prone to 
employ leverage and other sophisticated fina ncial techniques to increase their exposure 
to risky asset classes, would be enlarged to a category of fund managers that operate 
below the € 500 million threshold, invest capital committed into equity stakes in SMEs, do not engage in leverage and cannot, in term s of human and material resources, comply 
with the regulatory requirements of the AIFMD (most venture capital funds do not 
employ more than a dozen people (see Annex VIII)).  Option 2 would therefore not be a 
suitable tool to create a European notion of venture capital.  
Although the lowering or complete abolition of the threshold would grant smaller 
venture capital funds a passport, the price in  terms of additional administrative burden 
would be prohibitive. Compliance costs re sulting out of regulatory fragmentation 
between host countries would be replaced by the cost of complying with a regulatory 
framework designed for funds that engage in much more complex financial instruments. 
Lowering the AIFMD thresholds would therefore be of limited or no value in creating a common notion of what constitutes a ventur e capital funds. Option 2 is therefore not 
effective in achieving the intended aim -- to create a European marketing passport 
without the necessity of full compliance with  many of the AIFMD provisions that do not 
appear suitable for venture capital funds (e.g., rules on minimum capital requirements, 
delegation, depositaries, liquidity management, valuation of assets or the calculation of leverage).  
Modulating the implementation rules at level 2 to create a special framework for venture 
capital funds (Option 3
) would, at first sight appear to be a suitable approach in order to 
create a common notion of venture capital at EU  level. However, the drawback of this 
option would be that the 'special regime' governing the European marketing activities of 
venture capital operators would be entirely dependent on the appropriate policy choices taken at a level inferior to that of primary legislation. In these circumstances, these level 
2 choices would be constrained by the primary rules contained in the AIFMD, which take 
precedence over any deviating provisions containe d in level 2 rules. As level 2 measures 
need to be firmly embedded within the paramete rs of the legal obligations that arise from 
the AIFMD itself, the scope for adopting a mean ingful system for venture capital at level 
 
 542 appear rather constrained. Although the AIFMD, at level 1, provides for certain 
opening in favour of a modulated approach, the overall intention of the AIFMD is to 
apply a uniform set of reporting and operational requirements on all alternative investment funds, irrespective of their different  lines of business.  These constraints leave 
too little scope to develop a meaningful European approach to venture capital funds.     
The Commission has been working on an appropr iate system of mutual recognition for 
several decades now. The major pitfa lls in this approach (Option 5
) result from the fact 
that mutual recognition pre-supposes a requis ite revel of regulatory convergence between 
the national systems that would be the subj ect matter of mutual recognition.  However, 
the description of the national rules on ve nture capital and, in their absence those 
covering 'private placements' by venture capital funds, shows that various sets of rules covering either venture capital funds or, in  their absence, private placements and 
prospectus requirements, are far too heter ogeneous for the successful application of 
mutual recognition. As chart 7 demonstrates, even among the eight Member States that 
have instituted specific rules dedicated to the development of venture capital funds, aim 
and legislative techniques diverge considerab ly. Some Member States amalgamate the 
promotion of venture capital with regional po licy (Austria, France), while others link it 
to the promotion of domestic industries (Germany, UK). It is easily conceivable that fund-raising by such entities would not be uncontested in host Member States (whose 
industry would not benefit from the activities of the particular venture capital fund).  
Furthermore, some Member States take a ve ry narrow and targeted approach to venture 
capital funds, requiring that the fund invests a high percentage of its committed capital in 
entities that do not exceed a certain age of cor porate existence and that do not themselves 
exceed strict turnover thresholds. Again, it is difficult to conceive that Member States 
that apply such a narrow view would be in clined to apply mutual recognition with 
respect to venture funds that originate in  jurisdiction where the designation 'venture 
capital fund' denotes a broader approach (fear of dilution).  
Finally, it is important to note that 18 Memb er States do not have rules dedicated to 
venture capital. These Member States apply general rules on private placements, prospectuses, financial intermediaries or rely solely on company law (e.g., Belgium). If venture capital funds originating in one of th ese countries would wish to raise capital 
with investors in another country that has no specific 'venture capital' rules, there is no 
tangible basis on which the concept of 'mut ual recognition' could rest.  In these 
circumstances, as also described in Section 5, national approaches to venture capital or private placements are too different for a sy stem of mutual recognition to work on a 
conceptual basis. This conclusion would apply to both variants of mutual recognition, as described in the section on scope above (s ection 7.11.2). Mutual recognition is thus not 
an approach conducive to developing a co mmon understanding on a European notion of 
venture capital funds.   
7.12.2  Operational objective 2: Create a common regulatory approach for qualifying 
venture capital funds 
The major disadvantage associated with a special 'venture capital' passport embedded 
within the "passport" chapter of the AIFMD (Option 1
) would be the lack of coherence 
that a special passport for venture capital below the € 500 million threshold would be combined in one set of rules with a more general passport applying to all alternative fund 
managers.  This lack of legal coherence introduces additional complexity into the already complex provisions of the AIFMD. The AIFMD would contain a general passport 
applicable to all alternative investment funds that manage assets in excess of € 500 
 
 55million and comply with its provisions alongs ide a specific passport for sub-threshold 
venture capital operators.  In these circ umstances, it would require complex legal 
techniques to limit the benefit of the tailor-m ade passport to the intended beneficiaries. 
Despite these drawbacks, a solution along th e lines was favoured by two Member States 
and found support among a few industry players.  This option has not, however, gained 
wider stakeholder support.  
In addition, careful reasoning would need to be deployed to delineate the passport to the 
intended beneficiaries and avoid that other operators who wish to escape full compliance 
with the AIFMD would obtain a passport wit hout full compliance with the AIFMD.  For 
example, operators who may wish to obtain the passport include private equity, real 
estate funds or other closed-ended vehicles th at invest in real property.  It might be 
difficult, in practical terms, to exclude these operators once the AIFM-D is under review.   
It is also true that the AIFMD, as its  name implies, pursues the approach of 
encompassing all alternative investment funds that operate above the thresholds. It would 
therefore be difficult for Option 1 to achie ve the intended aim -- to create a common 
regulatory approach to venture capital -- w ithin the more general framework of the 
AIFMD.   
The inclusion of below-threshold fund mana gers into the scope of the AIFMD, as 
proposed in Option 2 , might appear an easy way to  align the divergent national 
regulatory approaches into a single EU one. As  the lowering of thresholds in relation to 
all ‘small’ funds is, however, unsuitable to differentiate between venture capital funds 
and alternative investment funds that pursu e other business strategies, Option 2 does not 
foster a common EU-wide understanding of ve nture capital funds this Option is not 
suitable for the development of a common regulatory approach to such funds.  
It would also be difficult to achieve the de sired level of regulatory convergence in the 
national approaches governing venture capital by adapting the AIFMD at level 2 (Option 
3). An approach that relies solely on leve l 2 rulemaking on venture capital funds would 
face too many regulatory constraints resulting from the need to comply with level 1. 
Developing a common regulatory approach at le vel 2 of the AIFMD is therefore not able 
to lead to a common EU approach to the regulatory treatment of venture capital funds. 
Most stakeholder also converge in stating th at any approach taking AIFMD, level 1 rules 
as a starting point would lead to an appro ach that was too burdensome and unsuitable for 
smaller and more specialised venture capital fund managers.73 
As the venture capital passport foreseen in Option 4  is not embedded within the wider 
scope of the AIFMD, it stands a better chance of developing into a visible and recognised 
brand, a development that would potentially follow the development of the UCITS brand. 
As regulatory friction between the AIFMD and the proposed stand-alone instrument 
would be reduced, this instrument has higher pot ential to create a visible 'venture capital' 
brand and thus achieve the intended goal of  a common EU approach to the regulatory 
treatment of venture capital funds. This  option was the most strongly supported 
approach, both by industry and public authority respondents to the public consultation. These two groups differed, however, as to wh ether the new instrument should cover all 
qualifying venture capital fund managers rega rdless of the application of the € 500 
                                                
 
73 www.evca.org 
 
 56million threshold or only sub-threshold fund managers. Three Members States spoke in 
favour of a bespoke sub-threshold regime, while another Member State argued for a 
uniform framework that was independent of the AIFMD thresholds. 
The enforcement of the 'mutual recognition' principle (Option 5 ) would be incumbent on 
the different national securities regulators, pr ecisely the entities that, in the absence of 
further harmonisation of the 'private placement'  rules, would be reluctant to apply the 
principle of mutual recognition.  Option 5 ca nnot, in the absence of further harmonisation 
of the notion of the elements that distingui sh a venture capital fund from other forms of 
alternative investment funds, achieve the intended goal of creating a common European 
approach governing the fundraising activities of such funds.    
7.12.3  Operational objective 3: Create a network of administrative cooperation for the 
supervision of qualifying venture capital funds  
Embedding the venture capital passport within the wider scope of the AIFMD (Option 1 ) 
provides less visibility and prevents the in tended emergence of a 'European venture 
capital fund' as a recognised brand. Wit hout this common brand, administrative 
cooperation will become a rather more difficult endeavour.  
The result of Options 2 and 3  would, in light of the analysis above, amount to the exact 
opposite of the intended policy aim – a European  approach to the fundraising activities of 
venture capital funds in a cost-efficient manne r also for the regulators that have to 
supervise compliance – these options are not a suitable basis for administrative cooperation that is tailored to an effective supervision of venture capital funds.  
With Option 4
, the regulatory distinction between the supervision of alternative 
investment funds and venture capital funds w ould be maintained. This clear demarcation 
would allow regulatory cooperation for the a ll-encompassing approach pursued in the 
AIFMD to be clearly distinct from those a pplicable to venture capital funds. As a clear 
distinction between the two regulatory sphere s would be maintained, appropriate forms 
of supervisory cooperation tailored to the activities of venture capital funds can be 
introduced into the stand-alone framewor k that exists autonomously alongside the 
AIFMD.  
In light of the above analysis, it is  not deemed realistic that Option 5  would be sufficient 
to overcome obstacles to mutual recogniti on that stem from divergent regulatory 
approaches on matters of substance.   Quite  to the contrary, due to high potential for 
friction between divergent regulatory approach es, a network of regulators confined to 
assessing mutual recognition between heterogene ous national schemes is not expected to 
be efficient on the ground.  
7.13 Summary of impacts: procedural options 
OBJECTIVES :  
  OPTIONS
: CREATE NOTION OF 
QUALIGYING VENTURE CAPITAL FUND ENSURE COMMON 
REGULATORY APPROACH TO QUALIFYING VENTURE CAPITAL FUNDS FACILITATE REGULATORY 
COOPERATION  
1 –Venture capital 
passport within the AIFMD  Very effective to create a 
common EU notion of venture capital fund, valid across EU jurisdictions  (++) Regulatory friction with 
AIFMD, risks diluting aims of AIFMD, risk of freeriding by non-qualifying funds ( --) Potentially less visibility for 
venture capital passport, thus difficult to create common enforcement culture (--) 
2- Lower the thresholds General lowering of threshold, No regulatory friction with Inefficient, as no common notion is 
 
 57of AIFMD  not distinguishing between 
business strategies, is not effective in creating common notion of venture capital (--) AIFMD (+) created, thus no basis for a 
common enforcement culture (--) 
3 – Special rules for venture capital at level 2 of AIFMD  Only effective in creating 
common notion, if there is flexibility at level 2 (-) Regulatory friction with 
AIFMD, as level 2 cannot derogate from the level 1 provisions (--) Potentially too many constraints at 
level 1 for this system to produce a common notion of venture capital funds that serves as a basis for a common enforcement culture (-) 
4- Venture capital passport as stand-alone instrument Very effective to create common 
notion valid across all EU jurisdictions (++) Stand-alone instrument avoids 
risk of friction with AIFMD (+) Stand-alone instrument has higher 
potential to create a visible 'venture capital' brand creating basis for common enforcement culture (+) 
5- Mutual recognition  In effective, due to the 
heterogeneous set of national rules that cover 'venture capital' (--) High potential friction between 
national regulators who would be tasked to apply the system of 'mutual recognition' (--) Due to high potential friction, the 
absence of a common notion of venture capital funds, the network of regulators might not be efficient on the ground (--) 
“++” strongly positive, “+” positive, “—“strongly nega tive, “-” negative, “=” marginal/neutral, “?” 
uncertain, and “n.a.” not applicable. 
As reflected in the above table, procedural Options 2, 3 and 5 are not able to attain the 
stated aims in an effective manner.  Option 2 is ineffective as a general lowering of the 
AIFMD threshold does not achieve the emerge nce of a common regulatory approach for 
venture capital funds operating beneath the th resholds. Option 3, while better suited to 
achieve the stated goals, ultimately fails as the envisaged level 2 measures must respect 
the constraints of the level 1 framework of  the AIFMD. A tailor-made regulatory system 
for venture capital funds, even if carefully crafted, risks falling foul of the stringent 
requirements at level 1 that govern issues such rules on minimum capital requirements, delegation, depositaries, liquidity management, valuation of assets or the calculation of leverage. Full compliance with these requireme nts, tailor-made for systemically relevant 
investment strategies that involve a high le vel of leverage do not appear suitable for 
venture capital funds.  
Option 5, in the absence of a higher level of regulatory convergence between Member 
States, is not effective in reaching the stated aim (a common understanding of what 
constitutes a venture capital funds that can serv e as a basis for a joined-up regulatory and 
enforcement culture with regard to such funds).   
A choice has, therefore, to be made between  Options 1 and 4.  Option 4 is deemed the 
most effective option to achieve the intended goal, which is to create a legal framework 
facilitating fundraising across the European Un ion. While Option 1 is also effective in 
achieving this aim, it comes saddled with i ssues involving the coherence of the AIFMD, 
a directive which would have to accommodate a strict supervisory approach vis-à-vis 
alternative fund managers with a more permi ssive approach for qualifying venture capital 
funds. Option 1 is also encumbered with a potentia l 'free-rider' issue, as funds that are not 
strictly qualifying venture capital funds would attempt to convince national regulators to extend the favourable treatment for ventur e capital funds to their cross-border fund-
raising activities as well. Finally, Option 4
 appears more efficient than Option 1 to 
establish a recognised European 'venture capital' brand.              
 
 588 COMPARISON OF OPTIONS AND POLICY CHOICE  
The table below consolidates all substantive and procedural options and displays them in 
a single matrix. On this basis, a choice can  be made by combining various substantive 
and procedural options.  
8.1 Overall summary of procedural and substantive options  
OPTION LEGISLATIVE TECHNIQUE SUBSTANTIVE SCOPE  
Passport limited to qualifying VC funds 
Option 1:  
> 50% of capital in unlisted SME Option 2:  
> 70% of capital in unlisted SME Option 3: 
> 90% of capital in unlisted SME 
1 –Venture capital passport within the AIFMD  Review of AIFMD, introduction of special rules on 
regulatory cooperation and introductions of specific "carve-outs" from the AIFMD's operational rules to provide passport to 'qualifying' venture capital funds without full compliance with AIFMD.     
Option 1: 
Mifid investors Opton 2:  All 
traditional VC investors Option 3: unlimited, 
including retail investors 
2- Lower the thresholds of AIFMD  Review of AIFMD to modify the applicable 
thresholds without any further substantive changes to the rules of the AIFMD.  All funds with assets below € 500 million 
Open to professional investors as defined in AIFMD 
3 – Special rules for venture capital at level 2 of AIFMD  Implementing rules at level 2. Advice will be 
sought from ESMA on how to cater to the special situation of venture capital funds. If ESMA advises on a tailor-made approach for such funds, the corresponding rules would be codified at level 2, 
when implementing the AIFMD.   Limited to qualifying funds and eligible investors as 
defined by ESMA and implemented in specific level 2 provisions 
Passport limited to qualifying VC funds 
Option 1:  > 50% of capital in unlisted SME Option 2:  
> 70% of capital in unlisted SME Option 3: 
> 90% of capital in unlisted SME 
4- Venture capital passport as stand-alone instrument Creation of a stand-alone legal instrument 
containing rules on qualifying venture capital funds, regulatory cooperation for their effective supervison and tailor-made operational rules different from those in the AIFMD  
Option 1: 
Mifid investors Option 2:  
All traditional VC investors Option 3: unlimited, 
including retail investors 
5- Mutual recognition  Creation of a stand-alone legal instrument 
containing rules on regulat ory cooperation for their 
effective supervison of the mutual recognition of lawfully offered private placements either by: - registered funds or  - qualifying and registered funds.  Option 1:  
Mutual recognition limited to qualifying VC funds (as in Options 1 and 3) r applicable to all funds below € 500 million.  Option 2: Mutual 
recognition for all lawful private placements offered by managers whose aggregate assets in total are below € 500 million. The definition of the qualifying fund and that of eligible investors would be left to national rules.      
On the basis of this matrix, the best combin ation of procedural and substantive options 
can be selected.  
8.2 Presentation of most promising combinations between procedural and 
substantive options 
In light of the analysis of substantial and procedural options that was conducted in the 
previous sections three combinations of substantive and procedural options are identified as promising a reasonable prospect of achieving the above stated policy aims.  
 
 59COMBINED OPTIONS LEGISLATIVE TECHNIQUE SUBSTANTIVE SCOPE  
Option 1: 
Sub-options 1/3/2:  Venture capital passport within the AIFMD, high threshold, all traditional VC investors  Review of AIFMD, introduction of special rules on 
regulatory cooperation and introductions of specific "carve-outs" from the AIFMD's operational rules to provide passport to 'qualifying' venture capital funds without full compliance with AIFMD.     Passport limited to qualifying VC funds
 
Option 3: > 90% of capital in unlisted SMEs Opton 2:  All traditional VC investors 
Option 2: Sub-options 4/2/2:  Venture capital passport as stand-alone instrument, intermediate threshold, all traditional VC investors Creation of a stand-alone le gal instrument containing 
rules on qualifying venture capital funds, regulatory cooperation for their effective supervison and tailor-made operational rules different from those in the AIFMD  Passport limited to qualifying VC funds
 
Option 2:  > 70% of capital in unlisted SMEs Option 2:  All traditional VC investors 
Option 3: Sub-options 4/1/2:- Venture capital passport as stand-alone instrument, low threshold, all traditional VC investors Creation of a stand-alone le gal instrument containing 
rules on qualifying venture capital funds, regulatory cooperation for their effective supervison and tailor-made operational rules different from those in the AIFMD  Passport limited to qualifying VC funds
 
Option 1:  > 50% of capital in unlisted SMEs Option 2:  All traditional VC investors 
 
8.3 Analysis of combined options 
The analysis of the short-listed options (c ombining options on (i) portfolio composition 
and eligible investors with (ii) procedural alternatives) directly addresses the costs and 
benefits of the options, including in particular  their effectiveness in relation to problems 
relating to restrictions of investors' choi ce, inefficient venture capital funds/managers 
operating conditions, inadequate SMEs financ ing mixes, as well some broader economic 
and social issues. 
8.3.1 Impact on venture capital flows – anticipated re-allocation effects 
All combined options would most likely have some desired re-allocation effects.  In an 
ideal scenario Option 1/3/2, on account of its  90% threshold requirement, would achieve 
the highest level of reallocation between venture capital and other comparable asset 
classes.  Option 4/2/2 would score at interm ediate level, while Option 4/1/2 would most 
closely resemble the current EU asset mix.  For these reasons, Option 4/1/2 would not 
achieve the intended aim of reallocating assets to venture capital funds.   A decision will have to be made between  Option 1/3/2 and Option 4/2/2. With both 
options, anticipated reallocation effects woul d, however, be limited to comparable asset 
classes.  It is not to be expected that an  increase in capital flows to venture capital funds 
would reallocate assets across different risk classes. Pension funds, insurance companies, 
or other risk-averse investors, would not sw itch more than their current percentages of 
investments toward venture capital (these per centages are contained in table 3, annex X) 
just because fund-raising for this asset class has become easier.   Essentially, any replacement effect that mo re capital commitments to venture capital 
funds would produce would be replacements be tween asset classes that most closely 
resemble each other.  Replacement effects w ould therefore occur in respect of asset 
classes that display a risk profile similar to that of venture capital. The greatest replacement impact would likely be on the mark et for comparable types of risky assets. 
The impact would be therefore mostly be  on other categories of venture capital 
 
 60investments, including funds targeting ventur e capital elsewhere globally, investments in 
emerging market assets, certain kinds of priv ate equity investments or investments in 
speculative or innovative hedge fund strategies.  The scale of the anticipated reallocation eff ects is a reflection of the degree to which 
market efficiency relating to raising vent ure capital funds is increased. Option 4/2/2, on 
account of its expected take up and relative lack  of regulatory friction is expected to lead 
to a higher reallocation to venture capital funds than Option 1/3/2. The latter, as 
mentioned above, suffers from some degree of regulatory friction in relation to the 
AIFMD. Even when combined with the higher threshold reserved for qualifying 
investments, Option 1/3/2 is not expected to gi ve rise to the optimal reallocation that is 
achieved with a stand-alone instrument such  as Option 4/2/2.  Current experience with 
the implementation of the AIFMD, level 2
74, shows that the legal certainty arising from 
clearly delineated legal frameworks outweighs  possible advantages related to a higher 
investment portfolio threshold.    In addition, as mentioned above, the enforcem ent of an option that stipulates a high 
percentage in favour of qualifying investment s raises the difficult 'oscillation' issue of 
funds whose investment portfolio hovers on th e threshold for considerable periods of 
their existence.  This is a powerful disin centive for venture capital fund's using a passport 
that hinges on a 90% threshold.      Finally, the relative ease of regulatory enforcem ent that is associated with Option 4/2/2 
(see analysis in Section 7.3 and 7.10) makes it easier for this option to achieve capital 
inflows to qualifying venture capital funds. It is a contention of this impact assessment 
that EU venture capital funds are under-represen ted in EU investment portfolios due to 
market inefficiencies. Option 4/2/2 is, on bala nce, the most promising option to correct 
the relative underperformance of EU ventur e capital operations and this Option would 
therefore enable EU venture capital funds to better compete alongside funds specialising 
in other risky asset classes on a level playing field.   As to the scope of the expected reallocation effect
, the following assumptions can be 
made.  If the implementation of Option 4/2/ 2 would increase investors funds that are 
allocated to venture capital funds, the cro ss-border capital flows channelled to venture 
capital would more closely resemble those of the private equity industry. Currently, as explained above, private equity raises 20% of their assets abroad while venture capital raises 12% of their assets abroad. If Opti on 4/2/2 was successful in rebalancing these 
flows, the assumption could be made that  the capital inflows into qualifying venture 
capital funds would rise to between 15% and 17% (with a possible reduction on cross-
border capital inflows to private equity).  
Taking the figures provided in table 12 (Annex X), i.e., that venture capital raised € 21,1 
billion, € 2.5 of which from other EU jurisid ition than the fund's home Member State, the 
following inflow scenarii can be calculated:  
Scenarios Cross-border capital raised in a three year 
period   % increase 
                                                 
74 Work at implementing AIFMD, level 2, is complicated  by the fact that distinctions between different 
funds and different invest ment strategies are materially rele vant but difficult to accomodate in a 
legislative instrument that follows  an all-encompassing approach.   
 
 6112% (current situation) € 2.5 billion   
15% (intermediate short-term scenario) € 3.16 billion + 26.4%  
17% (optimistic short-term scenario)  € 3.58 billion + 43,2% 
20% (long-term stable scenario) € 4.2 billion  + 68% 
 
As the last row demonstrates, if cross-bor der fundraising for venture capital would be 
aligned with current levels achieved by UC ITS funds – the 20% raised by UCITS funds 
in other jurisdictions than their home Member State seems to reflect a stable equilibrium that can be achieved after two decades of relatively open cross-border capital markets – 
the capital allocated to venture capital funds would rise to € 4.2 billion - an increase of 
68% over the current situation.   
8.3.2 Economies of scale  
On the basis of the above calculations, Option 4/2/2 would constitute an effective tool to 
increase cross-border fund-raising capacity for venture capital funds, thus potentially 
raising the capital pool that is available to specialist funds dedicated to provide equity 
financing to SMEs.  
The overall impact that increased cross-borde r capital flows can have in increasing the 
average size of assets managed by a Eur opean venture capital fund is difficult to 
quantify.  The starting point is that, in  2010, 635 venture capital funds operated in 
Europe (Table 1, Annex X). These funds, between themselves, raised € 21.1 billion in three years (2007-2010) which, on average, equate s to € 33 million raised per fund in this 
period.  Additional fundraising estimates can thus be calculated as follows:  
Scenarios Cross-border capital raised 
in a three year period/fund    Anticipated cross-border 
capital raised in a ten year period    % increase over ten 
years 
12% (current situation) € 3.9 million € 12.9 million  
15% (intermediate short-
term scenario) € 4.9 million € 16.2 million + 49% 
17% (optimistic short-
term scenario)  € 5.6 million € 17.5 million + 53% 
20% (long-term stable 
scenario) € 6.6 million € 21.8 million + 66% 
As the table above shows, the increases in capital raised per fund will be considerable, 
especially when considered in a 10 year pe rspective. On the other hand, the impact on 
average assets under management will still be incremental. Over a ten year period (reflecting the average life span of a vent ure capital fund) the sums, would, however, 
start making a meaningful contribution to overall fund sizes. This is especially true as the 
entire table is based on allocating all increased cross-border flows to the overall amount of 635 venture capital funds that, in 2010, operated across Europe. In reality, the 
allocation of the net increases in capital flow s will not be so evenly distributed, with 
bigger funds garnering a greater share of the anticipated overall increase.  
In these circumstances, the fact that d eeper capital pools would not immediately boost 
the average size of European venture capital funds from between € 60 million in assets 
under management to the desired threshold of € 230 million in assets under management, 
should not detract from the usefulness of Option 4/2/2. Progress will necessarily be 
incremental and, as the figures above demonstr ate, will take several years to come to 
fruition.   
 
 62The above calculations also neglect an im portant multiplier effect. While it is not 
possible to quantify precisely how much th e additional capital that is raised across 
national borders would generate in additional capital that is overall committed to venture capital funds, a rough estimation would consider  that an increase of cross-border capital 
commitments to venture capital in the range  of 1% would result in additional € 50 
million to be channeled into venture capital funds
75.  
 
8.3.3 Impact on existing national rules governing venture capital funds 
All of the possible combinations of options would have some impact on existing national 
frameworks covering venture capital funds, especi ally in those Member States that have 
adopted rules dedicated to the operation of such funds. Option 4/1/2 which would seamlessly integrate within the existing status  quo (which the industry estimates to be the 
50/50 split between qualifying and non-qualifyi ng investments), although the threshold 
in Option 4/2/2 would more closely resemble the benchmark in those Member States that have instituted rules dedicated to venture cap ital. The discrepancy between the status quo 
and the regulatory requirements detailed in chart 7 is mostly due to the low take-up that national systems have achieved, notably on account of the strict "location" requirements in relation to the target undertaking (c.f., th e current systems in Austria, Germany, the 
UK and some of the models in France).    On the other hand, Option 1/3/2 entails a significant departure from the prevalent 
national systems, mostly on account of the mo re ambitious portfolio threshold that is 
reflected in none of the current regulatory approaches.   In the end, the issue of interaction between  the new European rules governing venture 
capital and the existing national schemes shoul d not be overestimated. While the venture 
capital fund framework could impact nationa l fund regimes already targeting venture 
capital, it would be for Member States to c onsider whether existing frameworks might be 
adjusted for consistency with the new Eu ropean framework. Even in those Member 
States that have rules on venture capital overall adaptation requirements are not expected to be very high, as the chosen EU approach, based on a qualifying investment portfolio and on investments in certain qualifying inve stment targets reflects the best practice 
found in existing national rules.  It is also important to note that the European rules on 
venture capital fundraising would only apply fo r those funds who chose to register in 
order to benefit from the envisaged re gulatory framework. Funds, whose activities 
remain focused on domestic investors, would not be affected by the envisaged rules.      
8.3.4 Impact on the geographic location of venture capital activities 
All combined options presented above woul d, to various degrees, impact cross-border 
marketing. It is to be expected that, in a first phase, those fund jurisdictions that have 
developed strong infrastructures for invest ment funds (UK, Germany, Sweden, Denmark, 
Finland, the Netherlands, France and Spain, cf . Section 4.2 and 4.3), would attract more 
capital flows originating in those jurisdictions that have not done so. In a second phase, the latter jurisdictions will have a powerful i nventive to 'catch up' and create attractive 
fund infrastructures, so as to attract capital from investors in other Member States.   
                                                
 
75 Based on last 4 years' average of VC investing €5bn on an annual basis in approximately 3.000 SMEs. 
 
 63Again, the impacts of any of the three combined options should not be overestimated. 
While there might be some reallocation to  attractive 'fund jurisdictions', evidence 
suggests however that VC funds will continue  to be located close to their target 
companies, thereby limiting the extent of  such geographic redistribution of fund 
business.  
8.3.5 Shift in the SME 'financing mix' 
All options under discussion are based on a st rict requirement that qualifying venture 
capital funds most invest in equity or quasi e quity issued by the target companies. Due to 
the relatively strict requirements with resp ect to a venture capital fund’s investment 
portfolio and the qualifying investment tools,  the success of the envisaged fund-raising 
passport would likely have an impact on financ ing forms, with a re-allocation from debt 
instruments to equity. As Option 4/2/2 scores  highest in respect of achieving the intended 
reallocation of funds toward venture capital, this option would, in consequence, be best 
placed to improve the SMEs financing mix. Option 4/2/2 therefore scores best in 
ensuring stable long-term financing to SMEs in the early stages of their development.  
8.3.6 Impact on European competitiveness  
This section discussed follow-on effects on ce the principal objective of raising more 
funds to be channeled into funds that reflect  a European notion of venture capital funds is 
achieved.    A deeper and more liquid market for ve nture capital fundraising would increase the 
overall capital commitments that are channe led toward venture capital funds.  Better 
allocation of capital flows to high growth a nd innovative sectors like life science, energy 
and environment or computer and electronics  is beneficial for European growth.  
 Option 4/2/2, due to creating the deepest cap ital pool available to venture capital funds, 
could foster more specialization on the part  of the European venture capital industry. 
Higher specialization would allow venture cap ital funds to concentrate on particular 
industries (e.g., biotechnology, cleantech, renewa ble energies) and increase the size of 
their investments per company.  Larger fund si zes would thus lead to more meaningful 
investment, better focus in the venture capita l fund sector and an increased performance 
and competitiveness of the venture financing business in Europe.    Furthermore, more venture capital financing being channeled into early stage developments of innovative products and services would also trigger positive spillover effects and increase research and developm ent spending of public and private firms. 
According to latest research it is estimated th at an increase in venture capital investments 
in the range of 0.1% of Gross Domestic Product (GDP) is statistically associated with an 
increase in real GDP growth of 0.30 percentage  points. Early-stage investments have an 
even bigger impact of up to 0.96 percentage points
76.  
 
                                                 
76 Th. MEYER, "Venture Capital Adds Economic Spice", D eutsche Bank Research, September 14, 2010. 
 
 
 648.3.7 Impact on jobs 
According to a 2005 study77, companies backed by venture capital between 1997 and 
2004 created about 630.000 new jobs in th e EU in the period from 2000 to 2004. 
Although difficult to predict how a venture capital passport would affect the creation of new jobs, the high potential of venture capita l funded business to create above average 
employment growth is well documented (Yannis Pierrakis et al, NESTEA research report, June 2009, cited in Annex XII).  
8.4 Overview of costs and benefits of combined options 
 
Option Costs and benefits by stakeholder group 
Combined 
option Sub-options VC Fund 
Managers Investors Portfolio 
companies Economy Overall 
Assessm
ent 
Procedural:1  
Portfolio: 3 1 
Investors: 2 (-) risk of 
regulatory overlap if new VC rules are contained in AIFMD  
(--) disruption 
of existing business practices leading to limited uptake of the new framework (++) all 
traditional VC investors can be offered VCF investments 
(-) no 
improvement in portfolio diversification due to low VCFM take-up (-) inefficiencies 
in portfolio companies financing structure remain 
(--) may lead to 
disproportionately high reporting costs (-) contribution 
of VCF sector to more efficient and competitive economy limited  
(-) 
Procedural: 4 
Portfolio: 2 2 
Investors: 2 (++) benefit 
from single and separate set of rules, brings legal certainty 
(+) 
intermediate obligatory portfolio benefits existing business practice  (++) all 
traditional VC investors can be offered VCF investments 
(++) benefit of 
greater investment choice/portfolio diversification 
 (++) benefit from 
improved and more efficient financing structure 
(+) proportionate 
compliance costs related to reporting (++) VCF sector 
can explore its full potential 
(++) conducive 
environment creates more VC flows – more firms financed and – more jobs created (++) 
Procedural: 4 
Portfolio: 1 3 
Investors: 2 (++) benefit 
from single and separate set of rules, brings legal certainty 
(++) high fund 
structuring (++) all 
traditional VC investors can be offered VCF investments 
(--) possible 
investor (-) innovative, 
young companies do not benefit from increased VC flows, bias towards private equity persists (-) limited chance 
for VCF sector to fully exploit its full potential 
 (+) 
                                                 
77 Employment contribution of PE and VC in Europe, EVCA Publication, October 2005 
 
 65flexibility 
benefits existing business practice  confusion  as 
difficult to distinguish between VCF and traditional private equity funds 
(-) investors' 
bias towards private equity remains  
 
8.5 Policy choice and its key features 
It results from the impact analysis above, th at the preferred Option (Option 4/2/2) would 
be a stand-alone instrument (preferably a Regulation), compliance with which would 
entitle only a qualifying venture capital fund manager (who invests at least 70% of 
aggregate capital contributions in equity or  quasi-equity instruments issued by unlisted 
SMEs) to market all the funds in its portf olio which themselves comply with the 
Regulation in several Member States across the European Union (Option 4). Marketing 
would be allowed in respect of all traditional venture capital investors.  
The coexistence of the proposed stand-alone  rules and the AIFMD would be organised 
on the basis of mutual autonomy between two dis tinct sets of legal rules. This manner of 
proceeding avoids any unwanted legal comple xity and possible ambiguity that would 
result from the EU passport for qualifying venture capital funds and the passport applicable to all other alternative investme nt funds being covered in one and the same 
legal instrument.  
The chosen approach appears the most efficient because, in practical terms, a fund 
manager who complies with all of the substa ntive requirements set forth in the proposed 
instrument would obtain a European passport without the necessity to:  
– opt into the regulatory framework and passport system provided in Directive 
2011/61/EC or  
– Comply with the residual – and very heterogeneous - national rules on venture capital 
funds, private placements, prospectuses or requirements on local distribution.  
Box 4: Key features and workings of preferred option 
• The new framework will be voluntary . This implies that venture capital managers will not be obliged to 
abide by the uniform rules. As long as they wish to market their qualifying funds across the Union 
under the designation "European Venture Capital F und", compliance with the uniform rules will be 
necessary. Non-compliance with the uniform rules will be sanctions by the withdrawal of the right to 
use the designation.   
• Should the manager wish to benefit from the marketing passport it has to register with the regulator in 
its home Member State (i.e., the Member State where the manager is domiciled). The passport will only 
be available for managers domiciled in a EU Member State. The home Member State will register all 
funds that comply with the uniform framework. Essential requirements are: the venture capital fund 
invests at least 70% of investor's capital into unlisted SMEs; the venture capital fund invests in equity 
or quasi-equity directly issued by the SME (i.e., provides 'fresh capital'); the venture capital fund does 
not engage in leverage (i.e., invests more than the capital committed by investors ).  
 
 66• The proposed instrument would contain detailed provisions on the requisite cross-border notification 
process between the competent Home and Host Member States. These no tifications are triggered by the 
registration of a qualifying vent ure capital fund in accordance with  the proposed Regulation. The 
process and legal effects of these mutual notifications  are conceived and legally structured in line with 
the principles of Article 93 of Directive 2009/65/EC (UCITS) 
• Fund managers benefiting from the passport will have to comply with general principles governing the 
behaviour of a qualifying venture cap ital manager, notably in the conduct of its activities and in its 
relationship to investors, rules on the handling of c onflicts of interest, organisational requirements in 
terms of adequate human and technical resources, rules on the valuation of a qualifying venture capital 
fund's assets and the customary provisions on annual reports. In addition, the new instrument would 
contain key disclosure requirements that are incumb ent on a qualifying fund in relation to its investors  
• The home Member State can withdraw the passport if the venture capital fund manager does not fulfil 
any of the above mentioned essential requirements.  Withdrawal of the pass port will also lead to 
removal of the fund from the register of qualifying venture capital funds.  
• To ensure the effective supervision of qualifyi ng venture capital funds and their managers, the 
proposed rules would equip the competent authoritie s with the necessary s upervisory powers and will 
contain provisions on the administrative cooperation between the Home and Host Member States 
affected by the marketing of the qualifying venture capital funds 
• Third country venture capital managers will continue  to market their funds  in accordance with the 
national private placement regimes of the Memb er States where they market their funds. 
• Only those fund managers can benefit from the mark eting passport if the aggregate assets of their 
qualifying venture capital funds do not exceed € 500 million. Managers whose qualifying venture 
capital assets under management exceed this thres hold will need to seek authorisation under the 
AIFMD. At the moment, the aggregate qualifying venture capital assets are, on average, € 60 million. 
Therefore, the situation of having to seek full authorisation under the AIFMD should not arise very 
often. Should venture capital funds become more  successful and increase average assets under 
management significantly in the future, the Co mmission has the right to review the € 500 million 
threshold.  
8.5.1 Enforcement provisions 
Enforcement of the criteria applying to bot h qualifying managers and qualifying funds is 
necessary to safeguard the credibility of th e new designation "European Venture Capital 
Fund". The proposed rules would therefore sp ecify the conditions in which the Home 
Member State is obliged  to withdraw the European passpor t. It is important to note that 
the Home Member State must continually s upervise compliance of the qualifying venture 
capital fund manager, notably with the subs tantive requirements that relate to the 
composition of its fund's portfolios, the eligible  investment instruments used, the eligible 
target companies invested in and the elig ible investors addressed by the manager's 
marketing. Non-compliance with one of thes e uniform set of criteria will oblige the 
Home Member State to withdraw the manager's eligibility to use the designation "European Venture Capital Fund". Withdrawal of  this passport will also lead to removal 
of the fund from the national register of qualifying venture capital funds.    
Once, material non-compliance is ascertained, it is incumbent on the Home Member 
State to withdraw the benefit of the European  passport from the manager in relation to all 
its qualifying funds and inform the relevant Ho st Member States (those indicated in the 
registration) accordingly. To avoid regulat ory ambiguity, the proposed rules should 
stipulate that, upon withdrawal, the benefits of the passport will c ease with immediate 
effect°. Withdrawal of the passport will also entail that the fund manager will be 
removed from the register of qualifying venture capital funds.   
 
 67To ensure the effective supervision of  qualifying venture capital funds and their 
managers, the proposed rules would equip th e competent authorities with the necessary 
supervisory powers and will contain provi sions on the administrative cooperation 
between the Home and Host Member States affected by the marketing of the qualifying 
venture capital funds. 
8.6 Risks and synergies 
There is no evidence to suggest a re-balancing of portfolios of risky assets to ensure a 
more equal playing field for venture capita l funds would lead to any funding problems 
related to other alternative investment mana gers. The scale of such re-allocations would 
reflect the growth of funds under the new framework; institutional and high net worth 
investors (who would be included as eligible investors in the chosen approach) can be 
expected to take a balanced approach  on asset allocations; providing a stronger 
opportunity to target EU venture capital funds is  likely to be viewed by such investors as 
a useful means for further diversifying their portfolios; but large-scale shifts between 
risky asset classes are unlikely in the absence of other incentives.  The extent to which venture capital financing will be able to develop its potential as a 
means of stable and long-term financing critica lly depends on the extent to which a series 
of other factors that influence the envir onment (ecosystem) in which venture capital 
funds and their investment targets operate.    Eliminating regulatory fragmentation is one, but an important, element to improve the 
overall ecosystem in which venture capital f unctions. The targeted fund-raising passport 
should have, in the first place, positive effects on venture capital fund’s economies of scale and improve funds' potential for specialization.  
The proposal for a new VC f und framework exhibits strong synergies  with the 
Commission SME Financing Action Plan [r eference] and the SMA. The SMA has 
identified other issues that should be improved in order for SMEs to have better access to 
finance. Some measures addressed in the SMA are complementary to the present proposal. For example, on the supply side, m easures envisaged to improve SMEs access 
to public markets. Another option involve s the creation of dedicated SME stock 
exchanges. Venture capital strategies and thei r investments would be greatly enhanced, if 
there were more promising exit strategies, once a venture has enjoyed initial commercial 
success. The easier it is to engineer a successf ul listing, the more attractive investors will 
find a venture capital investment.   On the demand side, improving entreprene urs' knowledge about the benefits and 
opportunities that venture capital financing offers, increasing entrepreneurs business 
skills and focus on promoting their innovation ar e three elements that can also contribute 
positively to the impact the existing initiative will be able to bring about.  
One of the risks potentially endangering the success of the proposal resides in the 
potential consequences of recent changes in  the prudential framework for insurance 
companies and banks. Although these new rules have not yet been tested in practice, 
most industry practitioners and other experts predict that these developments will most 
likely make venture capital a less attractive investment opportunity, leading banks and 
insurance companies to scale back sharply their investments in this particular asset class: "For example, we see in Europe new capita l requirements coming up for pension funds 
 
 68and insurance companies that will render it very unattractive to them to invest in private 
equity and venture. That’s a very significant issue that the European Venture Capital 
Association is currently tackling in its lobbying work because it could have a major, completely unintended consequence of re ducing the capacity to provide funding to 
innovative growth companies. It remains to be seen how it will play out. Lawmakers and 
regulatory bodies have some work to do in or der to fine-tune the proposed regulations 
and to ensure that they don’t have negati ve, however unintended, impacts on the VC 
industry’s to fund innovations
78. 
The SME Financing Action Plan recognises these risks and proposes that in 2012, the 
Commission will, on the basis of technical work to be done by the European Banking 
Agency (EBA) and European Insurance and Pe nsions Agency (EIOPA), carry out a study 
on the relationship between prudential regul ation and venture capital investments by 
banks and insurance companies.  
Box 5 shows, that the Action Plan puts forward number of other complementary 
measures including deadlines for their implem entation. This is necessary in order to 
ensure that overall coherence of individual measures is ensured, especially in cases where measures are closely interlinked:  e.g. measures which will improve venture 
capital fundraising and the subsequent cross-bor der investments of these funds as well as 
prudential rules for banks and insurance companies.   Clearly, the overall impact of the steps and measures identified in the SME Financing 
Action Plan is expected to be greater than  the individual elements taken on their own: 
while each step can be justifie d on its own merits, taken together they can be expected to 
be far more effective.   Box 5: Overview of SME Financing Action Plan measures 
SME financing focus area Type of measure Implementation 
horizon 
REGULATORY MEASURES 
1.Improving regulatory framework for Venture capital      
(i) Cross-border fundraising of venture 
capital funds A New EU Venture capital framework creating a genuine 
internal market for Venture capital funds. Short term: 
Commission adoption December 2011 
(ii) Assessment of prudential rules for banks and insurance companies when investing in venture capital Study assessing the relationship between prudential regulation 
and venture capital investments to inform decision making whether to adapt prudential requirements related to venture capital investments Short term: 2012 
technical work by EBA and EIOPA,                      Mid-Long term: revision of CRD and Solvency II 
(iii) Cross-border venture capital investments The Commission will will in 2012complete its examination of 
the tax obstacles to cross-border venture capital investment with a view to presenting solutiohns in 2013 aimed at elimination the obstacles wiile at the same time preventing tax avioidance and evasion.  Mid-term: 2012 - 2013 
2. Review State aid rules relevant to 
SME access to finance The Commission will among others review a number of State 
aid guidelines, including on Risk Capital  Mid term - by 2013 
3. Improve SMEs access to capital 
markets     
                                                 
78 Source:  Ernst & Young, "Back to basics, Global ve nture capital insights and trends report 2010"  
 
 
 69(i) More visible SME markets The Commission proposed to attribute the label SME growth 
market to Multilateral Trading F acility (MTF) in the  Directive 
on Markets in Financial Instruments (MiFID), Short term: 
Commission adoption October 2011 
(ii) More visible listed SMEs The Commission proposed modification of Transparency 
Directive to provide for a central access point at the EU level to high quality and comparable information Short term: 
Commission adoption October 2011 
(iii) Reducing repor ting burdens for 
listed SMEs (i) Commission proposaed to modify the Accounting 
Directives to simplify and improve accounting rules for SMEs. (ii) Commission presented a proposal to reduce the regulatory burden for small issuers (Transparency Directive). (iii) Commission proposal for de legated acts specifying the 
content of a proportionate disclosure regime for SMEs and small issuers (Prospectus Directive) Short term:                        
(i),(ii) October 2011,        (iii) By July 2012 
4. Review the impact of bank capital  requirements on SMEs and recapitalisation of banks Review whether the preferential risk weight for SMEs 
exposures of 75% is too stringent. Short-mid term: 2012 
(review), later potential changes to CRD IV 
5. Accelerating the implementation of the Late Payments Directive The Commission strongly encourages Membre States to 
accelerate its implementation  
EU FINANCIAL MEASURES FOR SMEs 
1. Measures to improve lending to 
SMEs The Commission proposed Business Competitiveness and 
SME Programme with a guarant ee and an equity facility 2014-2020 
2. Measures to improve access to 
venture capital and other risk financing  The Commission will in addition to the above, venture capital 
facility and mezzanine financing for growth-oriented and early 
stage SMEs 2014-2020 
MEASURES FOCUS ON IMPROVING THE ENVIRONMENT FOR SMEs 
1. Better information for SMEs (i) Commission will enhance training, communi cation and exchange of good practice to 
provide SMEs information a bout financing possibilities, ( ii) create single portal about 
different source of EU finance available for SMEs   
2. Improve monitoring of the SME lending market Commission will work with bank federations and other to improve statistics and reinforce 
analytical framework for SMEs lending   
3. Promote qualitative rating Commission will promote exchange of good practices 
  
4. Stimulate the activity of Business angels and cross-border investments Commission will (i) encourage co-investments w ith BA, (ii) develop measure for cross-
border matching between enterprises and invest ors, (iii) improve ma tching of offers and 
requests for venture capital within the Enterprise Europe Network 
  
5. Promote information on SME access to capital markets Exchanges encouraged to increase informati on to SMEs about advantages of market 
listing (ii) Commission will promote establishment of an institute to promote analysis and 
research on listed medium-sized enterprises 
  
6. Policy coordination and implementation Encourage other stakeholders to provi de fora for improved access to finance 
  
 
8.7 Compliance costs  
The preferred policy design is not expected to result in creating significant new 
administrative costs or burden. The purpose of this initiative aims to eliminate costs related with raising venture capital funds across several jurisdictions. Having said this, any regulatory requirements are likely to incur some compliance costs. 
 
(i) Compliance with obligatory investment structure of the venture capital fund  
- Venture capital fund managers:
 
 
 
 70From the perspective of existing as well as new venture capital funds and their managers 
that will wish to benefit from the passporti ng opportunities, it is expected that some one-
off costs related to assessing how to comply with the criteria that define the common EU 
approach to what constitutes a venture capita l fund, especially the criteria on investment 
portfolios, investment tools and target undertakings, might occur. Fund managers with existing funds would need to assess whether it is appropriate to re-structure their fund 
portfolios along the new criteria to meet the definition of 'qualifying venture capital fund' 
or not. Adjustment costs could also arise – e.g. through disposal of assets if this is 
necessary, for preparing new documentation for investors, etc.  
Such costs would likely remain relatively lo w for existing funds because the approach 
based on a 70% target is close to the nati onal requirements that prevail in the eight 
Member States that have adopted rules governing the activities of venture capital funds.  A target of 90% (which obliges all but the most pure breed venture capital funds to alter 
their investment strategies to fall within the new approach) would have incurred more 
substantive costs for funds and investors related to disposal of assets.  
Moreover, these sort of considerations ar e part of a regular business decision-making 
process, given that the choice of whether to make use of the new framework or not is a 
decision that is left up to the individual fund manager; in this regard, the expected costs 
are in practice likely to be a fraction of the operating expenses that can be expected under 
'business as usual' for funds that wish to operate cross-border. In this respect, adaptations of investment strategies do not appear dispropor tionate in relation to the benefits that are 
associated with access to a European marketing passport.  
(ii) Compliance with reporting and disclosure requirements 
 
- Venture capital fund managers
 
Costs related to reporting and disclosure requi rements of the preferred option would arise 
from the need to assemble and transmit certain type of information to public authorities or investors.  
As far as for example pre-contractual disc losure is concerned, fund managers have 
considered this type of obligation as a signi ficant cost driver. Data collected on costs of 
the introduction of key investor information disclosures for UCITS funds estimated one-
off costs of between EUR 290 and 730 million (depending on factors that remained open at that time).
79 This is for an industry of around EUR 7 trillion; for perspective, these 
one-off costs were around 0.016% of assets under management. However, these are 
estimates for measures that apply to UCIT S funds in dealing with retail investor 
disclosure: costs for putting in place disclosu re systems for high volumes of investors, 
and for entirely replacing all existing disclosures.  
By contrast, the preferred option is unlikely to have significant cost implications. The 
content of proposed disclosure requirements merely refers to provision of information that fund managers already are likely to comp ly with as part of their usual business 
model when dealing with investors. This is the case in particular for information about 
the fund managers, its organizational structure,  its investment strategies or information 
                                                
 
79  CSES study on costs for the UCITS industry from introduction of Key Investor Information document 
proposals. 
 
 71relating to conflicts of interest. More over, fund managers will typically follow 
established industry reporting and transparency standards, and have readily entered into 
bespoke agreements with investors to make available specific disclosures or reporting as 
necessary for the high-risk nature of invest ments into venture capital funds, suggesting 
such costs are in practice readily absorbed into business as usual costs.  
The requirement to provide annual report with information being audited is another cost 
driver under the transparency requirements of the preferred option. The extent to which related costs will pose significant burden for small and medium size fund managers in 
particular, depends on the level of details  as to the content and form of such 
requirements, given that such reporting to a general degree is typical under commercial relations for such fund managers already. There was a broad support from great majority of respondents to the public consultation to require as a minimum that fund managers 
provide annual reports for each of their funds. German, Finnish and French public 
authorities, supported by an additional sixteen stakeholders, took the view that additional 
requirements should be included to audit fina ncial information in the qualifying venture 
capital funds' annual reports. Denmark and a fu rther eight stakeholders were of the 
opinion, however, that such audits should be  a matter of agreement between funds and 
investors. Five other stakeholders, mostly representing UK venture capital industry practitioners viewed annual reporting linked with audit requirements on the individual fund basis as excessive, overly burdensome, costly and of little benefit.  
In addition, the cost impact of proposed disclosure and reporting requirements would 
relate only to those venture capital fund mana gers that chose to benefit from the new 
European Venture capital fund framework. As such, it is a commercial decision for fund 
managers whether the acceptance of certain compliance obligations counterweighs the 
benefits managers will experience. To en sure a proportional approach, the proposed 
requirements seek a principle-based structur e that reflects existing business practices. 
This approach was supported by the great ma jority of stakeholders. Moreover, the 
proposed disclosure and reporting requireme nts have the potential over the longer-term 
to become an acceptable standard which shall help in building investors' trust about an 
investment strategy decision to invest in vent ure capital funds – one of the riskiest asset 
classes. 
- Venture capital fund investors
 
The preferred option is not expected to direc tly confer any additional costs to investors. 
Although it is possible that additional costs borne by venture capital fund managers can 
be passed on to investors, it is also the prer ogative of investors to require clarity on costs 
being imposed on their investments and in th e venture capital market these are typically 
subject to negotiations on case by case basis.  
- National authorities  
New requirements might increase costs for supervisors, including ensuring cooperation 
in ensuring effective supervision of those ve nture capital funds that decide to benefit 
from the new European framework. However, it is expected that these costs should not 
be significant because national authorities have  already functioning systems in respect of 
other investment fund regulatory framewor ks, be they European (e.g. UCITS) or 
national. The supervisory arrangements for oversight of qualifying venture capital funds 
build on existing framework and requirements vi s-à-vis national authorities in the area of 
investment funds. 
 
 72- Portfolio companies of qualifying venture capital funds  
The proposed disclosure and reporting require ments contained in the preferred option 
could increase costs for portfolio companies targeted by qualifying venture capital funds. 
These costs may arise in particular as a re sult of funds' obligation to provide regular 
annual reports. However, it is unlikely that th ese costs would be significantly higher than 
those borne under business as usual, as it is a precondition for portfolio companies that seek venture capital financing to be 'inve stment ready'. Venture capital funds, in 
assessing their potential investment targets, s ubject to existing market practices, place a 
very high importance on portfolio companies having a sufficient level of quality and being able to provide information that is essential when funds face reporting obligation 
towards their investors. 
Furthermore, the obligation of standardi zed reporting requirements placed on venture 
capital funds has the potential to steer the orient ation of future portfolio companies as to 
the requirements they need to consider in order to be eligible investment targets. 
8.8 Administrative burden 
In regards administrative burden, harmonized disclosure and reporting standards imply 
better data flows in the investment market  for venture capital, and these could entail 
certain costs over and against business as usual costs for both venture capital fund managers as well as their portfolio companies. However, providing for greater consistency in requirements could lead to so me reductions in costs for some portfolio 
companies. 
Overall, since the proposed option is a voluntar y regime (in terms of the decision as to 
whether to operate under the regime or not, though of course) costs would only be borne 
those seeking access the funding that the regime makes available.  
Moreover, it is expected that benefits of the proposed measure shall outweigh the costs 
from the perspective of venture capital fund ma nagers. This is in particular due to the 
fact that the creation of a European venture capital framework, based on a common 
notion of what constitutes a qualifying ventur e capital fund, is expected to significantly 
reduce the administrative burden for those ve nture capital fund managers that currently 
raise capital outside of the fund’s home Memb er State. The proposed framework would 
eliminate costs related to parallel registrations, duplicate authorizations, the maintenance of parallel corporate infrastructures and multiple and varying reporting obligations. 
These duplicate costs are the price that fund ma nagers pay for raising funds abroad in the 
current fragmented environment.
80  
All of these additional costs would be elim inated. The preferred option would therefore 
increase legal certainty and create a level pl aying field for venture capital fund managers 
when raising funds cross-border in the EU.  
The issue of reporting costs for portfolio companies was addressed in previous section 
8.7. 
                                                 
80 See Expert group report on removing obstacles to cross-border investments of venture capital funds, 
chapter 4.1 showing an example of concrete parallel fund structuring costs and what additional costs are 
associated with it. 
 
 73 
9 MONITORING AND COMPLIANCE  
The Commission will constantly monitor and evaluate the effectiveness of the the 
proposed policy choice in order to be able  to review the proposed instrument, if 
necessary to better achieve the policy goals set out in this Impact assessment. Such 
review could e.g. take place 4 years from th e transposition deadline of the new initiative 
that is estimated to be in 2014. This would be in line with the monitoring and assessment 
of the developments and implementation of the AIFM-D, whose transposition deadline is 
July 2013. For this purpose, the post-adoption monitoring and evaluation will focus on three issues: (1) has the new framework established a European notion of what constitutes a venture capital fund, (2) has th e new framework contributed to a common 
regulatory approach governing European vent ure capital funds and, and (3) has the new 
framework contributed toward the creation of a network of administrative cooperation 
for the effective introduction and supervision of the managers of European venture capital funds.  
European notion of what constitutes a venture capital fund        
 
A core plank of the Commission's monitori ng activities in relation to the regulatory 
framework for venture capital funds will cons ist in verifying whether the rules are 
specific enough so that investments channe lled through the new regulatory framework 
reach the intended beneficiaries (unlisted, innovative SMEs who rely on equity finance 
for success in an early phase of their existence).  
– The Commission will monitor in cooperation w ith national authorities, ESMA and the 
venture capital industry (in particular th e European Private Equity and Venture 
Capital Association - EVCA) that the investme nt strategies of those funds that operate 
under the EU venture capital passport are sufficiently tailored  toward the acquisition 
of equity stakes in innovative SMEs and th at the portfolio composition of the venture 
capital funds reflects the regulatory target percentage (70%). For this purpose it will 
also gather empirical data, e.g. by the means of a study.  
– Should empirical data gathered as part of  this monitoring (this monitoring will be 
conducted in cooperation with ESMA who is tasked with keeping a register of fund 
managers) reveal that the chosen portfolio  composition is not optimal in creating a 
workable notion of a European venture cap ital fund, the regulatory target percentage 
in favour of equity stakes in unlisted SM Es might part of the mentioned review. 
Revisions might lead to both an increase (to 90%), or a decrease (to 50%) of this 
target.  
– Should empirical data furthermore reveal that the favoured investment instruments 
(equity or quasi-equity stakes) are not su fficient to provide finance to SMEs the 
choice of instruments will be reviewed. It will be particularly verified whether it is necessary to increase the scope of eligible financing instruments or whether there is a 
need for more precision in relation to the financing instruments as proposed under this 
impact assessment. 
– Should empirical data reveal that the noti on of qualifying investment targets (unlisted 
SMEs) not lead to the expected strengtheni ng of Europe's SME sector, the range and 
breadth of possible investment targets will be reviewed.        
 
 74– The Commission will also monitor that the a pplicable rules adequately reflect the 
evolving lifecycles of a start-up company and correctly define the stages at which a 
venture capital fund endowed w ith the EU passport is allowed to invest. In this 
respect, the Commission will regularly assess whether the core definitions underpinning a fund's eligibility for the new EU  passport evolve in line with changing 
business practices, at European and internati onal levels. The results of this monitoring 
will feed into the possible review. 
Common regulatory approach
 
With respect to the emergence of a co mmon regulatory approach governing venture 
capital funds, the Commission will regularly a ssess the success of the cross-border fund-
raising passport, both in terms of uptake by venture capital managers and in terms of aggregate capital raised across national borde rs. Findings of this monitoring will also 
feed into a possible review of the proposed instrument. 
– The Commission, in close cooperation with ESMA ( who will be tasked with 
maintaining a central register, publicly acce ssible by internet, which lists all venture 
capital fund managers registered in the Union in accordance with the proposed 
Regulation ), will monitor the amount of managers  that are registered as 'European 
venture capital' fund managers in the European Union.  
– With a view of enhancing the effectiveness of the registration-based passport, the 
Commission and ESMA will also monitor 'd e-registrations' of venture capital fund 
managers and their probable causes.  
– The Commission, in cooperation with ESMA , national authorities and the venture 
capital industry, will regularly assess the im pact that the European passport rules 
have.  
– The Commission shall furthermore assess regularly  whether, or to what extent, the EU 
passport scheme is misused to effect invest ments in "buy-out" transactions that are not 
covered within the intended scope of the venture capital passport.  
– The Commission will also assess whether the creation of a special framework for 
venture capital funds (that would otherwise operate within the framework of national 
private placement or within the rules of the AIFMD) has led to regulatory arbitrage.  
Administrative cooperation 
 
The Commission will monitor whether and to what extent the network of national 
cooperation is able to effectively supervis e cross-border marketing by qualifying venture 
capital funds. In this respect:  
– The Commission, in close cooperation with ESMA ( in case of disagreement between 
the home and host competent authorities on an assessment, action or omission of one 
competent authority concerning compliance of  a qualifying venture capital fund or its 
manager, competent national authorities may re fer the matter to the ESMA which may 
act in accordance with the powers conferre d on it under Article 19 of Regulation (EU) 
No 1095/2010 ), will monitor the resolution of  disagreements concerning the 
compliance of a qualifying venture capital funds or their managers.   
 
 75– The Commission will monitor practical issues that arise from the fact hat the new 
passport system remains limited to sub-thre shold fund managers.  In light of the 
empirical data collected, the Commission will potentially propose to review the 
current threshold of € 500 million.  
Box 6: Summary of indicators to be monitored 
• effectiveness of the 70% obligat ory share of venture capital f unds' portfolio composition: the 
extent to which fund managers face difficulties to align or establish their investment strategies, 
• effectiveness of financing instruments within the permitted portfolio composition – equity and 
quasi equity instruments: which instruments prevail and what stage of SMEs financing is being 
targeted, 
• effectiveness of limited definition of investment targets (unlisted SMEs) within the 70% funds 
portfolio compositions, 
• number of registered and de-registered venture capital fund managers in the EU 
• the amount of funds raised by the venture capital funds (against the benchmark figures mentioned 
in chart 8, Section 5.1),  
• the financing mix available to the venture capital industry (against the benchmark figures in chart 
9, Section 5.1.),  
• the average size of a venture capital fund (Section 5.2.), 
• the compliance costs related to the new venture capital framework 
Such monitoring would be based in partic ular on the data and information already 
collected by and provided by national authorities in combination with ESMA and on information and data already gathered by the EU industry association (EVCA) on its 
own part. This could be further complemented by a targeted study. 
Since the data that would feed into mon itoring of the above indicators is already 
collected and assessed under existing national and industry practices, it it not expected that the monitoring envisa ged here would create any additional 
administrative burden for fund or SME st akeholders; the impact of additional 
monitoring activities on national and EU superv isory authorities is expected to be of 
a purely incremental nature that would be absorbed readily into business as usual practices. 
 
 76 
ANNEXES 
 
Annex I: Venture capital and private equity definitions 
Annex II: Overview of past actions and initiatives in relation to Venture Capital funds Annex III: Summary of cross-border tax problems of venture capital funds 
Annex IV: Executive Summary of the Impact Assessment on Private Placement Annex V: Related initiatives 
Annex VI: Feedback statement: Summary of responses to the public consultation on the 
European Venture Capital Framework  
Annex VII:  US SEC FINAL RULE: Venture capital fund defined 
Annex VIII: Venture capital Business model and examples of selected profiles of 
fund mangers 
Annex IX: Overview of different forms of SMEs mezzanine financing 
Annex X: Venture capital – fundraising, investments, performance 
Annex XI: Comparative analysis of European  and US venture capital funds and their 
performance 
Annex XII: Summary of selected academic lite rature related to the impact of Venture 
Capital 
Annex XIII: Economic dimension of venture capital 
Annex XIV: EU Member States Venture capital frameworks 
Annex XV: Examples of Member States' Eligible investors' criteria 
 
 
 
 
 
    
 
 77 
1. Annex I: Venture capital and private equity definitions 
 
1.1 Definitions and terms used by the European Private Equity and Venture 
capital association (EVCA) 
Private equity: provides equity capital to enterpri ses no quoted on a stock market. It 
includes the following investment stages: venture capital, growth capital, replacement capital, rescue/turnaround and buyouts. Private equity funds are pools of capital managed in general as closed-end, fixed-life funds doi ng primarily equity capital investments into 
enterprises not quoted on stock market. 
Venture capital: is strictly speaking, a subset of pr ivate equity and refers to equity 
investments made for the launch, early development or expansion of a business.  
Equity value:  Stricto-sensu, the amount of capital invested to acquire shares in an 
enterprise. The equity value includes equit y, quasi-equity, mezzanine, unsecured debt and 
secured debt financing provided by funds raised  by private equity firms focused primarily 
on direct investments (including co-investment f unds) or incorporated direct private equity 
firms investing from the balance sheet (eve rgreen and direct captive private equity 
programmes). 
Transaction value:  The sum of the "equity value" as described above, to which financing 
coming from the rest of the syndicate is added (LP co-investors, individuals, entrepreneurs, 
business angels, management, corporations, f unds of funds, other asset managers and/or 
financial institutions), together with the leverage (debt provided  by banks or other providers). In other words, stricto-sensu tran saction value is equal to enterprise value 
multiplied by the percentage ownership by the acquiring syndicate in which at least one 
financial sponsor (private equity firm) is involved. 
Venture capitalist: The manager of private equity fund who has responsibility for the 
management of the fund’s investment in a pa rticular portfolio company. In the hands-on 
approach (the general model for private equity investment), the venture capitalist brings in 
not only moneys as equity capital (i.e. wit hout security/charge on assets), but also 
extremely valuable domain knowledge, business contacts, brand-equity, strategic advice, 
etc. 
Limited Partnership:  The legal structure used by most venture and private equity funds. 
The partnership is usually a fixed-life investment  vehicle, and consists of a general partner 
(the management firm, which has unlimited liability) and limited partners (the investors, who have limited liability and are not involve d with the day-to-day operations). The 
general partner receives a management fee a nd a percentage of the profits. The limited 
partners receive income, capital gains, and ta x benefits. The general partner (management 
firm) manages the partnership using policy la id down in a Partnership Agreement. The 
agreement also covers, terms, fees, structur es and other items agreed between the limited 
partners and the general partner. 
 
  
 
 78Fund stage focuses (fundraising):  
 
Early-stage fund:  A venture capital fund focused on investing in companies in the early 
stages of their lives. 
Later-stage fund: A venture capital fund focused on investing in later-stage companies in 
need of expansion capital, usually providing th ird or fourth – (or a subsequent) round of 
venture investment. 
Balanced fund:  A venture capital fund focused on both early-stage and development, with 
no particular concentration. 
Growth fund:  Funds whose strategy is to invest in or acquire relatively mature companies 
that are looking for capital to expand or restru cture operations; they often provide the first 
private equity investment in a company.  
Buyout fund:  A fund whose strategy is to acquire other businesses. 
Mezzanine fund:  A fund that provides (generally s ubordinated) debt to facilitate the 
financing of buyouts, frequently alongside a right to some of the equity upside. 
Generalist fund : A fund with either a stated focus of  investing in all stages of private 
equity investment, or with a broad area of investment activity. 
Stage definitions (investments):  
Seed capital:  Financing provided to research, assess and develop an initial concept before 
a business has reached the start-up phase. 
Start-up capital:  Financing provided to companies for product development and initial 
marketing. Companies may be in the process of being set up or may have been in business for a short time, but not sold their product commercially. 
Early stage capital:  means seed and start-up capital. 
Other early-stage capital:  Financing to companies that have completed the product 
development stage and require further funds to initiate commercial manufacturing and sales. They will not yet be generating a profit. 
Later stage venture:  Financing provided for the expansion of an operating company, 
which may or may not be breaking even or tr ading profitability. Later-stage venture tends 
to finance companies already backed by VCs, and are therefore involved in third or fourth (or a subsequent) round of financing. 
Growth:  A type of private equity investment – most often a minority investment but not 
necessarily – in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisitaion without a 
change of control of the business. Growth capital tends to be a company's first private 
equity financing. Additionally, most investme nts made by buyout funds into venture stages 
would be defined as growth capital. 
 
 
 79Bridge financing:  financing made available to a co mpany for the period of transition 
between being privately owned and publicly quoted. 
Rescue/turnaround:  Financing made available to an existing business, which has 
experienced trading difficulties, with a view to re-establishing prosperity. 
Secondary purchase/replacement capital : The purchase of a minor ity stake of existing 
shares in a company from another private e quity firm or from another shareholder or 
shareholders. 
Refinancing bank debt:  An injection of capital to reduce a company's level of gearing. 
Management buyout:  Financing provided to enable current operating management and 
investors to acquire existing product lines or businesses. 
Management buy-in:  Financing provided to enable a ma nager or group of managers from 
outside the company to buy in to the company with the support of private equity investors. 
Initial Public Offering (IPO): means the process of launching the sale or distribution of a 
company's shares to the public for the first time. 
Public-to-private:  A transaction involving an offer for the entire share capital of a listed 
target company for the purpose of delisting th e company. Management may be involved in 
the offering. 
Other PIPE:  A private investment in public equity, as a minority or majority stake, ithout 
taking the company private. 
Other (leveraged) buyout:  Financing provided to acquire a company (other than MBI, 
MBO, public-to-private or other PIPE). It  may use a significant amount of borrowed 
money to meet the cost of acquisition. 
Secondary buyout:  A secondary buyout is a form of  buyout where both buyer and seller 
are private equity firms or financial sponsors (ie a leveraged buyout of a company that was acquired through a leveraged buyout). Seconda ry buyouts differ from secondaries or 
secondary market purchases which typically i nvolve the acquisition of portfolios of private 
equity assets, including limited partnership st akes and direct investments in corporate 
securities. 
Divestment on flotation (IPO):  An initial public offering (IPO) is the sale or distribution 
of a company's shares to the public for th e first time by listing the company on the stock 
exchange. It is one way a private equity firm can sell its shares and exit an investment. 
Repayment of preference shares/loans:  if a private equity firm provided loans or bought 
preference shares in the company at the time of investment, then their repayment according 
to the amortisation schedule represents a decrease of the financial claim of the firm into the 
company, and hence a divestment. 
Repayment of silent partnership:  A silent partnership belongs to the so-called mezzanine 
financing instruments. It is similar to a long- term bank loan but, in contrast to a loan, a 
silent partnership is subject to a subordination cl ause, so that in the ev ent of insolvency all 
other creditors are paid before the silent part ner. The company has to repay the partnership 
and has to pay interest and possibly a pr ofit-related compensation. The subordination 
 
 80clause gives the capital the status of equity  despite its loan character. This financing 
instrument is frequently used in Germany. 
Sale of quoted equity post-flotation:  This relates to the sale of quoted shares only if 
connected to a former private equity investment , such as the sale of quoted shares after a 
lock-up period. 
Sale to financial institution:  The sale of company shares to banks, insurance companies, 
pension funds, endowments, foundations and other asset managers. 
Corporate investor:  corporations that produce products  (manufacturing companies) or 
deliver non-financial services. This defin ition excludes banks, funds-of-funds, insurance 
companies, pension funds and other asset managers. 
Endowment:  An institution that is bestowed money (and possible other assets) via a 
donation with the stipulation to invest it and us e the gains for specific objectives so that the 
principal remains intact ( for perpetuity, for a defined period of time or until sufficient assets have been accumulated to achieve a designated purpose).    
Family office:  An office that provides services such  as investment management and other 
services (accounting, tax and financial advice etc) to one or several families. 
Foundations:  A non-profit organisation through which private wealth is contributed and 
distributed for public purpose (most often char itable purposes). It may either donate funds 
and support other organisations or be the so le source of funding for its own charitable 
activities. 
Funds of funds:  A private equity fund that primarily takes equity positions in other funds. 
Other asset manager:  Financial institutions (other th an bank, endowment, family office, 
foundation, insurance company or pension fund) managing a pool of capital by investing it across asset classes with the purpose to gene rate financial returns. This category may 
include direct private equity funds that occas ionally do indirect investments, but excludes 
funds of funds, which are a distinct category. 
Government agencies:  Country, regional, governmental and European agencies or 
institutions for innovation and development (inc luding structures such as the EBRD or 
EIF). 
Sovereign wealth funds:  state-owned investment fund ma naging a pool of money derived 
from a country's reserves. The funding for a sovereign wealth fund (SWF) comes from central bank reserves that accumulate as a re sult of budget and trade surpluses, and from 
revenue generated from the exports of natural resources. 
 
1.2 Related definitions in the Commission Guidelines on State Aid to promote 
Risk capital investments in SM Es: 2006/C 194/02 and amended 2010/C 329/05 
 
For the purposes of these guidelines, the following definitions shall apply: 
 
 
 81(a) ‘equity’ means ownership interest in a company, represented by the shares issued to 
investors; 
(b) ‘private equity’ means private (as opposed to public) equity investment in companies 
not listed on a stock-market, including venture capital, replacement capital and buy-outs; 
(c) ‘quasi-equity investment instruments’ means instruments whose return for the holder 
(investor/lender) is predominantly based on the profits or losses of the underlying target  
company, are unsecured 
in the event of default. This definition is based on a substance over form approach; 
(d) ‘debt investment instruments’ means loans and other funding instruments which 
provide the lender/investor with a predomin ant component of fixed minimum remuneration 
and are at least partly secured. This definition is based on a substance over form approach; 
(e) ‘seed capital’ means financing provided to study, asse ss and develop an initial concept, 
preceding the start-up phase; 
(f) ‘start-up capital’ means financing provided to companies, which have not sold their 
product or service commercially and are not yet generating a profit, for product 
development and initial marketing; 
(g) ‘early-stage capital’ means seed and start-up capital; 
(h) ‘expansion capital’ means financing provided for the growth and expansion of a 
company, which may or may not break even or trade profitably, for the purposes of 
increasing production capacity, 
market or product development or the provision of additional working capital; 
(i) ‘venture capital’ means investment in unquoted companies by investment funds 
(venture capital funds) that, acting as principa ls, manage individual, institutional or in-
house money and includes early-stage and expansion financing, but not replacement finance and buy-outs; 
(j) ‘replacement capital’ means the purchase of existing shares in a company from 
another private equity investment organi sation or from another shareholder or 
shareholders. Replacement capital is also called secondary purchase; 
(k) ‘risk capital’ means equity and quasi-equity financing to companies during their early-
growth stages (seed, start-up and expansi on phases), including informal investment by 
business angels, venture capital and alternative stock markets specialised in SMEs including high-growth companies (hereafter referred to as investment vehicles); 
(l) ‘risk capital measures’ means schemes to provide or promote aid in the form of risk 
capital; 
(m) ‘Initial Public Offering’ (‘IPO’) means the process of launching the sale or 
distribution of a company's shares to the public for the first time; 
(n) ‘follow-on investment’ means an additional investment in a company subsequent to an 
initial investment; 
 
 82(o) ‘buyout’ means the purchase of at least a controlling percentage of a company's equity 
from the current shareholders to take over its assets and operations through negotiation or a tender offer; 
(p) ‘exit strategy’ means a strategy for the liquidation of holdings by a venture capital or 
private equity fund according to a plan to achieve maximum return, including trade sale, 
write-offs, repayment of preference shares/loans, sale to another venture capitalist, sale to 
a financial institution and sale by public offering (including Initial Public Offerings); 
(q) ‘small and medium-sized enterprises’ (‘SMEs’) means small enterprises and 
medium-sized enterprises within the mean ing of Commission Regulation (EC) No 70/2001 
of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to 
small and medium-sized enterprises (1) or any Regulation replacing that Regulation; 
(r) ‘target enterprise or company’ means an enterprise or company in which an investor 
or investment fund is considering investing; 
(s) ‘business angels’ means wealthy private individuals who invest directly in young new 
and growing unquoted business (seed finance) and provide them with advice, usually in return for an equity stake in the business, but may also provide other long-term finance; 
(t) ‘assisted areas’ means regions falling within the scope of the derogations contained in 
Article 87(3)(a) or (c) of the EC Treaty;  
 
              
 
 83 
 
 84 2. Annex II: Overview of past actions and initia tives in relation to Venture Capital funds 
 
 
– Venture capital as essential source of financin g SMEs to drive innovation and growth (1998-2009) 
1998 - 2002 Commission Communication on Risk Capital Action Plan (RCAP)    
(http://ec.europa.eu/internal_market/securities/riskcapital/index_en.htm ) 
The importance of creating a well functioning risk capital markets81, of which venture capital funds  form an essential part, to 
stimulate future growth, job creation and competitiveness has been recognised already in 1998, in the Commission Communication on 
Risk Capital Action Plan (RCAP ). The RCAP was a driver towards completing the single market in risk capital, and looked at 
policies focusing on early-stage financing. As part of the fina l report in 2003, the Commission indicated the need to review th e merits 
and possibilities of a single fund structure and to ensure that th e potential of the single financia l market would be efficient ly used, 
including further progress in functioning of venture capital markets. 
June 2005 – Commission (DG ENTR) Workshop on Merits and po ssibilities of a European Fund Structure 
– (http://ec.europa.eu/enterprise/entrepr eneurship/financing/docs/efs_report.pdf )  
Commission organised a workshop on the merits and possibilities of a European fund structure that  gathered together a wide 
range of stakeholders and industry prac titioners. The workshop participants argued for simplifying the regulatory requirements for fund 
structures so that investors would not have to spend excessi ve time on analysing various requirements for establishing a fund i n non-
home jurisdictions. The experts concluded that a pan-European f und structure might be a solution in a long-term perspective, wh ereas 
in the short term, there was an urgent need for a mutual recognition at various levels.  
                                                 
81 Risk capital cover three types of financing: (i) informal inve stment by business angels, (ii) venture capital and (iii) stock markets specialized in SMEs  and high growth companies.  
 
 85  
October 2005  Risk Capital Summit in London organised by th e Commission (DG ENTR) and the UK Presidency – " Investing for 
Growth and Competitiveness in Europe " 
(http://ec.europa.eu/enterprise/entrepreneurship/ financing/docs/risk_capital_conference_paper.pdf ) 
– The event brought together high-level policy makers and representativ es from the risk finance sector to debate how risk capital  
should support innovation, growth and competitiveness of Europ ean SMEs and examine global good practices in risk capital 
intervention in Europe, US and Asia. Stakeholders agreed th at European risk capital markets were functioning below their 
potential and stated that Pan-European ear ly stage technology funds were needed. They highlighted that mutual recognition of 
legal structures for risk capital and reduction of obstacles to cross-border investment are required to stimulate Pan –European  
markets.  
 
June 2006  – Commission Communication “Financing SM E Growth – Adding European Value   
(http://ec.europa.eu/enterprise/entrepreneurship/financi ng/docs/com2006_financing_sme_growth/sec2006_841_financing_sme_growth_en .pdf)  
– The Commission outlined a set of measures to help innovative SMEs  by improving access to finance, in particular at the early 
stages. Making cross-border investments in venture capital eas ier was one of the key goals and the Commission called for 
concrete and pragmatic steps to overcome the existing legal, re gulatory and tax barriers and the Member States were asked to 
engage  with the issue.   
Oct 2006 -
March 2007  – Commission (DG ENTR) Expert group on Removing ob stacles to cross-border investments by VC funds 1 
– (http://ec.europa.eu/enterprise/newsroom/cf/document.cfm? action=display&doc_id=1094&user service_id=1&request.id=0 ) 
A particular attention was paid to the development of cross-border venture capital operations and to reducing the 
fragmentation of the European venture capital market in the cont ext of an extensive consultation with national and industry exp erts in 
2006-2007, organised by Directorate General Enterprise and Industr y. In the expert group report on removing obstacles to cross- border 
investments by venture capital funds from March 2007, experts r ecommended that apart from exchanging good practices and improvi ng 
coordination between the Member States, the most reasonable way to  progress in the short term would be the mutual recognition o f the 
existing national frameworks on venture capital funds. National and industry experts suggested that Member States could take st eps 
towards recognising venture capital funds, which are registered and operate in other jurisdictions in order to allow these fund s to 
 
 86 operate across borders without having to go through separate regi stration and regulation processes or to invest through complex  parallel 
structures. While the group recognised that it was up to the Member States to decide what would be the most suitable for them, there 
was a broad understanding that the findings would be taken into  consideration in the Commission’s reporting on the Council’s re quest. 
Based on this and further policy deliberations, the Commission issued in 2007 a Communication on cross-border venture capital f unds.  
2006 - 2010  – Community Guidelines on state aid to pr omote risk capital investment in  SMEs  (2006/C 194/02) 
 (http://eur-lex.europa.eu/LexUriServ/Lex UriServ.do?uri=OJ:C :2006:194:0002: 0021:EN:PDF ) as amended in 2010, (2010/C 329/5) 
–  ( http://eur-lex.europa.eu/LexUriServ/Lex UriServ.do?uri=OJ:C :2010:329:0004: 0005:EN:PDF ) 
 
December 2007  –  Commission Communication  on “ Removing obstacles to cross-border in nvestments by venture capital funds”, 
COM(2007)853 
– (http://eur-lex.europa.eu/LexUriServ/L exUriServ.do?uri=COM:2007:0853:FIN:EN:PDF ) 
Based on the mentioned expert group report on cross-border obst acles from March 2007 and further policy deliberations, the 
Commission issued in December 2007 a Communication on “Removing obstacles to cross-border investments by venture capital 
funds”. The Commission  advocated a broad partnership with and between Member States to work towards mutual recognition of the 
national frameworks for venture capital funds and to create a co mmon understanding of the features  of venture capital funds and  
qualified investors. The Commission invited the Member States to  overcome the regulatory and tax obstacles by reviewing existin g 
legislation or by adopting new laws. The aim has been to give all venture capital funds the opportunity to specialise and diver sify, 
including smaller specialist funds. Especially smaller countries and those with a developing venture capital market and industr y were 
invited to adopt or amend their legislation. With this Co mmunication, the Commission announced that it would report on progress  made 
in 2009. 
May 2007-
Early 2009   Commission (DG TAXUD) Expert group on Removing di rect tax obstacles to cross-border VC investments 
– (http://ec.europa.eu/taxation_customs/res ources/documents/taxation/company_tax/in itiatives_small_business/venture_capital/tax_ob stacles_venture_ca
pital_en.pdf ) 
– Direct tax obstacles to cross-border operations of venture cap ital funds were analysed with  another expert group in 2007-2009, 
organised by the Commission Directorate General for Taxation and Customs Union. The expert group highlighted that the risk 
 
 87 of creating a taxable presence ("permanent establishment") of the VC fund in the Member State of  investment and the different 
treatment of VC fund ( transparent / non transparent) by different  Member States are the main tax obstacles all of which may 
result in double taxation. The expert group recommended that VC f und managers should be classifi ed as "independent agent" 
by all tax authorities and that Member St ates would agree on a list for the classification (as either transparent or non-
transparent) of certain specific legal forms which are often used for VC funds. A report with main conclusions and 
recommendations of the expert group was published on February 2009. 
–  
29 May 2008 –  Competitiveness Council Conclusions (Slovenian Presidency) – ‘A fresh impetus for competitiveness and innovation 
of the European Economy’ 
– (http://www.consilium.europa.eu/ueDocs/c ms_Data/docs/pressD ata/en/intm/100715.pdf  - Page 4)   
–  The Council “ invited the Member States to make progress towards a mutual recognition of national frameworks as a 
promising initial step towards a gradual creation of an EU-wide framework… and invited the Commi ssion and the Member States to 
work together ” and "recognises the significant benefits of developing a more in tegrated and competitive VC market in Europe, and the 
contribution a regime for cross-border private placement in th e EU could make to facilitating cross-border VC fund raising".  
25 June 2008 – Commission Communication on Small Buiness Act (SBA) that is under the remaining regulatory and market gaps addressing 
also a “ reduction of venture capital market fragmentation at the EU level ” 
– (http://ec.europa.eu/enterprise /entrepreneurship/sba_en.htm ) 
July – 
December 2008  – Further to the Council Conclusions, the Commission continued the work together with the Member States and the industry 
towards a more integrated European venture capital market and organised two workshops in July - December 2008 . During 
these workshops, the Commission launched a debate on measures that Member States have taken or plan to take to 
accommodate the mutual recognition principle in their respective VC legislation. Member States  experts were asked to send 
written answers. 
– Based on the inputs from the Member States, ongoing work and fu rther policy deliberations, the Commission planed to issue a 
report by mid 2009 on progress made. 
 
 88 September 
2008   European Parliament resolution (based on the Rasmussen report)  with recommendation to the Commission on hedge 
funds and private equity (Annex, Recommendation 1, venture capital and SME sector)  
– (http://www.europarl.europa.eu/sides/getDoc.do?pubRef=- //EP//TEXT+TA+P6-TA-2008-0425+0+DOC+XML+V0//EN#BKMD-15 ) 
– “The Commission should propose legislation to provide a harmonised EU-wide framework for venture capital and private 
equity, and particularly so as to ensure cross-border access to  such capital for the SME sector (…).For this purpose, the 
Commission should implement, without delay, the policy propos als set out in its communication on removing obstacles to 
cross-border investments by venture capital funds. The propos al should be in line with pr inciples of good regulation and 
should avoid additional legal, fiscal and administrative complexities at EU level".  
October 2008   EESC- Internal Market section adopted EESC opinion  (rapporteur: Morgan) on Commission Communication on cross-
border venture capital: a favourable opinion welcoming Commission ongoing work (opinion was adopted  at the EESC plenary on 21 
October 2008).  
November 
2008  –  Commission (DG MARKT) published a call for tender to analyse the economics and the regulatory background of 
private placement as well as to examine obstacles to  private placement across bor ders within the EU ( more ) with a timelimit for receipt 
of tenders: 30 January 2009  
November 
2008  – Commission (DG ENTR)  focused workshop with researchers  - Conclusions and recommendations  summarised by Prof 
Markku Maula and presented to the national experts on 8 December 2008 
December 2008 –  Competitiveness Council  Conclusions (French Presidency) ‘Think Small First – A Small Business Act for Europe’ and 
Council Action Plan – cross-border VC and private placement regime’  
– (http://www.consilium.europa.eu/ueDocs/c ms_Data/docs/pressD ata/en/intm/104403.pdf   Page 4 & Page 13) 
– The Council "recalls the need for Member States and the Commission to reduce the present fragmentation of the venture-
capital market by facilitating cross-border investments"  and identifies as priority the examination of "options for a Community-wide 
private placement regime by  the end of 2009 to facilitate cross-border investment in order to strengthen Europe's venture capital 
market".  
December 2008 –  Commission (DG ENTR)  follow-up workshop with national and industry experts on the mutual recognition process of 
 
 89 national VC frameworks 
March 2009  – Commission (DG ENTR)  follow-up workshop with national and industry experts on the mutual recognition process of 
national VC frameworks  
May-June 
2009 – Commission ( DG ENTR) issued a report on the policy work carried out together with national and industry experts 
from 2005 to 2009 on removing obstacles to cross-border venture capital.   
– (http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=5646 ) 
– While there is a consensus among the Member States on promo ting mutual recognition of national frameworks, no significant 
measures have been taken yet that would make fundraising a nd investing across borders easier.  Council has agreed with the 
goal and the process of mutual recognition, however, in practice Member States have not yet taken any significant measures 
that would make operating across borders easier for VC funds. Therefore, the Commission recognises an imminent need to 
strengthen the partnership with and between Member States and to  work in a close cooperation with all relevant stakeholders 
in building a sustainable European venture capital market. 
October 2010 – Europe 2020 Strategy 
– (http://ec.europa.eu/europe2020/index_en.htm ) 
– Commitment:  "Making an efficient European venture capital market a reality, thereby greatly facilitating direct business access 
to capital markets and exploring incentives for private sector f unds that make financing available for start-up companies, and for 
innovative SMEs."  
October 2010 –  Communication from the Commission Europe  2020 Flagship Initiative Innovation Union COM  (2010)546 final 
– (http://ec.europa.eu/research/innovation- union/pdf/innovation-union-communication_en.pdf ) 
– This communication states that:  " Most venture capital funds in Europe are too small to support the continued growth of 
innovative companies and do not have the critic al mass to specialise and operate trans-nationally. Europe needs to improve its 
venture capital market by creating incentives to invest and by  improving regulation. Europe needs to improve its venture 
 
 90 capital market by creating incentives to invest and by improving regulation." 
February 2011  Communication from the Commission Review of the "Small Business Act" for Europe COM (2011)78 final 
(http://ec.europa.eu/enterprise/policies/sme/small-business-act/files/sba_review_en.pdf ) 
February 2011  –  European Council conclusions  stating that: "Every effort should be pursued to remove the remaining legal and 
administrative obstacles to the cross-border operations of venture capital funds." http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/119175.pdf
 
 
April 2011  – Communication from the Commission Single Market Act, Twelve levers to boost growth and strengthen confidence . 
"Working together to create new growth"  COM (2011) 206 final. http://ec.europa.eu/internal_market/smact/docs/20110413-
communication_en.pdf  
 
Venture capital as part of  a wider investment fund universe (2006-2009) 
July 2005  Commission Green Paper  on the Enhancement of the EU framework for investment funds; SEC(2005)947  
(http://eur-lex.europa.eu/LexUriServ/L exUriServ.do?uri=CELEX:52005DC0314:EN:NOT ) 
July 2006  – Commission (DG MARKT) Expert group report  on Alternative investment funds – subgroup on Private Equity funds 
http://ec.europa.eu/internal_market/investment/docs/other_docs/reports/equity_en.pdf )  
– To explore problems identified by stakeholders and ways to  enhance the European fram ework for investment funds, 
Directorate General for Internal Market organised in July 2006 an Expert group on private equity funds. This group concluded 
that different national approaches to re gulation and the resulting legal fragmentation caused high operating and administrative  
costs for investment funds operating across borders. Small or medi um-sized funds were penalised more than big ones and were 
deterred from developing cross-border operations. Especially fund structuring and selling funds across borders should be 
improved at the European level. The group recommended that Memb er States should treat private equity funds in the same 
way as public equity investments and that private equity funds  should be taxed solely in investors’ home country. Mutual 
recognition of fiscally transparent fund structures and a co mmon understanding of a ‘private placement’ might be a solution 
for this  
 
 91  
November 
2006  –  Commission White Paper  on the enhancing the single market fr amework for investment funds; SEC(2006)1452 
(http://ec.europa.eu/internal_market/investment/docs/legal_texts/whitepaper/executive_summary_en.pdf )  
– Some of the problems that venture capital funds face are common to other investment funds as well. This has been the focus of 
the White Paper on Enhancing the Single Market Framework fo r Investment Funds published by the Commission in November 
2006.  The conclusion was that the question should be approach ed from two angles. Should some types of non-harmonised 
funds82 be granted an EU passport similar to investment funds covered by the Undertakings in Collective Investments in 
Transferable Securities Directive (UCITS) to market their funds to retail investor s across Member State borders? And should a 
European private placement regime for the cross-border distri bution of non-harmonised funds (including venture capital funds) 
to institutional or sophisticated investors be established? 
 July 2008  – Commission (DG MARKT) preliminary impact assessment report on private placement  – revealing need for further 
preparatory work. http://ec.europa.eu/internal_market/investment/legal_texts/index_en.htm#nonlegis ) 
 
September 
2008  – EP-ECON committee adopts Rasmussen report  on private equity and hedge funds. 
 
2009-2011 Commission proposal for a Directive on Alternative Investment  Fund Managers (AIFM) – adopted in June 2011 (2011/61/EU)  
                                                 
82 As of today, the non-harmonised funds sector, including funds  like hedge funds, private equity, venture capital funds, infrast ructure funds, etc. have been captured by the recently adopted 
Directive on Alternative Investment Fund Managers (AIFM) 2011/61/EU 
 
 923. Annex III: Summary of cross-border tax problems of venture capital funds  
 
Tax regulation issues are seen by the venture capital industry as one of obstacles to the 
development of cross border venture capital ma rket. The lack of cohesion between the 27 
tax systems across the EU can lead to doubl e taxation, tax treatment uncertainties and 
administrative obstacles, which would preven t cross border operation of venture capital 
funds.  
To explore problems related to differences in tax treatment in different Member States and 
better understand the impact on venture capita l market, the Commission organized in 2007 
a Working group of public and private sector ta x experts. The expert group had to identify 
cases of double taxation and to consider possi ble ways of overcoming such obstacles. A 
report of 30 April 2010 set out the experts' findings and conclusions. 
 According to the Report of Expert Group
83, the two the main tax issues related to cross-
border venture capital investments consist on: 
1) The risk of a deemed permanent establishm ent for the VC fund or its investors in any 
other jurisdiction other than that in which th ey are based or resident together with the 
resulting double taxation, and 
2) The entitlement to double taxation conventi ons including the mutual recognition of the 
tax qualification of legal forms. 
Venture capital funds’ cross border investments require the local presence of the venture 
capital fund manager in the member state of investment, as many activities are carried out by the fund manager in the state where the portfolio company is established (research, advisory and managerial activities).  
Thus, in order to invest in other states outsi de that where it is based, the venture capital 
fund manager needs to have some form of pr esence in the state of the portfolio company. 
The tax authorities of this state may consider a fund manager to be a permanent establishment of the venture capital fund or of the investors. Then, double taxation may occur (at the level of the permanent establis hment and in the country or countries where 
the fund or investors are located). 
 
According to the OECD Model definition, a pe rmanent establishment is a fixed place of 
business through which the business of an enterp rise is wholly or partly carried on in 
another jurisdiction. It can take a structural form , such as a branch, or it can just be created 
by the activities of the enterprise in that other jurisdiction. This concept also applies to the 
cases where an enterprise carries on its activities in a foreign state through a person acting on its behalf, provided that that person is not an agent of independent status acting in the 
ordinary course of his/her business. 
Each state generally has its own domestic definition of what constitutes a permanent 
establishment. The different approaches adopt ed by the tax authorities of Member States 
                                                
 
83 
http://ec.europa.eu/taxation_customs/resources/docum ents/taxation/company_tax /initiatives_small_business/
venture_capital/tax_obstacles_venture_capital_en.pdf ) 
 
 93create uncertainty as to whether the local pr esence of the venture capital fund manager in 
the Member State of investment would be considered to constitute a permanent establishment of the venture capital fund or its investors in that state. 
The expert group argues that the optimum soluti on would be for the tax authorities to treat 
the local activities of a venture capital fund mana ger as those of an independent agent and 
therefore as not constituting a permanent establishment of the venture capital fund. 
Double taxation may arise if the different stat es involved in a venture capital investment 
(i.e. the state of establishment of the venture capital fund vehicle, the state of residence of 
investors in that venture capital fund and the st ate of the portfolio companies in which that 
venture capital fund invests) classify the ve nture capital fund in different ways, e.g. as 
transparent (and not entitled to DTC benef its) or non-transparent (and entitled to DTC 
benefits). 
So, if the state of residence of investor tr eats the venture capital fund as fully transparent 
and, thus, not entitled to the benefit of the DT C between the investor state and the venture 
capital fund state and the state of residence of  the venture capital fund treats the venture 
capital fund as non-transparent and therefore as  taxable on its own right, then, capital gains 
tax may be applied to the venture capital fund and to investor in his state of residence. 
 
 
 944. Annex IV: Executive Summary of the Im pact Assessment on Private Placement 
What is private placement? 
Private placement is an officially recognise d distribution method through which designated 
market participants can buy and sell financial instruments to each other without having to 
comply with rules that would usually apply wh en the same instruments are offered to the 
public/retail investors. It provides participants with a flexible cost-effective tool to sell and 
buy tailor-made financial instruments. Participation in private placements is usually reserved to appropriately qualified market pa rticipants; typically these are authorised 
financial intermediaries, including placement agents, banks or investment funds/firms, 
pension funds, life insurance companies, in so me cases also high net wealth individuals 
and corporate investors. 
Private placement is particularly suitable for the distribution and marketing of investment 
propositions which may be considered less su itable for wider public offer. This could 
include distribution of new types of invest ment strategy, such as single hedge funds, 
private equity funds or some commodity funds , whose risk-reward profile may make them 
less appropriate for retail investors.  
Problems and objectives 
Within Europe, Member States have devel oped different arrangements to support private 
placement between local buy-side and sell-side participants. Differences between national 
private placement regimes mean that it is often not possible to extend private offerings across EU Member States without adjusting the marketing material or even the offer itself. 
Offerors also have to be careful in determ ining the potential investors they can approach. 
This legal uncertainty is aggravated by freque nt changes to national rules and conditions as 
reported. Offerors therefore have to bear subs tantial costs in order to identify and comply 
with the relevant rules. These may lead to se lf-imposed restrictions on the Member States 
where investments are privately placed. Th is means lost business opportunities for 
placement intermediaries. It restricts investment choices or increases costs for potential qualified investors in other Member States. Investors may be deprived of important 
portfolio diversification opportunities. Financia l markets in smaller Member States might 
suffer from reduced liquidity in relevant financial instruments. 
Problems with cross-border private placements result primarily from inconsistencies 
between and insufficient transparency of, na tional regimes with respect to the boundaries 
of the regime: Who can participate? Which products can be placed? Which rules have still 
to be complied with? These shortcomings pr event potential participants from profiting 
from the benefits of private placement, w ith the adverse consequences for financial 
markets and the wider economy as describe d above. An EU private placement regime
84 
should help to overcome these problems. 
                                                 
84 The term 'EU private placement regime' is used in a very broad sense here. A regime does not 
necessarily have to be a legal framework but c ould as well consist of a common understanding of the 
concept only. 
 
 95Options and assessment 
Options for developing such a regime feature in the substance or coverage of such a regime 
and the appropriate instrument or technique to be  used to give effect to it. The former set 
of options focuses on the eligibility of invest ors, offerors and products. The latter includes 
both legislative and non-legislative forms at i ndustry, national and EU level. The analysis 
of the potential impacts of the options has re vealed that, at this stage, there are not 
sufficient available data and information to  come to a substantiated assessment and 
recommendation of the best way forward. Inst ead, the impact assessment work should be 
continued, with this report serving as a st ocktaking and information document for all 
stakeholders and interested partners. 
 
 96 
5. Annex V: Related initiatives 
 
5.1 Risk Capital Guidelines 
Access to capital is essential to spur growth of SME in their early stages of development 
and create more jobs in the EU. However, it is precisely innovative SME in seed and start-
up phases (before the commercialisation of pr oducts takes place) that face the lack of 
means of funding from financial markets de spite having a valuable business model and 
growth prospects. The Risk capital Guidelines (RCG) adopted in 200685 provide a clear set 
of rules designed in a flexible way to allow member States to target this specific market 
failure without interfering in the correct functioning of the market.  
The aim of the RCG is to leverage private f unds in cases where investors are reluctant to 
endorse the risks of financing innovative new or growing SME due mainly to imperfect 
and asymmetric information. This is a s ituation where potential investors face more 
difficulties in gathering reliable informati on on the business prospects of an SME and 
subsequently in monitoring and supporting the enterprise's development. The lack of 
information tends to exacerbate risk aversion and discourage equity investments in these companies. 
In order to counter this market failure, RCG foresee the possibility to grant support 
through different means: the constitution of a commercially managed Fund (involving 
private and public money), fiscal incentives, guarantees to investors and other financial 
instruments in favour of risk capital investors or venture capital funds.  
The RCG provide for a light assessment for equity investments that are limited to early 
stages (ie. start-up or expansion phase but onl y in assisted areas), mostly represented by 
equity or quasi equity instruments, where priv ate participation is at least 50% (or 30% in 
assisted areas) and that are profit-driven. Investment tranches must also be limited in size 
to assume the existence of a market failure . As a response to the financial crisis the 
Temporary framework reduced the private partic ipation from 50% to 30% in all areas and 
increased the original tranches of 1,5 M€ per target SME over each period of twelve 
months to 2,5 M€. Only the increase of tranches has been made permanent through a 
modification of RCG. 
Above this threshold, because of the gr eater potential to distort competition, the 
Commission will make a detailed assessment, a nd Member States will have to provide 
evidence of a market failure. A detailed assessm ent will also be necessary for financing the 
expansion stage of medium-sized enterp rises in non-assisted areas, for follow-on 
investments in SMEs beyond the €2.5 million and their early-growth financing, for 
investments with private participation of le ss than 50% in non-assisted areas or 30% in 
assisted areas and where there is little or no pr ivate participation and/or investing mainly 
through debt instruments in the seed phase. Also the two specific cases of investment 
vehicles (i.e. alternative market places) and co sts linked to the screening of companies in 
                                                 
85 Full text available at: http://eur-
lex.europa.eu/LexUriServ/LexUriS erv.do?uri=CELEX:52006XC0818(01):EN:NOT  
 
 
 97view of the conclusion of investments (‘s couting costs’) are subject to a detailed 
assessment.  
The RCG are valid until December 2013, but they foresee a mid-term review, as in the 
R&D&I Framework, 3 years after their entry into force. The Commission has launched a 
public consultation on the mid term review  of the RCG and its modification from 
06.10.2010 to 26.10.2010, focussing on those sections of  the RCG that were subject to 
temporary measures (i.e: Increase of annual investment tranche ("safe-harbour tranche",  reduction of private participation) and practical  issues arising from case experience, such 
as limitation of expansion investments to assisted areas, scouting costs, cumulation rules models of investment and Commercial mana gement. After the public consultation, the 
Commission adopted the modified communication on RCG
86, amending the Guidelines to 
increase the investment tranches from 1.5M€ to 2.5M €, thus ending the mid-term review. 
The next step is the full revision of the RCG by 2013. 
 
5.2  Financing instruments 
EU facilities for venture capital investments in to innovative SMEs address the market gap 
that SMEs face in getting access to equity.  
These facilities have a long history. Under th e Growth & Employment initiative (G&E) in 
the years 1998-2000 a facility called “ETF Star t-up” pioneered EU investments into 
venture funds. The success of this facility  led to its expansion under the Multiannual 
Programme for Enterprise and Entreprene urship (MAP) in the years 2001-2006/7. Under 
G&E and MAP, EUR 310 million have been invested into 39 venture capital funds. Thanks to the catalytic effect of the EU investment, the venture capital funds attracted 
other investors - this allowed to leverage a total target fund size of nearly EUR 2 billion 
and to support investments into more than 480 innovative SMEs in their seed and early stages. 
While the number of start-up businesses helped in this way has been relatively small, the 
impact of the most successful ones has been  very important. For example, under MAP the 
EU invested into a Luxembourg-based New Tech Venture Capital Fund II which has in 2003 supported the start-up of Skype, an innova tive company that has gone on to become 
the world leader in internet telephony, bought by Microsoft in May 2011 for 8.5 billion US dollars. 
The current generation of the venture capital facility is the “High Growth and Innovative 
SME facility” (GIF). It falls under the EU ’s Competitiveness and Innovation Framework 
Programme 2007-2013 (CIP). It is implemen ted for the Commission by the European 
Investment Fund (EIF) on a trust basis. The GI F's objective is to improve access to finance 
for the start-up and growth of SMEs, and investment in  eco-innovation . 
This objective is achieved by investment into  venture capital funds which then use these 
resources and resources from other investors, and also their technical expertise, to: 
                                                
 
86 Full text available at: http://eur-
lex.europa.eu/LexUriServ/LexUriS erv.do?uri=CELEX:52010XC1207(02):EN:NOT  
 
 
 98• contribute to the establishment and fina ncing of SMEs and the reduction of the 
equity market gap which prevents SMEs from exploiting their growth potential, 
with a view to improving the European venture capital market. 
• support innovative SMEs with high growth potential, in particular those 
undertaking research, development and other innovation. 
The Total GIF budget for the period 2007-2013 is  EUR 623 million. It is available in 35 
participating countries. It is expected that by investing into more than 30 venture funds 
over the lifetime of the programme, the Commi ssion will support investment into several 
hundreds of innovative SMEs. Every 1 euro of EU  investment is expected to be matched 
by approx. 5 euro of investment from other sources.  
Between 2007 and the end of 2010, the EU has invested EUR 220 million in 19 venture 
capital funds. This amount was supplemented by co-investments from private and public sources totalling EUR 1.2 bn. This means that overall, over EUR 1.4 billion has already become available for investment into innova tive, high-growth SMEs. Currently, 143 have 
received investments from the venture funds . Out of these 19 venture funds 10 were 
focusing on investing in more than 1 partic ipating country. The number of venture capital 
funds and SMEs supported by GIF is growing fast.  
On 29 June 2011, the Commission presented its proposal for a new financial framework 
2014-2020.  
Building upon the positive experience of the Competitiveness and Innovation Programme 
in particular, the new multiannual EU budget w ill provide dedicated support and services 
and access to finance for SMEs. Access to  SME finance will be provided through 
innovative financial instruments which are fina nced from a range of programmes targeting 
different policy areas.  First, with a dedicat ed “Programme for competitiveness and SMEs” 
amounting to €2.4bn, SMEs will be supported through an  equity facility for growth 
phase investments  and through a loan facility to cover loans for SMEs. Second, under the 
new Research and Innovation Framework Progr amme called “Horizon 2020” with a total 
proposed amount of €80bn, a part will be dedi cated to the increased use of innovative 
financial instruments. This will include  venture capital investments for innovative and 
high-tech companies and SMEs.   
See Policy fiches, Part II of the Communication - p. 17-20 and p. 83-86: 
http://ec.europa.eu/budget/biblio/documents/fin_fwk1420/fin_fwk1420_en.cfm  
 
5.3 Action plan to improve Access to Finance for SMEs  
The Action Plan is at the juncture between  financial reform (G20 commitments, roadmap 
provided by the Communication of June 2010), th e attention devoted to the problems of 
small and medium-sized enterprises (Revie w of Small Business Act and the Industrial 
Policy Flagship initiative), and the initiatives taken to relaunch the internal market (EU 
2020 and the Single Market Act) to foster growth, job creation and innovation. The Action 
Plan marks the point when progress in financial reform allows to start turning the attention 
to growth-enhancing measures. Easier access to  financer for SMEs in a more stable 
financial system, a significantly improved venture capital market in Europe and a better access to capital markets for SMEs will provide a large contribution to growth. 
The Action Plan is related to a large number of initiatives, in the regulatory side, in the 
budgetary side and in the policy side.  
 
 99In the regulatory side, the Action Plan li nks together the proposals the Commission is 
putting forward on the prudential requireme nts for banks (CRD IV) and insurance 
companies (Solvency II). In this regard the action plan proposes that in 2012, the 
Commission will, on the basis of technical wo rk to be jointly done by the European 
Banking Authority (EBA) and European Insura nce and Occupational Pensions Authority 
(EIOPA), carry out a study on the relationshi p between prudential regulation and venture 
capital investments by banks and insurance companies.   
Moreover, the action plans further contains pr oposals more directly linked to the structure 
of financial markets (Review of the Markets in  Financial Instruments Directive, Review of 
the Market Abuse Directive, Review of the Transparency Directive) and to the financial institutions more directly involved in financing small enterprises (Venture capital).  
In particular it identifies opportunities to con tinue work to build on the European Venture 
Capital fund framework to tackle double taxation issues and to encourage the emergence of 
national incentives for investors.  
 In the budgetary side, the Action Plan li nks the proposals the Commission is going to 
propose for the financial instruments fo r SMEs under the Multi annual Financial 
Framework.  
In the policy side, the initiative looks at po licy initiatives that the Commission could take 
in the field of SME finance. 
After an introductory section on the problem definition, the measures are presented in 
order of scale of financing needs for SMEs: first measures in favour of access to loans, which matter for the everyday work of million SMEs in Europe; second, measures in favour of venture capital, which targets its investments to those SMEs who bear more 
promises to grow; finally, measures favouring access for SMEs to capital markets.  
This last section targets enterprises that ha ve grown in size and that for their financing 
need access to larger sources of capital that can  be provided by financial markets. In this 
case, the Action Plan refers to small issuers or small listed companies, as their size is 
normally larger than that of an SME as normally defined in EU policies. 
In defining the measures, the right balance mu st be found between targeting measures to 
SMEs and avoiding putting them in a separate class that would make them unattractive for 
investors. 
 
 1006. Annex VI: Feedback statement: Summary of responses to the public consultation 
on the European Venture Capital Framework  
GENERAL REMARKS ON CONSULTATION PROCEDURE AND FEEDBACK:  
The issues on which the Commission in vited views and evidence included:  
• Venture capital investment strategy:  The forthcoming proposal on venture capital 
funds will aim to cover venture capital and no  other strategies of private equity. In 
light of this, the consultation invited view s on how best to capture venture capital 
strategies. The proposal would in addition fo cus on funds that invest the majority of 
their assets in SMEs. The consultation theref ore also sought views on the definition of 
eligible portfolio composition, in terms of types of financing and eligible target 
companies. It also asked whether the propos ed measure should specify the legal forms 
that the venture capital funds might adopt.  
• European legislative framework: The consultation  invited views on whether the new 
regime for venture capital should be based on voluntary registration. It also invited 
views on the notification procedures and it  asked whether the introduction of a third 
country regime would be beneficial.  
• Operating conditions: The consultation invited views on  the introduction of rules on 
organisation and conflicts of interest, based on existing EU rules. 
• Impact on Alternative Investment Fund Managers Directive 2011/61/ 
EU (AIFMD)87: The  consultation invited views on the interaction between the new 
regime for venture capital and AIFMD. It al so asked whether a stand-alone initiative 
for all venture capital funds wo uld be a suitable approach. 
• Eligible investors:  The consultation invited views on whether the new regime on 
venture capital should be restricted to  professional investors (as defined in Directive 
2004/39/EU on Markets in Financial Instruments88 (MiFID) or whether it should 
include other categories of sophisticated investors.  
The deadline for responses to this consulta tion paper was 10 August 2011.  Forty eight 
answers have been received: 38 from organisati ons, including representative bodies from 
across the banking and securities sectors, asse t managers and investors' representatives, 2 
from citizens and 8 from  public authorities.  
 Responses to the consultation highlighted the following messages:  
                                                 
87OJ L 174, 1.7.2011, p.1.  
88 OJ L 145, 30.4.2004, p. 61  
 
 101• A new European regime for venture capital wo uld facilitate the cross border activities 
of these funds. However, it should be fl exible to avoid creating unnecessary new 
burdens to the industry. 
• Venture capital funds need flexibility rega rding the forms of financing that venture 
capital managers may be willing to use. Howeve r, in order to fully meet the EU policy 
goals, a significant proportion of responde nts support a view that a venture capital 
fund should invest as a minimum 50% of its assets in SMEs . 
• The majority of venture capital funds are small funds with limited human and 
infrastructure resources. The rules on org anisation and conflicts of interest should 
therefore be principle base d and proportionate.   
• Many categories of venture capital funds' in vestors (e.g. business angels, family offices, 
and wealthy individuals) fall outside of the MI FID definition of professional investors.  
The new regime should include these categories  in the scope of eligible investors.   
 
 
 
 102 
I.  OVERVIEW OF RESPONSES TO THE CONSULTATION 
The consultation was launched on 15th June 2011 and closed on 10 August 2011. 
Responses were invited from all interested pa rties including representatives from venture 
capital fund industry, asset management org anisations, European public authorities and 
citizens. 
Forty eight answers to the consultation were received from a wide range of organisations 
and professional representatives, citizens and  national and European public authorities.  
Figure 1 provides a general presentation of the spread of the responses received, from 
organisations, public auth orities and citizens.   
 
PUBLIC AUTHORITY 8 
CITIZEN 2 
ORGANIZATION 38 
Total 48 
 
Answers per type of respondent
17%
4%
79%PUBLIC AUTHORITY
CITIZEN
ORGANIZATION
 
Figure 2 provides a more detailed presenta tion of the status of organisational 
respondents, broken down into six categori es:  asset management (i.e. asset managers and 
asset management association), banking and secu rities industries, insurance association, 
lawyers, investor associations and  other professional associations. 
42,1%
23,7%18,4%5,3%7,9%2,6% ASSET MANAGEMENT
BANKING AND SECURITIES INDUSTRY 
PROFESSIONAL ASSOCIATION
LAWYER 
INVESTOR ASSOCIATION
INSURANCE ASSOCIATION
 
 
 103 
Figure 3 lists the thirty eight answers rece ived from organisations according to their 
nationality:  
5,26%
26,32%
5,26%
31,58%5,26%13,16%5,26%2,63%2,63% 2,63% FR
UK
LU
EU
AT
DE
US
FI
CZ
RO
 
 
   
 
 104 
2. DETAILED ANALYSIS OF RESPONSES:  
The feedback statement presents a summary of responses to each of the eighteen 
questions raised in the consultation paper.  The tables provide a quick overview of the 
respondents’ opinions. These opinions have been  categorized into 'yes/no' categories of 
answers whenever possible.  Some resp ondents have also provided qualitative 
commentary to supplement or nuanc e their 'yes /no' answers.  
 
 
QUESTION 1 
 Do you think that encouraging Member States to  a process of mutual recognition of venture 
capital funds could facilitate the cross-border activity of Venture Capital Funds (VCF)? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
Yes 21 44% 2 1 9 9 18 
No 3 6% 1 0 0 2 2 
 
Most respondents expressed that mutual re cognition could be a possible solution to 
remove obstacles to cross border ac tivity of venture capital funds: 
(a) In terms of fundraising: the current fragmented framework has a negative 
impact on fundraising and leads to su bstantive additional cost. A mutual 
recognition of venture capital funds coul d help to facilitate the registration 
process.  
(b) In terms of investing: it could reduce administrative constraints for the fund 
manager and may help to remove the double taxation issue . 
However, many respondents, including Eu ropean Private Equity and Venture Capital 
Association (EVVCA), highlight that the main hurdle preventing venture capital manager 
from carrying on cross-border activities re lates to fundraising and not to investing. 
Venture capital fund managers are facing se veral difficulties to attract international 
investors. Indeed, in order to operate across borders, they need to go through a cumbersome and costly process (identificat ion of the suitable regime for potential 
investors, creation of comple x parallel structures, registrati on and regulation processes...) .   
QUESTION 2 
Do you believe that the main impediment preven ting cross-border venture capital fundraising and 
investments is the absence of a passport for activities under the AI FMD thresholds or the fact that 
the AIFMD is not tailored to venture capital in general? 
Opinions expressed: Number of 
opinions % over the 
total number Public Citizens Organisations 
 
 105expressed  of 
contributions authorities 
Industry Other Total 
The absence of a passport 
for activities under the AIFMD thresholds 12 25% 2 0 5 5 10 
 The fact that the AIFMD is not tailored to venture capital in general 
9 19% 0 0 5 4 9 
Regulatory barriers (including double taxation issues and understanding and complying with local regulations)   
23 47% 4 1 9 9 18 
 
As mentioned above, many respondents, in cluding industry organizations and public 
authorities acknowledge that raising fund s across borders is more challenging than 
investing across border. There is a logistical  and cost issue of having to raise funds 
country by country, without a passport. The main issues for VCF operating cross-border 
are related to the cost of structuring fu nds as well as the requirement to receive 
authorization in multiple jurisdictions,  thereby increasing operating costs. 
Seeking for international investors usually induce s excessive costs, such as legal advice in 
order to comply with different privat e placement regimes in Member states. 
The majority of respondents agree that AI FMD does not provide any passport regime 
suitable for small VCFs. And, the “opt-in” approach contained in the AIFMD would 
impose an excessive cost burden to VCFs and their managers. The adherence to the full set of provisions under the Directive woul d be unduly cumbersome and too expensive 
with regards to the operating costs of small funds. 
On the other hand, if no such passport is av ailable for smaller VCFs, there is a risk of 
discrimination between larger funds that benefi t from the passport and are able to reach a 
broad investor base and the non-benefiting smaller funds. Moreover, many institutional 
investors may exclude non-AIFMD compliant fund s from their investment scope, and this 
could significantly impair su ch funds fundraising ability. 
However many respondents mention that it is  quite difficult to currently have a clear 
assessment on the impact of the lack of a passport for activities under the AIFMD ( 
AIFMD passport will only become available to EU managers in mid-2013, the final date of 
the transposition period of the Level 1) . 
QUESTION 3: 
Do you believe that an initiative on cross-border operations of venture capital could contribute to 
eliminating the cross-border tax problems en countered or could facilitate tax incentives? 
 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the total 
number of 
contributions Public 
authorities Citizens 
Industry Other Total 
NO 14 29% 3 0 4 7 11 
 
 106YES. It could contribute to 
eliminating the cross border tax problems. 10 21% 0 1 5 4 9 
YES. It could facilitate tax 
initiatives. 2 4% 0 0 0 2 2 
 
 
Many respondents don't believe that an initiati ve on cross border operations of venture 
capital will contribute to eliminating cross border tax problems. They argue that cross-
border operations of other investment produc ts have failed to eliminate or even reduce 
the double taxation of investment income in side the EU and the tax discrimination of EU 
investors based on their country of residenc e. Furthermore, national tax systems vary 
greatly and are of an extremely complex nature.  
One respondent stated that that the diversity of  fiscal regimes of Member States is strictly 
related to persisting differences in financia l instruments across Member States. For this 
reason, a harmonized fiscal regime cannot be easily achieved as long as substantial 
differences in the financial instruments exist ac ross Member States. In addition, they don't 
believe that a passport for venture capital op erators should be linked to targeted tax 
incentives. This should remain a matter for national governments.  
Against this, 10 respondents supported that th is initiative would help to tackle tax 
hurdles. Incorporating a definition of a venture capital fund and manager in an EU 
directive may help in making progress on getti ng Member States to cooperate in relation 
to the taxation problems, and would lead to lead to a common classification of venture 
capital funds for tax purposes across the EU. 
 
QUESTION 4 
Do you agree with a regime based on voluntary regis tration & simple notification procedure?  Do 
you consider such a voluntary regime to have an y major cost implications for the key stake? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 23 47% 3 1 9 10 19 
YES. However AM 
companies should be authorised and not simply registered in order to benefit from the passport. 3 6% 2 0 1 0 1 
Costs depend on requirements 20 41% 2 1 6 11 17 
Registration should be made with national Authority 20 41% 5 0 9 6 15 
Registration should be made with ESMA 3 6% 1 1 0 1 1 
 
 107 
The majority of the respondents believe that  the new European regime for VCFs  should 
be flexible to avoid any additional burden to the industry. Most respondents, including 
public authorities and industry  organisations, agree to have a regime based on voluntary 
registration.  It gives venture capital fund managers the freedom to decide, depending on 
their fundraising strategy, whether they want  to use an EU-wide marketing passport or to 
comply with their national private placement regimes. 
According to EVCA, while many small VCFs managers want to broaden their investor 
base and pursue an international fundraising st rategy, many others are domestic and rely 
on national markets. Nearly 45% of all small funds raised by small funds’ managers in the period 2007-2010 received capital commitments fr om domestic investors only. This can be 
explained by their limited technical and human resources, or by the fact that they choose 
to be dedicated to their regional communities  both for fund raising and for investing. 
Many respondents agree that the cost saving s on a European passport depend on the new 
regime requirements.  To make the EU passp ort attractive for fund managers, the key 
here is to keeping the information requiremen ts to “register” simple, relevant and not 
cost-bearing. Generally speaking, since th e European passport would allow the venture 
capital fund manager to act across the EU with out being required to be locally authorized, 
it would reduce in particular: 
(1) Set-up and management costs of parallel investment structures. 
(2) 
Legal work and legal advisory costs.  
(3) Additional advisory fees on capital raising in different markets . 
It is difficult to quantify the potential cost savings as it will depend on several factors 
including the number of countries a small fund s' manager would look to market into and 
their private placement regimes. 
 However, some respondents noted that the cost s related to a legal advisory on different 
national private placement regi mes may amount to EUR 500 to EUR 1,000 per jurisdiction 
(i.e. EUR 13,500 to EUR 27,000 for the European Union) , if it is  only an update of a pre-existing documentation (i.e. where no in-depth advice is required) 
These costs will be significantly higher in particul ar (i) if first time advice is sought from a 
local law firm with only limited experience in the field or (ii) if specific advice, e.g. a legal 
opinion, on the specific fund structure is so ught or (iii) where domestic legislation has 
substantially changed compared to previous fund raisings. 
 A large majority of respondents favour a re gistration with the authority of the home 
member state of the manager. They argued t hat this option is much simpler as the 
relationship between the competent authorit y and these venture capital firms already 
exist. ESMA could consolidate a list of Manager s duly approved by national authorities of 
the Member States. 
 
 108 
QUESTION 5 
Do you believe that the new regime on venture ca pital funds should be restricted to professional 
investors? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
NO 27 56% 6 0 11 10 21 
YES 4 8% 1 1 2 0 2 
 
Most respondents agree on that the new regime  shouldn’t be restricted to professional 
investors. The MIFID definition of professio nal investors would exclude many categories 
of institutional and individual investors who ar e currently part of venture capital investor 
base. 
Investors in venture capital funds are typically  institutional investors as well as family 
offices and certain types of individuals.  Individual investors may include:  
(4) Entrepreneurs, family offices and other so  called "angel investors" (many of which 
are entrepreneurs themselves), who have traditionally constituted an important 
source of "intelligent capital" to the small fund sector;  
(5) Members of management teams running co mpanies in which the fund invests; 
(6) Industry sector experts  (where the fund has a sector focus) ;  
(7) Venture and enterprise capital experts  which would include both venture and 
enterprise capital executives and other professionals connected with the industry ; 
(8) Finance sector experts; and  
(9) Wealthy individuals.  
The majority of these categories would fall outside of the definition of professional 
investor. Indeed, Professional client as cu rrently defined under MiFID is designed to 
identify individuals who regularly trade in liste d securities or are experts in the trading of 
listed securities (and derivatives based on these securities). This definition is not coherent 
with venture capital investment which is a long term investment and can not be 
characterized by short-term, high-volume transactions. Any proposed restrictions would 
have a negative impact on the amounts inve sted in venture capital funds or would 
dissuade small and mid sized venture capital funds from opting into the new regime. 
However, those respondents in favour of acce ss to these categories of institutional or 
individual investors (described  above) are aware that the investment in venture capital 
 
 109funds implies a high level of risk and reco gnise any such access should be accompanied 
by strong regulatory safeguards. They  provide the following suggestions:  
 
(10) Individual investors that require protecti on when investing may be defined both 
by minimum thresholds and by an assessme nt of their ability to appraise risks 
involved in the investment.  
(11) The New regime should adopt the same approach as AIFMD  
QUESTION 6 
Do you agree with the need to require an annual report for each fund? 
 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
Yes. Annual report should 
include the annual financial accounts. Financial information should be audited.  16 33% 3 1 6 6 12 
Yes. However, the audit of financial information should be a matter to be agreed between the investor and the fund manager. 
8 17% 1 0 4 3 7 
Yes. However, Any blanket requirements on the reporting of such funds would add to the burdens of an SME investment regime. 
5 10% 0 0 2 3 5 
 
Most respondents agree that the regime should  require fund managers to provide at least 
an annual report. However, the contents of su ch reports may vary according to investor 
requirements and domestic law. The future EU regime shouldn’t be prescriptive about 
their contents or their form and shouldn’t pr ohibit fund managers from preparing reports 
on a more frequent basis.  
 Many respondents favour that the financial info rmation should be audited and consider it 
as a minimum requirement in terms of transpare ncy to investors. They argue that it is 
already a standard practice in venture capital market and institutional investors generally 
demand an external audit to be made. 
 8 respondents were of the view that the ob ligation to audit financial information would 
pose an additional financial burden to ve nture capital funds without any justified 
 
 110transparency benefit. Therefore, it should co nsequently be left to the fund managers and 
their investors’ discretion. 
 
QUESTION 7 
Do you think there is a need to specify any op erating condition for venture capital entities? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
NO 8 17% 1 0 2 5 7 
YES. Venture capital entities 
should comply with rules of conduct. Rules of conducts should be partly aligned with those applicable to AIFMs under the AIFM Directive. 
15 31% 5 0 7 3 10 
YES. However, organizational requirements should take into account that VC funds are small with little human and infrastructure resources. 
10 21% 4 0 4 2 6 
 
8 respondents believe that the new regime shouldn't specify any operating rules to 
venture capital fund managers. The new regime should impose as few burdens as possible on them. In support of this, it is argued that venture capital investment aims 
exclusively at sophisticated and professional investors. Hence, there is no need for a 
legislative code of conduct (these rules sh ould be negotiated between the managers and 
their investors). Moreover, imposing specific organisational requirements would stifle the 
activity and increase costs. 
However, the majority of respondents are conv inced that there is a need to specify the 
operating conditions for venture capital entiti es in the legislative proposal. They agree 
that these requirements should be princi ples-based and depend on whether venture 
capital funds are marketed to retail investors.  
15 respondents agree that venture capital enti ties should comply with rules of conduct 
when dealing with their investors. These ru les could be aligned with those applicable 
under the AIFM Directive. Many respondents be lieve that rules set out under article 12 of 
the AIFM Directive enable a high-level of in vestor’s protection without binding venture 
capital managers in a way that would be detr imental to the effectiveness of decisions-
making. 
Many respondents underline that most ventur e capital fund managers are small with little 
human and infrastructure resources. They  should be subject to organizational 
requirements that are prop ortionate to their size. 
  
 
 111 
  
QUESTION 8 
Do you believe that VC funds should be allowed to  adopt any of the legal forms traditionally used 
in Member States? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 24 50% 6 0 11 7 18 
NO. The legislative proposal 
should specify the legal forms VC funds might adopt 3 6% 0 1 0 2 2 
 
Most respondents underline that there are a broad variety of legal forms within the EU 
member states that any harmonization seems almost impossible. Venture capital fund 
managers should be able to choose the most a ppropriate legal form av ailable. This choice 
depends on investors' preferences, local re gulatory regime and tax treatments (i.e. 
transparent or non-transparent). Fund manager s need the freedom of choice with regard 
to the form of the vehicle in order to id entify to the most suitable structure. 
 
QUESTION 9 
Do you think it is worth specifying any in vestment rules for venture capital funds? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
NO 13 27% 0 0 5 8 13 
YES. Venture capital funds 
should invest more than 50% in SMEs. 16 33% 6 0 8 2 10 
 
In order to fully meet the EU policy goal s, the European passport would benefit funds 
investing in SMEs. A significant proportion of respondents support the definition of a 
compulsory investment percentage of assets t hat the venture capital fund should invest in 
SMEs. A threshold of 50% (calculated at the ti me of initial investment) ensures that the 
majority of VC funds’ total assets is go ing to companies that are SMEs and enables 
venture capital managers to diversify their po rtfolios by investing in larger businesses. 
Against this, few respondents argue that in vestment criteria are defined by close 
negotiation with the funds' investors and are based on a number of different factors (e.g. 
VC manager experience in different sectors and  stages, return target…). Setting additional 
 
 112investment rules by law or regulation would artificially restrict a fund manager’s ability 
to maximise returns. Furthermore, adding a new eligibility rule would lead to a situation 
where many funds of strategic importance would choose not to opt in to the new framework and consequently reduced impact of the new legislation. 
 
QUESTION 10 
Should the temporary nature of th e venture capital investment activity in SMEs constitute a 
criterion that should be reflected? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 4 8% 2 0 0 2 2 
NO 19 40% 4 1 8 6 14 
 
 The majority doesn't consider the temporar y nature of the venture capital investment 
activity in SMEs as a relevant criterion for the design of the future EU venture capital 
regime. The timing of both entry and exit from  the capital of the SME should be a venture 
capital manager’s decision and it usually depe nds on different factors, including market 
opportunities and local tax regimes. However,  they agree on that the investment in a 
typical venture capital fund is generally done  on a long-term basis and some respondents 
suggested excluding trading-related activities , as well as any type of investment whose 
return result from successive short-term pr ofits, from the scope of the new regime. 
 
QUESTION 11 
Are there any other means of finance that venture capital funds provide to SMEs that should be 
reflected (e.g. loans)?  
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 18 37% 4 1 8 5 13 
NO 1 2% 0 0 1 0 1 
 
Almost all respondents consider that VCFs  need flexibility regarding the forms of 
financing that venture capital managers may be  willing to use. To date, investment in 
SMEs is made through various types of inst ruments. The investment will often take the 
form of an equity portion, together with quasi-equity contributions, loans, and even 
options. Defining the relevant type of fi nancing depends on the need of SMEs and the 
taxation regime. Venture capital fund manag er will choose the appropriate instrument 
with a view to ensuring that returns will no t be adversely impacted by taxation at the 
level of the investment vehicles. 
There are many occasions in the life of SMEs when alternative funding to equity is used: 
 
 113(12) At the start or formation of SMEs, ty pically venture capi talists will employ 
convertible debt instruments. 
(13) Between financings, inside investors typi cally would bridge a company via loans 
until investment from a new investor can be secured. 
(14) Some VCFs provide finance for portfolio companies by means of a combination of 
equity and high-yield debt. A VCF may provide a portfolio company with a contingent loan which might be repayable at a premium if the portfolio company were ‘successful’ but might not be repayabl e if the company failed to reach certain 
targets. Further, some VCFs provide bri dging finance in the form of a simple loan 
or a convertible security to portfolio companies. 
 
QUESTION 12 
Do you think that there is a need to specify that the manager should  be actively involved in the 
development, growth and success of the SME? 
  
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 5 10% 1 0 4 0 4 
NO. the passive investment in 
an SME should also be considered by the proposal as venture capital investment 14 29% 3 1 4 6 10 
 
All respondents believe that venture capita l funding is not a passive funding and it 
requires some form of further involvement by the venture capital fund in the target 
business. Venture capital fund managers do no t just invest capital; they also provide 
valuable know-how to help the SME develop.  In particular, they bring strategic and 
operative advice and specialist sector knowledge.   
 
Whereas such involvement does not mean t hat the VCF will run the business of the 
underlying target, the venture capital fund may play an important and active advisory, 
mentoring or consulting role.  
Nonetheless, the degree of involvement depends on the type of investment and on the 
targeted SME. Most respondents feel that it would be challenging to have a rationale 
definition of “active involvement” which ta kes into account all the various situations 
what the investees are facing during their life-cycle. 
QUESTION 13 
Do you agree that the special rules on venture capi tal should only apply when funds invest in the 
seed, start-up and expansion stages of SMEs? 
Opinions expressed: Number of 
opinions % over the 
total number Public Citizens Organisations 
 
 114expressed  of 
contributions authorities 
Industry Other Total 
YES 12 25% 4 1 3 4 7 
NO 10 21% 1 0 5 4 9 
 
Many respondents (including EVCA) recommend  that there are no limits in terms of 
which stages of investment can be made by ve nture capital funds. They believe that these 
restrictions may result in funds having to av oid some investments that could be valuable 
to SMEs because they do not clearly fall within  the reach of the definition of seed, start-
up, and expansion stage. For example, 
(15) Excluding replacement capital may have an adverse effect since venture capital 
funds often provide replacement capital and  expansion capital at the same time. 
(16) Venture capital can be ideal for a number  of SMEs that are in a restructuring 
phase. This is particularly true in the lif e science sector where if a product fails in 
late stage development, a significant re structuring is required. Venture capital 
firms need the flexibility to be able to cons ider investment in all of these types of 
situations associated with SMEs. 
On the other hand, 12 respondents (including 4 public authorities) expressed that limiting 
the investments to the seed, star-up and expansion stages of SMEs is essential to prevent abuse of the passport scheme.  
QUESTION 14 
Do you agree that venture capital fund s do not/should not use leverage? 
  
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 7 15% 3 0 2 2 4 
NO 11 23% 1 1 4 5 9 
 
Most respondents agree on the fact that it is not a standard to use leverage in venture 
capital transactions. However, they specify t hat leverage may be used in fundraising and 
also if debt instruments are used.  
As an example, if a lending institution is willin g to participate in particular transaction as 
a debt provider a venture capital fund should not be prohibited to use leverage in such 
transaction. 
 
QUESTION 15 
 
 115Do you agree with the list of entities described below as not being proper investment targets for 
venture capital funds? 
Organisations 
Opinions expressed: Number of 
opinions 
expressed % over the 
total number 
of 
contributions 
received Public 
authorities Citizens 
Total Industry 
organisations Other 
organisations 
YES 7 15% 1 1 5 3 2 
NO. It's too restrictive. 15 31% 2 0 13 7 6 
 
In the context of the implementing provisions  of Title IV of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, the SE C proposed a definition of a “qualifying 
portfolio companies” (SMEs financed by venture capital funds). 
The SEC excluded from the scope of the “qualif ying portfolio companies”, the entities that 
meet one of the following criteria: 
(17) It is publicly traded (or controlled by a publicly traded company). 
(18)  It borrows or issues debt obligations, dire ctly or indirectly, in connection with the 
private fund’s investment in the portfolio company. 
(19) It redeems, exchanges or repurchases the securities of the company, or distributes 
to pre-existing security holders cash or other company assets, directly or 
indirectly, in connection with the privat e fund’s investment in such company. 
(20) It is itself a fund. 
Many respondents disagree with the list of entities described as not being proper 
investments targets for venture capital funds.  They believe that investment activity 
indirectly targeted at SMEs (i.e. through a fu nd of fund) should be included in the scope 
of the new regime.  
Other respondents argue that it would not se rve the aim of facilitating financing to SMEs 
to prohibit the funds regulated under the re gime to invest in companies listed on a 
regulated market. If such company qualifie s as an SME and is having difficulty raising 
funds in the capital markets, the legislative pr oposal should not deter investment in such 
a company through an overly restrictive definition.  
Further, listing portfolio companies on a st ock exchange via an IPO provides an important 
route to exit for small funds; in such case the fund will retain certain amount of shares in 
the listed company that may only be sold after a certain lock-up period. 
Listing new shares in a portfolio company at  a stock exchange can also be an instrument 
to secure further development and growth with out constituting an exit of the fund from 
the relevant portfolio company. 
QUESTION 16 
Do you think that the EU should  draw inspiration from the crit eria set by the SEC to define the 
target companies of the venture capital funds? 
 
 116Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
YES 4 8% 2 0 1 1 2 
NO 13 27% 2 1 6 4 10 
 
The majority of respondents believe that th e criteria set by the SEC can be used for 
orientation but have to be adapted to the Euro pean needs. It should be taken into account 
that venture capital market is much more de veloped in the US than in Europe. Therefore, 
European regime needs to offer more flexib ility and the scope of permitted investments 
should be much broader. 
QUESTION 17 
Would a third country regime be beneficial? 
  
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
NO 5 10% 3 0 2 0 2 
YES 15 31% 2 1 7 5 12 
 
Many respondents agree that third countr y regime would be beneficial. European 
commission can draw inspiration from AIFMD to design an appropriate regime for third 
country venture capital funds. 
However, some respondents, including 3 pub lic authorities, agree that funds from non-
member countries should no t be given an EU-passport. 
 
QUESTION 18 
Which option do you support? 
(21) Exemption from the AIFMD only those mana gers that are below the threshold of the 
AIFMD. 
(22) Exemption from the scope of the AIFMD th e managers that fall under the new venture 
capital regime even if they t respass the thresholds of AIFMD. 
(23) Creation a lighter regime for venture capital f und managers within the AIFMD itself.   
Organisations 
Opinions expressed: Number of 
opinions 
expressed  % over the 
total number 
of 
contributions Public 
authorities Citizens 
Industry Other Total 
 
 117(1) Exemption for entities 
below the AIFMD threshold 10 21% 3 0 4 3 7 
(2) Exemption independently from the AIFMD threshold 13 27% 1 1 4 7 11 
(3) Creation a lighter regime for venture capital fund managers within the AIFM Directive itself.  
6 13% 2 0 3 1 4 
 
The majority of respondents believe that a new European regime for venture capital 
should be introduced as a standalone initia tive. The AIFMD was designed for a rather 
different market segment. Simply modifyin g the Directive would lead to a situation 
where many of the original (non-fitting) conc epts would be maintained. Respondents feel 
that such approach would be incomplete and  wouldn't properly address the issue. The 
specific needs of the venture capital industry  can be more efficiently dealt with under a 
standalone initiative. This approach would, in addition, give time to appropriately consult 
with various stakeholders without bein g caught by the AIFMD own deadlines 
Many respondents, including 3 public auth orities and EVCA, believe that the right 
approach is to exempt from the AIFMD those fund managers below the AIFMD threshold.   
(24) This approach would encompass the majori ty of the venture capital business in 
Europe, and, the existing threshold could make it easier to draw a line between 
venture capital and other private equity funds. 
(25) Moreover, including managers that exceed  the threshold would require a more 
extensive modification of the AIFMD, as it would certainly re-open the discussion 
with respect to the scope of the AIFMD in  general. This would necessarily imply 
an extension of its transposition period. As a consequence, uncertainty for market participants would most likely increase. 
Furthermore, 7 respondents expressed that the arguments raised for the exclusion of 
VCFs from the scope of AIFMD would be also valid for other strategies. 
The European Commission stated in the consultation paper that VCFs do not pose 
systemic risk or create investor protection concerns because they are focused solely on 
professional markets. Therefore, it would s eem to be disproportionate to require venture 
capital fund managers to fully comply with  AIFMD requirements in exchange for the 
passport. However, some respondents argue that  the same findings are also true for other 
types of funds (e.g. open-ended real estate funds). 
 
 
*  *  * 
 
 1187. Annex VII:  US SEC FINAL RULE:  Venture capital fund defined 
 
(a) Venture capital fund defined. For purposes of section 203(l) of the Act (15  
U.S.C. 80b–3(l)), a venture capital fund is any private fund that:  (1) Represents to investors and potential investors that it pursues a venture capital strategy;  (2) Immediately after the acquisition of any asset, other than qualifying investments or 
short-term holdings, holds no more than 20 pe rcent of the amount of the fund’s aggregate 
capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments, valu ed at cost or fair value, consistently 
applied by the fund;  
(3) Does not borrow, issue debt obligati ons, provide guarantees or otherwise incur 
leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borro wing, indebtedness, guarantee or leverage 
is for a non-renewable term of no longer than  120 calendar days, except that any guarantee 
by the private fund of a qualifyi ng portfolio company’s obligations up to the amount of the 
value of the private fund’s investment in the qualifying portfolio company is not subject to 
the 120 calendar day limit;  
(4) Only issues securities the terms of whic h do not provide a holder with any right, except 
in extraordinary circumstances, to withdraw, redeem or require the repurchase of such 
securities but may entitle holders to receive distributions made to all holders pro rata; and  
(5) Is not registered under section 8 of th e Investment Company Act of 1940 (15 U.S.C. 
80a–8), and has not elected to be treated as  a business development company pursuant to 
section 54 of that Act (15 U.S.C. 80a–53).  
(b) Certain pre-existing venture capital funds. For purposes of section 203(l) of the Act 
(15 U.S.C. 80b–3(l)) and in addition to any ve nture capital fund as set forth in paragraph 
(a) of this section, a venture capital fund also includes any private fund that:  
(1) Has represented to investors and potential investors at the time of the offering of the 
private fund’s securities that it pursues a venture capital strategy;  
(2) Prior to December 31, 2010, has sold securities to one or more investors that are not 
related persons, as defined in § 275.206(4)–2(d )(7), of any investment adviser of the 
private fund; and  
(3) Does not sell any securities to (inc luding accepting any committed capital from) any 
person after July 21, 2011.  
(c) Definitions. For purposes of this section:  
(1) Committed capital means any commitment pursuant to which a person is obligated to:  
(i) Acquire an interest in the private fund; or  (ii) Make capital contributions to the private fund.  
 
 119 
(2) Equity security has the same meaning as in section 3(a)(11) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78c(a)(11)) and § 240.3a11–1 of this chapter.  
(3) Qualifying investment means:  
(i) An equity security issued by a qualifyi ng portfolio company that has been acquired 
directly by the private fund from the qualifying portfolio company;  
(ii) Any equity security issu ed by a qualifying portfolio company in exchange for an equity 
security issued by the qualifying portfolio comp any described in paragraph (c)(3)(i) of this 
section; or (iii) Any equity security issu ed by a company of which a qualifying portfolio 
company is a majority-owned subsidiary, as defined in section 2(a)(24) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)(24)),  or a predecessor, and is acquired by the 
private fund in exchange for an equity security described in paragraph (c)(3)(i) or (c)(3)(ii) 
of this section.  
(4) Qualifying portfolio company means any company that:  
(i) At the time of any investment by the privat e fund, is not reporting or foreign traded and 
does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or fore ign traded; (ii) Does not borrow or issue debt 
obligations in connection with the privat e fund’s investment in such company and 
distribute to the private fund the proceeds of such borrowing or issuance in exchange for 
the private fund’s investment; and (iii) Is not  an investment company, a private fund, an 
issuer that would be an investment comp any but for the exemption provided by § 270.3a–7 
of this chapter, or a commodity pool.  
(5) Reporting or foreign traded means, with respect to a company, being subject to the 
reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), or having a security listed or traded on any exchange or organized market operating in a foreign jurisdiction.  
 
(6) Short-term holdings means cash and cash equivalents, as defined in § 270.2a51–
1(b)(7)(i) of this chapter, U.S. Treasuries w ith a remaining maturity of 60 days or less, 
and shares of an open-end management inve stment company registered under section 8 
of the Investment Company Act of 1940 (15 U. S.C. 80a–8) that is regulated as a money 
market fund under § 270.2a–7 of this chapter.  
Definition of equity security:
 
The final rule incorporates the definition of equity security in section 3(a)(11) of the 
Exchange Act and rule 3a11–1 thereunder. Accordingly, equity security includes common 
stock as well as preferred stock, warrants a nd other securities convertible into common 
stock in addition to limited partnership interests.96 Our definition of equity security is 
broad. The definition includes various securitie s in which venture capital funds typically 
invest and provides venture capital funds w ith flexibility to determine which equity 
securities in the portfolio company capital structure are appropriate for the fund . Our use 
of the definition of equity security under the Exchange Act acknowledges that 
venture capital funds typically invest in common stock and other equity instruments 
that may be convertible into equity common stock but does not otherwise specify the 
 
 120types of equity instruments that a ventur e capital fund could hold in deference to the 
business judgment of venture capital funds.  
 
Rule 203(l)–1(c)(2) (equity security  ‘‘has the same meaning as in section 3(a)(11) of the  
Securities Exchange Act of 1934 (15 U. S.C. 78c(a)(11)) and § 240.3a11–1 of this 
chapter.’’). See 15 U.S.C. 78c(a)(11) defining ‘‘equity security’’ as ‘‘any stock or similar 
security; or any security future on any such s ecurity; or any security convertible, with or 
without consideration, into such a security, or carrying any warrant or right to subscribe to 
or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security.’’); 
Rule of section 3(a)11–1 under the Ex change Act (17 CFR 240.3a11–1) (defining 
‘‘equity security’’  to include  ‘any stock or similar security, certificate of interest or 
participation in any profit sharing agreement,  preorganization certificate or subscription, 
transferable share, voting trust certificate or certificate of deposit for an equity security, 
limited partnership interest, interest in a joint ve nture, or certificate of interest in a business 
trust; any security future on any such security; or any security convertible, with or without 
consideration, into such a security, or carryi ng any warrant or right to subscribe to or 
purchase such a security; or any such warrant or right; or any put, call, straddle, or other 
option or privilege of buying such a security from or selling such a security to another 
without being bound to do so.’’). See rule 3a11–1 under the Exchange Act (17 CFR 
240.3a11–1) (defining ‘‘equity security’’ to include any ‘‘limited partnership interest’’).  
  
 
 1218. Annex VIII:  Venture capital business model and selected managers profiles  
 
The term "venture capital" does not always  have the same meaning. Differences are 
observed in the main venture capital markets: the US and EU.89 The US has a more 
distinctive approach to venture capital funds as comprising nearly exclusively investments in seed, start-up and expansion stage of a company. US understanding of  venture capital 
does not include any form of buy-out activity, this is a preserve of private equity 
investment strategies. This has just been confirmed by the US Securities and Exchange 
Commission adopting rules that define venture capital.
90 In Europe, due to its 
development, venture capital is understood as more  of a subset of private equity and as a 
concept it includes commitments to unquoted co mpanies, with financing focus on their 
early stages of development. However, other forms of investments and other stages of companies are not excluded.
91 It is thus not an exception to  find a European venture capital 
fund investing portion of funds' capital in buy-out transactions92.  
The remainder of this chapter though tries to identify the key aspects and characteristics of 
the funding activities that, in the EU, are generally grouped under the heading of venture 
capital and how these activities differ from other types of financing, mainly those of private equity – especially buy-outs. 
Venture capital can be supplied in many ways. For example corporations provide venture 
capital directly to selected portfolio companie s and remain the main investor therein. There 
are also venture capital funds that pool capital from a number of investors in a pursuit of a 
defined strategy and as such strive to divers ify the individual investors' risks by investing 
into carefully selected portolio companies. Ve nture capital funds are usually structured as 
limited partnerships with a limited lifespan, us ually 10 years. The investors are the limited 
partners and the venture capital firm is th e general partner of the partnership/fund. 
Furthermore, venture capital funds are usua lly connected with investments in young and 
small companies that own or develop certain  technological know-how (in the life sciences, 
computer electronics and software, to industrial products etc.).
93   
As venture capital is generally linked with  financing of young and newly established 
companies, the provision of equity finance pr evails. It provides fresh capital to companies 
for operating and business purposes. In exchange for the direct cash injection into the company, the fund receives an equity stake in  the company in the form of a common or 
preferred stock and becomes part-owner or part ner in the business. This form of financing 
                                                
 
89 M. Bender, Spatial Proximity in Ventur e Capital Financing, 2010, chapter 2.1.1.  
90 See Annex VII: The US Securities and Exchange Commissi on adopted  in July 2011 final rules that implement the 
Dodd-Frank act, among others on definition of venture capital fund; http://www.sec.gov/rules/final/2011/ia-3222fr.pdf  
91 A. Rigaut: The development of venture Capital fundraising in Europe; 2001; page 10 
http://aloys.rigaut.free.fr/pdf/Thesis_Coleurop.PDF  or  G. Baygan and M. Freudenberg, DSTI/DOC(2000)70: The 
Internationalisation of Venture Capital Activity in OECD C ountries: Implications for Meas urement and Policy, page 11 
http://www.oecd.org/officialdocuments/publicdispla ydocumentpdf/?cote=DST I/DOC%282000%297&docLanguage=En  
92 See Annex VIII: Examples of selected ve nture capital firms and their strategic focus 
93 Venture deals are directed at various sectors, of which life science, computer and consumer electronics, 
communications or business and industrial products and services accounted for more  than 70% in 2010. Furthermore, the 
share of high-tech investments within the venture capital flow s remains relatively steady, at about 30% on a yearly basis. 
Source EVCA: www.evca.eu   
 
 122is referred to as primary or direct acquisition of equity from the target company as opposed 
to a secondary acquisition, where a fund buys sh ares from existing shareholders either on 
an exchange or by means of a buy-out of existing shareholders.  
Venture capital being the equity provider accepts more risk than for example bank with its 
loans; as creditors are expected to be paid  before owners in case of company's failure. 
Since the success of a venture capital funds' inve stments is directly linked to the success of 
the underlying companies, venture capital f und managers (unlike the traditional debt 
providers94) usually provide important non-financial support to these companies, through 
endorsement95, contacts96 and advice97 to facilitate the professionalization98, growth99, 
internationalization100 and performance101 of their portfolio companies. In order to 
efficiently engage in such support, local pres ence and proximity to their target companies 
is essential. It is important especially in the early stages of portf olio company life when 
more intensive support is needed to get th e business running. Recent research also finds 
that presence of local venture capital invest ors attracts foreign venture capital firms and 
target companies that are financed by such cross-border syndicates (European or 
                                                 
94 Sefano Caselli, 2010, Private equity and Venture Capital in Europe: Markets, Techniques, and Deals, chapter 4.4 on 
reasons for choosing a closed-end fund to provide equity  financing rather than a bank or investment firm.  
95 Stuart, T.E., Hoang, H., and Hybels, R.C., 1999, Inte r-organizational endorsements and the performance of 
entrepreneurial ventures. Administrative Science Quarterly 44(2): p. 315-349. and Hsu, D.H., 2004, What do 
entrepreneurs pay for venture capital affiliation? Journal of Finance 59(4): p.1805-1844.  
96 Maula, M.V.J., Autio, E., and Murray, G.C., 2005, Co rporate Venture Capitalists and Independent Venture 
Capitalists: What Do They Know, Who Do They Know, a nd Should Entrepreneurs Care? Venture Capital: 
An International Journal of Entrepreneurial Finance 7(1): p. 3-19 and Lindsey, L., 2008, Blurring Firm Boundaries: The 
Role of Venture Capital in Strategic Alliances. Journal of Finance . 
97 See Maula et al.(2005) and Hellmann, T. and Puri, M., 2000, The interaction between product market and financing 
strategy: The role of venture capital. Review of Financial Studies 13(4): p. 959-984.  
98 Hellmann, T. and Puri, M., 2002, Venture capital and the pr ofessionalization of start-up firms: Empirical evidence. 
Journal of Finance 57(1): p. 169-197 and Davila, A. and Foster, G ., 2005, Management accounting systems adoption 
decisions: Evidence and 
performance implications from early-stage/startup companies. Accounting Review 80(4): p. 1039-1068.  
99 Bertoni, F., Colombo, M.G., and Grilli, L., 2008, Ve nture Capital Financing and the Growth of New 
Technology-Based Firms. Working paper and Davila, A., Foster, G., and Gupta,  M., 2003, Venture capital financing and 
the growth of startup firms. Journal of Business Venturing 18(6): p. 689-708.  
100 Fernhaber, S.A. and McDouga ll, P.P., 2008, Venture Capitalists as Catalyst s to new Venture Internationalization: The 
Impact of their Investments, Re putation and Knowledge Resources. Entrepreneurship Theory and Practice. And  
Lockett, A., Wright, M., Burrows, A., Sc holes, L., and Paton, D., 2008, The expor t intensity of venture capital backed 
companies. Small Business Economics 31(1): p. 39-58.  
101 Hsu, D.H., 2006, Venture capitalists and c ooperative start-up commercialization strategy. Management Science 52(2): 
p. 204-219 and Bottazzi, L., Da Rin, M., and Hellmann, T., 2008, Who are the active investors? Evidence from venture 
capital. Journal of Financial Economics . 
 
 123International) show better performance than  target firms supported only with local or 
locally syndicated venture capital firms. 102 
A venture capital fund's engagement follows several financing rounds. Each financing 
round is conditional upon the target or "portf olio" company achieving certain milestones. 
Usually these financing rounds correspond to the evolution of the portfolio company:  
– the very first round of financing is supplied to a company that aims to prove the value 
of a new idea (also known as seed financing);  
– the next round of financing is linked to marketing and product development (usually 
referred to as start-up financing);  
– a subsequent round of financi ng aims to provide working capital is to companies who 
start selling product but are not yet turning a profit.  
Up until this stage of financing, the capital provi ded to companies in these early stages is 
usually equity capital. Venture capital funds  are also active providers of mezzanine 
financing, which is used predominantly in the expansion stage of SMEs but also in start-
ups and is a helpful financing structure for innovation. Mezzanine finance is a collective term for hybrid forms of finance: it has featur es of both debt and equity. There are various 
types of mezzanine finance, each having its own unique characteristics. On the positive 
side, choosing the appropriate form of mezzanine financing SMEs can retain control over the company without surrendering ownership right s and the cost of it for SMEs compared 
to pure equity is usually lower. The most common form of mezzanine finance
103 is the 
subordinated loan , which is an unsecured loan with a lower ranking in case of bankruptcy 
compared to senior debt.  Participating loans are normal loans, but rather than there being 
a fixed return, their remuneration is contingent upon the results of the business. Silent 
participation is closer to a stockholding than a subordinated or participating loan. There 
are also equity related mezzanine finance inst ruments. These instruments present a greater 
risk profile to the lender and, in turn offer a higher rate of return. Mezzanine products with 
profit participation rights are more related to equity and under company law the holder is 
entitled to rights over the company’s profits. A further equity mezzanine financing 
instrument is the convertible bond . In addition to the usual right to fixed interest 
payments and repayment of principal, holders  of convertible bonds or bonds with warrants 
have the right to acquire shares in the company instead of accepting repayment of the 
bond. Another equity mezzanine financing instrument is the bond with warrants , which 
in principal is similar to the convertible bond. The main difference is that the warrants (subscription rights) are separate from the bond and thus can be traded independently.  
Finally, venture capital funds can also provide bri dge financing. It is a short term loan that 
usually facilitates portfolio company transition to an IPO or another stage of financing. A 
bridge loan can also be is assorted with an option to convert the loan into equity. 
                                                
 
102 D. Devigne, T. Vanacker, S. Manigart  and I. Paeleman: Cross-border venture capital and the development of portfolio 
companies, page 45, Figure 1: Predicted gr owth curves for portfolio company sales  
103 See Annex IX: Overview of different forms of SMEs  mezzanine financing from Roundtable between bankers and 
SMEs, Mezzanine finance,  http://ec.europa.eu/enterprise/new sroom/cf/_getdocum ent.cfm?doc_id=1065  
 
 
 124The business objective of venture capital fund as  an investor is to steer its portfolio 
companies towards a profitable sale and there by realise a profit that should considerably 
exceed the investments made to the company throughout fund's time of engagement in it. 
There are number of possible exit routes, incl uding, for example, a sale to management, 
repayment of principal. The two most comm on exits are the portfolio company's listing on 
a stock exchange (the so called initial public o ffering – IPO) or the sale of the portfolio 
company to a strategic buyer - either a private equity firm or a corporation (the so called 
trade sale).  
Venture capital, being a very risky type of a sset class, is a preserve of institutional and 
qualified investors. According to the latest i ndustry data, the share of such these investors 
(e.g., banks, capital market experts, endowments and foundations, government agencies, corporations, fund of funds, insurance comp anies, asset managers, pension funds or 
sovereign wealth funds) in European ventur e capital comprises nearly 50% of assets 
collected by venture capital funds.  The investments by private individuals and family offices account for roughly 15% of assets ma naged by European venture capital funds.  
This percentage is double the percentage that private investors contribute to financing of 
private equity.
104 Most Member States allow for certain private individuals (e.g. high net 
worth individuals) to invest in venture capital,  as long as certain conditions are met. These 
conditions may involve a minimum investment limit or some form of appropriateness test 
to ensure that such investors are aware of and accept the inherent risks associated with 
investments in venture capital operations. 
Data shows that venture capital funds make lim ited use of leverage. Leverage can occur at 
two levels, at the level of the fund and the portfolio company. (i) At fund level , neither 
venture capital nor private equity funds use exte nsively leverage or in other terms borrow, 
unless for a very short period of time, and for practical purposes – usually to cover their liquidity needs between committed capital from investors that has been called but takes 
usually couple of weeks before the fund r eceives it on its accounts. (i) At portfolio 
company level , debt can be used for different pur poses. Usually venture capital equity 
investment in early stages of company's lif e is not accompanied by debt financing from 
other sources as no other viable financing a lternative exists at that stage. However, 
European venture capital funds do engage in buy-out transactions where the venture fund 
provides only a part of the total acquisition with the remainder being matched by borrowing from a bank whereby the assets of th e portfolio company serve as the collateral 
to the lender. Lastly, unrelated to the ve nture capital investment activity, portfolio 
companies borrow money in the ordinary course of their business. 
Based on these key characteristics of vent ure capital funds, multitude of fund types 
emerge. Some venture capital funds may be fo cused on investing in new ideas – in new 
and early stages of companies, some may prefer to invest in already more established firms that need support in order to expand or become publically traded firms. Other funds may on the other hand focus solely in certain industries and as such their financing would cut across all the stages of portfolio companies'  life-cycle before their successful exit is 
realised. Additional dimension is funds' geogra phical focus, some are local/regional others 
national or operating world-wide. The situati on in Europe is now characterised by the 
move from locally focused ventures toward s more sector specific venture capital firms 
looking out for opportunities globally.  
                                                
 
104 The remaining 30% is unknown – data assembled by the industry EVCA. 
 
 125 
   
Venture capital manager A 
type of firm: GP - Dept of corporation - financial institution 
staff size: 3 
capital under management: € 4,000,000 
financing stages: Expansion – development, Other early stage, Seed, Start-up 
type of financing: Minority Equity, Debt, Shareholders loans 
industry sectors: Business and Industrial Products 
Business and Industrial Services Chemicals and Materials Communications Computer and Consumer Electronics Energy and Environment 
geographical preferences: United Kingdom 
remarks: Our company provides investment and support for IT, med-
tech and clean technology companies. Our strategy is to lead investment in technology-driven companies that seek to address markets with significant growth potential. We are authorised and regulated by the FSA. 
 
 
 126 
     
Venture capital manager B 
type of firm: GP - Independent (no parent) 
staff size: 17 
capital under management: € 373,130,000 
financing stages: Expansion – development, Other early stage, Small buyout 
(<15m equity), Start-up 
type of financing: Minority Equity 
industry sectors: Communications, Computer and Consumer Electronic, Life 
Sciences 
geographical preferences: Belgium, Finland, France, Germany, Ireland, Netherlands, 
Norway, Sweden, Switzerland, United Kingdom, United States of America, Israel 
fund managed/advised: …Private Equity Fund II 
fund capital: € 115,000,000 
 
 127vintage year: 1998 
fund focus: Balanced fund 
fund managed/advised: ….Life Sciences Fund 
fund capital: € 90,000,000 
vintage year: 2011 
fund focus: Balanced fund 
 
 
Venture fund manager C 
type of firm: GP - Independent (no parent) 
staff size: 20 
capital under management: € 430,000,000 
financing stages: Expansion – development, Other early stage, Seed, Start-up 
type of financing: Minority Equity 
industry sectors: Business and Industrial Products 
Business and Industrial Services Communications Energy and Environment Life Sciences 
 
 128Other 
geographical preferences: Germany, Western Europe 
fund managed/advised: X 
fund capital: € 53,233,972 
vintage year: 1998 / 1999 
fund focus: Early stage fund 
fund managed/advised: Y 
fund capital: € 240,000,000 
vintage year: 2000 
fund focus: Early stage fund 
fund managed/advised: Z 
fund capital: € 128,500,000 
vintage year: 2007 
fund focus: Development fund, Early stage fund 
 
Venture capital manager D 
 
 129type of firm: GP - Independent (no parent) 
staff size: 8 
capital under management: € 156,000,000 
financing stages: Start-up 
type of financing: Majority Equity 
industry sectors: Business and Industrial Products 
Communications Life Sciences 
geographical preferences: France, Switzerland, United Kingdom 
fund managed/advised: X 
fund capital: € 61,000,000 
vintage year: 1998 
fund focus: Early stage fund 
fund managed/advised: Y 
fund capital: € 150,000,000 
vintage year: 2000 
fund focus: Early stage fund 
 
 130remarks: Company D invests in early stage high-tech companies that 
have high-growth potential, w ith innovative products and/or 
unique solutions and led by seasoned management teams.  
 
     
Venture capital manager E 
type of firm: GP - Independent (no parent) 
staff size: 11 
capital under management: € 185,000,000 
financing stages: Expansion – development, Other early stage, Privatisation, 
Public to private, Replacement, Seed, Small buyout (<15m equity), Start-up 
type of financing: Majority Equity, Minority Equity, Shareholders loans 
industry sectors: Business and Industrial Products 
Business and Industrial Services Communications Computer and Consumer Electronics Consumer Goods and Retail Consumer Services: others Energy and Environment 
 
 131geographical preferences: Western Europe 
fund managed/advised: X 
fund capital: € 160,000,000 
vintage year: 2007 
fund focus: Balanced fund 
remarks: Independent international venture capital fund with a 
service-oriented and labour-intensive style of investing. Investing in all technology sectors, including clean technology, focus is on high-growth, high-potential international companies based in Europe. Strong value-added approach, entrepreneurial style and with extensive local networks in several countries. 
 
Venture capital firm F 
type of firm: GP - Corporate venturer - Industrial company
LP - Corporate investor 
staff size: 5 
financing stages: Expansion - development 
Other early stage Seed Start-up 
type of financing: Minority Equity 
 
 132Mezzanine 
Shareholders loans 
industry sectors: Communications 
Computer and Consumer Electronics Consumer Goods and Retail Consumer Services: others 
geographical preferences: Germany, Western Europe, Switzerland 
remarks: VC Firm F is a subsidiary of  a leading media corporation 
based in Germany. VC firm F is actively seeking high-
growth potential companies in the digital media and IT segments and financially supports the development, market launch and internationalisation of its partners. 
 
   
 
 1339. Annex IX: Overview of different forms of SMEs mezzanine financing105 
 
Mezzanine finance can be a complementary sour ce of finance to debt and equity and can 
be helpful in financing the start-up, and expansion of SMEs, innovation and business transfers. Mezzanine finance instruments are gaining in importance but remain little used 
compared with loan financing. The level of  development in the market for mezzanine 
financing varies across Europe, especially where SMEs are concerned. While SMEs in 
some countries can choose from a wide range  of different products, other countries still 
have ground to make up in this area.  
Mezzanine finance is a collective term for hybrid  forms of finance: it has features of both 
debt and equity. There are various types of  mezzanine finance, each having its own unique 
characteristics: 
The most common form of mezzanine finance is the subordinated loan , which is an 
unsecured loan with a lower ranking in case of  bankruptcy compared to senior debt.  
Providers of subordinated loans receive a fixed interest rate and are ranked before equity 
investors should the borrower be wound up. Participating loans are normal loans, but 
rather than there being a fixed return, their remuneration is contingent upon the results of 
the business. Despite sharing in profits, particip ating loans do not give rise to an ownership 
relationship. Participation in losses is contractually excluded. In legal terms, a “silent” 
participation is closer to a stockholding than a subordinated or participating loan. The 
distinguishing feature of this form of financing is that one or more persons take an equity 
stake in a company, but without assuming a ny liability to the company’s creditors. The 
typical “silent” participation affects only the co mpany’s internal affairs and is not apparent 
to outside observers. Participation in profits  and losses and contractual rights of approval 
and control are structured flexibly. 
There are also equity related mezzanine finan ce instruments. These instruments present a 
greater risk profile to the lender and, in tu rn offer a higher rate of return. Mezzanine 
products with profit participation rights are more related to equity and under company 
law the holder is entitled to rights over the comp any’s profits. In general the financier has 
no voting or management rights. However, the inst rument is rather flexible and the right to 
be consulted on business decisions can be incl uded in the contractual documents. A further 
equity mezzanine financing instrument is the convertible bond . In addition to the usual 
right to fixed interest payments and repayment of principal, holders of convertible bonds or 
bonds with warrants have the right to acquire shares in the company instead of accepting 
repayment of the bond. This right is exercisable for a defined period and at a predetermined conversion or subscription rate. This way the issuer may convert debt into 
equity. Another equity mezzanine financing instrument is the bond with warrants , which 
in principal is similar to the convertible bond. The main difference is that the warrants (subscription rights) are separate from the bond and thus can be traded independently.  
 
                                                
 
105 Roundtable between bankers a nd SMEs, Mezzanine finance,  
 http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=1065  
 
 134One characteristic which the various mezzanine instruments share is that they can be 
structured flexibly in many different forms,  and can be combined in numerous ways, to 
provide tailor-made solutions for the specific financing needs of the company in question. 
Mezzanine products can be complex. In cases wh ere they are not obviously debt or equity 
then the classification of the instrument depends on national and/or international 
regulations/principles such as the prevalent national acc ounting principles or Basle II. 
Whether a mezzanine product can be classified as equity mezzanine or not is a very significant aspect for both the lender and th e recipient. Equity mezzanine may positively 
influence the internal bank rating and/or the ex ternal rating of an SME and thus the price 
of finance. It also impacts on the aspects of tax-deductibility; and the level of default risk borne by the financial institution. 
Mezzanine finance instruments have been ga ining in importance but remain little used 
compared to classic loan financing. Mezzanin e finance products usually have the following 
positive features: 
• Mezzanine finance is in principle unsecured. Mezzanine finance is subordinated to senior 
loans. This results in an improved balance sheet structure and better access to additional 
loans or equity (leverage effect). 
• By choosing the appropriate form of mezzanin e finance SMEs can retain control over the 
company and avoid surrendering ownership rights. 
• In general the cost of mezzanine finance for SMEs is lower than for pure equity. • Interest payments on some types of mezzanine finance are tax-deductible. • Mezzanine finance can be a very useful financial tool in the cases of business expansion, business transfer, innovation and public to private transactions. • The confidence of a mezzanine capital provi der increases the image of the company. 
Banks will invest more easily in a company that has the trust of a risk taking investor. • For equity providers mezzanine finance can lead to smaller, more conservative stakes in companies with potentially higher returns. • The revenues for providers of mezzanine finance are higher than for senior debt. • Providers of mezzanine finance are often mo re willing to offer advice and valuable 
strategic assistance than providers of debt finance, especially when the return on the 
investment is partly dependent on the pe rformance of the company. Mezzanine finance 
provides also some challenges for financiers and SMEs. 
• The understanding of mezzanine finance by SMEs  is limited: SMEs are often not aware 
of the opportunities and the requirements. 
• Mezzanine finance is often difficult to obt ain by low-and middle-tier SMEs. There are 
many requirements to meet in order to obtain this type of finance. In particular, the 
transparency requirements are very high and st ringent. In addition, the financing contract 
 
 135may include restrictive covenants that the borro wer has to abide by such as not to acquire 
additional capital. Mezzanine finance is more expensive than debt financing. 
• The interest component and the debt-like characteristics of mezzanine finance make it difficult for suppliers of mezzanine finance to low and middle-tier SMEs to arrange an 
early exit. For the upper-tier SME segment secondary markets exist. 
• Individually structured mezzanine deals will often take several months to complete. 
 
 
 
 136 
 10. ANNEX X: Venture capital – fundraising, investments, performance  
 
Table 1: Geographical location of venture capital managers in the EU (2010) 
Table 1: Geographical location of venture capital managers in the EU (2010) 
MEMBER STATE VC FIRMS BUYOUT FIRMS VC  CAPITAL '000 € BUYOUT CAPITAL '000 € 
AT 17 15 56.600 1.378.000 
Baltics 7 4 124.000 431.000 
BE 25 12 1.420.000 3.249.000 
BG 2 0 47.000 0 
CZ 1 2 12.000 217.000 
DK 19 11 2.367.000 2.763.000 
FI 19 12 1.658.000 1.642.000 
FR 67 82 8.698.000 36.984.000 
DE 124 68 10.832.000 14.058.000 
GR 3 2 96.000 539.000 
HU 7 3 232.000 46.000 
IRL 13 5 950.000 833.000 
IT 13 53 640.000 11.848.000 
LUX 5 4 673.000 839.000 
NL 32 31 2.075.000 8.026.000 
PL 13 9 250.000 2.421.000 
PT 7 1 754.000 30.000 
RO 2 1 11.000 0 
ESP 62 33 2.785.000 7.670.000 
SE 68 33 4.449.000 29.510.000 
UK 129 172 12.780.000 227.666.000 
TOTAL EU 635 553 50.909.600 350.150.000 
Source: EVCA Yearbook 2011 
 
 
 137Table 2: Funds raised and investments by private equity and venture capital 
2003-2010 (industry statistics) 
YEAR Funds Raised PE 
and VC Funds Raised 
VC Investments PE 
and VC Investments  VC 
   € billion € billion  € billion   € billion 
2003 27 6 29 8 
2004 28 9 37 10 
2005 72 11 47 12 
2006 112 17 71 17 
2007 80 8 72 6 
2008 80 6 54 7 
2009 18 4 24 4 
2010 20 3 43 3 
TOTAL 437 64 377 67 
 
27 2872112
80 80
1820
691117
864 329374771 72
54
2443
8101217
6 74 3
020406080100120
2003 2004 2005 2006 2007 2008 2009 2010€ billion
Funds Raised PE and VC Funds Raised VC Investments PE and VC Inv estments VC 
Source: EVCA, own calculations 
 
    
 
 138Table 2a: Venture capital and private equity funds raised between 2007-2010 
2007-2010 2007-2010 
Funds raised by fund 
stage focus  amount      
(€ bn) N° of funds average fund 
size (€ mn) amount (€ bn) 
  Independent funds only All funds including 
captive and 
independent 
Early-stage 4 73 59 8 
Later stage venture 4 35 116 4 
Balanced 5 75 65 9 
Total venture 13 183 72 21 
Growth capital 58 79 738 8 
Buyout 86 137 633 144 
Mezzanine 8 15 338 8 
Generalist 6 58 111 14 
Total funds raised 170 472 360 197 
Source: EVCA, own calculations 
 
Table 2b: Venture capital funds raised between 2003-2010 in the US and EU 
year US funds raised 
(USD million) N° of funds Average fund size 
(USD million) Average fund size 
(EUR million) 
2003 9000 91 99 82 
2004 21000 161 130 98 
2005 28000 173 162 138 
2006 30000 167 180 135 
2007 37000 172 215 146 
2008 27000 146 185 170 
2009 15000 76 197 130 
2010 6000 33 182 138 
          
Total 173.000 USD mn 1019   130 EUR mn 
 
 139Total  131.000 EUR 
mn      
     
year EU funds raised 
(USD million) N° of funds Average fund size 
(USD million) Average fund size 
(EUR million) 
2003 2000 61 33 27 
2004 4000 62 65 48 
2005 7000 70 100 85 
2006 6000 83 72 54 
2007 6000 72 83 66 
2008 7000 65 108 85 
2009 4000 27 148 98 
2010 1000 11 91 69 
          
Total 37.000 USD mn 451   67 EUR mn 
 Total  28.000 EUR mn      
Source: Ernst & Young, "Back to basics, Global venture capital insights and trends report 2010, own 
calculations and estimates  
 
Table 3: Private equity and venture capi tal funds raised by type of investor 
2007-2010 
  Amount 
VC Venture capital Amount 
PE Private equity 
  € bn % € bn % 
Academic institutions 32 0,2 472 0,2 
Banks 1.614 8,0 20.317 10,4 
Capital markets 402 2,0 3.820 1,9 
Corporate investors 2.117 10,0 4.980 2,5 
Endowments and foundations 446 2,0 5.475 2,8 
Family offices 1.079 5,0 8.351 4,3 
Fund of funds 1.451 7,0 23.670 12,1 
Government agencies 2.935 14,0 6.853 3,5 
 
 140Insurance companies 468 2,0 13.020 6,6 
Other asset managers 590 3,0 9.315 4,7 
Pension funds 1.335 6,0 40.696 20,7 
Private individuals 2.037 10,0 8.952 4,6 
Sovereign wealth funds 288 1,0 6.186 3,2 
Unknown 6.353 29,0 44.040 21,6 
TOTAL 21.147   196.150   
 
Venture capital funds raised by type of investor 2007-2010
0%8%
2%
10%
2%
5%
7%
14%
2% 3%6%10%1%30%Academic institutions
Banks
Capital markets
Corporate investors
Endow ments and foundations
Family offices
Fund of funds
Government agencies
Insurance companies
Other asset managers
Pension funds
Private individuals
Sovereign w ealth funds
Unknow n
 
 
 
Table 4: European and US venture capi tal investments as a share of GDP (in 
%) in 2010 
0,00%0,02%0,04%0,06%0,08%0,10%0,12%0,14%0,16%
US
Luxembourg
SwedenDenmark FinlandNorway
Switzerland
United KingdomFrancePortugal
European totalGermany
Belgium
NetherlandsHungary
Ireland
Austria
Spain
Bulgaria
Czech Republic
Baltic countriesPolandItaly
GreeceRomania
 
 
 
 141 
 Table 5: Average annual number of companies receiving venture capital 
investments in 2003-2006 
Investment phase 
(EVCA 
definitions) EUROPE 
(number of 
companies)  Investment 
phase (NVCA 
definitions) US 
(number of 
companies
)  EUROPE/U
S 
 
Seed 349  Seed/Start-up 233  1.50x 
Start-up 2.142  Early stage 839  2.55x 
Total early stage 2.490  Early stage 1.072  2.32x 
Expansion 3.372  Expansion 1.253  2.69x 
Replacement capital 314  Later stage 841  0.37x 
Total later stage 3.686  Total later stage 2.094  1.71x 
TOTAL 6.179  TOTAL 3.166  1.95x 
Source: K. Raade and C.T. Macha do: Recent developments in the Eu ropean private equity markets, 
Economic papers 319, April 2008 http://ec.europa.eu/economy_finance/publications/publication12419_en.pdf
 
Table 6: Average deal size of vent ure capital investments in 2003-2006 for 
Europe and US 
Investment phase 
(EVCA 
definitions) EUROPE     
(€ million)  Investment 
phase (NVCA 
definitions) US          
(€ million)  EUROPE/U
S 
 
Seed 0.425  Seed/Start-up 2.181  0.19x 
Start-up 1.425  Early stage 3.449  0.41x 
Expansion 2.652  Expansion 6.011  0.44x 
Replacement capital 7.208  Later stage 7.699  0.94x 
Source: K. Raade and C.T. Macha do: Recent developments in the Eu ropean private equity markets, 
Economic papers 319, April 2008 http://ec.europa.eu/economy_finance/publications/publication12419_en.pdf
 
 
Table 7: Overview of European investments of private equity and venture 
capital in 2007-2010 for Europe (industry statistics) 
Stage 
distribution of 
investments amount 
('000) N°of 
deals averag
e deal 
size      N°of 
compani
es average 
investment 
per 
company of 
which 
N°of of which in 
SMEs ('000)  
 
 142(€ mn) (€ mn) SMEs 
Seed 768.342 2.669 0.287 1.818 0.422    
Start-up 8.918.652 11.562 0.711 7.023 1.270     
Later stage 
venture 11.234.769 8.711 1.287 5.419 2.073     
Total venture (EU+non-EU) 20.921.764 22.942 0. 911 13.747 1.522 12.552  17.458.847 
Growth 24.315.196 4.496 5. 408 2.803 8.675 1.808 7.364.672 
Rescue/Turnaro
und 1.643.578 529 3.107 401 4.099     
Replacement capital 7.058.773 800 8.823 635 11.116     
Buyout 139.100.033 5.429 25. 622 3.769 36.906 2.536 21.630.333 
TOTAL 193.039.344     21.355   16.896 46.453.852 
Source: EVCA, own calculations 
 
Table 8: Overview of European venture capital and private equity investments 
2007-2010 (market statistics – in European companies) 
Stage distribution of 
investments amount ('000) Number of companies of which SMEs 
  
Seed 732.629 1.783     
Start-up 8.295.356 6.595     
Later stage venture 10.775.716 5.080     
Total venture 19.803.702 12.961 11.665 95% 
Growth 23.239.900 2731 1.775 65% 
Rescue/Turnaround 1.964.844 400     
Replacement capital 6.832.167 618     
Buyout 136.586.487 3.756 2.066 55% 
TOTAL 188.427.099 20.130 17.110 85% 
Source: EVCA, own calculations 
 
  
 
 143 
    Table 9a: Share of European venture capital and private equity investments 
into SMEs 2007-2010 
 
80%83%86%84%95%97% 98% 98%
64%
55%69%70%
49%55%58%
54%
0%10%20%30%40%50%60%70%80%90%100%
2007 2008 2009 2010 All Private Equity Venture Grow th Buyout (excl Grow th) 
Source: EVCA 
 
Table 9b: European venture capital funds investments in SMEs (2003-2010) 
024681012141618
2003 2004 2005 2006 2007 2008 2009 2010€ billion
01.0002.0003.0004.0005.0006.0007.0008.000
Amount invested Number of SMEs 
Source: EVCA, own calculations 
 
 144 
Table 10: Investments by number of employees in 2010 (% of number of 
companies financed) – market statistics 
Venture capital
33,0%
58,6%1,3%
0,3%
0,6%0,4% 5,8%
0 - 19
20 - 99
100 - 199
200 - 249
250 - 499
500 - 999
1000 - 4999
5000 +
 
Source: EVCA 
 
Table 11: Private equity and venture capital investments by sector 2010 
Venture capital Private e quity (buyout and growth) 
Unknown 0,09% Unknown 0,07% 
Transportation 1,13% Transportation 5,51% 
Real estate 0,34% Real estate 0,49% 
Life sciences 30,04% Life sciences 12,33
% 
Financial services 1,15% Financial services 5,97% 
Energy & environment 10,74% Energy & environment 2,87% 
Consumer services 2,69% Consumer services 10,01
% 
Consumer goods & retail 4,07% Consumer goods & retail 20,99
% 
Construction  0,67% Construction  1,33% 
Computer & consumer electronics 20,26% Computer & consumer 
electronics 8,09% 
 
 145Communications 15,03% Communications 10,48
% 
Chemicals & materials 2,52% Chemicals & materials 2,40% 
Business & industrial services 3,54% Business & industrial services 8,76% 
Business & industrial products 7,29% Business & industrial products 10,19
% 
Agriculture 0,43% Agriculture 0,50% 
Source: EVCA 
 
Table 12: Venture capital and privat e equity fund raising geography 2007-2010 
  All Venture capital Private equity (excluding 
Venture capital) 
  € mn % € mn % 
Domestic 10,896 51,5% 48,315 27,6% 
Non-domestic 2,550 12,1% 34,860 19,9% 
Outside Europe 1,297 6,1% 49,121 28,1% 
Unknown 6,403 30,3% 42,705 24,4% 
Total 21,147  175,002  
Source: EVCA, own calculations 
 
Table 13: Global Venture capital investments in 2009  
02.0004.0006.0008.00010.00012.00014.00016.00018.000
US Europe China Isreal India CanadaEUR million
 
 
 146Source: Ernst & Young, "Back to basics, Global venture capital insights and trends report 2010, own 
calculations and estimates 
 
In China106, current VC consists of first or second institutional financings of 
companies. Venture capitalists invest in companies which are already profitable. 
Therefore, the VC market as understood in  Europe and in the US is still emerging. 
For instance, the angel and seed investor  network is highly fragmented. Moreover, 
former VC funds have moved into the equ ity market. Like in Europe, we observe a 
reluctance to take risk among the new entr epreneurs and engineers. VC could also 
have a role to play in terms of training, coaching.  
China has advantages for VC investors. Firs t of all, the Chinese domestic market is 
growing rapidly. The firms oriented to wards the domestic market have great 
opportunities to capture growth with specifi c products and business models that fit 
with China's market. However, the infrastructure for early-stage companies is lacking:
107 "… this starts with finding high-pot ential CEOs and building world-class 
technical teams and ends with a captive funding vehicle that seeds new companies."
108 Moreover, many VC players in China need deeper knowledge of 
their local environment; they need to wo rk better with good companies across China 
and across the different sectors. 
 
                                                 
106 Peter Liu, interview with Ernst &Young (ref.: "Global Venture Capital Insights and Trends Report 
2010", Ernst&Young) 
107 Kai Fu, interview with Ernst & Young (ref.: "Gl obal Ventutre Capital Insights and Trends Report 
2010", Ernst&Young) 
108 "Global Ventutre Capital Insights and Trends Report 2010", Ernst&Young 
 
 14711. Annex XI: Comparative analysis of European and US venture capital 
funds and their performance 
The previous chapter provided a snapshot of  the size and structure of the European 
venture capital fund industry. However, it is vital to also examine the importance of 
the industry in terms of trends and challenges – to lay the basis for assessing the impact of possible barriers to its further de velopment. Venture capital is in essence a 
global activity and as such one shall look at the European venture market in a 
broader context. Comparative analysis w ith its US counterpart is particularly 
informative, given the European and US i ndustries are globally the most mature and 
substantive.. 
Indeen, the venture capital industry has its roots in the US, and the US industry 
remains by far the largest and most mature. US sucesses in developing certain high-tech industries, which has helped the US to  attract scientists and entrepreneurs from 
elsewhere, have been seen as also successes in part for its venture capital industry.
109 
Growth accelerated through the 1970s compar ed to Europe, where venture capital 
was relatively new and only began to take hold in the late 1990s.110 Both the EU and 
US venture capital markets  proportionally decreased since 2000. The bursting of the 
dotcom bubble in the early years of the 2000s a nd the financial crisis from the end of 
2007 onwards brought about severe reducti ons in available funding for venture 
capitalists, especially in the US. Since then, venture capital has been growing, but it still remains below 2000 values. 
 Most venture capital funds in the US are private. In Europe, strong public support 
and financial commitment through European and national initiatives and support programmes have been the decisive drivi ng force. However, many experts now voice 
concerns that there is limit to what public policy providing financial incentives and subsidies can do on its own. Moreover, over-reliance on such financial incentives can indeed prevent the development and take-up of new financial products in the market or responsiveness of the ventur e capital market to innovation in the SME 
sector,since public policy must typically make decisions on acceptable targets a 
priori . This is in particular against th e background of European venture capital 
markets that can be seen as underperforming when compared to the US, for instance.  
It is important to understand more deeply the major differences between the EU and 
US markets and  factors that could have potentially driven the performance of EU 
venture capital markets. The key differences observed by experts, academics and industry players are summarised below (see box 1). 
Box 1: Most important differences in th e characteristics of European and US 
venture capital funds and markets in which they operate 
 
Insufficient funding: In 2000-2009 period, the US venture capital industry raised 1.933 funds 
with total value of US $ 314 billion compared  to 800 funds with total value of US $ 60 
                                                 
109 2008, EVCA Yearbook. 
110Atlantic Drift – Venture capital perfo rmance in the UK and the US, June 2011 
http://www.nesta.org.uk/library /documents/AtlanticDrift.pdf  
 
 
 148billion raised in the EU.111 In other words, the amount raised in the EU for venture capital 
investments is only a quarter of its US counterpart.  In 2010 , the average European venture 
capital investment as share of GDP was 0.027% (highest for Sweden with 0.068%, followed 
by Finland 0.055% and the UK with 0.042%) compared to 0.14  % in the US.112 
Aavailable funding spread too thinly : European funds invest only 20% of their US 
counterparts but support nearly twice as many companies. US average seed investment per 
company since 2002 amounted to € 1.5 million and reached an average of € 4 million in 
2009, while the US average early stage finanicng was rather stable at around € 3 million per 
company. EU on the other hand invested in the same period (2002-2009) about only € 0.5 
million per company in the seed stage and around € 1 million in the startup phases. 113 
Between 1990-2005 US venture funds invested in  follow-up rounds in roughly 40 % of their 
companies, compared to only 20% in Europe.114 
Investment stage focus: US investors invest more in early stages (seed and start-up) than 
their EU counterparts who focus more on later stage investments in protfolio companies. 
However, in the EU there is relatively long history of European public funding support for 
firms in their early stages of life, as a public policy response to the shortfall in appropriate 
sources of financing in these early stages.  
Risk-reward:  The US focus on financing earlier (and riskier) stages of companies is 
ultimately reflected in US venture capital fund returns (measured by their Internal Rate of 
Return – IRR) , which have been more reward ing than returns on EU funds. This is in line 
with the risk-reward thesis, wh ere the riskier the investment, the greater the potential payoff 
in case of success. (EIF)  
Sector Specialisation: Since 1990s, US venture capital f unds exhibit higher levels of 
specialisation than their continental EU or UK counterparts. US funds focus on 
internet/computer, electronics and biotech/health sectors with almost 80% of their 
investments between 1990-2009. Although the years 2006-2009 saw a trend towards higher 
specialisation in the EU as well, these thr ee specific sectors still only reached 60%; more 
generally EU funds' specialisation has been mo re dispersed than that of the US. (NESTA)  
Syndication115: US funds tend to syndicate much more than EU funds (invest with a larger 
number of co-investors) and tend to syndicate more effectively, as their syndictes grow over 
time.116 The motivating factors for syndication include risk diversification, improved 
screening of portfolio companies, complementarity in monitoring and advising portfolio 
companies, information sharing and pooling of contacts in the exit phase. This has been  
taken as an indicator of the greater maturity of the US venture capital market.117 
                                                 
111 Ernst & Young, "Back to basics, Global ve nture capital insights and trends report 2010" 
112 Josh Lerner, Yannis Pierrakis, Li am Collins and Albert Bravo Biosca, "Atlantic Drift - Venture Capital 
performance in the UK and the US, Research report June 2011 
113 Roger Kelly, "The performance and prospects of Eur opean Venture capital, European Investment Fund; 
Working Paper 2011/9 
114 Ulrich Hege, Frederic Palomino and Armin Schwienbacher, “Venture Capital Performance: The Disparity 
Between Europe and the United States”, Revue de l’association francaise de finance, vol. 30, no. 1, 2009, p. 26  
115 Syndication is the process whereby a group of venture capitalists will each put in a portion of the amount of 
money needed to finance a small business. 
116 See Hege et al., but also R. Kelly and Lerner et al. 
117 See Hege et al. 
 
 149Cluster concentration: Information about potential investment opportunities generally 
circulates within circumscribed geogrraphic and industyr zones. This makes it advantageous 
for fund managers to locate near each other, close to agglomerations of high potential 
entrepreneurs. Funds raised in four of such  geographical clusters (Silicon Valley, New York, 
Massachusetts and London) hosted 40 % of all ve nture capital funds launched in the US and 
Europe in 1990-2005.118 This sort of concentration is rather an exception in Europe, 
although some signs of develoment in the US  direction emerge, e.g. Medicon Valley in 
Denmark/southern Sweden, the Heidelberg  Cluster or the Silicon Fen in the UK.119 
Internationalisation:  A much larger share of EU venture capital funds invest in US firms 
than the opposite, although in the period 2006-2009 the proportion of US investments in EU 
companies somewhat increased. Between 1990 and 2005, less than 20% of US funds raised 
were invested in European companies, co mpared to 40% of EU venture capital funds 
investing in US firms.120 
 
Exit market fragmentation:  European exit markets are fragmented as there is no single small 
cap market facilitating exit, along the lines of NASDAQ.121 
Enterpreneuership: Becoming an entrepreneuer is not regarded as a career in Europe – 
cultural attitudes are such that higher edu cation and training tends to be focused on 
traditional career structures and there is less encouragement, advice or support for those who 
wish to pursue an entrepreneurial career.122 
Bankruptcy:  There is still a strong stigma attached to bankruptcy in most  European 
countries, whereas in the US, this is less the case – the idea that it is better to have tried and 
failed than not to have tried at all is more prevalent – this toleran ce for failure has been 
posited as vital for allowing entrepreneurship to flourish.(EIF) 
Culture, Language, Regulatory regimes: 27 different cultures, languages and regulatory 
regimes compete in the EU, compared with a (broadly) single unified one in the US.  
Before looking more closely at how these di fferent factors might impact the relative 
performance of EU and US funds, the s cale of the perceived performance gap 
between the EU and US and its evolution n eed to be established. This is briefly 
summarised below (see box 2). 
Box 2: Performance gap between UK123 and US venture capital funds124   
                                                 
118 See Lerner et al. 
119 See R. Kelly 
120 See Lerner et al. 
121 See R. Kelly 
122 ibid 
123 See Lerner et al.- explaining that performance data is only available for a subset of funds, so the analysis 
restricts itself only to UK and US as data comp ilation for these two regions is most complete. 
124 See Lerner et al. 
 
 150UK venture capital funds have historically on average underperformed US funds, but the gap 
has narrowed. Clear UK-US gap exists for funds raised before the dotcom bubble (1990-
1997).  
For instance, the average IRR fo r funds raised in this period was 33% in the US and 13% in 
the UK. Funds raised between 1998 and 2005 repor ted -0.21% IRR for US funds and -1.21% 
for the UK. Overall funds followed the same pa ttern in the same period, however a relative 
convergence was driven by worsening US fund performances when the dotcom bubble burst, 
rather than by UK funds closing the gap.  
However, average returns do not capture the larg e variability in returns within countries. The 
performance gap between bad and good performing funds within a country is much larger 
than the gap in the average re turns across countries (UK versus  US). Indeed, the best US 
funds prior to the dotcom bubble outperformed UK funds by 89%.  
Recent studies have sought to identify the mo st statistically relevant factors that 
determine the performance differences betw een venture capital funds on either side 
of the Atlantic. Overall views and analys is vary on the relative importance of the 
different factors outlined. Conclusions di ffer depending on the timing of research, 
the pool of funds covered, as well as the methodologies used (see box 3).  
Box 3: Factors determining the performance gap - SUPPLY SIDE 
Lindström (2006) : Contrary to the common perception (that EU venture funds perform 
worse than US), the effect of the fund locati on was found to be insignificant when controlled 
for fund characteristics. This means that perform ance of EU and US funds is determined by 
fund characteristic rather than location. Furt her quantitative analysis however found that the 
differences in fund characteristics between EU and US are not very significant. Still, some 
clear differences were identified and the variab les contributable to most of the performance 
gap between US and EU venture capital funds were: (i) low EU deal syndication (see table 
X), followed by (ii) fewer EU corporate vent ures (corporate vs independent) and also (iii) 
low EU sector specialisation (lower share of IT and high-tech investments in the EU).   
Hege et al. (2009): The key determinants of the performance gap are: (i) US venture 
capitalists show a positive relationship betw een total funding and performance while the 
reverse is true for Europeans. One reason appear s to be that US venture capital react with an 
increased funding flow upon good early performance, in contrast to Europeans; (ii) US 
venture capitalists use instruments of control and contingent funding efficiently, since 
performance reacts positively to shorter funding intervals in the US, while the opposite is 
true in Europe; (iii) US venture investors use syndication more effectively, as their 
syndicates grow over time, while their European counterparts do not (but these results 
appeared to be weakly significant at the time of the study) and (iv) lastly, US venture 
capitalists are more sector specialised and incl ude more corporate investors that in the 
European funds. 
Lerner et al. (2011): Here the key findings indicate that the performance gaps between US 
and UK funds were driven by wider economic environments: (i) notably the background of 
investor or other cultural issues. Furthermore (ii) prior outperformance, (iii) early round 
investments, managers' experience as well as (iv) an optimal size of the fund are found to be 
the strongest quantifiable predictors of perfo rmance for venture capital funds. Lastly the (v) 
clustering of the venture capital industry in hubs and (vi) sectoral specialisation are also 
factors explaining historical performance differences. 
Box 4: Factors determining VC performan ce and the access to finance by SMEs 
- DEMAND SIDE 
 
 151C. Masons and J. Kwowk125(2010):  Access by SMEs to finance is constrained by demand-
side weaknesses. Most businesses are not investment ready (IR). Their owners are unwilling 
to seek external equity finance and those who are willing do not understand what equity 
investors are looking for or how to ‘sell’ themselves and their businesses to potential 
investors. These weaknesses, in turn, comp romise the effectiveness of supply-side 
interventions, such as initiatives to stimulate business angels or which create public sector 
venture capital funds. This has highlighted th e need for investment readiness programmes 
that seek to increase the pool of investable businesses. 
SQW Consulting126 (2009): From the experience of UK, those consulted reported a low level 
of IR amongst target firms.  One venture capital fund turns down 98% of applications 
received due to a lack of IR.  Another commented that IR schemes do not appear to have had 
much impact on the quality of applications subm itted.  However, other funds reported a lack 
of any form of IR assistance in their area a nd mentioned that Business Link (a scheme for 
this) did not seem to be able to signpost companies to suitable support. One fund manager 
stated that the problem with IR schemes is that they are not tough enough on businesses 
about their management.  The schemes are good at showing people how to prepare business 
plans but fail to make businesses understand the importance that VCs place on the key 
investment criteria. 
L. Silver, B. Berrgren, F. Vegholm (2010)127: From the Swedish experience, the research 
analysis indicates that an increased level of  IR in SMEs results in closer working 
relationships with financiers and a higher level of commitment by the investors, which in 
turn leads to greater market accessibility fo r SMEs. This study supports public policy 
focused on programs that alleviate the problems associated with the lack of IR in SMEs. 
Luis Galveias128 (2011):  Investors greatest concerns’ about investing in SMEs fall into lack 
of market and customer validation, lack of experienced management team to take the 
business forward and lack of skills. 
Lerner (2011):  Here the key findings indicate to performance between US and UK funds 
being driven by the wider economic environmen t in which funds operate including also (i) 
number of oportunities available and the barrieers to their development, (ii) the ambition and 
ability of entrepreneurs are additional factors found to be the strongest quantifiable 
predictors of performance for venture capital funds. 
 
  
                                                
 
125 Colin Mason, Jennifer Kwok: Investment Readiness Programmes and Access to Finance: A 
Critical Review of Design Issues, Local Economy June 2010 vol. 25 no. 4 269-292   
126 SQW Consulting: The supply of equity finance to SMEs: revisiting the "equity gap" A report to the 
Department for Busine ss, Innovation (2009)  
127 L. Silver, B. Berrgren, F. Vegholm: The impact of investment readiness on inve stor commitment and market 
accessibility in SMEs, Journal of Small Business and Entrepreneurship, 2010 volume 23, Issue 1  
128 Improving Investment Readiness for ICT EU F unded Research Luis Galveias, EBAN, March 2011: 
http://www.vleva.eu/sites/www.vleva.eu/file s/events/bijlages/luis_galveias_eban.pdf  
 
 
 152 
Table 14:  European venture capital a nd private equity investment - Pooled 
average IRR% for investment horizon of 1, 3, 5, 10 and 20 years as of 30.6.2006  
Stage/horizon 1 year 
2006 3 Years 
2004-2006  
5 Years 
2002-2006 
 10 Years 
1997-2006 20 Years 
1987-2006 
Early stage -10.2 -0.7 -6.4 -0.9 0 
Development 0.0 5.9 0.2 9.2 8.8 
Balanced 0.0 14.4 3.7 12.8 10.3 
Total venture -6.6 6.8 -0.8 6.8 6.9 
Buyout 36.1 13.2 7.1 14.3 13.9 
All private equity 33.3 10.4 3.9 11.2 10.6 
Source: K. Raade and C.T. Macha do: Recent developments in the Eu ropean private equity markets, 
Economic papers 319, April 2008  
Table 15:  US venture capital and privat e equity investment - Pooled average 
IRR% for investment horizon of 1, 3, 5, 10 and 20 years as of 30.6.2006  
Stage/horizon 1 year 
2006 3 Years 
2004-2006  
5 Years 
2002-2006 
 10 Years 
1997-2006 20 Years 
1987-2006 
Early/seed stage 2.6 5.5 -5.4 38.3 20.5 
Development 7.5 12.9 1.9 16.9 14.6 
Later stage 14.5 8.9 1.8 9.0 13.7 
Total venture 7.0 9.1 -1.2 20.5 16.5 
Buyout 21.6 15.6 2.2 8.8 13.2 
All private equity 16.5 13.1 6.8 11.2 14.0 
Source: K. Raade and C.T. Macha do: Recent developments in the Eu ropean private equity markets, 
Economic papers 319, April 2008  
 
In 2006, the long-term investment horiz on and returns of US venture capital 
operators were high. They significantly out performed European venture capital with 
10-year returns at 20.5% as compared to  6.8% in Europe. Also the profitability 
levels of seed and start up investments measured in a 10-year perspective was 
 
 153significantly higher in the US. While in the US investment in early/seed funds posted 
a 10-year return of 38.3%, the equivalent European figure remained at -0.9%.129  The 
2010 figures130 do not show such a big profitability gap between the two continents. 
The mid term 5-year returns of European VCF investments were negative -1.57% compared to 1.16% for US funds. Intere stingly, a 10-year horizon, both European 
and US VCF show negative returns of - 3.78 % and -6.59 % respectively. It is true 
that US VCF show past consistent outperformance. However, recent study
131 points 
to the fact that average returns do not captu re the large variability in returns within 
countries, when comparing UK and US vent rue capital funds performance. It found 
that the performance gap between bad and good performing funds within a country is 
much larger than the gap in the average re turns across countries, thus suggesting that 
investors can find good performing funds everywhere. Furthermore, it suggests that returns are not driven by th changes in  funds characteristics like size or an 
investment strategy but instead, it is most likely the result of characteristics of funds' 
environment in which they operate (venture capital 'ecosystem'). 
 
The venture capital ecosystem  
Increasingly, latest studies refer to a venture capital 'ecosystem'132 as having a 
decisive influence on whether venture capital funds perform badly or not. The 
venture capital ecosystem can be understood as  a combination of all the factors as 
described above (see box 1), including suffi cient capital flows between the market 
participants, specific knowledge and experien ce of the demand as well as supply side 
of the market, existence of supply of new ideas and willingness to pursue new business opportunities (box 4), but also ex istence of supportive economic, regulatory 
and fiscal frameworks. In other words, in such an environment, the demand and 
supply side should ideally be in equilibrium.
133  
The demand for cross-border venture capital is  largely related to the existence of a 
strong pool of attractive investment opportunities indicated e.g. by high quality human capital
134, patents135, world class science emanating from universities136, 
                                                 
129 K. Raade and C.T. Machado: Recent developments in the European private equity markets, Economic papers 
319, April 2008 http://ec.europa.eu/economy_finan ce/publications/publication12419_en.pdf  
130 EVCA, Thomson Reuters 
131 Atlantic Drift – Venture capital perform ance in the UK and the US, June 2011,   
132 Clarysse, Knockaer and Wright, 2009 or Lerner 2011 for example  
133 Aizenman, J. and Kendall, J., 2008, The Internationalization of Ventur e Capital and Private Equity: SSRN 
working paper.  
134 Ibid and and Tykvová, T. and Schertler, A., 2008, Sy ndication to Overcome Transaction Costs of Cross-
border 
Investments ? Evidence from a Worldwide Privat e Equity Deals' Dataset. Working paper  
135 Guler, I. and Guillén, M.F., 2007, Transnational Conn ections and Strategic Choice: Venture Capital Firms' 
Entry into Foreign Markets. Working paper  
136 Wright, M., Clarysse, B., Must ar, P., and Lockett, A., 2007, Academic Entrepreneurship in Europe . 
 
 154higher GDP growth rate, and supportiv e exit markets including mergers and 
acquisitions and initial public offering (IPO) opportunities137.  
 The supply of venture capital is positively related to a functioning tax and legal 
framework for raising venture capital funds
138. The frictions reducing the cross-
border flows include e.g. distance, fore ign language, different currencies, not 
belonging to a common market, trade relations , lack of availability of experienced 
co-investors, lack of information and trus t, and lack of regulatory environment the 
investors would know and trust. The factors are largely similar also for cross-border 
                                                                                                                                          
Cheltenham: Edward Elgar  
137 Jeng, L.A. and Wells, P.C., 2000, The Determinan ts of Venture Capital Funding: Evidence Across 
Countries. Journal of Corporate Finance 6: p. 241-289 and Cumming, D., Flem ing, G., and Schwienbacher, A., 
2005, Liquidity risk and venture capital finance. Financial Management 34(4): p. 77-105.  
138 Schertler, A. and Tykvová, T., 2008, Stay at Home or Go Abroad? The Impact of Fiscal and Legal 
Environments on the Geography of Private Equity Flows. Working paper  
 
 155fundraising139. From the brief overview of factor s that determine the success of a 
venture capital it is evident that some of these factors are harder to influence (e.g. 
cultural factors impacting the supply of en trepreneurs or language barriers) than 
others 
                                                 
139 Groh, A.P., Liechtenstein, H., and Canela, M.A., 2008, International allocation determinants of institutional 
investments in venture capital and private equity lim ited partnerships. IESE Wo rking Paper WP no 726 and 
Cumming, D. and Johan, S., 2007, Regul atory harmonization and the developm ent of private equity markets. 
Journal of Banking & Finance 31(10): p. 3218-3250  
 
 15612. Annex XII: Summary of selected academic literature related to the 
impact of Venture Capital 
 
12.1. Venture capital, growth and employment 
On the Lifecycle Dynamics of Venture-C apital- and Non-Venture-Capital-Financed 
Firms 
Manju Puri, Duke University and NBER; Re becca Zarutskie, Duke University; June 
2010 
• First, we examine the quantitative importa nce of VC in new firm creation in 
the economy. Using data from the Census we see that from the point of view 
of new firm founding, VC financed firm s are an extremely small percentage 
of all new firms created in the LB D – accounting for 0.11% over our 25 year 
sample period and increasing to 0.22% in the late 1990s. However, the picture is different if we focus on alternative measures such as employment. The amount of employment generated by VC backed firms accounts for roughly 4-7% of employment in the US  in the late 1990s till 2000, steadily 
rising from 2.8% in the 1980s. Hence, in terms of employment generated, VC is widely perceived to be an engine of growth for the economy. 
 
The impact of venture capital on innovation behaviour and firm growth Peneder, Michael (2010), Venture Capital, 12: 2, 83 — 107 
• Second, the data show that, on average, VC-financed firms are more 
innovative and grow faster in terms of  employment and sales revenue than 
other firms. However, the observed differences in innovation performance 
(measured as the share in sales revenue  of new products and services) prove 
to be the result of pure selection effect s and not the direct causal impact of 
VC financing on innovation. In other words,  VC equity tends to finance firms 
with above average levels of innovati on rather than making the firms more 
innovative. From the standpoint of the individual firms, this observation does 
not constitute a separate impact beyond that already captured by the specific 
financing function. However, from the pe rspective of the economy at large, it 
offers evidence of the selection f unction, telling us that venture capital 
succeeds in allocating resources to innovative firms, thereby fostering structural change and development. 
• We argue that by offering a unique comb ination of ownership and incentives, 
private equity investment seems to lo wer the cost of start-up capital and 
result in higher industry dynamics. The results are generally robust to using different proxies for entry, contemporane ous or historical volumes of private 
equity investment, and to correcting fo r omitted variable bias. We also find 
that the effect of private equity is higher in countries with better judicial systems and in countries with smaller share of the informal economy. This result is only logical: to the extent that private equity targets industries that rely heavily on intangible assets like intellectual property, licenses and 
 
 157patents, its effect should be more pr onounced in countries where the returns 
to those are protected by the legal system . At the same time, we find that the 
relatively higher effect of private equ ity investment on entry in high-entry 
industries is robust to accounting for other industry characteristics, as well as for other characteristics of the busin ess environment that have been 
suggested by the literature as determinants of entry rates.  
 
Venture capital financing and the growth of new technology-based firms 
Fabio Bertoni, Massimo G. Colombo and Luca Grilli; Department of Management, 
Economics and Industrial Engineering, Politecnico di Milano 
• Our results clearly support the view th at VC financing fuels firm growth. 
According to our estimates, after recei ving the first round of VC financing 
portfolio firms exhibit a considerably greater growth rate measured in terms of both the number of employees and th e amount of sales, during the three 
subsequent years. The difference of the growth rate with respect to that of 
otherwise similar non VC-backed firms is both statistically significant and of an economically considerable magnitude. At the end of the third year the estimated number of employees and amount of sales are 98.5% and 93.2% 
greater than those in absence of VC financing. We think that these results 
offer new interesting insights into the ro le of VC financing in fostering the 
growth of high-tech start-ups. Quite in terestingly, they clearly document that 
even in an unfavourable environmen t as the one provided by the Italian 
financial system, VC financing has a dramatic positive influence on NTBF growth, especially when the investor is  a financial venture capitalist. This 
evidence has important policy implications. In fact, in Europe the VC sector is far less developed than in the USA or  in Israel. While an analysis of the 
determinants of this situation lies be yond the scope of the present work, the 
findings illustrated here support the view that the development of the demand for and supply of VC financing shoul d figure prominently in the innovation 
policy agenda of European governments. 
 
From funding gaps to thin markets: UK Government support for early-stage venture 
capital 
BVCA – NESTA Research report; September 2009 
• The econometric methods allow us to quantify the effects. This is important 
as it matters a lot whether the effects ar e small, medium or large. The actual 
number of additional jobs created by all the 782 recipient firms was 1,407 more than would be expected without  funding (or 1.8 extra jobs per firm). 
These findings suggest these scheme s are better at producing employment 
than the EIS and VCT schemes. Sim ilarly, the scale of the capitalisation 
effect implies that ‘treatment’ (i.e. funded) firms have, on average, received 
£98,455.50 greater capitalisation than ‘untreated’ firms. 
• A key economic role of US venture capita l is the allocation of financial and 
managerial resources to help grow firms that will have a dramatic impact on productivity in the economy. When we co mpared the funded firms with the 
 
 158control sample we found that recipien t firms do have higher average labour 
productivity (mean sales per employee measured in £’000s) than matched firms that did not receive funding from  the schemes being evaluated. In the 
first instance, this was identified as a one-off, upward shift in per capita labour productivity for supported firms, over and above that achieved by unsupported firms. After controlling for other influences, in the ‘typical’ 
supported firm this would equate to £57,800 (sales per worker) in increased 
labour productivity. 
Reshaping the UK economy: The role of public investment in financing growth 
Yannis Pierrakis and Stian Westlake; NESTA Research report, June 2009 
• Different estimates put the number of bus inesses in the UK that are reliant on 
venture capital at between 880 and 1,100. These firms play an important role in economic growth and job creation. Th e largest recent survey showed that 
over the five years to 2006/7, firms back ed by venture capital increased their 
worldwide employment by 8 per cent per y ear, a much higher rate of growth 
than the 3 per cent reported by most mi d-sized companies. Venture-backed 
firms’ UK employment also grew by 6 per cent, compared to a national annual rise in employment of 1 per cen t. The evidence from the US, where 
venture activity has a longer pedigree, is even more compelling. The largest study showed that American companies that received venture capital from 
1970-2006 accounted for 10.4 million jobs and $2.3 trillion in revenues in 2006. The total revenue of venture capital financed companies comprised 17.6 per cent of the nation’s GDP and 9.1 per cent of US private sector 
employment in 2006. Venture capital-backed companies outperformed their non-ventured counterparts in job crea tion and revenue growth. Employment 
in venture-backed companies jumped by 3.6 per cent between 2003 and 2006 as national employment grew by just 1.4 per cent. At the same time, venture capital-backed company sales grew by mo re than 11.8 per cent, compared to 
an overall rise in US company sales of 6.5 per cent during the same period. 
 
The Economic and Social Impact of Private E quity in Europe: Summary of Research 
Findings 
Per Strömberg, Professor of Finance, Stockholm School of Economics, September 
2009 
• In cross-country data, there is a clear positive relationship between private 
equity investment activity and ec onomic growth. However, no rigorous 
academic study has analysed whether private equity actually has an impact on the GDP growth of a country. The pr oblem in undertaking such studies is 
to control for the reverse causality expl anation – that growth causes private 
equity investment, rather than the other way around. Researchers argue that management buyouts played a catalytic role and helped restore the US 
economy during the 1980s and early 1990s. The overall research evidence shows a positive effect of leveraged buyouts on individual firm performance 
and productivity. This suggests that, on a macroeconomic level, leveraged 
buyouts contribute to better allocation of capital and a more efficient 
economy. As such, they can be a powerful tool for accelerating the 
 
 159restructuring of the economies. Th rough leveraged buyouts, scarce equity 
capital can be freed from declining, low-value added industries and invested in high-risk, high-value-added emerging industries that may otherwise not be 
financed. Some studies suggest that private equity has a positive impact on 
stock market development. Since stock market development has been shown to increase economic growth, this suggests another causal route where private equity can impact economic growth. 
 
High Growth Entrepreneurs, Public Policies and Economic Growth  Erik Stam, Kashifa Suddle, S. Jolanda A. Hessels, Andre J. Van Stel, Jena Economic 
Research Paper No. 2007-019; Hudson Institute Research Paper No. 08-02. 
 
• The results of our empirical exercises suggested that ambitious 
entrepreneurship contributes more strongly to macro-economic growth than entrepreneurial activity in general. We  found a particularly strong effect of 
high-expectation entrepreneurship for transition countries. 
 
12.2. Efficiency gains and industry dynamics 
 
How does venture capital financing improve efficiency in private firms? A look 
beneath the surface 
Thomas Chemmanur, Karthik Krishnan, Debarshi Nandy; CES 08-16 June, 2008 
 
• Our main findings are as follows. First,  the overall efficiency of VC backed 
firms is higher than that of non-VC b acked firms. Second, this efficiency 
advantage of VC backed firms arises  from both screening and monitoring: 
the efficiency of VC backed firms prio r to receiving financing is higher than 
that of non-VC backed firms and further,  the growth in efficiency subsequent 
to receiving VC financing is greater fo r such firms relative to non-VC backed 
firms. On average, VCs select firm s that have higher TFP of around 6% 
compared to non-venture backed private firms, and further VC firms are able to achieve an increase in their T FP of around 10% due to the monitoring 
services provided by the VCs. Both these effects are economically significant, resulting in an increase in profits of approximately 21% and 35% 
respectively. Third, the above increase in  efficiency of VC backed firms 
relative to non-VC backed firms increases over the first two rounds subsequent to receiving financing, and remains higher till exit. Fourth, while 
the efficiency of firms prior to VC financing is lower for firms backed by 
higher reputed VCs, the increase in effi ciency subsequent to financing is 
significantly higher for the former firm s, consistent with higher reputation 
VCs having greater monitoring ability compared to lower reputation VCs. Our results indicate that this differe nce in monitoring ability between higher 
 
 160and lower reputation VC backed firms results in TFP improvements that are 
10% greater for higher reputation VC ba cked firms, which is economically 
very significant as it implies an incr ease in profits of approximately 35%. 
Fifth, the efficiency gains generated by VC backing arise primarily from 
improvement in product market perfor mance (sales); however for higher 
reputation VCs, the additional efficiency  gains arise from both an additional 
improvement in product market performance as well as from reductions in production costs. 
 
On the real effects of private equity  investment: Evidence from new business 
creation 
Alexander Popov and Peter Roosenboom; ECB Working paper series, No 1078 / 
August 2009 
 
• We find that private equity investment has a beneficial effect on entry, which 
is relatively higher for industries which naturally have higher entry rates and 
are more R&D intensive. The eff ect remains strong once we exclude 
investment allocated to buy-outs, sugge sting that early stage finance is 
important in this respect. Our results hold both in 1998-1999 and 2006-2007, when we account for industry size, and when we exclude the transition economies. The results stay unchange d after we address the endogeneity 
problem (does private equity induce entry or is it attracted to countries with a more dynamic industrial structure?) by using an IV procedure in which variation in national prudential regula tion guiding the investment behaviour 
of Europe’s pension funds is used as  an instrument for the supply of PE 
funds.  
 
Dynamic Interactions between Venture Capital Returns and the Macroeconomy: 
Theoretical and Empirical Evidence from the United States 
Roland Füss, Denis Schweizer; European Business School Research Paper Series 
09-15 
 
• Existing empirical evidence of the inte rrelationship between the Nasdaq and 
VC returns confirms that a well-functi oning stock market can be considered a 
viable exit channel. These findings of  comovements and short-term dynamics 
are in accordance with the empirical re sults of Cochrane (2005), who showed 
that VC returns behave similarly to the smallest Nasdaq stocks. We can also show that the returns of VC investments are influenced by industrial production, according to VEC Granger causality. Again, this finding confirms the results of Gompers and Lerner (1998) by using the GDP as a 
proxy for economic conditions. However, we do not find a direct connection 
between VC and long-term interest rate  in the short term. The sign of the 
coefficient from the normalized cointegration vector is positive, which 
 
 161implies the demand side has a larger influence. This effect was also found by 
Romain and van Pottelsberghe (2004) for aggregate country data. 
 
12.3. Growth deficit in Europe 
• Entrepreneurs: A vigorous and entrepreneurial economy needs a high birth 
rate of new businesses founded by properly resourced and well prepared entrepreneurs. According to the Global Entrepreneurship Monitor
140, high-
expectation entrepreneurial activity (e xpectations of over 20 employees in 
five years) is highest in the USA, w ith Germany and the UK at less than half 
the US levels. Globally, start-ups exp ecting to employ 20 or more employees 
are responsible for almost 75% of total expected jobs in all entrepreneurial activity. The insufficiently growth -oriented financing of innovative 
enterprises is one of the causes for the EU’s inferior performance in the last 
two decades.  
• Old firms:  The results of this are clearly visible. Among 500 largest listed 
European companies only 12 were born in  the second half of the twentieth 
century, against 51 in the US. Only th ree were created after 1975 in Europe, 
compared with 26 in the US. The t op US firms are changing constantly, 
while in Europe the largest companies are likely to stay on top for a long period. In the US they are challenged by new entrants and also by their own shareholders, who often force them to  divest non-core activities or to split 
into separate entities
141.  
• Creative destruction:  Research in 2000142 found that one-third to one-half 
of aggregate productivity growth in US  manufacturing is directly due to 
reallocation between firms, creation of new firms, and disappearance of 
unsuccessful ones. 
  
12.4. Financial constraints 
• Finance, labour: One study
143 suggests that, in terms of obstacles to growth, 
financial constraints are at least as im portant as labour market rigidities when 
observed over a sample of companies across different countries.  
• Dynamics lacking: The relative underdevelopment of Europe’s financial 
sector is largely about the dynamics created by appropriate incentives. For 
example, initial public offerings (IPOs ) in the US play a key role in 
                                                 
140  Global Entrepreneurship Monitor: High-Expectation Entrepreneurship 2005, 
Summary Report. 
141  Philippon, T, Véron N 2008; Financing Europe’s Fast Movers , Bruegel Policy Brief 2008/01, 
Brussels. 
142  Foster, L., Haltiwanger, J. Krizan C J; Aggregate Productivity Growth: Lessons from 
Microecononmic Evidence,  NBER Working Paper 6803/2000.  
143  Aghion, P, Fally T, Scarpetta S, Credit Constraint as a Barrier to the Entry and Post-Entry 
Growth of Firms, Economic Policy 22/52, October 2007. 
 
 162motivating people to both look for ideas and start new companies. Without a 
vibrant exit market, investors might not see many entrepreneurs asking for 
finance. The academic literature of th e past decade has robustly established 
that financial development is not only the consequence of growth but also a 
cause. 
• Ambitious firms face difficulties:  The majority of SMEs in most European 
countries would not place access to finance for growth as the major barrier to 
their success144. This is because it is only a minority of the founders of small 
businesses would wish to grow thei r businesses aggressively. However, 
significant numbers of the most innovative and ambitious young companies in an economy still repeatedly cite financial difficulties as a major constraint to their continuing and rapid development.
145  
 
12.5. High growth potential is rare 
• But important:  It has been argued146 based on UK evidence that essentially 
some 4% of new firms starts will represent over 50% of additional total benefits when measured by employment, sales, exports or other economic ‘desirables’.  
• Focus needed:  Thus, an argument exists for financing mechanisms and 
programmes that fit more closely the circumstances and needs of valuable target groups. In this context, issues  of formal and informal sources of 
venture capital, and initiatives to exploit mezzanine finance, securitisation of debt and the enhanced role of stock markets for ‘alternative investments’ 
become major points of an integrated SME finance policy response.  
• Diverse universe:  A comprehensive programme of SME finance targeting 
firms with potential for high growth needs to recognise the need for a diversity of instruments appropriate to  the circumstances of enterprises of 
different sizes, operating in different sect ors and at different stages of their 
life-cycle.  
• Use risk capital: Given limited and erratic cash fl ows at the early period of 
the firm’s growth trajectory, the so-called ‘J Curve’ effect
147, risk capital may 
be a much more appropriate form of fi nance that bank debt with the latter’s 
requirement for regular interest payment from retained or trading income. 
• Entrepreneurs are not born: Regardless of the quality and extent of the 
professional support available for business founders, the entrepreneurs themselves have to be sufficiently prep ared and informed in order to make 
use of the resources available.  
                                                
 
144  European Commission Flash Barometer 2005 SME Access to Finance: Executive Summary . 
Brussels 
145  Maula, M., Murray, G. C. and Jääskeläinen, M 2007. Public Financing of Young Innovative 
Companies in Finland. Report to the Finnish Ministry of Trade and Industry. MTI Publications, Helsinki.pp127. 
146 Storey, D. J. 1994. Understanding the Small Business Sector . Routledge, London. 
147 Mathonet P-Y, Meyer T Beyond the J-Curve, Wiley 2005. 
 
 163• Investment readiness:  Investors frequently allude to the poor level of 
understanding or preparation by entrepre neurs seeking commercial sources of 
finance. Training in, or an understanding of, investment readiness is a strong 
positive signal to investors of both debt and equity, as well as to customers 
and suppliers, as to the quality of the applicant SME firm.  
• Management skills: Despite the increasing media interest in entrepreneurs, a 
large proportion of new business owne rs are both poorly informed and ill 
prepared for the rigours of commercial activity148. Poor management is 
largely responsible for the very high d eath rate of new enterprises in their 
first five years.149 In order to survive and flourish, entrepreneurs need to be 
commercially credible. They must be able to demonstrate both a compelling business idea and the necessary managerial and financial competence.  
 
12.6. Success stories 
Many successful companies such as Skype, WaveLight AG, Fimasys, etc. would not 
exist today without the funding and guidan ce provided during their early stages by 
venture capitalists supported by the Co mpetitiveness and Innovation framework 
Programme (CIP). This highlights again that  VC funds and investors are particularly 
important for start-ups and SMEs. The SMEs should be considered as an essential job creator in the economy.  
The following cases have been supported by the VC investments of EU programmes: 
Skype , the internet communications company Skype received EU support, its 
success is a striking example of vent ure capital investment for innovation 
companies. Skype was a early beneficiar y of the European Commission's ETF Start-
up facility investment. WaveLight AG,  formerly known as WaveLight Laser 
Technologie AG, a German firm making lasers for treatment of skin and eye 
complaints, has seen annual revenues grow more than ten times in the past five 
years, with turnover in 2003-04 reachi ng €62 million. It found finance from two 
funds to which the EU had contributed. Fimasys , a French financial-services 
software provider, also received support from EU funds. With annual revenues 
growing by more than 50% per year over th e past three years, it is listed by the 
Deloitte Technology Fast 500 ranking of high-growth European SMEs. Durham 
Graphene Science Dutch physicist Andre Geim and his British partner Konstantin 
Novoselov won the 2010's Nobel Prize in Phys ics for their work on graphene, a new 
form of carbon material just one-atom thick which is not only the thinnest ever but 
                                                 
148 European Commission. 2006. Investment Readiness: Summary report of the workshop  28 
November. Brussles. 
149 Cressy, R.  2006. Why do most firms die young? Small Business Economics , 26: 103-116  
 
 164also the strongest. graphene has some excep tional properties: it is almost completely 
transparent, yet so dense that not even helium, the smallest gas atom, can pass 
through it. It has numerous potential applica tions, such as super-fast, super-light 
graphene transistors, not to mention transp arent touch screens, solar cells and light 
panels. The two scientists’ work was par tly funded by the EU’s Competitiveness and 
Innovation Programme. 
 
 16513. ANNEX XIII:  ECONOMIC DIMENSION OF VENTURE CAPITAL  
13.1 Impact of venture capital on economy 
Venture capital helps to drive innovation, ec onomic growth and job creation. VC has 
a lasting effect on the economy as it mobilis es long term investment. Moreover, VC 
backed companies often create high-quality j obs as VC supports the creation of the 
most successful and innovative businesses. In the Information Technology (IT) sector the cost of creating new busin esses has generally gone down, which is 
profitable for the existing and coming start- ups. The VC will amplify the benefits of 
the growing entrepreneurial culture.  
According to research venture capital cont ributes to economic growth. One estimate 
is that an increase in VC investments of  0.1% of Gross Domestic Product (GDP) is 
statistically associated with an increase in  real GDP growth of 0.30 percentage point. 
Early-stage investments have an even  bigger impact of 0.96 percentage point
150 (the 
sample contained 14 European countries  and the US in 1989-2009). The study also 
notes that bubbles, such as the dotcom boom  in 2000 and the financial crisis in 2009, 
led to lower coefficients.  
Regarding the causality between VC i nvestments and economic growth, the 
conclusion is that countries with high VC  activity typically have stronger economic 
growth. The opposite is not true: not all hi gh-growth countries have a vibrant VC 
market. The link to growth is confirmed by another study, noting that an increase in the supply of VC in a metropolitan area stim ulates the production of new firms in the 
area.
 151 
Samila and Sorenson studied the impact of  VC, using a panel of U.S. metropolitan 
areas, on employment and aggregate inco me. They found a positive correlation as 
VC stimulates the creation of more firms than it funds. Investing venture capital in 
an additional firm would stimulate the entry of two to twelve new companies. This naturally affects positively job creation a nd aggregate income: "A doubling in the 
number of firms funded by venture capita l also results in a 0.22% to 1.24% 
expansion in the number of jobs and a 0.48% to 3.78% increase in aggregate 
income."  
These results seem consistent with eith er of two potential mechanisms: "First, 
nascent entrepreneurs may recognize the need for capital in the future and establish firms only when they perceive reasona ble odds of obtaining that funding. Second, 
the snowball effect, VC-funded firms ma y encourage others to engage in 
entrepreneurship through a demonstration eff ect or by training future firm founders." 
                                                
 
150 Th. MEYER, "Venture Capital Adds Economic Spice", D eutsche Bank Research, September 14, 
2010. 
151 Samila and Sorensosn (2011), "Venture Capita l, Entrepreneurship, and Economic Growth", 
TheReview of Economics and Statisti." 
 
 166At European level, various surveys suggest comparable results. VC-backed firms 
reported that they had been able to create a significant number of new jobs according to an EVCA survey (2002). Around 90% of the venture backed companies declared 
an increase in the total number of employees following the VC investment. 
Moreover, venture backed companies were able to create an average of 46 jobs per 
company.
152 On top of this, employees at all levels (top-, middle management and 
other employees) achieved higher levels of earnings and other forms of remuneration (stock options, performance-related pay).  
Venture capitalists are especially present in  high-tech sectors, which might lead to 
rising levels of research and development (R&D) expenditures contributing to innovation and growth. 
VC can also contribute to fighting climat e change and promote sustainability. Start-
ups in these fields will take time to mature , but they can offer the promise of green 
jobs located within the EU. VC may fast en the (industrial) reactions to climate 
change and at the same time deal with the employment situation of a country.
153 
13.2 I MPACT OF VENTURE CAPITAL ON BUSINESSES  
VC investment is vital to the existence a nd success of growth-oriented businesses, in 
particular in the seed, start-up and expans ion stages. For start-up companies, as the 
business generates more costs than revenues,  the EBIT (Earnings Before Interest and 
Taxes154) is initially negative. Therefore invest ment in equity can help in these 
stages. 
Hellmann and Puri (2000)155 draw a positive correlation between VC and 
innovation; they suggest that VC stimulat es innovative activities of firms: "A start-
up financed by a venture capitalist needs le ss time to bring a product to the market; 
moreover, firms pursuing an innovative stra tegy potentially have better access to VC 
funds." Yet, Romain & Van Pottelsberghe (2004)156 warn against this statement 
which might be too simplistic, as the sample  Hellmann and Puri considered is based 
on 149 recently formed firms in the particular region of the Silicon Valley. 
                                                 
152 EVCA (2006), "Survey of the Economic and Social Impact of Venture Capital in Europe", EVCA 
Research Paper.  
153 Eco-Innovation, June 2009. (http://ec.europa.e u/environment/etap/f iles/eco_innovation.pdf)  
154 EBIT: Measure of a firm's profitability that excludes interest and income tax expenses. 
155 Hellmann and Puri (2010), "The Interaction betw een Product Market and Financing Strategy: The 
Role of Venture Capital", Review of Financial Studies. 
156 Romain and Van Pottelsberghs (2004), "The Economic Impact of Venture Capital", Solvay 
Business School – Working Paper: WP-CEB 04/014. 
 
 167According to an EVCA survey (2002)157, VC funds are focussing in certain business 
sectors and a substantial part of VC b acked companies are active in high-tech 
industries (computer related, biotechnology, me dical-health related). VC is used to 
achieve significant increases in development expenses: in the survey, all the respondents declared that the initial VC investment has been followed by a sharp increase in spending on R&D. "Half the seed/start-up companies multiplied their efforts in this area by more than four tim es (median increase 370%), while half the 
expansion stage companies almost doubled  the amount invested (median increase 
95%)."    
The non-financial support provided by the VC investors includes consultancy, 
financial advice, marketing strategy, traini ng, etc. This support has often led to an 
improved competitive position of the beneficiar ies.  For seed and start-up companies 
receiving VC, the median value of the tr aining expenditure multiplied by more than 
four times and doubled for the expans ion stage companies. Concerning the 
marketing expenditure, the median value more than tripled after the investment for the seed and start-up companies and by almost the same amount for the expansion stage companies. In their working relations hips, the VC investors adopt a "hands-on 
strategy" with the companies; they usually meet on a weekly or monthly basis. 
Engel (2002)
158 considered a panel dataset of around 1000 German start-ups and 
concluded that the German venture backed  companies have achieved significantly 
higher growth rates due to the financial involvement and services provided by the 
venture capitalists. It should be noted th at Engel does not observe growth rate 
differences between high-tech and low-tech industries. 
With a panel dataset of 16 OECD countries159 over the period 1990-2001, Romain & 
Van Pottelsberghe (2004) estimated the pe rformances and the economic impact of 
VC.160 They demonstrated that VC contributes to growth through two main channels. 
The first one is the introduction of new products and processes on the market. The 
social return of VC is much larger th an the return of business or public R&D 
expenditure, probably due to a high risk premium and large potential spillovers or knowledge externalities. 
The second channel is the development of  an improved absorptive capacity of the 
knowledge generated by private and public re search institutions. A high level of VC 
investment further allows improving the economic impact of private and public 
                                                
 
157 EVCA (2002), "Survey of the Economic and Social Impact of Venture Capital in Europe", EVCA 
Research Paper.  
158 Engel (2002), "The Impact of Venture Capital in firm growth: an Empirical Investigation", ZEW 
Discussion Paper. 
159 These 16 OECD countries are: Australia, Belgium, Canada, Denmark, Finland, France, Germany, 
Ireland, Italy, Japan, the Netherlands, Norawy, Spain, Sweden, UK and US. 
160 Romain & van Pottelsberghe, "The Economic Impact of Venture Capital", Solvay Business School , 
2004; (Working Paper: WP-CEB 04/014) 
 
 168R&D. In other words, VC improves the "crystallisation" of knowledge into new 
products and processes.  
The EVCA survey (2002)161 showed changes in the turnover and profits for the 
responding companies since the VC investme nt. Compared to their competitors, 90% 
of the respondents considered the growth in  their turnover had either been the same 
as or greater than that of their compe titors. 57% reported a higher growth, and 77% 
considered that the growth in  EBIT (Earnings Before Interest and Taxes) had either 
been the same as or greater than the growth in their competitors' profits. 
VC investments are not "one-shot" actions , they provide medium to long term 
support. According to an EVCA survey ( 2002), 90% of the respondents said that the 
planned duration of the VC investments was between two and seven years. 
Venture backed companies also increase th eir sales in export markets. Following the 
VC investment, companies at all stages in the EVCA survey (2002) reported an increase in exports. In terms of economic  impact this improvement in exports 
strengthens the trade balance. Moreover,  this enables companies to establish 
international contacts and to increase thei r visibility and credibility. Therefore, VC 
investors contribute to the creation of networks. 
 
                                                
 
161 EVCA (2002), "Survey of the Economic and Social Impact of Venture Capital in Europe", EVCA 
Research Paper. 
 
 16914. Annex XIV: EU Member States Venture capital frameworks 
There are 2  Member States where existing lega l frameworks designed specifically 
for venture financing are note used or proved impractical: 
Austria:  Funds established as Mittelstandsfinanzierungs AG (MiFiG) have some tax 
incentives in exchange for some restricti ons: (i) must be founded by banks, (ii) take 
no more than 49% of stakes in a company, (iii) not allowed to invest in energy and 
financial services industry, (iv) at least 2/3 of funds' portfolio must be invested 
domestically, (v) loan financing of portfolio companies is restricted to the amount of 
equity the fund provided to the same co mpany. It can invest a maximum of EUR 
1.5mn per year and per company and this is only possible in development areas 
defined by EU. This is one of the reasons, wh y this legal framework is not 
currently used at all by Aust rian venture capital funds.  In addition, there are 
specific criteria set forth in the tax code wh ich a fund needs to comply with in order 
to benefit from a capital gains tax exemption.  
Germany:  pursuant to the German Venture Capital Act (Wagniskapital-
beteiligungsgesetz - "WKBG"), a company qua lifies as a "venture capital company" 
under the WKBG if: (i) its articles of associ ation have as their object the acquisition, 
holding, management and sale of venture capital participations; (ii) 70% of the total assets managed by the venture capital company must be equity capital participations in a target company - that is not listed and has its registered office in Germany. 
Because the scope of the regulatory framework was too limited to work for a 
venture capital fund no single venture capi tal firm elected for the application of 
the WKBG. 
There are 7  Member States with different le gal frameworks designed specifically 
for venture financing:  
Estonia:  VC Funds definition (IFA): a) at l east 60 % the assets of the fund are 
invested in shares or units not traded on the regulated market, debt securities, or shares or units of other VCFs. 
France:  *FCPR (Fonds Commun de Placement à Risque accounted for 717 funds at 
the end of 2010) - must have more than 50% of its funds invested in unlisted 
companies (of which 20% of public equity  of small caps (< 150M euros) can be 
included ); *FCPI (Fonds Commun de Placemment dans l’Innovation accounted for 
317 funds at the end of 2010) - a kind of FCPR with more constraints on investments 
but with tax incentives. FCPI must invest  60% of its funds in  equity of unquoted 
innovative companies  – of which 20% can be of pub lic equity of innovative small 
caps (< 150M euros). Innovative companies means: their  research spending , as 
defined in Article 244 of the "Tax Code",  represent at least 15% of the target 
company expenses. It the company is defined  as "industrial company", it is eligible if 
its research spending is at 10%. In other ca ses, the companies will be eligible if they 
can prove that they create innovative products, processes or techniques. The latter, is subject to an assessment by a public institution responsible for promotion of 
research) . *FIP (Fonds d’Investissement de Pr oximité accounted for 240 funds at the 
end of 2010) - a kind of FCPR with more constraints on investments and with tax 
incentives. FIP must invest 60% of its funds in PE (10% must be invested in newly 
created companies, less than 5 years old). To be eligible at this 60% quota, 
 
 170companies must be SMEs, have main activ ity in 1 or 2 or 3 regions which have 
common borders in France.  
Italy:  A measure included in the last Financ ial Act, recently approved by the Italian 
Government, foresees tax incentives for ve nture capital funds, which are defined as 
harmonized funds under the AIFMD that invest more than 75 % of their 
commitments in seed, start up, early stag e or expansion financing in unlisted 
companies (target companies must be es tablished in the EU, must have been 
established for less than 36 months a nd may have a maximum turnover of EUR 
50m). The measure is yet to be implemented by an act of the Italian Ministry of Economics. 
Portugal: (1) Acquire, originally or on a secondary basis, investment units in 
companies with high growth and appreci ation potential; (2) Acquire, by assignment 
or subrogation, credits on companies in whic h they participate or in which they 
intend to participate; (3) Grant credit, under any form, or provide guarantees in 
benefit of companies in which they particip ate; (4) Apply their treasury surpluses in 
financial instruments; (5) Conduct any fore ign exchange operations necessary to the 
development of the respective activity. Fund' s investments in securities admitted to 
trading on a regulated market cannot exceed 50% of the net asset value of the funds. 
Slovenia: Law: Venture Capital Companies Act (ZDTK; adopted in Oct 2007, 
amended in July 2009). Qualifying fund portfo lio: VC company has to invest at least 
50% of funds in SMEs and a further 30% in private equity financing or mezzanine 
capital to unlisted companies in which it ha s invested VC after the first year of 
operation. Qualifying investment instru ments include Equity, Quasi Equity, 
Convertible loans and guarantees, mezzanine capital. Qualifying investment targets 
are unlisted SMEs and there is no geogra phical limitation on targeted companies. 
Rules on eligible investors have not been  specified except the minimum investment 
of each investor into a VC company shall be €50,000. VC companies headquartered in Slovenia pay corporate income tax at ra te of 0% on activities of allowed venture 
capital investments if the portfolio VC company submits a separate tax return just for that part of its activity. 
Spain:  *Common regime – defined by: mandatory investment ratio (60% of assets in 
stakes, of which 30% can be granted princi patory loans), free disposal ratio, have no 
more than 25% of calculable assest invested  in the same company or more than 35% 
in companies belonging to the same group) . *Simplified regime: private placement 
(shares offered without any kind of pub licity), min investment (500,000 EUR per 
investor, unless if institutional investor), reduced scope (max 20 shareholders, excl. 
institutional investors); more flexible investment regime (diversification - 40% of assets). Both regimes – several exceptions  providing greater flexibility for investing 
in listed securities on domestic and foreign markets. VCEs may use up to 20% of mandatory ratio for investing in Annex III 54 other VCEs ( if the latter do not then 
invest more than 10% in other VCEs) Funds  of funds: VCEs must invest at least 
50% of mandatory ratio in direct investme nt VCEs (but max 40% of assets in one 
VCE). 
United Kingdom : VCTs are companies whose shar es trade on London stock market. 
Recent changes in legislation introduced in  2010: (i) VCTs will have the ability to 
invest in companies based outside of the UK (previously VCTs could only invest in 
companies with at least 50 percent of th eir qualifying activities in the UK) , (ii) 
VCTs will also be able to be listed out side of London on any European exchange, 
 
 171(iii) VCT can invest in loans to investee companies as opposed to equity. For older 
VCT funds the maximum is 70%, but from th is year it is 30%, a further attempt by 
the Government to increase the risk profile of VCTs (iv) There will also be changes 
to the qualifying company limits from April 2012. An increase in the size of 
company a VCT can invest in to £15 m illion from £7m, and an increase in the 
maximum number of employees from 50 to 250. Finally, there is to be a four-fold increase in the annual investment limit per qualifying company to £10m. 
 
 
EN 172 15. Annex XV: Examples of Member Stat es Eligible investors' criteria 
 
France: (FCPR à procédure allégée)  
(i) Corporate and individual investors whose initial subscription is for at least EUR 
30,000 and who meet one of the following three conditions: a) They provide technical or financial assistance to unlis ted companies covered by the fund's purpose 
to promote their creation or growth; b) They provide assistance to the portfolio 
management company of the fast-track  venture capital fund in finding potential 
investors or contribute towards the comp any's objectives in seeking, selecting, 
tracking and disposing of investments; c) They have acquired knowledge about 
investment capital by being a direct equity  investor in unlisted companies or by 
subscribing to a venture capital fund that is  not advertised or promoted, or a fast-
track venture capital fund, or else an unlisted venture capital firm;  
 
(ii) Investors whose initial subscription is EUR 30,000 or more and who hold a total of 
EUR 1,000,000 or more in deposits, life insurance products or financial instruments; 
 
(iii) Companies that met two of the following th ree criteria at the end of the previous 
financial year: a) Total balance-sheet  assets of more than EUR 20,000,000; b) 
Turnover of more than EUR 40,000,00; c) Shar eholders' equity of more than EUR 
2,000,000 . 
 
(iv) Investors whose initial subscription is EUR 500,000 or more. 
 
Luxembourg: (SICAR /SIF) 
 
 
(i) Institutional investors  
 
(ii) Professional investors within the meaning of MiFID  
 
(iii) Any other investor (including an individua l investor) who: (A) Confirms in writing 
that he/she/it is a well-informed investor; and (B) Either:  invests (or commits to invest) a minimum of EUR125 000 in the SICAR/SIF; or obtains a certificate 
delivered by a credit institution within the meaning of Directive 2006/48/EC, an investment firm within the meaning of Directive 2004/39/EC or a management company within the meaning of Directive 2001/107/EC certifying his/her/its expertise, experience and capacity to adequately appraise an investment in the SICAR/SIF. The directors and all other pe rsons involved in the management of a 
SICAR/SIF may invest in the respective SICAR/SIF. 
 
 
EN 173 United Kingdom  
 
Investors who do not meet the definition of MiFID professional inve stor can be offered 
venture capital funds under certain conditions:  
(i) these investors must have signed a  certifi cate of a given format recently which states 
both (a) his/her eligibility to be treated as high net worth or sophisticated investor, and 
(b) contains a written acknowledgement of the risks and 
(ii) must have been given a written warning which is precisely defined in content and 
format