COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Date: 2011-12-07
Institutions: European Commission
Subjects: aid to undertakings, economic growth, fund (EU), innovation, marketing, small and medium-sized enterprises, venture capital

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 

2 

INTRODUCTION....................................................................................................... 5 

PROCEDURAL  ISSUES  AND  CONSULTATION  OF  INTERESTED 
PARTIES..................................................................................................................... 6 

2.1  Related initiatives .............................................................................................. 7 

2.2  Wider context .................................................................................................... 9 

2.3  Consultation of interested 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  SME-centred  than  other  alternative 

investment funds.............................................................................................. 13 

4  KEY  CHARACTERISTICS  OF  THE  EUROPEAN  VENTURE  CAPITAL 

INDUSTRY............................................................................................................... 13 

4.1  Venture capital funds remain 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 domestically ........................................................................... 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 

 
 
 
5.2.1 

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  European  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 
introduction  and  supervision  of  managers  of 

effective 
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:  Common  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 

2

 
 
7.6.3  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:  Common  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 combinations 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 
3

 
 
8.3.4 

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  ...........................................................................................................................  

4

 
 
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. 

INTRODUCTION  

1 
Venture capital funds are operators that 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  potential  for  growth  and  expansion.  In  the  EU, 
venture capital funding displays high potential benefits 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 better than those that receive no venture capital 
backing.  Venture  capital  financing,  coupled  with  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  businesses  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 optimal 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  prerequsite  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 enterprises (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 Capital Adds Economic Spice", Deutsche Bank Research, September 14, 2010 

5 Communication from the Commission on Removing obstacles to cross-border investments 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 actions and initiatives in relation to SME access to finance and venture capital funds. 

5

 
 
 
                                                 
 
The Europe 2020 Strategy8 and the Innovation Union9 brought new impetus to efforts at 
consolidating  Europe's  venture  capital  industry.  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 the 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 venture capital funds to expand assets under 
management  and  thus  make  such  funds  into  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  and  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  Member  States  that  have  not  adopted 
specific rules on venture capital funds, fundraising 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/innovation-union/index_en.cfm?pg=keydocs 6 October 2010 

http://ec.europa.eu/internal_market/smact/docs/20110413-communication_en.pdf 13 April 2011 

10 

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 obstacles to cross-border investments by VC funds : 
http://ec.europa.eu/enterprise/newsroom/cf/itemlongdetail.cfm?item_id=2033  

6

 
 
                                                 
on  '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 covers venture capital funds. However the AIFMD 
distinguishes between managers with assets below and above a €500 million threshold. 
Managers whose aggregate assets under management are above € 500 million are subject 
to  the  stringent  reporting  and  operational  requirements  set  out  in  the  AIFMD.  In 
exchange for compliance, these managers benefit 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 AIFMD19.  
2.1  Related initiatives20   

The European Union supports risk financing (including 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  Programme  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  firms  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 Venture Capital Association (EVCA) estimates 2011 

20  See  Annex  V:  Related  initiatives:  (i)  Risk  Capital  Guidelines,  (ii)  Financial  instruments  and  (iii)  Action  plan  for 
SMEs access to finance 

7

 
 
                                                 
These  financing  structures,  be  they  established  at  EU  or  national  level  need  to  comply 
with rules on State Aid. To guide Member States 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 200621, 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 Strategy. This strategy restated the need to 
engage in targeted regulatory action to improve SMEs' access to financing, in particular 
by  addressing  barriers  that  hinder  the  flow  of  venture  capital  financing  by  means  of 
dedicated  investment  funds.  The  February  2011  European  Council  endorsed  this 
approach calling for the removal of remaining regulatory obstacles to cross border flows 
of venture capital. As a result, the Commission'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 - gearing 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 finance. 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  particular  it  identifies  opportunities  to  continue 
work  to  build  on  the  venture  capital  fund  framework  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  ease  burdens  on  SMEs  and  to  facilitate  their 
access  to  investment  markets:  ensuring  proportionality  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/LexUriServ.do?uri=CELEX:52006XC0818(01):EN:NOT 

22 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010XC1207(02):EN:NOT 

23 Venture capital: policy lessons from the VICO project, September 30, 2011, www.vicoproject.org 

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2.2  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  facilitating  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 objectives24. 

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 Property 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 policy 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 improving 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 framework for venture capital funds. The consultation 
closed  on  10  August  2011.  Forty  eight  answers  have  been  received:  38  from 
organisations,  including  representative  bodies  from  across  the  banking  and  securities 
sectors, asset managers and investors' representatives, 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 public 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  voluntary  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, depending 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 – developing 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 delivering economic, social and territorial cohesion. 
25 http://ec.europa.eu/internal_market/investment/venture_capital_en.htm 

26 See Annex VI: Feedback statement: Summary of responses to the European Commission public consultation on the 
European venture capital framework 

9

 
 
 
 
  
                                                 
with  their  national  private  placement  rules.  Respondents  pleaded  in  favour  of  a  registration  process  and 
reporting requirements would be simple, relevant and not create any substantial administrative cost. 

As regards their form of incorporation, venture capital 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  operating  conditions  (organisational 
requirements / rules of conducts) for venture capital managers. However, most respondents highlight that 
these requirements should be principle-based and proportionate to the venture capital fund size and human 
and infrastructure resources.  

Many categories of venture capital fund investors (business 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 intended policy goals, venture capital fund managers should be 
obliged  to  invest  a  significant  proportion of the capital received from investors 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  legislative  initiative.    Most  respondents  disagree  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,  Internal 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  meeting  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 subsequent 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  impact the eight Member States that have 
introduced rules on venture capital, as compared 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;    

10

 
 
 
 
 
–  an  in-depth  analysis  of  two  sets  of  three  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  procedural  options  which  do  not  necessarily  base 
themselves  on  the  chosen  approach  (e.g.,  lowering  of  AIFMD  thresholds  or  an 
approach  based  solely  on  mutual  recognition  can  be  achieved  without  a  common 
regulatory approach to venture capital funds);  

–  an overall view of how substantive and procedural options are combined to justify the 

chosen approach, and  

–  more detailed analysis of the risks for the chosen 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  November  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 raise 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 problems, (ii) Box 4, Section 8.5 introduces a clear 
description of the features of preferred option 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  associated  with  the  short-listed  options  and  (iii) 
Sections  8.7  and  8.8  provide  more  information  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  enforced,  (ii)  clarification  as  to  whether 
indicators  could  be  the  sources  of  administrative  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  KEY 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  creation  of  jobs  in  the  European  Union.  SMEs 

11

 
 
 
account  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 deploying 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  investors  face  higher  transaction  costs  when 
investing  in  SMEs  as  compared  to  more  mature  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  than  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  shows  a  correlation  between  firms’  lack  of 
equity capital and its poor, sub-optimal performance 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  likely  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 Corporate Governance,” Journal of Finance 43(3): 567-591 - 
Williamson argues that firms engaged in projects requiring highly specific assets are more likely to be financed with 
equity. He suggests that a firm’s financial structure is akin to a governance structure and predicts that a firm’s equity 
ratio will be positively correlated with asset specificity. 

28 A. Robb and R. Seamans, 2011. Entrepreneurial Finance 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 the survey stated that, without venture capital investment, 
they could not have existed or would have developed more slowly and where almost 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/Economical_Impact/EconomicImpacto
fVentureCapital.pdf  

12

 
 
                                                 
equity  financing  gap  that  currently  plagues  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  (Annex  X)  shows,  the  target  companies  of 
venture capital funds are almost exclusively 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 INDUSTRY

31 

4.1 

Venture capital funds remain a niche sector 

Despite years of policy initiatives that promote 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 capital 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  and  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 aggregate, 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  capital  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. Journal 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 under 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.

13

 
 
                                                 
 
120

100

80

60

40

20

0

n
o

i
l
l
i

b

€ 

112

72

71

72

80

80

47

54

37

27

29

28

8

6

9

10

11

12

17

17

43

24

18

20

8

6

6

7

4

4

3

3

2003

2004

2005

2006

2007

2008

2009

2010

Funds Raised PE and VC Funds Raised VC Investments PE and VC Investments 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 stage of their development.  Due to their focus 
on small and innovative SMEs, it is often challenging 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  suppliers.  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 

INVESTMENT HORIZON RETURNS FOR PERIOD ENDING 31ST DECEMBER 2010

ALL VENTURE

EUROPE

USA*

ALL BUYOUTS

EUROPE

ALL PE

USA*

EUROPE

USA*

* Data for US is up to 30th Sept 2010

Source: Thomson Reuters

1 YR
17.36

17.94

20.87

26.26

20.66

23.83

3 YR
-4.26

0.62

-4.48

1.16

-4.34

1.82

5 YR
-1.57

1.16

6.02

2.35

4.33

2.67

10 YR
-3.78

-6.59

8.39

-0.25

4.59

-1.68

20 YR
0.29

21.08

11.91

7.49

9.32

10.63

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 effects on already underperforming venture capital 

14

 
 
 
 
funds, it also represents a serious challenge to the prospects of newly launched venture 
capital  funds.  Furthermore,  existing  venture  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  undertakings  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  managers  are  concentrated  in  eight  Member 
States (UK, Germany Sweden, Denmark, Finland Netherlands, France and Spain all have 
venture capital assets under managemnt in excess 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 Netherlands, 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 

Country 

Related top 10 country assessment on GCI sub-index – innovation 

GCI 
Rank 

3 

4 
6 

7 

8 

GCI sub-
index 
innovation  
2 

4 
5 

9 

8 

Finland  
Germany 

Netherlands 

Denmark 

10 

12 

UK 

Sweden has been placing significant emphasis on creating the conditions for innovation-led 
growth. Sweden has developed a very sophisticated business culture and is one of the 
world’s leading innovators. 
Finland is one of the innovation powerhouses in Europe. 
Germany’s business sector is highly sophisticated, especially when it comes to production 
processes and distribution channels, and German 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 attributes allow Germany to benefit greatly from its 
significant market size, which is based on both its large domestic market and its strong 
exports. 
Dutch businesses are highly sophisticated and innovative, and the country is rapidly and 
aggressively harnessing new technologies for productivity improvements. 
Danish workforce has the skills needed to reach high levels of technological adoption and 
innovation. 
The United Kingdom continues to have sophisticated and innovative businesses that are 
highly adept at harnessing the latest technologies 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  investors  in  other  jurisdicitons  than  the  country 
where the funds are domiciled. For further details of fundraising geography for venture 
capital and private equity, reference is made to table 12, Annex X. 

15

 
 
 
4.5  Traditional venture capital investors 

Traditional  investors  in  venture  capital  comprise  entrepreneurs,  family  offices,  angel 
investors,  member  of  the  management  teams,  industry  sector  experts,  venture  capital 
experts, finance sector experts and wealthy individuals (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 prudential rules for banks and insurance companies. 
These  new  provisions  require  banks  and  insurance  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  supervisors may decide to apply a 150% or 
higher risk weight reflecting the higher risks associated 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 compared 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  sector,  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  

Funds Raised PE and VC (€ billion)

Funds Raised VC (€ billion)

120

100

80

60

40

20

0

2003

2004

2005

2006

2007

2008

2009

2010

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  industry  is  fragmented  and  dispersed.  This 
fragmentation and dispersion leads to a perceptible investor's reluctance against investing 
16

 
 
 
in  venture  capital  funds.  This,  in  turn,  prevents  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  private  placement  of  investments  in  'venture 
capital' funds.   

Chart 5: Regulatory systems governing the activity of venture capital in Europe 

Law 

Member 
State 

1. 
Austria 

MiFiG  No rules  

Qualifying fund portfolio   Qualifying 
investment 
instruments 
Equity (not 
exceeding 
49% of shares 
in target and 
€ 1.5 
million/year) 
Equity  

70% of fund's total assets 
invested in equity issued 
by unlisted target  

WKBG 

2. 
Germany 

3. 
Estonia 

4.  
France 

FCPR 
à 
procéd
ure 
allege 

FCPR 
contrac
tuels  

FCPR 

Equity  

Equity 
Quasi equity 
Convertible 
bonds 
Shares or 
units 

Equity 
Quasi-equity 
Convertible 
bonds 
Shares or 
units 
Derivatives 
financial 
instruments 
Equity 
Quasi equity 
Convertible 
bonds 
Shares or 
units 

60% of fund's total assets 
invested in equity issued 
by unlisted target 
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 and convertible 
bonds convertibles  issued 
by unlisted entities,  shares 
/units of investment funds 
invested in unlisted 
companies 

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”)  

FCPI 

60% invested in financial 
instruments  issued by 

Equity 
Quasi equity 

Eligible 
investo
rs 

No 
rules  

Tax 
treatment 

Capital 
gains tax 
exemption 

Qualifying 
investment 
targets 
No investments 
in energy and 
financial service 
companies 

Unlisted 
company with 
less than € 20 
Mio equity and 
less than 10 
years of 
existence  

Unlisted 
company 

Unlisted 
companies 

Geographic 
location of 
targets 

2/3 of 
portfolio must 
be invested in 
Austrian 
development 
areas 
Only targets 
with 
registered 
office in 
Germany 

No 
rules 

No limitations  No 

rules 

No limitation 

Instituti
onal 

Exemption 
from trade 
tax – 
deemed 
incompatibl
e with EU 
state aid 
rules  
No rules 

Tax 
incentives 
for eligible 
investors 

Unlisted 
companies 

No limitation   

No rules 

Instituti
onal 

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) 
Unlisted 
company for 

Retail 

Companies 
established in 
EU 

 Tax 
incentives 
for eligible 
investors 

Companies 
established in 

Retail 

 Tax 
incentives 

17

 
 
  
unlisted or listed, 
innovative companies  
15% in Shareholder 
accounts (“avances en 
compte courant d’associé”) 

Bonds (i.e. 
convertible 
bonds) 

FIP 

Equity 
Quasi-equity 
Bonds (i.e. 
convertible 
bonds) 

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”)  

5. 
Italy 

Financi
al Act 

Equity 

75% of fund's total assets 
in seed, start-up, early 
stage or expansion phase 
of unlisted companies 

6. 
Portugal 

50% of fund's total assets 
in unlisted companies 

Equity, credit, 
guarantees 

Ventur
e 
capital 
compa
nies 
Act 
(2007) 

7. 
Slovenia 

8. 
Spain 

At least 50% of fund 
portfolio invested in SMEs 
and further 30% in private 
equity or mezzanine capital 

30% of fund's total assets 
in equity, 30% in 
participating loans, no 
more than ¼ in one entity 

Equity, quasi-
equity; 
convertible 
loans, 
guarantees 
and 
mezzanine 
capital 

Equity, quasi-
equity 

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) 
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) 
Unlisted 
companies 
established for 
less than 36 
months with 
turnover less 
than € 50 
million/year 
Listed and 
unlisted 
companies with 
high 
appreciation 
potential  
Unlisted SMEs 

Some 
exceptions 
allowing 
investments also 
in listed 
companies 

EU 

for eligible 
investors 

Only SMEs 
that have 
activities in at 
least one 
French region 

Retail  

Tax 
incentives 
for eligible 
investors 

Companies 
established in 
the EU 

No 
rules  

Tax 
incentives 
for 
qualifying 
funds 

No limitations  No 

rules 

SL based 
VC firms 
have 0% 
corporate 
income tax  

No limitations  Minimu

m 
investm
ent by 
investor 
is € 
50.000 

No limitations  Simplifi

ed 
system 
for 
private 
placeme
nts for 
investm
ents 
exceedi
ng € 
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 

18

 
 
  
  
  
  
   
  
  
  
limit 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  the  new  European  regime  for  venture 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 capital funds' cross-border fundraising process 

Venture  capital  fund  managers  undertaking  cross-border  placement  of  venture  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  effective  private 
placement regimes in certain Member States it is not a straight-forward decision. Managers usually need to 
obtain legal advice and undertake 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 funds in some Member States. 

(ii) Compliance with other Member States' marketing/placement rules 
Compliance  with  the  relevant  marketing  or  placement  rules  in  several  Member  States'  can  entail  a  wide 
range  of  actions.  The  main  areas  of  regulatory  compliance  are  various  national  requirements  on  prior 
authorisation,  registration  of  managers  and/or  funds,  the  licensing  of  managers  and  the  separate 
registration of fund vehicles (this usually requires a setting up of parallel fund structures in those Member 
States),  provision  of  disclosure  documents  and  reporting  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  restrictive  rules  vis-à-vis  foreign  fund  marketing/placement. 
Cost associated with marketing and placement 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  all  their  parallel  vehicles  set  up  for  purposes  of  cross-
border placement to investors in other Member States. The due diligence of host Member States' rules and 
regulations does not end with successful placement of funds in these countries, but has to continue on an 
ongoing basis to ensure smooth operation of the parallel structures in several jurisdictions. 

33 Private placement is widely understood as marketing/sale of (in 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. 

19

 
 
 
 
 
 
 
 
                                                 
5.1.2  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  more  complex  as  the  number  of  targeted 
jurisdictions increases. Raising funds from potential 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 counsel 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  estimate34.  Generally,  the  costs  of  a  major  law  firm 
experienced in advising on fundraising in relation 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 authorization requirements . As soon as more in-
depth advice is required legal advice costs may rise considerably.  

Generally,  the  costs  of  a  major  law  firm  experienced  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 advice is required legal advice costs may rise 
considerably.  

Third, the sponsor will then decide whether the outcome of legal advice justifies further 
pursuit  of  fundraising  in  the  chosen  jurisdictions.  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 € 
40.00035.  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.  

20

 
 
                                                 
5.1.3  Driver  3:  Raising  venture  capital  funds  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 
1,000  for  each  jurisdiction  targeted  by  a 
placement  rules  may  amount  to  €  500  to  € 
venture capital sponsor.  If the venture capital 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 manager 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  legislation, 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 partnerships (which is the typical structure 
use for venture capital funds) qualify as securities or not and hence are covered by the 
Prospectus Directive. This also means that exemptions from prospectus requirements, i.e. 
the  private  placement  exceptions  in  the  Prospectus  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  marketing.  In  addition,  market  participants 
reported  that,  due  to  national  laws  being  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 cases the legal advice was to obtain a definite 
opinion  or  'ruling'  from  the  national  regulatory  authorities,  a  process  which  may  again 
take  several  months.  In  such  cases,  potential  offers  are  usually  not  marketed  in  the 
jurisdiction for which conclusive advice could not be obtained.   

It is therefore difficult to make general statements 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 satisfy 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  research  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 prospectus 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  States  often  demand  submission  of  a  full 

21

 
 
prospectus,  especially  in  case  no  specific  'venture capital' regime is available. This full 
prospectus  needs  to  be  approved  by  the  relevant  financial  regulator.  A  prospectus 
approved by a regulator in one Member State cannot 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  interest in limited partnerships as financial 
instruments  and  hence  has  its  own  national  prospectus  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  narrow  venture  capital  exemptions  from  the 
'private  placement'  rules  that  apply  in  Germany36  (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  identified  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 steps 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  requirements  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. The system of prior notifications, licenses or 
authorisations is particularly complex and costly in the Member States that have neither 
venture capital rules nor rules pertaining to private placements.     

Many Member States require that a local and licensed placement agent (i.e. a financial 
institution)  is  employed  when  a  venture  capital  fund  is  marketed  in  their  territories. 
Alternatively, the venture capital manager itself 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  such  a  license  because  he  has  no  local 
establishment.  

Moreover,  stakeholders  point  to  additional  complexity  that  is  associated  with  local 
licensing arrangements. In relation to closed-ended funds, the MiFiD rules on financial 
instruments”  are  often  interpreted  in  different  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.  

22

 
 
                                                 
organized  as  limited  partnerships.  While  some  countries  consider  such  limited 
partnerships as "financial instruments" according to Annex I, Section C of MiFiD, others 
do  not  share  this  approach.    This  divergence  of  approach  leads  some  countries  to 
consider  the  offering  of  investments  in  closed-ended  funds  as  in  investment  service, 
subject to authorization, while others do not.  

For example, when a closed-ended fund originating 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 40.000 40. There would, of course, be additional 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 personnel41.        

The  2007  Expert  group  report  on  removing  obstacles  to  cross-border  investments  by 
venture  capital  funds  estimated  that  the  cost  managing  four  parallel  fund  structures 
necessary to raise funds in three different jurisdictions exceeded 0.4% of the total capital 
committed to this fund. This level of cost has a significant impact, especially on a smaller 
fund's overall performance record.  

5.1.6  Driver  6:  The  wider  ecosystem  in  which  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 markets was recognized already in the RCAP in 
1998 as an essential precondition to ensure job 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.   

23

 
 
 
 
                                                 
The RCAP identified number of requirements for well functioning Risk Capital Markets 
that  need  to  be  simultaneously  met  so  that  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) fragmentation of stock markets ; (ii) institutional and 
regulatory  barriers,  (iii)  taxation,  (iv)  weaknesses  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 which 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  this  work  has  shown  strong  interconnections 
between the different factors, it has also shown 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  invest  in  will  develop.  Many  of  the  barriers 
identified  in  the  RCAP  have  already  been  addressed  and  corresponding  measures 
implemented43,  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  outstanding  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 valuable 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/LexUriServ.do?uri=COM:2003:0654:FIN:EN:PDF  
By end of 2003, the RCAP reported progress on measures included in the RCAP as well as in the Financial services 
action plan (FSAP) including among others: (i) Directive on prospectuses 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 Accounting 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 addressed in order to create a better environment for risk capital, 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2006:0349:FIN:en:PDF 

24

 
 
 
 
 
                                                 
venture 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 tax 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  for  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 venture capital funds had greater opportunities to 
raise  capital  in  different  jurisdictions.  Especially  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  addressed45.  Nevertheless, 
stakeholders point to the fact that a precondition 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  toward  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, were 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 Statement, 9 August 2011, p. 31 

46 EVCA, Position Statement, 9 August 2011, p. 31 

47The data source used for this comparison, Dow Jones VentureSource, is different than the one used when showing 

only European fundraising and investments (EVCA).  

48 Annex XI, box 1. 

25

 
 
 
 
 
 
                                                 
As  long  as  this  bias  in  favour  of  private  equity  --  a  sector  that  invests  in  mature 
companies  and  organises  leveraged  buy-outs  --  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  stage,  plays  a  minor  role  in  the  financing  of 
SMEs. As chart 5 illustrates, SMEs depend primarily 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 

DK/NA

Other

Venture capital companies

12

2

2

Private financing companies (other than banks)

4

Private investors

7

Public institutions supportin investîmes

11

Leasing/renting companies

24

Banks

79

0

10

20

30

40

50

60

70

80

90

%

Source: OECD 2006  

These  findings  are  particularly  striking  in  light  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 financial 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 capital 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) survey 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, around 15% of SMEs surveyed 
quoted "access to finance" as their most pressing problem and this has not changed compared to previous surveys. 

http://www.ecb.europa.eu/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201104en.pdf?b704f6b228e071b
ea9507d7569412805 

26

 
 
 
                                                 
puts 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) 

n
o

i
l
l
i

b
D
S
U

40

35

30

25

20

15

10

5

0

200

180

160

140

120

100

80

60

40

20

0

s
d
n
u
f

f
o
r
e
b
m
u
N

2003

2004

2005

2006

2007

2008

2009

EU Funds Raised VC

US Funds Raised VC

N° of EU funds

N° of US funds

Source: Ernst & Young, "Back to basics, Global venture 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 funds managed by a particular fund manager. 
According to the latest figures available from the European Private Equity and Venture 
Capital Association (EVCA), 98% of European venture capital fund managers manage a 
portfolio  of  funds  that  would  be  beneath  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 which stage of its 'lifecycle' the SME52 finds itself. But the 
debt/equity ratio should, in principle, be skewed in favour of a high equity percentage as 
empirical  studies  demonstrate  that  a  high  level  of  equity  investment,  combined  with  a 
stable legal framework, provides the best financing structure for start-up SMEs53.  

Empirical studies show that start-up companies backed by venture capital financing fare 
better  than  those  that  rely  on  other,  less  stable,  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  investment  targets.  On  average,  VC-backed  firms 
tend to be more profitable than those who 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 Venture Capital Association (EVCA) estimates 2011 

52 Source: European Venture Capital Association (EVCA), quoted 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.  

27

 
 
 
 
 
 
  
                                                 
According  to  a  study  conducted  in  late  1980s’55,  firms  with  low  amount  of  equity 
investment  (relative  to  debt  financing)  are  prone  to  suffer  from  poor  performance.  A 
more  recent  study56  confirms  the  superior  performance 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 debt. The lack of equity financing in Europe 
therefore constitutes a serious impediment to the faster development of innovative firms.  

Problem Tree:  

Wider ‘ecosystem’ 

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 

2. stock market fragmentation  
3.taxation 
4.low investment readiness of portfolio firms 
5. human resources 
6. cultural barriers 

Problem 
Drivers 

Out of Scope

Inefficient cross-border VC fundraising : is complex and costly and VC fund managers face: 
 (i) multiple procedures and  
(ii) extra costs not incurred on the domestic market related especially to  
(iv) compliance with prospectus rules and with  
iv)  requirements of local presence and registration   

Investors 

VCF 

SMEs 

•  Restricted Investor's 

preference in the EU is 
skewed against venture capital 

•  EU venture capital 
funds are below the 
optimum size 

•  Inadequate SME 
financing mix 

Untapped Single Market gains from venture capital financing: 
(i) Economic gain: GDP growth, innovation 
(ii) Social benefit: job creation 
(iii) Environmental: innovation 

Problems

Impacts

5.3  Baseline scenario  

Should the problems described in previous chapter 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 Corporate Governance,” Journal of Finance 43(3): 567-591 - 
Williamson argues that firms engaged in projects requiring highly specific assets are more likely to be financed with 
equity. He suggests that a firm’s financial structure is akin to a governance structure and predicts that a firm’s equity 
ratio will be positively correlated with asset specificity. 

56 A. Robb and R. Seamans, 2011. Entrepreneurial Finance and Performance: A Transaction Cost Economics 
Approach 

28

 
 
 
 
 
 
 
                                                 
 
 
 
 
 
Venture capital fund managers 
The  current  system  discourages  smaller  venture  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 such 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  needs  to  go  through  a  cumbersome  and  costly 
process including: identification of the suitable regime for potential investors, creation of 
complex parallel fund-raising structures, submission and approval of sales prospectuses, 
foreign registrations or authorisations, the establishment of a local distribution office and 
on-going  regulatory  compliance  processes  involving  a  multitude  of  host  Member 
States57. 

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 regulatory 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  jurisdictions  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)  Venture  capital  activity,  both  in  terms  of  asset 
management, fundraising and fund domiciles remains concentrated in four big Member 
States plus the Netherlands and the three Nordic 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 for 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 thinly spread; (v) growth and innovation potential 
is lost as investoir’s capital remains directed 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 investors in these markets, as a consequence, face 
a more restricted choice of foreign investment 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. 

29

 
 
 
                                                 
essentially 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. Less 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 venture capital funds, which may lack both capital 
and  expertise  to  make  a  significant  impact  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 development 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 venture 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  change  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  investors). All the compliance costs incurred by 
both  the  venture  capital  fund  manager  are  sunk  costs  and  documentation  or  structures 
created for one jurisdiction cannot be reused for others. 

European Economy 

Without any overhaul of the existing disparate 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 benefits 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)  reduced  transaction  costs  and  increased  market 
liquidity,  (iii)  a  more  diversified  and  innovative  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 

30

 
 
 
 
 
 
sufficiently by Member States alone and can therefore, 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,  between  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  capital  operators  had  not  contributed  to  a 
reduction  of  the  fragmentation  of  venture  capital  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  Chart  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  articulated  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 essential 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  OBJECTIVES  

6.1  General  objective  –  make  European  SMEs  more  competitive  in  a  global 

marketplace 

The overarching objective is to make European industries more competitive in a global 
marketplace.    Europe  is  not  short  of  ideas  and  innovators.    It  is  in  the  area  of  start-up 
financing  and  entrepreneurship  where  Europe  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  noteworthy  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 technological excellence, remains by far the most 
successful breeding ground for high-tech and latterly '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 investments by venture capital funds, 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.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 

31

 
 
                                                 
The 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  European  system  for  the  cross-border 

fundraising of venture capital funds 

Venture  capital  is  the  tool  of  choice  for  start-up  companies.    Early-stage  entrepreneurs 
need  the  stability  of  equity  finance  in  preference  over  loans  or  other  debt  instruments.  
Venture  capital  combines  stable  capital  commitments  with  entrepreneurial  advice. 
Venture capital funds can act both as capital provider and business adviser.  

This  form  of  risk-sharing  and  entrepreneurial  involvement  is  absent  in  all  alternative 
forms of finance that may otherwise be channelled toward start-up companies.  This deep 
involvement  in  the  early  business  development  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 company's lifecycle. As mentioned above, these 
approaches are complementary to venture capital funding but cannot replace it. Venture 
capital  financing  is  therefore  deemed  the  best  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 focuses 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  fundraising  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  available  to  venture  capital  funds,  a  common 
understanding  of  the  concept  of  'venture  capital'  becomes  necessary.    A  key  building 
block  of  any  future  action  in  this  area  must  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 and portfolio composition, which differentiate a 
venture capital fund from the broader population 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 features of a qualifying of 'venture capital fund'.  

6.3.2  Create  a  common  regulatory  approach  governing  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  operational  infrastructures  comply  with  this 
definition.  Such  advantages  could  consist  in  the  creation  of  uniform  rules  for  the 

32

 
 
marketing of qualifying venture capital funds and 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  efficient  European  venture  capital  funds,  the 
common  notion  of  'venture  capital  fund'  may  also  serve  as  a  suitable  "point  of 
attachment"  to  further  explore,  together  with  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 practical enforcement of cross-border fundraising 
is  the  institution  of  a  framework  of  administrative  cooperation  in  overseeing  and 
enforcing  the  new  marketing  'passport'.    The  importance  of  an  effective  framework  of 
regulatory cooperation between the national authorities that need to oversee and enforce 
the new rules governing cross-border activities 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: 

Europe 2020 Strategy & Innovation Union 2010 & Single Market Act 
Support job creation, Develop economic growth, Facilitate innovation 

General 

Make European SMEs more competitive in a global marketplace 

Improve investors' portfolio diversifications  
Facilitate SMEs equity financing and reduce financing costs 
Harmonize VCF operations to reach critical mass 

Create a European system for the cross-border fundraising of venture 
capital funds that will: 

Specific 

Improve legal clarity and simplify cross-border VCF fundraisings 
Decrease costs for cross-border VCF fundraising 

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 

Operational 

33

 
 
 
7  OPTIONS 

This  impact  assessment  will  analyse  several  options  that  appear  suitable  to  achieve  the 
above-mentioned  aims.    A  differentiation  will  be  made  between  substantive  policy 
options and options concerning the legal form of their implementation.  

With respect to substantive policy options, this impact assessment will consider how to 
best define the essential features that characterise 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  whether  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  instrument  detailing  the  conditions  of  'mutual 
recognition' between national approaches governing 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  investment  strategy  and  portfolio  composition  that 
would characterise and differentiate a venture capital fund from other forms of collective 
investment  funds.  Options 
the  appropriate  portfolio 
therefore  revolve  around 
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 venture capital funds to institutional, professional 
or  other  financially  sophisticated  investors.  This  is  largely  justified  by  the  intrinsically 
risky nature of venture capital activities. Options 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  
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 that 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 

INVESTMENT INSTRUMENTS 

PORTFOLIO COMPOSITION  

In line with the impact assessment's previous sections on 

An essential policy choice 

the important role that equity investments play as a stable 

needs to be made in relation to 

source of start-up financing (Sections 3.1 and 5.3), the 

the percentage of the aggregate 

qualifying investment instruments will be defined as 

capital contributions and 

equity and quasi-equity.  Equity and quasi-equity 

uncalled committed capital that 

instruments best embody the long-term commitment that 

need to be invested in 

is best suited to bring a business venture to fruition. For 

qualifying investment 

the purposes of this analysis 'equity' is defined as an 

instruments issued by 

ownership interest in an undertaking, represented by the 

qualifying target companies. 

shares or other form of participation in the capital of the 

Three options on this matter 

target company, issued to the investors. Quasi-equity is 

will be assessed as to their 

60  These  criteria  are  inspired  by  the  SME  definition  contained  in  Commission  Recommendation  concerning  the 

definition of micro, small and medium-sized enterprises of 6 May 2003. 

34

 
 
                                                 
2. A company that is unlisted if it is 

defined as any instrument, whose return is predominantly 

suitability to achieve the 

not listed on a regulated market as 

based on the profits or losses of the qualifying portfolio 

operational objectives 

defined in Article 4(1)(14) of 

undertaking and which is unsecured in the event of 

enumerated in the previous 

Directive 2004/39/EC.   

default. In this manner, quasi-equity displays a risk and 

section 

reward profile which is closely correlated to that of equity.  

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 investment funds. In order to fully develop the 
benefit  of  a  venture  capital  system  for  the  intended  investment  targets,  the  selection  of 
the portfolio composition is crucial. In relation to the percentage of the aggregate capital 
contributions  that  must  be  invested  in  qualifying  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 contributions in qualfying target undertakings. The 
investment  tools  available  to  a  venture  capital  fund  would  comprise  investment  in 
equities  or  quasi-equity  securities  that  are  directly  issued  by  the  qualifying  target 
company.   

It  is  important  to  clarify  that  the  venture  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,  secondary  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 inspired by the 50% threshold  that applies to 
venture  capital  funds  that  are  eligible  for  participation  in  the  Commmission's 
Competetivenes  and  Innovation  Framework  Programme  (CIP)  that  aims  to  support 
innovation and growth of SMEs. The 50% threshold 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 investments61.   

7.2.2  Option 2: Intermediate scope  

In  this  option,  the  qualifying  venture  capital  fund  needs  to  invest  70%  of  its  aggregate 
capital contributions into equity or quasi-equity 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  assessing  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  

35

 
 
                                                 
its  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  borne  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 bankruptcy62".  

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  reflects  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 Directive63.  The choice of a rather high percentage 
for qualifying investments also reflects the policy 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 

TARGET 

INVESTMENT 

NON-QUALIFYING 

INVESTMENTS  (%  OF 

UNDERTAKING 

INSTRUMENTS 

COMMITTED CAPITAL) 

INVESTMENTS (AS % OF 

COMMITTED CAPITAL) 

1 -Flexible  

> 

50% 

in 

target 

Unlisted SME 

Equity or quasi-equity, directly 

50% in secondary trading or 

undertakings 

acquired from issuer 

other instruments of choice 

2- 

> 

70% 

in 

target 

Unlisted SME 

Equity or quasi-equity, directly 

30% in secondary trading or 

Intermediate  

undertakings 

acquired from issuer  

other instruments of choice 

3 - Strict  

> 

90% 

in 

target 

Unlisted SME 

Equity  or  quasi-equiy,  directly 

10% in secondary trading or 

undertakings 

acquired from issuer 

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  venture  capital  funds  would  directly  address 
regulatory  fragmentation  that  currently  prevails  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  eligible  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 invest 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.   

36

 
 
 
                                                 
confusion  and  legal  uncertainty  that  venture  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 qualifying venture capital fund. The aim behind this 
definition  is  to  precisely  circumscribe  the  scope  of  a  favourable  European  regulatory 
framework  that  attaches  tangible  advantages  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 opportunities lead to more efficient and bigger 
European  venture  capital  funds,  the  common  notion  of  'venture  capital  fund'  may  also 
serve as good starting point for further exploring 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  requirements  contained  in  the  AIFMD.    This 
ambition  is  most  clearly  expressed  in  the  following  stakeholder  comment  by  the 
European Venture Fund  Investors Network (EVFIN): "As such, they (EVFIN members) 
believe  that  the  EU  initiative  in  question  will  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  venture  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 management rules contained in the AIFMD. A key 
requirement  of  a  common  approach  to  venture  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  the  UCITS  framework,  where  non-eligible 
investments are also confined to a 10% maximum 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,  especially  in  order  to  distinguish  this  from  a 

37

 
 
private  equity  fund.  Most  prominent  among  the  criteria  discussed  in  the  public 
consultation  was  the  introduction  of  a  compulsory  investment  percentage  in  favour  of 
qualifying  SMEs.  Sixteen  stakeholders  (including  seven  industry  organisations,  the 
industry  federation  EVCA  and  six  public  authorities)  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. Four 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  high  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 expansion phases of the target SMEs.  A 70% 
threshold  --  although  less  strict  than  the  90%  variant  --  appears  ultimately  more 
conducive to developing a successful and realistic notion of a European venture capital 
fund.  The  lower  threshold  might  well  be  compensated  by  the  fact  that  the  venture 
capital's  success  in  raising  capital  with  investors  is  higher  once  the  manager  enjoys  a 
somewhat larger discretion as to the composition 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  threshold  is  also  borne  out  by  comparing  existing 
Member  States  venture  capital  frameworks  (cf.  chart  5)  which  contain  mandatory 
investment targets in favour of unlisted SMEs 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 complying 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 venture capital fund, the intermediary approach is 
closer  to  the  national  requirements  that  prevail  in  the  eight  Member  States  that  have 
adopted rules governing the activities of venture 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  conducive  to  establishing  a  common  notion  of 
venture capital funds than a somewhat ‘idealistic’ target of 90% (which 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 investments 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 rather low guarantee that a clear distinction 
between venture capital, on the one hand, and other alternative investment strategies, on 
the  other  hand,  emerges.  While  it  could  be  argued  that  this  option  enhances  the  fund 
38

 
 
 
 
manager'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 provide potential investors with a clear idea 
of  the  business  strategy  that  stands  behind  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 
years65).  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 expectation that a European notion will emerge, while 
allowing  a  venture  capital  fund  manager  sufficient  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 offered by a European framework dedicated to 
venture capital fundraising. Option 1, on the other hand, appears to offer an insufficient 
likelihood that the intended outcome is achieved.     

7.4.2  Operational  objective  2:  Common  regulatory  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 spectre of "circumvention" and lack of focus 
on the core objectives of a venture capital fund. 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 approach carries with it as high risk that the 
rules  will  be  circumvented  by  alternative  investment  funds  that  do  not  pursue  a  true 
venture  capital  strategy.  The  risk  of  regulatory  arbitrage  and  free-riding  by  non-
qualifying funds also arises.    

Also, a 50% threshold would act as an inventive 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  equip  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  capital  fund.    A  50%  threshold  is  therefore 
considered  to  diffuse  to  underpin  a  common  European  regulatory  approach  to  venture 
capital.   

A  credible  expectation  therefore  emerges  that  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  capital  therefore  requires  rules  on  investment 

65  Venture  capital  funds  are  constructed  as  investment  vehicles  with  usually  a  limited  lifespan  amounting    to,  on 

average, not more than seven to ten years. 

39

 
 
                                                 
portfolio, which are ambitious enough to provide an incentive that a fund focuses also on 
the  business  development  and  advisory  functions  commonly  associated  with  venture 
capital funds66. Also the core focus on selecting promising start-up companies would be 
lost if selecting and advising such entities would 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 that 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 qualifying and non-qualifying assets, would raise 
practical  issues  in  enforcing  the  new  approach  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 their respective territories, would need to 
trust the identity and business strategy behind a venture capital fund.  A 50/50 approach 
might give rise to suspicions that the fund, 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  stricter  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 leverage ratios is one of the core objectives 
of  the  AIFMD68.  Host  Member  States  might  therefore  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 authorities can cooperate with relative ease in 
determining that the qualifying fund, at all times, 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  the  fund.  This  method  of  calculation  facilitates 
enforcement of the rules on the portfolio composition 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  associated  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.  

40

 
 
                                                 
frequent 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  target  for  qualifying  investments,  a  single  non-
qualifying  investment  may  cause  a  fund  to  breach  the  investment  targets69.  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,  approach  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  high  number  of  'borderline'  cases,  where  funds 
'oscillate' around the threshold for non-qualifying 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  approach  in  Option  2.    In  light  of  its  higher 
likelihood  of  take-up  by  the  relevant  industries  and  its  better  score  on  practical 
enforcement, a preference is given to Option 2.     

7.5  Summary of impacts: portfolio composition  

Options/Objectives 

Create notion of 
qualifying venture 
capital fund 

Baseline 
1. Flexible scope 
2.  Intermediate scope 
3. Strict scope 

0 
-- 
+ 
++ 

Effectiveness 
Ensure common 
regulatory approach 
to qualifying 
venture capital 
funds 
0 
- 
+ 
++ 

Facilitate 
regulatory 
cooperation  

Efficiency  
Practical 
feasibility  

0 
-- 
+ 
+ 

0 
-- 
++ 
-- 

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 the 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,  
at: 
Section 
http://www.esma.europa.eu/index.php?page=consultation_details&id=185. 

available 

2011, 

July 

III, 

13 

41

 
 
                                                 
    
“++”  strongly  positive,  “+”  positive,  “—“strongly  negative,  “-”  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  investor  as  defined  in  Markets  in  Financial 
Instruments  Directive  (Mifid)  would  be  eligible  to  invest  in  qualifying  venture  capital 
funds.  

7.6.2  Option 2: Traditional venture capital investors   

According  to  this option only  professional investors as defined in Markets in Financial 
Instruments Directive (Mifid) and certain investors traditionally associated with venture 
capital  investments  would  be  eligible  to  invest  in  qualifying  venture  capital  funds. 
Traditional  investors  in  venture  capital  comprise  entrepreneurs,  family  offices,  angel 
investors,  member  of  the  management  teams,  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  passport  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  practice  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 would include two important safeguards aimed 
at avoiding mis-selling of venture capital funds to unsuitable investors: 

(a) 

(b) 

a  first  safeguard  would  be  to  require  those  investors  a  minimum  initial 
investment  ("entry  ticket")  of  at  least 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 

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  Directive,  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 

OPTION 2  

MIFID INVESTORS 

TRADITIONAL VC INVESTORS  

OPTION 3 

BROAD SCOPE  

42

 
 
Professional investors 

Professional investors as defined in MiFID, entrepreneurs, 

All types of investors mentoned under 

as defined in MiFID 

family offices, angel investors, member of the management 

traditional investors, includsing retail 

teams, industry sector experts, venture capital experts, finance 

investors 

sector experts, wealthy individuals.  

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  venture  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  this  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 investment 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 
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).  

include  provisions  ensuring  a  very  high 

to 

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  immediate  development  of  a  common  approach, 
more likely it would further complicate such an endeavour.    

Option 3 would have two additional consequences. Firstly, it would create a precedent as 
it  would  open  a  part  of  the  alternative  investment  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 costs of complying with the different provisions 
aimed  at  protecting  investors  would  be  very  high.  The  advantage  of  the  new  venture 
capital regime compared to the AIFM Directive would be largely neutralised. 

43

 
 
A more balanced approach between the type of eligible investors on the one hand and the 
obligations to be imposed on venture capital funds managers on the other is needed. This 
pleads  in  favour  of  options  1  or  2.    In  respect  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  retail  investors  is,  on  account  of  the  increased 
importance  of  investor  protection  rules,  rather  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  chart  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  individuals,  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  largely  supported  by  the  responses  received  to  the 
public  consultation.  59%  of  respondents  (including  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  Member  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. This concern is, however, addressed by the fact 
that the uniform venture capital fund will only be accessible to the uniform category of 
eligible  investors.  Only  6%  of  replies  favoured  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 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  invested  in  venture  capital  funds  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 prudential rules for banks and insurance companies. 
These  new  provisions  require  banks  and  insurance  companies  to  set  aside  additional 
regulatory  capital  with  respect  to  the  amount  of  assets  invested  into  private  equity  or 
venture capital funds71. 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  prudential  framework  for  insurance  companies  and  banks 
resulting  from    solvency  and  capital  requirements.  According  to  the  Basel  III  rules,  national 
44

 
 
 
                                                 
is 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  targeted,  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 the 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 

Options/Objectives 

Create notion of 
qualifying venture 
capital fund 

Baseline 
1. Mifid investors  
2. Traditional VC 
investors 
3. Broad scope 

0 
= 
= 

= 

Effectiveness 
Ensure common 
regulatory approach 
to qualifying 
venture capital 
funds 
0 
+ 
+ 

-- 

Facilitate 
regulatory 
cooperation  

Efficiency  
Practical 
feasibility  

0 
+ 
+ 

-- 

0 
+ 
++ 

-- 

“++”  strongly  positive,  “+”  positive,  “—“strongly  negative,  “-”  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  more  complex  as  the  number  of  targeted 
jurisdictions increases. Raising funds from potential 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  (AIFMD,  Directive  2011/61/EC)  to  incorporate 
'venture capital funds' as defined in the amending directive.   

supervisors  may  decide  to  apply  a  150%  or  higher  risk  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.  

45

 
 
 
                                                                                                                                                 
This  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 European 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  passport  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 remainder 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  aggregate  assets  under  management  exceed  €  500 
million (calculated separately from the assets 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  this  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  qualifying  funds  in  all  Member  States  that  are 
indicated in the Home Member State registration. 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 venture 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  principles  governing  the  behaviour  of  a  alternative 
fund manager, notably in the conduct of its activities and in its relationship to investors, 
rules  on  the  handling  of  conflicts  of  interest,  organisational  requirements  in  terms  of 

46

 
 
adequate  human  and  technical  resources,  rules  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  fund's  investment  strategy  and  objectives, 
investment  instruments  used  by  the  funds  information  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  applying  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 fund 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 Host Member States (those indicated in the 
registration)  accordingly.  To  avoid  regulatory  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  modified  introducing  detailed  provisions  on  the 
requisite  cross-border  notification  process  between  the  competent  Home  and  Host 
Member  States;  these  provisions  would  only  apply  only  to  the  supervision  of  venture 
capital funds. These notifications are triggered by the registration of a qualifying venture 
capital  fund.  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). 

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 administrative 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,  however,  come  at  the  price  of  full  compliance 
with all substantive provisions of Directive 2011/61.    

47

 
 
As  this  option  would  rely  on  a  general  lowering  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.  Option  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  venture 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 tailor-made set of rules should be created to 
promote  cross-border  fundraising  by  qualifying  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 passport 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 Option 1, qualifying venture capital funds would be 
exempted  from  AIFMD's  requirements  that  are  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  registration  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.  

48

 
 
In order to ensure coherence between the regulatory approaches of the AIFMD and the 
new  instrument,  the  proposed  stand-alone  instrument  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 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 are set 
out  in  the  proposed  stand-alone  instrument.  Most  importantly,  registration  shall  entitle 
the qualifying fund manager to market its qualifying funds in all Member States that are 
indicated in the Home Member State registration. 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 using 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  (in  clear  demarcation  to  the  AIFMD),  the 
proposed instrument would also contain reporting obligations incumbent on the venture 
capital  fund  manager  in  relation  to  the  qualifying  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, 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  instrument  would  contain  certain  key  disclosure  requirements  that  are 
incumbent  on  a  qualifying  fund  in  relation  to  its  investors:  these  requirements  shall 
contain  pre-contractual  disclosure  obligations  on  the  qualifying  fund's  investment 
strategy  and  objectives,  investment  instruments  used  by  the  funds  information  on  cost 
and  associated  charges,  and  the  risk/reward  profile  of  the  investment  proposed  by  a 
qualifying fund.   

7.10.4.3 Special enforcement provisions 

Seamless  enforcement  of  the  criteria  applying  to  both  qualifying  managers  and 
qualifying  funds  is  necessary  to  safeguard  the  credibility  of  the  new  designation 

49

 
 
"European  Venture  Capital  Fund".  The  proposed  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 Home Member State must continually supervise 
compliance of the qualifying venture capital fund 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 Host Member States (those indicated in the 
registration)  accordingly.  To  avoid  regulatory  ambiguity,  the  proposed  rules  should 
stipulate  that,  upon  withdrawal,  the  benefits  of  the  passport  will  cease  with  immediate 
effect. 

The proposed instrument would contain detailed provisions on the requisite cross-border 
notification  process  between  the  competent  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 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). 

To  ensure  the  effective  supervision  of  qualifying  venture  capital  funds  and  their 
managers, the proposed rules would equip the competent authorities with the necessary 
supervisory  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. 

7.10.5  Option 5 – Administrative network to enforce mutual recognition  

A  further  option  would  be  to  create  a  stand-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 venture capital or private operators in one Member 
State  could  offer  share  or  other  participations  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 either the national rules pertaining to venture 
capital funds (cf. chart 7) or, in their absence, the rules on private placements, the Host 
Member  State  in  which  the  qualifying  fund  (which  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 registration should be available to a manager on 
the  basis  of  a  simple  registration  as  either  a  'venture  capital'  manager  or  a  'private 

50

 
 
placement'  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  instrument  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  the  mutual  recognition  of  national  private 
placements in their respective territories.  

7.10.5.2 Scope of mutual recognition 

The  principle  of  mutual  recognition  could  either  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 SMEs. 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 established among national regulators to enforce 
the  mutual  recognition  of  lawfully  executed  private  placements  by  qualifying  venture 
capital funds.   

7.10.5.3 Special rules on enforcing mutual recognition 

The proposed instrument would contain detailed provisions on the requisite cross-border 
notification  process  between  the  competent  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 legally structured in line with the principles 
of Article 93 of Directive 2009/65/EC (UCITS). 

To ensure the effective supervision of registered funds and their managers, the proposed 
rules would equip the competent authorities with the necessary supervisory powers and 
will  contain  provisions  on  the  administrative  cooperation  between  the  Home  and  Host 
Member States affected. 

7.11  Summary of procedural options:  

OPTION 

SCOPE LIMITED TO QUALIFYING 

LEGISLATIVE TECHNIQUE 

VENTURE CAPITAL FUNDS  

1 

–Venture 

capital 

Limited to qualifying funds 

Review  of  AIFMD,  intorduction  of  special  rules  on 

passport  within 

the 

AIFMD  

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.  

2-  Lower  the  thresholds 

All  funds  with  assets  below  €  500 

Review  of  AIFMD  to  modify  the  applicable  thresholds 

of AIFMD  

million  

without  any  further  substantive  changes  to  the  rules  of  the 

51

 
 
3  –  Special  rules  for 

Limited 

to  qualifying 

funds,  as 

Implementing  rules  at  level  2.  Advice  will  be  sought  from 

venture capital at level 2 

defined at level 2 of the AIFMD   

ESMA  on  how  to  cater  to  the  special  situation  of  venture 

AIFMD.  

of AIFMD  

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 

Limited to qualifying funds 

Creation  of  a  stand-alone  legal  instrument  containing  rules 

passport  as  stand-alone 

instrument 

on  qualifying  vneture  capital  funds,  regulatory  cooperation 

for  their  effective  supervison  and  tailor-made  operational 

rules different from those in the AIFMD 

5- Mutual recognition  

Either  limited  to  qualifying  venture 

Creation  of  a  stand-alone  legal  instrument  containing  rules 

capital  funds  or  applicable  to  all 

on regulatory cooperation for the effective supervison of the 

lafully  offered  private  placements  by 

mutual recognition of lawfully registered venture capital or 

registered funds.  

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  options  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 definition 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 kind of fund vehicle that will benefit from a   
passport exempting foreign fundraising activities both from both national rules on private 
placements  that  apply  in  various  host  countries  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  applicable  upon  registration,  no  longer  be 
burdened  with  administrative  costs  that  venture  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 starting 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  often  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 Options 1 and 4, by defining clear contours of 
what  constitutes  a  venture  capital  fund,  would  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.  

52

 
 
                                                 
The  advantage  of  Option  4  over  Option  1  resides  in  the  fact  that  this  Option  would 
achieve  the  benefits  associated  with  option  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.  Due  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. Therefore, other operators who may wish to obtain 
the passport, such as private equity, real estate 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 alternative 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  this  approach  would  be  that  it  would  make 
compliance with all the provisions of the AIFMD 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 financial 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 terms 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  resulting  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  venture  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 contained in level 2 rules. As level 2 measures 
need to be firmly embedded within the parameters of the legal obligations that arise from 
the AIFMD itself, the scope for adopting a meaningful system for venture capital at level 
53

 
 
2  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 appropriate system of mutual recognition for 
several decades now. The major pitfalls in this approach (Option 5) result from the fact 
that mutual recognition pre-supposes a requisite revel of regulatory convergence between 
the national systems that would be the subject matter of mutual recognition.  However, 
the  description  of  the  national  rules  on  venture  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  heterogeneous  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  considerably.  Some  Member  States  amalgamate  the 
promotion of venture capital with regional policy (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 very 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 corporate 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  inclined  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  Member  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  these  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  'mutual  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  system  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 (section 7.11.2). Mutual recognition is thus not 
an approach conducive to developing a common 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 
54

 
 
million  and  comply  with  its  provisions  alongside  a  specific  passport  for  sub-threshold 
venture  capital  operators.    In  these  circumstances,  it  would  require  complex  legal 
techniques to limit the benefit of the tailor-made passport to the intended beneficiaries. 
Despite these drawbacks, a solution along the 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 without 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  that  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  achieve  the  intended  aim  --  to  create  a  common 
regulatory  approach  to  venture  capital  --  within  the  more  general  framework  of  the 
AIFMD.   

The  inclusion  of  below-threshold  fund  managers  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 pursue other business strategies, Option 2 does not 
foster  a  common  EU-wide  understanding  of  venture  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  desired  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 level 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 level 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 that any approach taking AIFMD, level 1 rules 
as a starting point would lead to an approach 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 potential 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 whether the new instrument should cover all 
qualifying  venture  capital  fund  managers  regardless  of  the  application  of  the  €  500 

73 www.evca.org 

55

 
 
                                                 
million 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,  precisely  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 cannot, in the absence of further harmonisation 
of the notion of the elements that distinguish 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  intended  emergence  of  a  'European  venture 
capital  fund'  as  a  recognised  brand.  Without  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  manner  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 would be maintained. This clear demarcation 
would  allow  regulatory  cooperation  for  the  all-encompassing  approach  pursued  in  the 
AIFMD to be clearly distinct from those applicable to venture capital funds. As a clear 
distinction between the two regulatory spheres would be maintained, appropriate forms 
of  supervisory  cooperation  tailored  to  the  activities  of  venture  capital  funds  can  be 
introduced  into  the  stand-alone  framework  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  recognition  that  stem  from  divergent  regulatory 
approaches  on  matters  of  substance.      Quite  to  the  contrary,  due  to  high  potential  for 
friction  between  divergent  regulatory  approaches,  a  network  of  regulators  confined  to 
assessing mutual recognition between heterogeneous 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 

Very effective to create a 

Regulatory friction with 

Potentially less visibility for 

passport within the 

common EU notion of venture 

AIFMD, risks diluting aims of 

venture capital passport, thus 

AIFMD  

capital fund, valid across EU 

AIFMD, risk of freeriding by 

difficult to create common 

jurisdictions  (++) 

non-qualifying funds ( --) 

enforcement culture (--) 

2- Lower the thresholds  General lowering of threshold, 

No regulatory friction with 

Inefficient, as no common notion is 

56

 
 
 
 
of AIFMD  

not distinguishing between 

AIFMD (+) 

created, thus no basis for a 

business strategies, is not 

effective in creating common 

notion of venture capital (--) 

common enforcement culture (--) 

3 – Special rules for 

Only effective in creating 

Regulatory friction with 

Potentially too many constraints at 

venture capital at level 

common notion, if there is 

AIFMD, as level 2 cannot 

level 1 for this system to produce a 

2 of AIFMD  

flexibility at level 2 (-) 

derogate from the level 1 

common notion of venture capital 

provisions (--) 

funds that serves as a basis for a 

common enforcement culture (-) 

4- Venture capital 

Very effective to create common 

Stand-alone instrument avoids 

Stand-alone instrument has higher 

passport as stand-alone 

notion valid across all EU 

risk of friction with AIFMD (+) 

potential to create a visible 'venture 

instrument 

jurisdictions (++) 

capital' brand creating basis for 

common enforcement culture (+) 

5- Mutual recognition  

Ineffective, due to the 

High potential friction between 

Due to high potential friction, the 

heterogeneous set of national 

national regulators who would 

absence of a common notion of 

rules that cover 'venture capital' 

be tasked to apply the system of 

venture capital funds, the network 

(--) 

'mutual recognition' (--) 

of regulators might not be efficient 

on the ground (--) 

“++”  strongly  positive,  “+”  positive,  “—“strongly  negative,  “-”  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 emergence of a common regulatory approach for 
venture  capital  funds  operating  beneath  the  thresholds.  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 requirements, tailor-made for systemically relevant 
investment  strategies  that  involve  a  high  level  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 serve 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  Union.  While  Option  1  is  also  effective  in 
achieving this aim, it comes saddled with issues 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 permissive approach for qualifying venture capital 
funds. Option 1 is also encumbered with a potential '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  venture  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.              

57

 
 
8  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  

1 –Venture capital 

Review of AIFMD, introduction of special rules on 

Passport limited to qualifying VC funds 

passport within the 

regulatory cooperation and introductions of 

Option 1:  

Option 2:  

Option 3: 

AIFMD  

specific "carve-outs" from the AIFMD's 

operational rules to provide passport to 'qualifying' 

venture capital funds without full compliance with 

AIFMD.     

> 50% of 

capital in 

unlisted 

SME 

> 70% of 

capital in 

unlisted 

SME 

> 90% of capital in 

unlisted SME 

Option 1: 

Opton 2:  All 

Option 3: unlimited, 

Mifid 

traditional 

including retail 

investors 

VC investors 

investors 

2- Lower the 

thresholds of 

AIFMD  

Review of AIFMD to modify the applicable 

All funds with assets below € 500 million 

thresholds without any further substantive changes 

Open to professional investors as defined in AIFMD 

to the rules of the AIFMD.  

3 – Special rules for 

Implementing rules at level 2. Advice will be 

Limited to qualifying funds and eligible investors as 

venture capital at 

sought from ESMA on how to cater to the special 

defined by ESMA and implemented in specific level 2 

level 2 of AIFMD  

situation of venture capital funds. If ESMA advises 

provisions 

on a tailor-made approach for such funds, the 

corresponding rules would be codified at level 2, 

when implementing the AIFMD.   

4- Venture capital 

Creation of a stand-alone legal instrument 

Passport limited to qualifying VC funds 

passport as stand-

containing rules on qualifying venture capital 

Option 1:  

Option 2:  

Option 3: 

alone instrument 

funds, regulatory cooperation for their effective 

supervison and tailor-made operational rules 

different from those in the AIFMD 

> 50% of 

capital in 

unlisted 

SME 

> 70% of 

capital in 

unlisted 

SME 

> 90% of capital in 

unlisted SME 

Option 1: 

Option 2:  

Option 3: unlimited, 

Mifid 

All 

including retail 

investors 

traditional 

investors 

VC investors 

5- Mutual 

recognition  

Creation of a stand-alone legal instrument 

Option 1:  

Option 2: Mutual 

containing rules on regulatory cooperation for their 

Mutual recognition 

recognition for all lawful 

effective supervison of the mutual recognition of 

limited to qualifying VC 

private placements 

lawfully offered private placements either by: 

funds (as in Options 1 

offered by managers 

- registered funds or  

and 3) r applicable to all 

whose aggregate assets 

- qualifying and registered funds.  

funds below € 500 

in total are below € 500 

million.  

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 combination 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.  

58

 
 
 
COMBINED OPTIONS 

LEGISLATIVE TECHNIQUE 

SUBSTANTIVE SCOPE  

Option 1: 

Review of AIFMD, introduction of special rules on 

Passport limited to qualifying VC funds 

Sub-options 1/3/2:  

regulatory cooperation and introductions of specific 

Option 3: > 90% of capital in unlisted 

Venture capital passport 

"carve-outs" from the AIFMD's operational rules to 

SMEs 

within the AIFMD, high 

provide passport to 'qualifying' venture capital funds 

Opton 2:  All traditional VC investors 

threshold, all traditional 

without full compliance with AIFMD.     

VC investors  

Option 2: 

Creation of a stand-alone legal instrument containing 

Passport limited to qualifying VC funds 

Sub-options 4/2/2:  

rules on qualifying venture capital funds, regulatory 

Option 2:  > 70% of capital in unlisted 

Venture capital passport as 

cooperation for their effective supervison and tailor-

SMEs 

stand-alone instrument, 

made operational rules different from those in the 

Option 2:  All traditional VC investors 

intermediate threshold, all 

AIFMD 

traditional VC investors 

Option 3: 

Creation of a stand-alone legal instrument containing 

Passport limited to qualifying VC funds 

Sub-options 4/1/2:- 

rules on qualifying venture capital funds, regulatory 

Option 1:  > 50% of capital in unlisted 

Venture capital passport as 

cooperation for their effective supervison and tailor-

SMEs 

stand-alone instrument, 

made operational rules different from those in the 

Option 2:  All traditional VC investors 

low threshold, all 

AIFMD 

traditional VC investors 

8.3  Analysis of combined options 

The analysis of the short-listed options (combining 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'  choice,  inefficient  venture  capital  funds/managers 
operating conditions, inadequate SMEs financing 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 intermediate 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 would, 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  switch  more  than  their  current  percentages  of 
investments toward venture capital (these percentages are contained in table 3, annex X) 
just because fund-raising for this asset class has become easier.  

Essentially,  any  replacement  effect  that  more  capital  commitments  to  venture  capital 
funds  would  produce  would  be  replacements  between  asset  classes  that  most  closely 
resemble  each  other.    Replacement  effects  would  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 market for comparable types of risky assets. 
The  impact  would  be  therefore  mostly  be  on  other  categories  of  venture  capital 

59

 
 
 
 
 
 
 
investments, including funds targeting venture capital elsewhere globally, investments in 
emerging  market  assets,  certain  kinds  of  private  equity  investments  or  investments  in 
speculative or innovative hedge fund strategies. 

The  scale  of  the  anticipated  reallocation  effects  is  a  reflection  of  the  degree  to  which 
market efficiency relating to raising venture 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 give 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 274, 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  enforcement  of  an  option  that  stipulates  a  high 
percentage  in  favour  of  qualifying  investments  raises  the  difficult  'oscillation'  issue  of 
funds  whose  investment  portfolio  hovers  on  the  threshold  for  considerable  periods  of 
their existence.  This is a powerful disincentive for venture capital fund's using a passport 
that hinges on a 90% threshold.     

Finally, the relative ease of regulatory enforcement 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-represented in EU investment portfolios due to 
market inefficiencies. Option 4/2/2 is, on balance, the most promising option to correct 
the  relative  underperformance  of  EU  venture  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  cross-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  Option  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  investment  strategies  are  materially  relevant  but  difficult  to  accomodate  in  a 
legislative instrument that follows an all-encompassing approach.   

60

 
 
 
 
 
 
                                                 
12% (current situation) 
15% (intermediate short-term scenario) 
17% (optimistic short-term scenario)  
20% (long-term stable scenario) 

€ 2.5 billion  
€ 3.16 billion 
€ 3.58 billion 
€ 4.2 billion  

+ 26.4%  
+ 43,2% 
+ 68% 

As  the  last  row  demonstrates,  if  cross-border  fundraising  for  venture  capital  would  be 
aligned with current levels achieved by UCITS 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-border  capital  flows  can  have  in  increasing  the 
average  size  of  assets  managed  by  a  European  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, equates 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    

12% (current situation) 
15%  (intermediate  short-
term scenario) 
17% 
term scenario)  
20% 
scenario) 

(optimistic 

(long-term 

short-

stable 

€ 3.9 million 
€ 4.9 million 

€ 5.6 million 

€ 6.6 million 

Anticipated 
cross-border 
capital  raised  in  a  ten  year 
period    
€ 12.9 million 
€ 16.2 million 

€ 17.5 million 

€ 21.8 million 

%  increase  over  ten 
years 

+ 49% 

+ 53% 

+ 66% 

As the table above shows, the increases in capital raised per fund will be considerable, 
especially  when  considered  in  a  10  year  perspective.  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  venture  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  flows  will  not  be  so  evenly  distributed,  with 
bigger funds garnering a greater share of the anticipated overall increase.  

In  these  circumstances,  the  fact  that  deeper  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  demonstrate,  will  take  several  years  to  come  to 
fruition.  

61

 
 
 
 
 
 
 
The  above  calculations  also  neglect  an  important  multiplier  effect.  While  it  is  not 
possible  to  quantify  precisely  how  much  the  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 funds75.  

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, especially 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-qualifying  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 capital. 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.,  the  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  more  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 should not be overestimated. While the venture 
capital  fund  framework  could  impact  national  fund  regimes  already  targeting  venture 
capital, it would be for Member States to consider whether existing frameworks might be 
adjusted  for  consistency  with  the  new  European  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  investment  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  for  those  funds  who  chose  to  register  in 
order  to  benefit  from  the  envisaged  regulatory  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  would,  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 investment 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  inventive  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. 

62

 
 
 
 
 
 
 
                                                 
Again,  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  strict  requirement  that  qualifying  venture 
capital funds most invest in equity or quasi equity issued by the target companies. Due to 
the  relatively  strict  requirements  with  respect  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 financing 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  once  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  venture  capital  fundraising  would  increase  the 
overall  capital  commitments  that  are  channeled  toward  venture  capital  funds.    Better 
allocation of capital flows to high growth and 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 capital pool available to venture capital funds, 
could  foster  more  specialization  on  the  part  of  the  European  venture  capital  industry. 
Higher  specialization  would  allow  venture  capital  funds  to  concentrate  on  particular 
industries  (e.g.,  biotechnology,  cleantech,  renewable  energies)  and  increase  the  size  of 
their investments per company.  Larger fund sizes would thus lead to more meaningful 
investment, better focus in the venture capital 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  development  spending  of  public  and  private  firms. 
According to latest research it is estimated that 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 points76.  

76 Th. MEYER, "Venture Capital Adds Economic Spice", Deutsche Bank Research, September 14, 2010. 

63

 
 
 
 
 
 
 
 
                                                 
 
8.3.7 

Impact on jobs 

According  to  a  2005  study77,  companies  backed  by  venture  capital  between  1997  and 
2004  created  about  630.000  new  jobs  in  the  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 capital 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 

1 

Procedural:1  

Portfolio: 3 

Investors: 2 

Overall 
Assessm
ent 

VC Fund 
Managers 

Investors 

Portfolio 
companies 

Economy 

(++) all 
traditional VC 
investors can 
be offered VCF 
investments 

(-) inefficiencies 
in portfolio 
companies 
financing 
structure remain 

(-) contribution 
of VCF sector to 
more efficient 
and competitive 
economy limited 

(-) 

(-) no 
improvement in 
portfolio 
diversification 
due to low 
VCFM take-up 

(--) may lead to 
disproportionatel
y high reporting 
costs 

(-) 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 

2 

Procedural: 4 

Portfolio: 2 

Investors: 2 

(++) benefit 
from single and 
separate set of 
rules, brings 
legal certainty 

(++) all 
traditional VC 
investors can 
be offered VCF 
investments 

(++) benefit from 
improved and 
more efficient 
financing 
structure 

(+) 
intermediate 
obligatory 
portfolio 
benefits 
existing 
business 
practice  

(++) benefit of 
greater 
investment 
choice/portfoli
o 
diversification 

(+) proportionate 
compliance costs 
related to 
reporting 

3 

Procedural: 4 

Portfolio: 1 

Investors: 2 

(++) benefit 
from single and 
separate set of 
rules, brings 
legal certainty 

(++) all 
traditional VC 
investors can 
be offered VCF 
investments 

(++) high fund 
structuring 

(--) possible 
investor 

(-) innovative, 
young companies 
do not benefit 
from increased 
VC flows, bias 
towards private 
equity persists 

(++) VCF sector 
can explore its 
full potential 

(++) conducive 
environment 
creates more VC 
flows – more 
firms financed 
and – more jobs 
created 

(++) 

(-) limited chance 
for VCF sector to 
fully exploit its 
full potential 

(+) 

77 Employment contribution of PE and VC in Europe, EVCA Publication, October 2005 

64

 
 
 
 
 
 
 
                                                 
flexibility 
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, that 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  portfolio  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 distinct sets of legal rules. This manner of 
proceeding  avoids  any  unwanted  legal  complexity  and  possible  ambiguity  that  would 
result  from  the  EU  passport  for  qualifying  venture  capital  funds  and  the  passport 
applicable  to  all  other  alternative  investment  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 substantive 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  Fund",  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).  

65

 
 
 
 
•  The  proposed  instrument  would  contain  detailed  provisions  on  the  requisite  cross-border  notification 
process between the competent 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 
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  capital  manager,  notably  in  the  conduct  of  its  activities  and  in  its 
relationship  to  investors,  rules  on  the  handling  of  conflicts 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 incumbent 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  passport  will  also  lead  to 
removal of the fund from the register of qualifying venture capital funds.  

•  To  ensure  the  effective  supervision  of  qualifying  venture  capital  funds  and  their  managers,  the 
proposed rules would equip the competent authorities with the necessary supervisory 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 Member States where they market their funds. 

•  Only  those  fund  managers  can  benefit  from  the  marketing  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  threshold  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  Commission  has  the  right  to  review  the  €  500  million 
threshold.  

8.5.1  Enforcement provisions 

Enforcement of the criteria applying to both qualifying managers and qualifying funds is 
necessary to safeguard the credibility of the new designation "European Venture Capital 
Fund".  The  proposed  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 Home Member State must continually supervise compliance of the qualifying venture 
capital  fund  manager,  notably  with  the  substantive  requirements  that  relate  to  the 
composition of its fund's portfolios, the eligible investment instruments used, the eligible 
target  companies  invested  in  and  the  eligible  investors  addressed  by  the  manager's 
marketing.  Non-compliance  with  one  of  these  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 Host Member States (those indicated in the 
registration)  accordingly.  To  avoid  regulatory  ambiguity,  the  proposed  rules  should 
stipulate  that,  upon  withdrawal,  the  benefits  of  the  passport  will  cease  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.   

66

 
 
To  ensure  the  effective  supervision  of  qualifying  venture  capital  funds  and  their 
managers, the proposed rules would equip the competent authorities with the necessary 
supervisory  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. 

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  capital funds  would lead  to  any  funding  problems 
related to other alternative investment managers. 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 critically depends on the extent to which a series 
of  other  factors  that  influence  the  environment  (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 functions. 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  fund  framework  exhibits  strong  synergies  with  the 
Commission  SME  Financing  Action  Plan  [reference]  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, measures envisaged to improve SMEs access 
to  public  markets.  Another  option  involves  the  creation  of  dedicated  SME  stock 
exchanges. Venture capital strategies and their 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 successful listing, the more attractive investors will 
find a venture capital investment.  

On  the  demand  side,  improving  entrepreneurs'  knowledge  about  the  benefits  and 
opportunities  that  venture  capital  financing  offers,  increasing  entrepreneurs  business 
skills and focus on promoting their innovation are 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 capital requirements coming up for pension funds 

67

 
 
 
 
 
 
 
and 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  reducing  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 order to fine-tune the proposed regulations 
and  to  ensure  that  they  don’t  have  negative,  however  unintended,  impacts  on  the  VC 
industry’s to fund innovations78. 

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 Pensions Agency (EIOPA), carry out a study 
on  the  relationship  between  prudential  regulation  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  implementation.  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-border 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 justified 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 

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. 

(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 

(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.  

Implementation 
horizon 

Short term: 
Commission adoption 
December 2011 
Short term: 2012 
technical work by EBA 
and EIOPA,                      
Mid-Long term: 
revision of CRD and 
Solvency II 

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 venture capital insights and trends report 2010" 

68

 
 
 
 
  
  
  
  
                                                 
 
(i) More visible SME markets 

(ii) More visible listed SMEs 

(iii) Reducing reporting burdens for 
listed SMEs 

The Commission proposed to attribute the label SME growth 
market to Multilateral Trading Facility (MTF) in the  Directive 
on Markets in Financial Instruments (MiFID), 

Short term: 
Commission adoption 
October 2011 

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 

(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 delegated 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 guarantee and an equity facility 

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 

2014-2020 

MEASURES FOCUS ON IMPROVING THE ENVIRONMENT FOR SMEs 

1. Better information for SMEs 

(i) Commission will enhance training, communication and exchange of good practice to 
provide SMEs information about financing possibilities, (ii) create single portal about 
different source of EU finance available for SMEs 

2. Improve monitoring of the SME 
lending market 

3. Promote qualitative rating 

Commission will work with bank federations and other to improve statistics and reinforce 
analytical framework for SMEs lending 

Commission will promote exchange of good practices 

4. Stimulate the activity of Business 
angels and cross-border investments 

Commission will (i) encourage co-investments with BA, (ii) develop measure for cross-
border matching between enterprises and investors, (iii) improve matching 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 information 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 provide 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: 

69

 
 
 
  
  
  
  
  
  
 
 
 
 
From the perspective of existing as well as new venture capital funds and their managers 
that will wish to benefit from the passporting 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 capital 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  low  for  existing  funds  because  the  approach 
based  on  a  70%  target  is  close  to  the  national  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  are  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 disproportionate 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 requirements 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  disclosure  is  concerned,  fund  managers  have 
considered this type of obligation as a significant 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  UCITS  funds  in  dealing  with  retail  investor 
disclosure:  costs  for  putting  in  place  disclosure  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  comply  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. 

70

 
 
 
                                                 
relating  to  conflicts  of  interest.  Moreover,  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  investments  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 financial information in the qualifying venture 
capital  funds'  annual  reports.  Denmark  and  a  further  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  managers  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  ensure  a  proportional  approach,  the  proposed 
requirements  seek  a  principle-based  structure  that  reflects  existing  business  practices. 
This  approach  was  supported  by  the  great  majority  of  stakeholders.  Moreover,  the 
proposed disclosure and reporting requirements 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 venture capital funds – one of the riskiest asset 
classes. 

- Venture capital fund investors 

The preferred option is not expected to directly 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 prerogative of investors to require clarity on costs 
being imposed on their investments and in the 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  venture  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  frameworks,  be  they  European  (e.g.  UCITS)  or 
national. The supervisory arrangements for oversight of qualifying venture capital funds 
build on existing framework and requirements vis-à-vis national authorities in the area of 
investment funds. 

71

 
 
- Portfolio companies of qualifying venture capital funds 

The  proposed  disclosure  and  reporting  requirements  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  result  of  funds'  obligation  to  provide  regular 
annual reports. However, it is unlikely that these 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  'investment  ready'.  Venture  capital  funds,  in 
assessing their potential investment targets, subject 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  standardized  reporting  requirements  placed  on  venture 
capital funds has the potential to steer the orientation 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  some  reductions  in  costs  for  some  portfolio 
companies. 

Overall, since the proposed option is a voluntary 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  managers.  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 venture capital fund, is expected to significantly 
reduce the administrative burden for those venture capital fund managers that currently 
raise capital outside of the fund’s home Member 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 managers pay for raising funds abroad in the 
current fragmented environment.80  

All of these additional costs would be eliminated. The preferred option would therefore 
increase legal certainty and create a level playing 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. 

72

 
 
                                                 
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 the 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 the new framework contributed to a common 
regulatory approach governing European venture 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  monitoring  activities  in  relation  to  the  regulatory 
framework  for  venture  capital  funds  will  consist  in  verifying  whether  the  rules  are 
specific  enough  so  that  investments  channelled  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 with national authorities, ESMA and the 
venture  capital  industry  (in  particular  the  European  Private  Equity  and  Venture 
Capital Association - EVCA) that the investment 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 that 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 capital fund, the regulatory target percentage 
in  favour  of  equity  stakes  in  unlisted  SMEs  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  sufficient  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 notion of qualifying investment targets (unlisted 
SMEs) not lead to the expected strengthening of Europe's SME sector, the range and 
breadth of possible investment targets will be reviewed.        

73

 
 
 
–  The  Commission  will  also  monitor  that  the  applicable  rules  adequately  reflect  the 
evolving  lifecycles  of  a  start-up  company  and  correctly define the stages  at which a 
venture  capital  fund  endowed  with  the  EU  passport  is  allowed  to  invest.  In  this 
respect, 
the  core  definitions 
underpinning a fund's eligibility for the new EU passport evolve in line with changing 
business practices, at European and international levels. The results of this monitoring 
will feed into the possible review. 

the  Commission  will  regularly  assess  whether 

Common regulatory approach 

With  respect  to  the  emergence  of  a  common  regulatory  approach  governing  venture 
capital funds, the Commission will regularly assess 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  borders.  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 accessible 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  'de-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  impact  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 investments 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 supervise 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 refer the matter to the ESMA which may 
act in accordance with the powers conferred 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.   

74

 
 
–  The  Commission  will  monitor  practical  issues  that  arise  from  the  fact  hat  the  new 
passport  system  remains  limited  to  sub-threshold  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%  obligatory  share  of  venture  capital  funds'  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  particular  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. 

that 

Since  the  data  that  would  feed  into  monitoring  of  the  above  indicators  is  already 
collected  and  assessed  under  existing  national  and  industry  practices,  it  it  not 
expected 
the  monitoring  envisaged  here  would  create  any  additional 
administrative  burden  for  fund  or  SME  stakeholders;  the  impact  of  additional 
monitoring activities on national and EU supervisory authorities is expected to be of 
a  purely  incremental  nature  that  would  be  absorbed  readily  into  business  as  usual 
practices. 

75

 
 
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  literature  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 

76

 
 
 
 
 
 
 
 
 
 
 
 
 
1.  Annex I: Venture capital and private equity definitions 

Definitions  and  terms  used  by  the  European  Private  Equity  and  Venture 

1.1 
capital association (EVCA) 

Private  equity:  provides  equity  capital  to  enterprises  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  doing  primarily  equity  capital  investments  into 
enterprises not quoted on stock market. 

Venture  capital:  is  strictly  speaking,  a  subset  of  private  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 equity, 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 funds) or incorporated direct private equity 
firms  investing  from  the  balance  sheet  (evergreen  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,  funds  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  transaction  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  particular  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.  without  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  involved  with  the  day-to-day  operations).  The 
general  partner  receives  a  management  fee  and  a  percentage  of  the  profits.  The  limited 
partners receive income, capital gains, and tax benefits. The general partner (management 
firm)  manages  the  partnership  using  policy  laid  down  in  a  Partnership  Agreement.  The 
agreement also covers, terms, fees, structures and other items agreed between the limited 
partners and the general partner. 

77

 
 
 
 
 
 
 
Fund 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 third 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 restructure 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  subordinated)  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 trading 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 investments made by buyout funds into venture stages 
would be defined as growth capital. 

78

 
 
 
 
Bridge  financing:  financing  made  available  to  a  company  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  minority  stake  of  existing 
shares  in  a  company  from  another  private  equity  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 manager 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 the 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).  Secondary  buyouts  differ  from  secondaries  or 
secondary market purchases which typically involve the acquisition of portfolios of private 
equity  assets,  including  limited  partnership  stakes  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 the 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 clause, so that in the event of insolvency all 
other creditors are paid before the silent partner. The company has to repay the partnership 
and  has  to  pay  interest  and  possibly  a  profit-related  compensation.  The  subordination 

79

 
 
clause  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  definition  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 use 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 charitable purposes). It may either donate funds 
and  support  other  organisations  or  be  the  sole  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 than 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  generate  financial  returns.  This  category  may 
include direct private equity funds that occasionally 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  (including  structures  such  as  the  EBRD  or 
EIF). 

Sovereign wealth funds: state-owned investment fund managing 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 result of budget and trade surpluses, and from 
revenue generated from the exports of natural resources. 

Related  definitions  in  the  Commission  Guidelines  on  State  Aid  to  promote 

1.2 
Risk capital investments in SMEs: 2006/C 194/02 and amended 2010/C 329/05 

For the purposes of these guidelines, the following definitions shall apply: 

80

 
 
 
 
 
(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 predominant 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, assess 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  principals,  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 
investment  organisation  or  from  another  shareholder  or 
another  private  equity 
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  expansion  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; 

81

 
 
(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 meaning 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; 

82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
83

 
 
 
2.  Annex II: Overview of past actions and initiatives in relation to Venture Capital funds 

– 

Venture capital as essential source of financing 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 final report in 2003, the Commission indicated the need to review the merits 
and  possibilities  of  a  single  fund  structure  and  to  ensure  that  the  potential  of  the  single  financial  market  would  be  efficiently  used, 
including further progress in functioning of venture capital markets. 

June 2005 

– 

– 

Commission (DG ENTR) Workshop on Merits and possibilities of a European Fund Structure 

(http://ec.europa.eu/enterprise/entrepreneurship/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 practitioners. The workshop participants argued for simplifying the regulatory requirements for fund 
structures so that investors would not have to spend excessive time on analysing various requirements for establishing a fund in non-
home jurisdictions. The experts concluded that a pan-European fund structure might be a solution in a long-term perspective, whereas 
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 investment by business angels, (ii) venture capital and (iii) stock markets specialized in SMEs and high growth companies. 

84 

 
 
 
 
                                                 
October 2005 

Risk Capital Summit in London organised by the 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 representatives from the risk finance sector to debate how risk capital 
should support innovation, growth and competitiveness of European SMEs and examine global good practices in risk capital 
intervention  in  Europe,  US  and  Asia.  Stakeholders  agreed  that  European  risk  capital  markets  were  functioning  below  their 
potential and stated that Pan-European early 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 

Oct 
2006 
March 2007 

-

– 
(http://ec.europa.eu/enterprise/entrepreneurship/financing/docs/com2006_financing_sme_growth/sec2006_841_financing_sme_growth_en.pdf)  

Communication 

Commission 

“Financing 

Growth 

Adding 

SME 

European 

– 

Value  

– 

– 

– 

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  easier  was  one  of  the  key  goals  and  the  Commission  called  for 
concrete and pragmatic steps to overcome the existing legal, regulatory and tax barriers and the Member States were asked to 
engage with the issue.  

Commission (DG ENTR) Expert group on Removing obstacles to cross-border investments by VC funds 1 

(http://ec.europa.eu/enterprise/newsroom/cf/document.cfm?action=display&doc_id=1094&userservice_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 context of an extensive consultation with national and industry experts in 
2006-2007, organised by Directorate General Enterprise and Industry. In the expert group report on removing obstacles to cross-border 
investments by venture capital funds from March 2007, experts recommended that apart from exchanging good practices and improving 
coordination between the Member States, the most reasonable way to progress in the short term would be the mutual recognition of the 
existing  national  frameworks  on  venture  capital  funds.  National  and industry  experts  suggested  that  Member  States  could  take  steps 
towards  recognising  venture  capital  funds,  which  are  registered  and  operate  in  other  jurisdictions  in  order  to  allow  these  funds  to 

85 

 
 
 
 
operate across borders without having to go through separate registration 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 request. 
Based on this and further policy deliberations, the Commission issued in 2007 a Communication on cross-border venture capital funds. 

2006 - 2010 

– 

– 

Community Guidelines on state aid to promote risk capital investment in  SMEs (2006/C 194/02) 

(http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:194:0002:0021:EN:PDF) as amended in 2010, (2010/C 329/5) 

(http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:329:0004:0005:EN:PDF) 

December 2007  – 

Commission  Communication  on  “Removing  obstacles  to  cross-border  innvestments  by  venture  capital  funds”, 

COM(2007)853 

– 

(http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0853:FIN:EN:PDF) 

Based on the mentioned expert group report on cross-border obstacles 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  common  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  existing 
legislation  or  by  adopting  new  laws.  The  aim  has  been  to  give  all  venture  capital  funds  the  opportunity  to  specialise  and  diversify, 
including smaller specialist funds. Especially smaller countries and those with a developing venture capital market and industry were 
invited to adopt or amend their legislation. With this Communication, the Commission announced that it would report on progress made 
in 2009. 

May 2007-
Early 2009 

Commission (DG TAXUD) Expert group on Removing direct tax obstacles to cross-border VC investments 

– 
pital_en.pdf) 

(http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/initiatives_small_business/venture_capital/tax_obstacles_venture_ca

– 

Direct tax obstacles to cross-border operations of venture capital 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 

86 

 
 
 
 
 
 
 
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 fund managers should be classified as "independent agent" 
by  all  tax  authorities  and  that  Member  States  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 

– 
of the European Economy’ 

Competitiveness Council Conclusions (Slovenian Presidency) – ‘A fresh impetus for competitiveness and innovation 

– 

(http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/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 Commission and the Member States to 
work together” and "recognises the significant benefits of developing a more integrated and competitive VC market in Europe, and the 
contribution a regime for cross-border private placement in the EU could make to facilitating cross-border VC fund raising". 

25 June 2008 

– 
also a “reduction of venture capital market fragmentation at the EU level” 

Commission Communication on Small Buiness Act (SBA) that is under the remaining regulatory and market gaps addressing 

July – 
December 2008 

– 

– 

– 

(http://ec.europa.eu/enterprise/entrepreneurship/sba_en.htm) 

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 further policy deliberations, the Commission planed to issue a 
report by mid 2009 on progress made. 

87 

 
 
 
 
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  proposals  set  out  in  its  communication  on  removing  obstacles  to 
cross-border  investments  by  venture  capital  funds.  The  proposal  should  be  in  line  with  principles  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 borders within the EU (more) with a timelimit for receipt 
of tenders: 30 January 2009  

November 
2008 

– 
Markku Maula and presented to the national experts on 8 December 2008 

Commission  (DG  ENTR)  focused  workshop  with  researchers    -  Conclusions  and  recommendations    summarised  by  Prof 

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/cms_Data/docs/pressData/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 

88 

 
 
 
 
 
 
 
national VC frameworks 

March 2009 

May-June 
2009 

October 2010 

– 

– 

– 

– 

– 

– 

Commission  (DG  ENTR)  follow-up  workshop  with  national  and  industry  experts  on  the  mutual  recognition  process  of 

national VC frameworks  

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 promoting mutual recognition of national frameworks, no significant 
measures have been taken yet that would make fundraising and 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. 

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  funds  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 critical 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 

89 

 
 
 
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 
funds." 

operations 

venture 

capital 

to 

of 

administrative 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/119175.pdf 

cross-border 

obstacles 

the 

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/LexUriServ.do?uri=CELEX:52005DC0314:EN:NOT) 

July 2006 

– 
http://ec.europa.eu/internal_market/investment/docs/other_docs/reports/equity_en.pdf)  

Commission  (DG  MARKT)  Expert  group  report  on  Alternative  investment  funds  –  subgroup  on  Private  Equity  funds 

– 

To  explore  problems  identified  by  stakeholders  and  ways  to  enhance  the  European  framework  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 regulation and the resulting legal fragmentation caused high operating and administrative 
costs for investment funds operating across borders. Small or medium-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  Member  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 common understanding of a ‘private placement’ might be a solution 
for this 

90 

 
 
 
 
 
November 
2006 

– 
(http://ec.europa.eu/internal_market/investment/docs/legal_texts/whitepaper/executive_summary_en.pdf)  

Commission  White  Paper  on  the  enhancing  the  single  market  framework  for  investment  funds;  SEC(2006)1452 

– 

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 for Investment Funds published by the Commission in November 
2006.    The  conclusion  was  that  the  question  should  be  approached 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 investors across Member State borders? And should a 
European private placement regime for the cross-border distribution of non-harmonised funds (including venture capital funds) 
to institutional or sophisticated investors be established? 

 July 2008 

– 
preparatory work. http://ec.europa.eu/internal_market/investment/legal_texts/index_en.htm#nonlegis) 

Commission  (DG  MARKT)  preliminary  impact  assessment  report  on  private  placement  –  revealing  need  for  further 

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, infrastructure funds, etc. have been captured by the recently adopted 
Directive on Alternative Investment Fund Managers (AIFM) 2011/61/EU 

91 

 
 
 
 
 
 
                                                 
3.  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 market. The lack of cohesion between the 27 
tax  systems  across  the  EU  can  lead  to  double  taxation,  tax  treatment  uncertainties  and 
administrative  obstacles,  which  would  prevent  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 capital market, the Commission organized in 2007 
a Working group of public and private sector tax experts. The expert group had to identify 
cases  of  double  taxation  and  to  consider  possible  ways  of  overcoming  such  obstacles.  A 
report of 30 April 2010 set out the experts' findings and conclusions. 

According to the Report  of  Expert  Group83, the two the main tax issues related to cross-
border venture capital investments consist on: 

1) The risk of a deemed permanent establishment for the VC fund or its investors in any 
other  jurisdiction  other  than  that  in  which  they  are  based  or  resident  together  with  the 
resulting double taxation, and 

2) The entitlement to double taxation conventions 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  outside  that  where  it  is  based,  the  venture  capital 
fund manager needs to have some form of presence 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  establishment and in  the country or countries where 
the fund or investors are located). 

According  to  the  OECD  Model  definition,  a  permanent  establishment  is  a  fixed  place  of 
business  through  which  the  business  of  an  enterprise  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  adopted  by  the  tax  authorities  of  Member  States 

83 
http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/initiatives_small_business/
venture_capital/tax_obstacles_venture_capital_en.pdf) 

92

 
 
 
 
 
                                                 
create uncertainty as to whether the local presence 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 solution would be for the tax authorities to treat 
the local activities of a venture capital fund manager 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 states 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 state of the portfolio companies in which that 
venture  capital  fund  invests)  classify  the  venture  capital  fund  in  different  ways,  e.g.  as 
transparent  (and  not  entitled  to  DTC  benefits)  or  non-transparent  (and  entitled  to  DTC 
benefits). 

So, if the state of residence of investor treats the venture capital fund as fully transparent 
and, thus, not entitled to the benefit of the DTC 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. 

93

 
 
 
4.  Annex IV: Executive Summary of the Impact Assessment on Private Placement 

What is private placement? 

Private placement is an officially recognised 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 when 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  participants;  typically  these  are  authorised 
financial  intermediaries,  including  placement  agents,  banks  or  investment  funds/firms, 
pension  funds,  life  insurance  companies,  in  some  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  suitable  for  wider  public  offer.  This  could 
include  distribution  of  new  types  of  investment  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  developed 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 determining the potential investors they can approach. 
This legal uncertainty is aggravated by frequent changes to national rules and conditions as 
reported. Offerors therefore have to bear substantial costs in order to identify and comply 
with the relevant rules. These may lead to self-imposed restrictions on the Member States 
where  investments  are  privately  placed.  This  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. Financial 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, national 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  prevent  potential  participants  from  profiting 
from  the  benefits  of  private  placement,  with  the  adverse  consequences  for  financial 
markets  and  the  wider  economy  as  described  above.  An  EU  private  placement  regime84 
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 could as well consist of a common understanding of the 
concept only. 

94

 
 
                                                 
Options 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 investors, offerors and products. The latter includes 
both legislative and non-legislative forms at industry, national and EU level. The analysis 
of  the  potential  impacts  of  the  options  has  revealed  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. Instead, the impact assessment work should be 
continued,  with  this  report  serving  as  a  stocktaking  and  information  document  for  all 
stakeholders and interested partners. 

95

 
 
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  products  takes  place)  that  face  the  lack  of 
means  of  funding  from  financial  markets  despite  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 funds 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  situation  where  potential  investors  face  more 
difficulties  in  gathering  reliable  information  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  only  in  assisted  areas),  mostly  represented  by 
equity or quasi equity instruments, where private 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 participation 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  greater  potential  to  distort  competition,  the 
Commission  will  make  a  detailed  assessment,  and  Member  States  will  have  to  provide 
evidence of a market failure. A detailed assessment will also be necessary for financing the 
expansion  stage  of  medium-sized  enterprises  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  less  than  50%  in  non-assisted  areas  or  30%  in 
assisted areas and where there is little or no private 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 costs linked to the screening of companies in 

85 Full text available at: http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006XC0818(01):EN:NOT 

96

 
 
 
 
                                                 
 
view  of  the  conclusion  of  investments  (‘scouting  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  management.  After  the  public  consultation,  the 
Commission adopted the modified communication on RCG86, 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 into innovative SMEs address the market gap 
that SMEs face in getting access to equity.  

These facilities have a long history. Under the Growth & Employment initiative (G&E) in 
the  years  1998-2000  a  facility  called  “ETF  Start-up”  pioneered  EU  investments  into 
venture  funds.  The  success  of  this  facility  led  to  its  expansion  under  the  Multiannual 
Programme  for  Enterprise  and  Entrepreneurship (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 innovative 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  implemented  for  the  Commission  by  the  European 
Investment Fund (EIF) on a trust basis. The GIF'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/LexUriServ.do?uri=CELEX:52010XC1207(02):EN:NOT 

97

 
 
 
                                                 
 
•  contribute to the establishment and financing 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 Commission 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 innovative, 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 participating 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 will provide dedicated support and services 
and  access  to  finance  for  SMEs.  Access  to  SME  finance  will  be  provided  through 
innovative financial instruments which are financed from a range of programmes targeting 
different policy areas.  First, with a dedicated “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 Programme 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 
http://ec.europa.eu/budget/biblio/documents/fin_fwk1420/fin_fwk1420_en.cfm 

the  Communication  -  p.  17-20  and  p.  83-86: 

Action plan to improve Access to Finance for SMEs  

5.3 
The Action Plan is at the juncture between financial reform (G20 commitments, roadmap 
provided  by  the  Communication  of  June  2010),  the  attention  devoted  to  the  problems  of 
small  and  medium-sized  enterprises  (Review  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.  

98

 
 
 
In  the  regulatory  side,  the  Action  Plan  links  together  the  proposals  the  Commission  is 
putting  forward  on  the  prudential  requirements  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  work  to  be  jointly  done  by  the  European 
Banking  Authority  (EBA)  and  European  Insurance  and  Occupational  Pensions  Authority 
(EIOPA), carry out a study on the relationship between prudential regulation and venture 
capital investments by banks and insurance companies.  

Moreover, the action plans further contains proposals 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 continue 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  links  the  proposals  the  Commission  is  going  to 
propose  for  the  financial  instruments  for  SMEs  under  the  Multi  annual  Financial 
Framework.  

In the policy side, the initiative looks at policy 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  have  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 must be found between targeting measures to 
SMEs and avoiding putting them in a separate class that would make them unattractive for 
investors. 

99

 
 
 
6.  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 invited 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  views  on  how  best  to  capture  venture  capital 
strategies.  The  proposal  would  in  addition  focus  on  funds  that  invest  the  majority  of 
their assets in SMEs. The consultation therefore 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 proposed 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 

2011/61/ 
EU  (AIFMD)87:  The  consultation  invited  views  on  the  interaction  between  the  new 
regime  for  venture  capital  and  AIFMD.  It  also  asked  whether  a  stand-alone  initiative 
for all venture capital funds would be a suitable approach. 

Investment  Fund  Managers  Directive 

•  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  consultation  paper  was  10  August  2011.    Forty  eight 
answers have been received: 38 from organisations, including representative bodies from 
across the banking and securities sectors, asset 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  

100

 
 
 
 
                                                 
•  A new European regime for venture capital would facilitate the cross border activities 
of  these  funds.  However,  it  should  be  flexible  to  avoid  creating  unnecessary  new 
burdens to the industry. 

•  Venture  capital  funds  need  flexibility  regarding  the  forms  of  financing  that  venture 
capital managers may be willing to use. However, in order to fully meet the EU policy 
goals,  a  significant  proportion  of  respondents  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  organisation  and  conflicts  of  interest  should 
therefore be principle based and proportionate.   

•  Many categories of venture capital funds' investors (e.g. business angels, family offices, 
and wealthy individuals) fall outside of the MIFID definition of professional investors.  
The new regime should include these categories in the scope of eligible investors.   

101

 
 
 
 
 OVERVIEW OF RESPONSES TO THE CONSULTATION 

I. 
The  consultation  was  launched  on  15th  June  2011  and  closed  on  10  August  2011. 
Responses were invited from all interested parties including representatives from venture 
capital fund industry, asset management organisations, 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 authorities and citizens.   

PUBLIC AUTHORITY 

CITIZEN 

ORGANIZATION 

Total 

8 

2 

38 

48 

Answers per type of respondent

17%

4%

79%

PUBLIC AUTHORITY

CITIZEN
ORGANIZATION

Figure  2  provides  a  more  detailed  presentation  of  the  status  of  organisational 
respondents, broken down into six categories:  asset management (i.e. asset managers and 
asset  management  association),  banking  and  securities  industries,  insurance  association, 
lawyers, investor associations and other professional associations. 

7,9%

2,6%

5,3%

18,4%

23,7%

ASSET MANAGEMENT

BANKING AND SECURITIES INDUSTRY 

42,1%

PROFESSIONAL ASSOCIATION

LAWYER 

INVESTOR ASSOCIATION

INSURANCE ASSOCIATION

102

 
 
 
 
 
 
 
Figure  3  lists  the  thirty  eight  answers  received  from  organisations  according  to  their 
nationality:  

2,63% 2,63% 2,63%

5,26%

5,26%

13,16%

5,26%

31,58%

26,32%

5,26%

FR

UK

LU

EU

AT

DE

US

FI

CZ

RO

103

 
 
 
 
 
 
 
 
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 
  Some  respondents  have  also  provided  qualitative 
answers  whenever  possible. 
commentary to supplement or nuance 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)? 

Opinions expressed: 

Number of 
opinions 
expressed 

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Industry  Other 

Total 

Organisations 

Yes 

No 

21 

3 

44% 

6% 

2 

1 

1 

0 

9 

0 

9 

2 

18 

2 

Most  respondents  expressed  that  mutual  recognition  could  be  a  possible  solution  to 
remove obstacles to cross border activity of venture capital funds: 

(a)  In  terms  of  fundraising:  the  current  fragmented  framework  has  a  negative 
impact  on  fundraising  and  leads  to  substantive  additional  cost.  A  mutual 
recognition  of  venture  capital  funds  could  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  European  Private  Equity  and  Venture  Capital 
Association (EVVCA), highlight that the main hurdle preventing venture capital manager 
from  carrying  on  cross-border  activities  relates  to  fundraising  and  not  to  investing. 
Venture  capital  fund  managers  are  facing  several  difficulties  to  attract  international 
investors.  Indeed,  in  order  to  operate  across  borders,  they  need  to  go  through  a 
cumbersome  and  costly  process  (identification  of  the  suitable  regime  for  potential 
investors, creation of complex parallel structures, registration and regulation processes...).   

QUESTION 2 

Do you believe that the main impediment preventing cross-border venture capital fundraising and 
investments is the absence of a passport for activities under the AIFMD 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 

104

 
 
 
 
 
 
 
expressed  

of 
contributions 

authorities 

Industry  Other 

Total 

The  absence  of  a  passport 
the 
for  activities  under 
AIFMD thresholds 

 The  fact  that  the  AIFMD  is 
not tailored to venture capital 
in general 

Regulatory barriers (including 
double  taxation  issues  and 
understanding and complying 
with local regulations)   

12 

25% 

9 

19% 

23 

47% 

2 

0 

4 

0 

0 

5 

5 

5 

4 

10 

9 

1 

9 

9 

18 

As  mentioned  above,  many  respondents,  including  industry  organizations  and  public 
authorities  acknowledge  that  raising  funds  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  funds  as  well  as  the  requirement  to  receive 
authorization in multiple jurisdictions, thereby increasing operating costs. 

Seeking for international investors usually induces excessive costs, such as legal advice in 
order to comply with different private placement regimes in Member states. 

The  majority  of  respondents  agree  that  AIFMD  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  would  be  unduly  cumbersome  and  too  expensive 
with regards to the operating costs of small funds. 

On  the  other  hand,  if  no  such  passport  is  available  for  smaller  VCFs,  there  is  a  risk  of 
discrimination between larger funds that benefit 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 funds from their investment scope, and this 
could significantly impair such 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 encountered or could facilitate tax incentives? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the total 
number of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

NO 

14 

29% 

3 

0 

4 

7 

11 

105

 
 
 
 
YES. It could contribute to 
cross 
eliminating 
border tax problems. 

the 

YES. It could facilitate tax 
initiatives. 

10 

2 

21% 

4% 

0 

0 

1 

0 

5 

0 

4 

2 

9 

2 

Many  respondents  don't  believe  that  an  initiative  on  cross  border  operations  of  venture 
capital  will  contribute  to  eliminating  cross  border  tax  problems.  They  argue  that  cross-
border  operations  of  other  investment  products  have  failed  to  eliminate  or  even  reduce 
the double taxation of investment income inside the EU and the tax discrimination of EU 
investors  based  on  their  country  of  residence.  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  financial  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 across Member States. In addition, they don't 
believe  that  a  passport  for  venture  capital  operators  should  be  linked  to  targeted  tax 
incentives. This should remain a matter for national governments.  

Against  this,  10  respondents  supported  that  this  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 getting 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 registration & simple notification procedure?  Do 
you consider such a voluntary regime to have any major cost implications for the key stake? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

23 

47% 

However 

AM 
YES. 
companies 
be 
authorised  and  not  simply 
registered  in  order  to  benefit 
from the passport. 

should 

3 

6% 

Costs 
requirements 

depend 

on 

Registration  should  be  made 
with national Authority 

Registration  should  be  made 
with ESMA 

20 

20 

3 

41% 

41% 

6% 

3 

2 

2 

5 

1 

1 

0 

1 

0 

1 

9 

1 

6 

9 

0 

10 

19 

0 

1 

11 

6 

1 

17 

15 

1 

106

 
 
 
 
 
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 strategy, 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 from 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 savings on a European passport depend on the new 
regime  requirements.    To  make  the  EU  passport  attractive  for  fund  managers,  the  key 
here  is  to  keeping  the  information  requirements  to  “register”  simple,  relevant  and  not 
cost-bearing.  Generally  speaking,  since  the  European  passport  would  allow  the  venture 
capital fund manager to act across the EU without being required to be locally authorized, 
it would reduce in particular: 

(1) 

(2) 

(3) 

Set-up and management costs of parallel investment structures. 

Legal work and legal advisory costs. 

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 funds' manager would look to market into and 
their private placement regimes. 

However, some respondents noted that the costs related to a legal advisory on different 
national private placement regimes 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 particular (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  sought  or  (iii)  where  domestic  legislation  has 
substantially changed compared to previous fund raisings. 

A  large  majority  of  respondents  favour  a  registration  with  the  authority  of  the  home 
member  state  of  the  manager.  They  argued  that  this  option  is  much  simpler  as  the 
relationship  between  the  competent  authority  and  these  venture  capital  firms  already 
exist. ESMA could consolidate a list of Managers duly approved by national authorities of 
the Member States. 

107

 
 
 
 
 
QUESTION 5 

Do  you  believe  that  the  new  regime  on  venture  capital  funds  should  be  restricted  to  professional 
investors? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

NO 

YES 

27 

4 

56% 

8% 

6 

1 

0 

1 

11 

10 

21 

2 

0 

2 

Most  respondents  agree  on  that  the  new  regime  shouldn’t  be  restricted  to  professional 
investors. The MIFID definition of professional investors would exclude many categories 
of institutional and individual investors who are 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 companies in which the fund invests; 

(6) 

(7) 

Industry sector experts (where the fund has a sector focus);  

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  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 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  invested  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  access  to  these  categories  of  institutional  or 
individual  investors  (described  above)  are  aware  that  the  investment  in  venture  capital 

108

 
 
 
 
funds implies a high level of risk and recognise any such access should be accompanied 
by strong regulatory safeguards. They provide the following suggestions:  

(10) 

Individual  investors  that  require  protection  when  investing  may  be  defined  both 
by  minimum  thresholds  and  by  an  assessment  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? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

Yes.  Annual  report  should 
include  the  annual  financial 
Financial 
accounts. 
be 
information 
audited.  

should 

Yes.  However,  the  audit  of 
financial 
information  should 
be  a  matter  to  be  agreed 
between  the  investor  and  the 
fund manager. 

Yes.  However,  Any  blanket 
requirements on the reporting 
of  such  funds  would  add  to 
the  burdens  of  an  SME 
investment regime. 

16 

33% 

3 

1 

6 

6 

12 

8 

5 

17% 

1 

0 

4 

3 

7 

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 such 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 prohibit fund managers from preparing reports 
on a more frequent basis.  

Many respondents favour that the financial information should be audited and consider it 
as  a  minimum  requirement  in  terms  of  transparency  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  obligation  to audit financial information would 
pose  an  additional  financial  burden  to  venture  capital  funds  without  any  justified 
109

 
 
 
 
 
 
 
transparency benefit. Therefore, it should consequently be left to the fund managers and 
their investors’ discretion. 

QUESTION 7 

Do you think there is a need to specify any operating condition for venture capital entities? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

NO 

8 

17% 

1 

5 

0 

0 

2 

7 

5 

3 

7 

10 

15 

31% 

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. 

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 should 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  convinced  that  there  is  a  need  to  specify  the 
operating  conditions  for  venture  capital  entities  in  the  legislative  proposal.  They  agree 
that  these  requirements  should  be  principles-based  and  depend  on  whether  venture 
capital funds are marketed to retail investors.  

15  respondents  agree  that  venture  capital  entities  should  comply  with  rules  of  conduct 
when  dealing  with  their  investors.  These  rules  could  be  aligned  with  those  applicable 
under the AIFM Directive. Many respondents believe that rules set out under article 12 of 
the  AIFM  Directive  enable  a  high-level  of  investor’s  protection  without  binding  venture 
capital  managers  in  a  way  that  would  be  detrimental  to  the  effectiveness  of  decisions-
making. 

Many respondents underline that most venture capital fund managers are small with little 
human  and 
infrastructure  resources.  They  should  be  subject  to  organizational 
requirements that are proportionate to their size. 

110

 
 
 
 
 
 
QUESTION 8 

Do you believe that VC funds should be allowed to adopt any of the legal forms traditionally used 
in Member States? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

NO.  The  legislative  proposal 
should specify the legal forms 
VC funds might adopt 

24 

3 

50% 

6% 

6 

0 

0 

1 

11 

0 

7 

2 

18 

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 appropriate legal form available. This choice 
depends  on  investors'  preferences,  local  regulatory  regime  and  tax  treatments  (i.e. 
transparent or non-transparent). Fund managers need the freedom of choice with regard 
to the form of the vehicle in order to identify to the most suitable structure. 

QUESTION 9 

Do you think it is worth specifying any investment rules for venture capital funds? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

NO 

YES.  Venture  capital  funds 
should invest more than 50% 
in SMEs. 

13 

16 

27% 

33% 

0 

6 

0 

0 

5 

8 

8 

2 

13 

10 

In  order  to  fully  meet  the  EU  policy  goals,  the  European  passport  would  benefit  funds 
investing  in  SMEs.  A  significant  proportion  of  respondents  support  the  definition  of  a 
compulsory investment percentage of assets that the venture capital fund should invest in 
SMEs.  A  threshold  of  50%  (calculated  at  the  time  of  initial  investment)  ensures  that  the 
majority  of  VC  funds’  total  assets  is  going  to  companies  that  are  SMEs  and  enables 
venture capital managers to diversify their portfolios by investing in larger businesses. 

Against  this,  few  respondents  argue  that  investment  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 
111

 
 
 
 
 
 
 
 
investment 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  the  venture  capital  investment  activity  in  SMEs  constitute  a 
criterion that should be reflected? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

NO 

4 

19 

8% 

40% 

2 

4 

0 

1 

0 

8 

2 

6 

2 

14 

 The  majority  doesn't  consider  the  temporary  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 depends 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 profits, 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)?  

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

NO 

18 

1 

37% 

2% 

4 

0 

1 

0 

8 

1 

5 

0 

13 

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  instruments.  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  financing  depends  on  the  need  of  SMEs  and  the 
taxation  regime.  Venture  capital  fund  manager  will  choose  the  appropriate  instrument 
with  a  view  to  ensuring  that  returns  will  not  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: 

112

 
 
 
 
 
 
(12)  At  the  start  or  formation  of  SMEs,  typically  venture  capitalists  will  employ 

convertible debt instruments. 

(13) 

(14) 

Between financings, inside investors typically would bridge a company via loans 
until investment from a new investor can be secured. 

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 repayable if the company failed to reach certain 
targets. Further, some VCFs provide bridging 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? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

NO. the passive investment in 
an  SME  should  also  be 
considered  by  the  proposal 
as venture capital investment 

5 

14 

10% 

29% 

1 

3 

0 

1 

4 

4 

0 

6 

4 

10 

All  respondents  believe  that  venture  capital  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  not  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  that  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  takes  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 capital 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 

113

 
 
 
  
 
 
expressed  

of 
contributions 

authorities 

Industry  Other 

Total 

YES 

NO 

12 

10 

25% 

21% 

4 

1 

1 

0 

3 

5 

4 

4 

7 

9 

Many  respondents  (including  EVCA)  recommend  that  there  are  no  limits  in  terms  of 
which stages of investment can be made by venture capital funds. They believe that these 
restrictions may result in funds having to avoid 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 life science sector where if a product fails in 
late  stage  development,  a  significant  restructuring  is  required.  Venture  capital 
firms need the flexibility to be able to consider 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 funds do not/should not use leverage? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

NO 

7 

11 

15% 

23% 

3 

1 

0 

1 

2 

4 

2 

5 

4 

9 

Most  respondents  agree  on  the  fact  that  it  is  not  a  standard  to  use  leverage  in  venture 
capital transactions. However, they specify that leverage may be used in fundraising and 
also if debt instruments are used.  

As an example, if a lending institution is willing 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 

114

 
 
 
  
 
 
Do  you  agree  with  the  list  of  entities  described  below  as  not  being  proper  investment  targets  for 
venture capital funds? 

Opinions expressed: 

Number of 
opinions 
expressed 

% over the 
total number 
of 
contributions 
received 

Public 
authorities 

Citizens 

Organisations 

Total 

Industry 
organisations 

Other 
organisations 

YES 

NO. It's too restrictive. 

7 

15 

15% 

31% 

1 

2 

1 

0 

5 

13 

3 

7 

2 

6 

In  the  context  of  the  implementing  provisions  of  Title  IV  of  the  Dodd-Frank  Wall  Street 
Reform  and  Consumer  Protection  Act,  the  SEC  proposed  a  definition  of  a  “qualifying 
portfolio companies” (SMEs financed by venture capital funds). 

The SEC excluded from the scope of the “qualifying portfolio companies”, the entities that 
meet one of the following criteria: 

(17) 

(18) 

(19) 

It is publicly traded (or controlled by a publicly traded company). 

 It borrows or issues debt obligations, directly or indirectly, in connection with the 
private fund’s investment in the portfolio company. 

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 private 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 fund of fund) should be included in the scope 
of the new regime.  

Other respondents argue that it would not serve the aim of facilitating financing to SMEs 
to  prohibit  the  funds  regulated  under  the  regime  to  invest  in  companies  listed  on  a 
regulated  market.  If  such  company  qualifies  as  an  SME  and  is  having  difficulty  raising 
funds in the capital markets, the legislative proposal should not deter investment in such 
a company through an overly restrictive definition.  

Further, listing portfolio companies on a stock 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 without constituting an exit of the fund from 
the relevant portfolio company. 

QUESTION 16 

Do you think that the EU should draw inspiration from the criteria set by the SEC to define the 
target companies of the venture capital funds? 

115

 
 
 
Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

YES 

NO 

4 

13 

8% 

27% 

2 

2 

0 

1 

1 

6 

1 

4 

2 

10 

The  majority  of  respondents  believe  that  the  criteria  set  by  the  SEC  can  be  used  for 
orientation but have to be adapted to the European needs. It should be taken into account 
that venture capital market is much more developed in the US than in Europe. Therefore, 
European  regime  needs  to  offer  more  flexibility  and  the  scope  of  permitted  investments 
should be much broader. 

QUESTION 17 

Would a third country regime be beneficial? 

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

NO 

YES 

5 

15 

10% 

31% 

3 

2 

0 

1 

2 

7 

0 

5 

2 

12 

Many  respondents  agree  that  third  country  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  public  authorities,  agree  that  funds  from  non-
member countries should not be given an EU-passport. 

QUESTION 18 

Which option do you support? 

(21) 

(22) 

Exemption  from  the  AIFMD  only  those  managers  that  are  below  the  threshold  of  the 
AIFMD. 

Exemption  from  the  scope  of  the  AIFMD  the  managers  that  fall  under  the  new  venture 
capital regime even if they trespass the thresholds of AIFMD. 

(23)  Creation a lighter regime for venture capital fund managers within the AIFMD itself.   

Opinions expressed: 

Number of 
opinions 
expressed  

% over the 
total number 
of 
contributions 

Public 
authorities 

Citizens 

Organisations 

Industry  Other 

Total 

116

 
 
 
  
 
 
(1)  Exemption 
below the AIFMD threshold 

for  entities 

(2)  Exemption  independently 
from the AIFMD threshold 

(3)  Creation  a  lighter  regime 
fund 
for 
venture 
managers  within 
the  AIFM 
Directive itself.  

capital 

10 

13 

6 

21% 

27% 

13% 

3 

1 

2 

0 

1 

0 

4 

4 

3 

3 

7 

1 

7 

11 

4 

The  majority  of  respondents  believe  that  a  new  European  regime  for  venture  capital 
should  be  introduced  as  a  standalone  initiative.  The  AIFMD  was  designed  for  a  rather 
different  market  segment.  Simply  modifying  the  Directive  would  lead  to  a  situation 
where many of the original (non-fitting) concepts 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 being caught by the AIFMD own deadlines 

Many  respondents,  including  3  public  authorities  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  majority  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 seem 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). 

*  *  * 

117

 
 
 
 
 
7. 

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 percent 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,  valued  at  cost  or  fair  value,  consistently 
applied by the fund;  

(3)  Does  not  borrow,  issue  debt  obligations,  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 borrowing, 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 qualifying 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 which 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 the 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 venture 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  (including  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.  

118

 
 
 
(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  qualifying  portfolio  company  that  has  been  acquired 
directly by the private fund from the qualifying portfolio company;  

(ii) Any equity security issued by a qualifying portfolio company in exchange for an equity 
security issued by the qualifying portfolio company described in paragraph (c)(3)(i) of this 
section; or (iii) Any equity security issued 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 private 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 foreign traded; (ii) Does not borrow or issue debt 
obligations  in  connection  with  the  private  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 company 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 with a remaining maturity of 60 days or less, 
and shares of an open-end management investment 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  and  other  securities  convertible  into  common 
Our  definition  of  equity  security  is 
stock  in  addition  to  limited  partnership  interests.
broad.  The  definition  includes  various  securities  in  which  venture  capital  funds  typically 
invest  and  provides  venture  capital  funds  with  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 

96 

119

 
 
 
 
 
types  of  equity  instruments  that  a  venture  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 security; 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  Exchange  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 venture, 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  carrying  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’’).  

120

 
 
 
 
 
8. 

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  companies,  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 companies 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 diversify the individual investors' risks by investing 
into carefully selected portolio companies. Venture capital funds are usually structured as 
limited partnerships with a limited lifespan, usually 10 years. The investors are the limited 
partners  and  the  venture  capital  firm  is  the  general  partner  of  the  partnership/fund. 
Furthermore,  venture  capital  funds  are  usually  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 prevails. 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 partner in the business. This form of financing 

89 M. Bender, Spatial Proximity in Venture Capital Financing, 2010, chapter 2.1.1. 

90  See  Annex  VII:  The  US  Securities  and  Exchange  Commission  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 
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 Countries: Implications for Measurement and Policy, page 11 
http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DSTI/DOC%282000%297&docLanguage=En 

venture  Capital 

in  Europe; 

development 

fundraising 

2001; 

page 

of 

92 See Annex VIII: Examples of selected venture 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 flows remains relatively steady, at about 30% on a yearly basis. 
Source EVCA: www.evca.eu  

121

 
 
 
                                                 
is referred to as primary or direct acquisition of equity from the target company as opposed 
to a secondary acquisition, where a fund buys shares 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' investments is directly linked to the success of 
the  underlying  companies,  venture  capital  fund  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 presence and proximity to their target companies 
is  essential.  It  is  important  especially  in  the  early  stages  of  portfolio  company  life  when 
more  intensive  support  is  needed  to  get  the  business  running.  Recent  research  also  finds 
that  presence  of  local  venture  capital  investors  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,  Inter-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, Corporate Venture Capitalists and Independent Venture 

Capitalists: What Do They Know, Who Do They Know, and 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  professionalization  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, Venture 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 McDougall, P.P., 2008, Venture Capitalists as Catalysts to new Venture Internationalization: The 
Impact  of  their  Investments,  Reputation  and  Knowledge  Resources.  Entrepreneurship  Theory  and  Practice.  And  
Lockett, A., Wright, M., Burrows, A., Scholes, L., and Paton, D., 2008, The export intensity of venture capital backed 
companies. Small Business Economics 31(1): p. 39-58. 

101 Hsu, D.H., 2006, Venture capitalists and cooperative 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. 

122

 
 
                                                 
International)  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 "portfolio" 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 financing 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 provided 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 features 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 rights and the cost of it for SMEs compared 
to  pure  equity  is  usually  lower.  The  most  common  form  of  mezzanine  finance103  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 instruments. 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 bridge 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 growth 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/newsroom/cf/_getdocument.cfm?doc_id=1065 

123

 
 
                                                 
 
The  business  objective  of  venture  capital  fund  as  an  investor  is  to  steer  its  portfolio 
companies  towards  a  profitable  sale  and  thereby  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,  including,  for  example,  a  sale  to  management, 
repayment of principal. The two most common exits are the portfolio company's listing on 
a  stock  exchange  (the  so  called  initial  public  offering  –  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  asset  class,  is  a  preserve  of  institutional  and 
qualified investors. According to the latest industry data, the share of such these investors 
(e.g.,  banks,  capital  market  experts,  endowments  and  foundations,  government  agencies, 
corporations,  fund  of  funds,  insurance  companies,  asset  managers,  pension  funds  or 
sovereign  wealth  funds)  in  European  venture  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  managed  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 limited 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 extensively 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  receives  it  on  its  accounts.  (i)  At  portfolio 
company  level,  debt  can  be  used  for  different  purposes.  Usually  venture  capital  equity 
investment  in  early  stages  of  company's  life  is  not  accompanied  by  debt  financing  from 
other  sources  as  no  other  viable  financing  alternative  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 the portfolio company serve as the collateral 
to  the  lender.  Lastly,  unrelated  to  the  venture  capital  investment  activity,  portfolio 
companies borrow money in the ordinary course of their business. 

Based  on  these  key  characteristics  of  venture  capital  funds,  multitude  of  fund  types 
emerge.  Some  venture  capital  funds  may  be  focused  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' geographical focus, some are local/regional others 
national  or  operating  world-wide.  The  situation  in  Europe  is  now  characterised  by  the 
move  from  locally  focused  ventures  towards  more  sector  specific  venture  capital  firms 
looking out for opportunities globally.  

104 The remaining 30% is unknown – data assembled by the industry EVCA. 

124

 
 
                                                 
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 

Business and Industrial Products 

Business and Industrial Services 

industry sectors: 

Chemicals and Materials 

Communications 

Computer and Consumer Electronics 

Energy and Environment 

geographical preferences:  United Kingdom 

Our company provides investment and support for IT, med-

tech and clean technology companies. Our strategy is to lead 

remarks: 

investment  in  technology-driven  companies  that  seek  to 

address  markets  with  significant  growth  potential.  We  are 

authorised and regulated by the FSA. 

125

 
 
 
 
 
 
 
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: 

Norway,  Sweden,  Switzerland,  United  Kingdom,  United 

Belgium,  Finland,  France,  Germany,  Ireland,  Netherlands, 

States of America, Israel 

fund managed/advised:  …Private Equity Fund II 

fund capital:  € 115,000,000 

126

 
 
 
 
 
 
 
 
vintage 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 

Business and Industrial Products 

Business and Industrial Services 

industry sectors: 

Communications 

Energy and Environment 

Life Sciences 

127

 
 
 
 
Other 

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 

128

 
 
 
type of firm:  GP - Independent (no parent) 

staff size:  8 

capital under management:  € 156,000,000 

financing stages:  Start-up 

type of financing:  Majority Equity 

Business and Industrial Products 

industry sectors: 

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 

129

 
 
Company D invests in early stage high-tech companies that 

remarks: 

have high-growth potential, with 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 

Expansion  –  development,  Other  early  stage,  Privatisation, 

financing stages: 

Public to private, Replacement, Seed, Small buyout (<15m 

equity), Start-up 

type of financing:  Majority Equity, Minority Equity, Shareholders loans 

Business and Industrial Products 

Business and Industrial Services 

Communications 

industry sectors: 

Computer and Consumer Electronics 

Consumer Goods and Retail 

Consumer Services: others 

Energy and Environment 

130

 
 
 
 
 
 
 
 
geographical preferences:  Western Europe 

fund managed/advised:  X 

fund capital:  € 160,000,000 

vintage year:  2007 

fund focus:  Balanced fund 

Independent  international  venture  capital  fund  with  a 

service-oriented  and  labour-intensive  style  of  investing. 

Investing 

in  all 

technology  sectors, 

including  clean 

remarks: 

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 

131

 
 
 
Mezzanine 

Shareholders loans 

industry sectors: 

Communications 

Computer and Consumer Electronics 

Consumer Goods and Retail 

Consumer Services: others 

geographical preferences:  Germany, Western Europe, Switzerland 

VC  Firm  F  is  a  subsidiary  of  a  leading  media  corporation 

based  in  Germany.  VC  firm  F  is  actively  seeking  high-

remarks: 

growth  potential  companies  in  the  digital  media  and  IT 

segments and financially supports the development, market 

launch and internationalisation of its partners. 

132

 
 
 
 
 
 
9. 

Annex IX: Overview of different forms of SMEs mezzanine financing105 

Mezzanine finance can be a complementary source 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, participating 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  any  liability  to  the  company’s  creditors.  The 
typical “silent” participation affects only the company’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 finance instruments. 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. In general the financier has 
no voting or management rights. However, the instrument is rather flexible and the right to 
be consulted on business decisions can be included 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 and SMEs, Mezzanine finance,  

 http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=1065 

133

 
 
 
 
                                                 
One  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 where 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  accounting  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 the recipient. Equity mezzanine may positively 
influence the internal bank rating and/or the external 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  gaining  in  importance  but  remain  little  used 
compared to classic loan financing. Mezzanine 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 mezzanine 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 provider 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  more  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  performance  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  obtain  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 stringent. In addition, the financing contract 

134

 
 
may include restrictive covenants that the borrower 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. 

135

 
 
 
 
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 

Baltics 

BE 

BG 

CZ 

DK 

FI 

FR 

DE 

GR 

HU 

IRL 

IT 

LUX 

NL 

PL 

PT 

RO 

ESP 

SE 

UK 

TOTAL EU 

17 

7 

25 

2 

1 

19 

19 

67 

124 

3 

7 

13 

13 

5 

32 

13 

7 

2 

62 

68 

129 

635 

15 

4 

12 

0 

2 

11 

12 

82 

68 

2 

3 

5 

53 

4 

31 

9 

1 

1 

33 

33 

172 

553 

Source: EVCA Yearbook 2011 

56.600 

124.000 

1.420.000 

47.000 

12.000 

2.367.000 

1.658.000 

8.698.000 

1.378.000 

431.000 

3.249.000 

0 

217.000 

2.763.000 

1.642.000 

36.984.000 

10.832.000 

14.058.000 

96.000 

232.000 

950.000 

640.000 

673.000 

2.075.000 

250.000 

754.000 

11.000 

2.785.000 

4.449.000 

539.000 

46.000 

833.000 

11.848.000 

839.000 

8.026.000 

2.421.000 

30.000 

0 

7.670.000 

29.510.000 

12.780.000 

227.666.000 

50.909.600 

350.150.000 

136

 
 
 
 
 
 
Table  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 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

27 

28 

72 

112 

80 

80 

18 

20 

TOTAL 

437 

6 

9 

11 

17 

8 

6 

4 

3 

64 

29 

37 

47 

71 

72 

54 

24 

43 

377 

8 

10 

12 

17 

6 

7 

4 

3 

67 

120

100

80

60

40

20

0

n
o

i
l
l
i

b

€ 

112

72

71

72

80

80

47

54

37

27

29

28

8

6

9

10

11

12

17

17

43

24

18

20

8

6

6

7

4

4

3

3

2003

2004

2005

2006

2007

2008

2009

2010

Funds Raised PE and VC Funds Raised VC Investments PE and VC Investments VC

Source: EVCA, own calculations 

137

 
 
  
 
 
 
 
 
 
 
Table 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 

Later stage venture 

Balanced 

Total venture 

Growth capital 

Buyout 

Mezzanine 

Generalist 

4 

4 

5 

13 

58 

86 

8 

6 

Total funds raised 

170 

Source: EVCA, own calculations 

73 

35 

75 

183 

79 

137 

15 

58 

472 

59 

116 

65 

72 

738 

633 

338 

111 

360 

8 

4 

9 

21 

8 

144 

8 

14 

197 

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 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

9000 

21000 

28000 

30000 

37000 

27000 

15000 

6000 

91 

161 

173 

167 

172 

146 

76 

33 

99 

130 

162 

180 

215 

185 

197 

182 

82 

98 

138 

135 

146 

170 

130 

138 

Total 

173.000 USD mn 

1019 

130 EUR mn 

138

 
 
  
 
  
  
  
  
  
  
Total  

131.000 EUR 
mn  

year 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

EU funds raised 
(USD million) 

N° of funds 

Average fund size 
(USD million) 

Average fund size 
(EUR million) 

2000 

4000 

7000 

6000 

6000 

7000 

4000 

1000 

61 

62 

70 

83 

72 

65 

27 

11 

33 

65 

100 

72 

83 

108 

148 

91 

27 

48 

85 

54 

66 

85 

98 

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  capital  funds  raised  by  type  of  investor 
2007-2010 

Amount 
VC 

Venture capital 

€ bn 

32 

1.614 

402 

% 

0,2 

8,0 

2,0 

Academic institutions 

Banks 

Capital markets 

Corporate investors 

2.117 

10,0 

Endowments and foundations 

446 

Family offices 

Fund of funds 

Government agencies 

1.079 

1.451 

2.935 

2,0 

5,0 

7,0 

14,0 

Amount 
PE 

€ bn 

472 

20.317 

3.820 

4.980 

5.475 

8.351 

23.670 

6.853 

Private equity 

% 

0,2 

10,4 

1,9 

2,5 

2,8 

4,3 

12,1 

3,5 

139

 
 
  
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
 
 
  
  
Insurance companies 

Other asset managers 

Pension funds 

Private individuals 

Sovereign wealth funds 

Unknown 

TOTAL 

468 

590 

1.335 

2.037 

288 

6.353 

2,0 

3,0 

6,0 

10,0 

1,0 

29,0 

13.020 

9.315 

40.696 

8.952 

6.186 

44.040 

21.147 

196.150 

6,6 

4,7 

20,7 

4,6 

3,2 

21,6 

Venture capital f unds raised by type of  investor 2007-2010

0%

8%

2%

30%

10%

2%

5%

7%

1%

10%

6%

3%

2%

14%

Academic institutions

Banks

Capital markets

Corporate investors

Endow ments and f oundations

Family of f ices

Fund of  f unds

Government agencies

Insurance companies

Other asset managers

Pension f unds

Private individuals

Sovereign w ealth f unds

Unknow n

Table  4:  European  and  US  venture  capital  investments  as  a  share  of  GDP  (in 
%) in 2010 

0,16%

0,14%

0,12%

0,10%

0,08%

0,06%

0,04%

0,02%

0,00%

US

Luxembourg

Sweden

Denmark

Finland

Norway
France
Switzerland
United Kingdom

Germany
Portugal
European total

Netherlands
Belgium

Hungary

Ireland

Austria

Spain

Bulgaria
Poland
Czech Republic
Baltic countries

Italy

Greece

Romania

140

 
 
  
  
 
 
 
 
 
 
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 

Start-up 

349 

  Seed/Start-up 

2.142 

  Early stage 

Total early stage 

2.490 

  Early stage 

Expansion 

3.372 

  Expansion 

233 

839 

1.072 

1.253 

Replacement capital 

314 

  Later stage 

841 

Total later stage 

3.686 

  Total later stage 

2.094 

TOTAL 

6.179 

  TOTAL 

3.166 

1.50x 

2.55x 

2.32x 

2.69x 

0.37x 

1.71x 

1.95x 

Source: K. Raade and C.T. Machado: Recent developments in the European private equity markets, 
Economic papers 319, April 2008 
http://ec.europa.eu/economy_finance/publications/publication12419_en.pdf 

Table  6:  Average  deal  size  of  venture  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 

Start-up 

0.425 

  Seed/Start-up 

2.181 

1.425 

  Early stage 

Expansion 

2.652 

  Expansion 

Replacement capital 

7.208 

  Later stage 

3.449 

6.011 

7.699 

0.19x 

0.41x 

0.44x 

0.94x 

Source: K. Raade and C.T. Machado: Recent developments in the European 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) 

141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(€ 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 
venture 

stage 

Total 
(EU+non-EU) 

venture 

11.234.769 

8.711 

1.287 

5.419 

2.073 

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 

Replacement 
capital 

1.643.578 

529 

3.107 

401 

4.099 

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 

Start-up 

732.629 

8.295.356 

Later stage venture 

10.775.716 

1.783 

6.595 

5.080 

Total venture 

19.803.702 

12.961 

Growth 

23.239.900 

Rescue/Turnaround 

1.964.844 

Replacement capital 

6.832.167 

Buyout 

TOTAL 

136.586.487 

188.427.099 

Source: EVCA, own calculations 

2731 

400 

618 

3.756 

20.130 

11.665 

1.775 

2.066 

17.110 

95% 

65% 

55% 

85% 

142

 
 
 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
 
 
 
Table  9a:  Share  of  European  venture  capital  and  private  equity  investments 
into SMEs 2007-2010 

95%

80%

97%

98%

98%

83%

86%

84%

64%

49%

69%

70%

55%

55%

58%

54%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

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) 

18

16

14

12

10

8

6

4

2

0

n
o

i
l
l
i

b

€ 

8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

0

2003

2004

2005

2006

2007

2008

2009

2010

Amount invested

Number of SMEs

Source: EVCA, own calculations 

143

 
 
 
 
 
 
 
 
 
 
 
Table  10:  Investments  by  number  of  employees  in  2010  (%  of  number  of 
companies financed) – market statistics 

Venture capital

33,0%

5,8%

0,4%

1,3%

0,3%

0,6%

0 - 19

20 - 99

100 - 199

200 - 249

250 - 499

500 - 999

1000 - 4999

5000 +

Source: EVCA 

58,6%

Table 11: Private equity and venture capital investments by sector 2010 

Venture capital 

Private equity (buyout and growth) 

Unknown 

0,09%  Unknown 

Transportation 

1,13%  Transportation 

Real estate 

0,34%  Real estate 

Life sciences 

30,04%  Life sciences 

Financial services 

1,15%  Financial services 

Energy & environment 

10,74%  Energy & environment 

Consumer services 

2,69%  Consumer services 

Consumer goods & retail 

4,07%  Consumer goods & retail 

Construction  

0,67%  Construction  

Computer & consumer electronics 

20,26% 

Computer 
electronics 

& 

consumer 

0,07% 

5,51% 

0,49% 

12,33
% 

5,97% 

2,87% 

10,01
% 

20,99
% 

1,33% 

8,09% 

144

 
 
 
 
 
Communications 

15,03%  Communications 

Chemicals & materials 

2,52%  Chemicals & materials 

10,48
% 

2,40% 

Business & industrial services 

3,54%  Business & industrial services 

8,76% 

Business & industrial products 

7,29%  Business & industrial products 

Agriculture 

0,43%  Agriculture 

10,19
% 

0,50% 

Source: EVCA 

Table 12: Venture capital and private equity fund raising geography 2007-2010 

All Venture capital 

Private equity (excluding 
Venture capital) 

€ mn 

% 

€ mn 

% 

10,896 

51,5% 

48,315 

27,6% 

2,550 

1,297 

6,403 

21,147 

12,1% 

34,860 

19,9% 

6,1% 

49,121 

28,1% 

30,3% 

42,705 

24,4% 

175,002 

Domestic 

Non-domestic 

Outside Europe 

Unknown 

Total 

Source: EVCA, own calculations 

Table 13: Global Venture capital investments in 2009 

n
o

i
l
l
i

m
R
U
E

18.000

16.000

14.000

12.000

10.000

8.000

6.000

4.000

2.000

0

US

Europe

China

Isreal

India

Canada

145

 
 
 
  
  
 
 
 
 
 
 
Source: 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 equity market. Like in Europe, we observe a 
reluctance  to  take  risk  among  the  new  entrepreneurs  and  engineers.  VC  could  also 
have a role to play in terms of training, coaching.  

China has advantages for VC investors. First of all, the Chinese domestic market is 
growing  rapidly.  The  firms  oriented  towards  the  domestic  market  have  great 
opportunities  to capture growth with specific 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-potential 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 work 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.: "Global Ventutre Capital Insights and Trends Report 
2010", Ernst&Young) 

108 "Global Ventutre Capital Insights and Trends Report 2010", Ernst&Young 

146

 
 
 
 
                                                 
11. 

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 development. 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  with  its  US  counterpart  is  particularly 
informative, given the European and US industries 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  compared  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 and the financial crisis from the end of 
2007  onwards  brought  about  severe  reductions  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 driving 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  venture  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  the  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  the  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 performance in the UK and the US, June 2011 

http://www.nesta.org.uk/library/documents/AtlanticDrift.pdf 

147

 
 
                                                 
 
billion 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 
113 
million  per  company  in  the  seed  stage  and  around  €  1  million  in  the  startup  phases. 
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 rewarding than returns on EU funds. This is in line 
with the risk-reward thesis, where the riskier the investment, the greater the potential payoff 
in case of success. (EIF) 

Sector  Specialisation:  Since  1990s,  US  venture  capital  funds  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  three  specific  sectors  still  only  reached  60%;  more 
generally EU funds' specialisation has been more 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 venture capital insights and trends report 2010" 

112  Josh  Lerner,  Yannis  Pierrakis,  Liam  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  European  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. 

148

 
 
                                                 
Cluster  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 venture 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, compared 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  education  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  tolerance  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 different factors might impact the relative 
performance  of  EU  and  US  funds,  the  scale  of  the  perceived  performance  gap 
between  the  EU  and  US  and  its  evolution  need  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 compilation for these two regions is most complete. 

124 See Lerner et al. 

149

 
 
 
                                                 
UK 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 for funds raised in this period was 33% in the US and 13% in 
the UK. Funds raised between 1998 and 2005 reported -0.21% IRR for US funds and -1.21% 
for the UK. Overall funds followed the same pattern 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 large 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  returns  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  most  statistically  relevant  factors  that 
determine the performance differences between venture capital funds on either side 
of  the  Atlantic.  Overall  views  and  analysis  vary  on  the  relative  importance  of  the 
different  factors  outlined.  Conclusions  differ  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 location was found to be insignificant when controlled 
for fund characteristics. This means that performance of EU and US funds is determined by 
fund characteristic rather than location. Further 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 variables 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  ventures  (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  between  total  funding  and  performance  while  the 
reverse is true for Europeans. One reason appears 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  include  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 performance 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 performance and the access to finance by SMEs 
- DEMAND SIDE 

150

 
 
C. 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,  compromise  the  effectiveness  of  supply-side 
interventions,  such  as  initiatives  to  stimulate  business  angels  or  which  create  public  sector 
venture  capital  funds.  This  has  highlighted  the  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 submitted.  However, other funds reported a lack 
of any form of IR assistance in their area and 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  for  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 environment 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 Business, Innovation (2009)  

127 L. Silver, B. Berrgren, F. Vegholm: The impact of investment readiness on investor commitment and market 
accessibility in SMEs, Journal of Small Business and Entrepreneurship, 2010 volume 23, Issue 1  

128  Improving  Investment  Readiness  for  ICT  EU  Funded  Research  Luis  Galveias,  EBAN,  March  2011: 
http://www.vleva.eu/sites/www.vleva.eu/files/events/bijlages/luis_galveias_eban.pdf 

151

 
 
 
 
 
                                                 
 
Table  14:    European  venture  capital  and  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 

Development 

Balanced 

Total venture 

Buyout 

0.0 

0.0 

-6.6 

36.1 

All private equity 

33.3 

-0.7 

5.9 

14.4 

6.8 

13.2 

10.4 

-6.4 

0.2 

3.7 

-0.8 

7.1 

3.9 

-0.9 

9.2 

12.8 

6.8 

14.3 

11.2 

0 

8.8 

10.3 

6.9 

13.9 

10.6 

Source: K. Raade and C.T. Machado: Recent developments in the European private equity markets, 
Economic papers 319, April 2008  

Table  15:    US  venture  capital  and  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/seed stage 

Development 

Later stage 

Total venture 

Buyout 

2.6 

7.5 

14.5 

7.0 

21.6 

All private equity 

16.5 

5.5 

12.9 

8.9 

9.1 

15.6 

13.1 

-5.4 

1.9 

1.8 

-1.2 

2.2 

6.8 

38.3 

16.9 

9.0 

20.5 

8.8 

11.2 

20.5 

14.6 

13.7 

16.5 

13.2 

14.0 

Source: K. Raade and C.T. Machado: Recent developments in the European private equity markets, 
Economic papers 319, April 2008  

In  2006,  the  long-term  investment  horizon  and  returns  of  US  venture  capital 
operators were high. They significantly outperformed 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 

152

 
 
 
 
 
 
 
 
significantly 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.  Interestingly,  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 study131 points 
to the fact that average returns do not capture the large variability in returns within 
countries, when comparing UK and US ventrue 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 returns 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  sufficient  capital  flows  between  the  market 
participants, specific knowledge and experience 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 existence 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  capital134,  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_finance/publications/publication12419_en.pdf 

130 EVCA, Thomson Reuters 

131 Atlantic Drift – Venture capital performance 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  Venture  Capital  and  Private  Equity:  SSRN 
working paper. 

134  Ibid  and  and  Tykvová,  T.  and  Schertler,  A.,  2008,  Syndication  to  Overcome  Transaction  Costs  of  Cross-
border 

Investments ? Evidence from a Worldwide Private Equity Deals' Dataset. Working paper 

135 Guler, I. and Guillén, M.F., 2007, Transnational Connections and Strategic Choice: Venture Capital Firms' 

Entry into Foreign Markets. Working paper 

136 Wright, M., Clarysse, B., Mustar, P., and Lockett, A., 2007, Academic Entrepreneurship in Europe. 

153

 
 
 
                                                 
higher  GDP  growth  rate,  and  supportive  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  funds138.  The  frictions  reducing  the  cross-
border  flows  include  e.g.  distance,  foreign  language,  different  currencies,  not 
belonging  to  a  common  market,  trade  relations,  lack  of  availability  of  experienced 
co-investors,  lack  of  information  and  trust,  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 Determinants of Venture Capital Funding: Evidence Across 

Countries. Journal of Corporate Finance 6: p. 241-289 and Cumming, D., Fleming, 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 

154

 
 
 
                                                                                                                                          
fundraising139.  From  the  brief  overview  of  factors  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  entrepreneurs  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  limited  partnerships.  IESE  Working  Paper  WP  no  726  and 
Cumming,  D.  and  Johan,  S.,  2007,  Regulatory  harmonization  and  the  development  of  private  equity  markets. 
Journal of Banking & Finance 31(10): p. 3218-3250 

155

 
 
                                                 
12. 

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-Capital- and Non-Venture-Capital-Financed 
Firms 

Manju Puri, Duke University and NBER; Rebecca Zarutskie, Duke University; June 
2010 

•  First, we examine the quantitative importance 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 firms are an extremely small percentage 
of all new firms created in the LBD – 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 effects 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  innovation  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 perspective of the economy at large, it 
offers  evidence  of  the  selection  function,  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 combination of ownership and incentives, 
private  equity  investment  seems  to  lower  the  cost  of  start-up  capital  and 
result in higher industry dynamics. The results are generally robust to using 
different proxies for entry, contemporaneous or historical volumes of private 
equity investment, and to correcting for 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 

156

 
 
 
 
patents, its effect should be more pronounced 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  equity  investment  on  entry  in  high-entry 
industries is robust to accounting for other industry characteristics, as well as 
for  other  characteristics  of  the  business  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  that  VC  financing  fuels  firm  growth. 
According  to  our  estimates,  after  receiving  the  first  round  of  VC  financing 
portfolio firms exhibit a considerably greater growth rate measured in terms 
of  both  the  number  of  employees  and  the  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  role  of  VC  financing  in  fostering  the 
growth of high-tech start-ups. Quite interestingly, they clearly document that 
even  in  an  unfavourable  environment  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 beyond 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 should 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 are 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  schemes  are  better  at  producing  employment 
than  the  EIS  and  VCT  schemes.  Similarly,  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 capital 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 compared the funded firms with the 

157

 
 
 
 
control sample we found that recipient 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 businesses 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. The largest recent survey showed that 
over the five years to 2006/7, firms backed by venture capital increased their 
worldwide employment by 8 per cent per year, a much higher rate of growth 
than  the  3  per  cent  reported  by  most  mid-sized  companies.  Venture-backed 
firms’  UK  employment  also  grew  by  6  per  cent,  compared  to  a  national 
annual rise in employment of 1 per cent. 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 creation 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 more 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 Equity 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  economic  growth.  However,  no  rigorous 
academic  study  has  analysed  whether  private  equity  actually  has  an  impact 
on the GDP growth of a country. The problem in undertaking such studies is 
to control for the reverse causality explanation – 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 

158

 
 
 
restructuring  of  the  economies.  Through  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  backed  firms.  Second,  this  efficiency 
advantage  of  VC  backed  firms  arises  from  both  screening  and  monitoring: 
the efficiency of VC backed firms prior 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 for such firms relative to non-VC backed 
firms.  On  average,  VCs  select  firms  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  TFP  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  efficiency  subsequent  to  financing  is 
significantly  higher  for  the  former  firms,  consistent  with  higher  reputation 
VCs  having  greater  monitoring  ability  compared  to  lower  reputation  VCs. 
Our results indicate that this difference in monitoring ability between higher 
159

 
 
 
 
 
 
 
and lower reputation VC backed firms results in TFP improvements that are 
10%  greater  for  higher  reputation  VC  backed  firms,  which  is  economically 
very  significant  as  it  implies  an  increase  in  profits  of  approximately  35%. 
Fifth,  the  efficiency  gains  generated  by  VC  backing  arise  primarily  from 
improvement  in  product  market  performance  (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  effect  remains  strong  once  we  exclude 
investment  allocated  to  buy-outs,  suggesting  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  unchanged  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  regulation 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 interrelationship between the Nasdaq and 
VC returns confirms that a well-functioning stock market can be considered a 
viable exit channel. These findings of comovements and short-term dynamics 
are in accordance with the empirical results 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 

160

 
 
 
 
 
 
implies 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  Monitor140,  high-
expectation  entrepreneurial  activity  (expectations  of  over  20  employees  in 
five years) is highest in the USA, with Germany and the UK at less than half 
the US levels. Globally, start-ups expecting to employ 20 or more employees 
are  responsible  for  almost  75%  of  total  expected  jobs  in  all  entrepreneurial 
activity.  The 
innovative 
enterprises is one of the causes for the EU’s inferior performance in the last 
two decades.  

insufficiently  growth-oriented 

financing  of 

•  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 three were created after 1975 in Europe, 
compared  with  26  in  the  US.  The  top  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 entities141.  

•  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 study143 suggests that, in terms of obstacles to growth, 
financial constraints are at least as important 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. 

161

 
 
 
 
 
                                                 
motivating 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  the 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  their  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  sectors  and  at  different  stages  of  their 
life-cycle.  

•  Use risk capital: Given limited and erratic cash flows at the early period of 
the firm’s growth trajectory, the so-called ‘J Curve’ effect147, risk capital may 
be a much more appropriate form of finance 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  prepared  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. 

162

 
 
 
                                                 
•  Investment  readiness:  Investors  frequently  allude  to  the  poor  level  of 
understanding or preparation by entrepreneurs 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  owners  are  both  poorly  informed  and  ill 
prepared  for  the  rigours  of  commercial  activity148.  Poor  management  is 
largely  responsible  for  the  very  high  death  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 guidance provided during their early stages by 
venture  capitalists  supported  by  the  Competitiveness  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  venture  capital  investment  for  innovation 
companies. Skype was a early beneficiary 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  reaching  €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  the  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 Physics 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 

163

 
 
 
                                                 
also the strongest. graphene has some exceptional 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  applications,  such  as  super-fast,  super-light 
graphene transistors, not to mention  transparent touch screens, solar cells and light 
panels. The two scientists’ work was partly funded by the EU’s Competitiveness and 
Innovation Programme. 

164

 
 
13. 

ANNEX XIII: ECONOMIC DIMENSION OF VENTURE CAPITAL 

13.1 

Impact of venture capital on economy 

Venture capital helps to drive innovation, economic growth and job creation. VC has 
a lasting effect on the economy as it mobilises long term investment. Moreover, VC 
backed companies often create high-quality jobs as VC supports the creation of the 
most  successful  and  innovative  businesses.  In  the  Information  Technology  (IT) 
sector  the  cost  of  creating  new  businesses  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 contributes 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 point150 (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  investments  and  economic  growth,  the 
conclusion is that countries with high VC activity typically have stronger economic 
growth.  The  opposite  is  not  true:  not  all  high-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 stimulates 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  income.  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  and  aggregate  income:  "A  doubling  in  the 
number  of  firms  funded  by  venture  capital  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  either  of  two  potential  mechanisms:  "First, 
nascent entrepreneurs may recognize the need for capital in the future and establish 
firms  only  when  they  perceive  reasonable  odds  of  obtaining  that  funding.  Second, 
the  snowball  effect,  VC-funded  firms  may  encourage  others  to  engage  in 
entrepreneurship through a demonstration effect or by training future firm founders." 

150 Th. MEYER, "Venture Capital Adds Economic Spice", Deutsche Bank Research, September 14, 
2010. 

151  Samila  and  Sorensosn  (2011),  "Venture  Capital,  Entrepreneurship,  and  Economic  Growth", 
TheReview of Economics and Statisti." 

165

 
 
                                                 
At  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 climate 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  fasten  the  (industrial)  reactions  to  climate 
change and at the same time deal with the employment situation of a country.153 

13.2 

IMPACT OF VENTURE CAPITAL ON BUSINESSES 

VC investment is vital to the existence and success of growth-oriented businesses, in 
particular in the seed, start-up and expansion stages. For start-up companies, as the 
business generates more costs than revenues, the EBIT (Earnings Before Interest and 
Taxes154)  is  initially  negative.  Therefore  investment  in  equity  can  help  in  these 
stages. 

Hellmann  and  Puri  (2000)155  draw  a  positive  correlation  between  VC  and 
innovation; they suggest that VC stimulates innovative activities of firms: "A start-
up financed by a venture capitalist needs less time to bring a product to the market; 
moreover, firms pursuing an innovative strategy 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.eu/environment/etap/files/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 between 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. 

166

 
 
                                                 
According to an EVCA survey (2002)157, VC funds are focussing in certain business 
sectors  and  a  substantial  part  of  VC  backed  companies  are  active  in  high-tech 
industries  (computer  related,  biotechnology,  medical-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 times (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,  training,  etc.  This  support  has  often  led  to  an 
improved competitive position of the beneficiaries.  For seed and start-up companies 
receiving VC, the median value of the training expenditure multiplied by more than 
four  times  and  doubled  for  the  expansion  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 relationships, 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  that  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  performances  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  than  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 research 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) 

167

 
 
                                                 
R&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 investment. 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 competitors. 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 their 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 their 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. 

168

 
 
 
                                                 
14. 

Annex XIV: EU Member States Venture capital frameworks 

There are 2 Member States where existing legal 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 restrictions: (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  company.  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,  why  this  legal  framework  is  not 
currently  used  at  all  by  Austrian  venture  capital  funds.  In  addition,  there  are 
specific criteria set forth in the tax code which a fund needs to comply with in order 
to benefit from a capital gains tax exemption.  

to 

Germany:  pursuant 
the  German  Venture  Capital  Act  (Wagniskapital-
beteiligungsgesetz - "WKBG"), a company qualifies as a "venture capital company" 
under the WKBG if: (i) its articles of association 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 capital firm elected for the application of 
the WKBG. 

There  are  7  Member  States  with  different  legal  frameworks  designed  specifically 
for venture financing: 

Estonia:  VC  Funds  definition  (IFA):  a)  at  least  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  public  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 cases, 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 Proximité 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, 

169

 
 
companies  must  be  SMEs,  have  main  activity  in  1  or  2  or  3  regions  which  have 
common borders in France.  

Italy: A measure included in the last Financial Act, recently approved by the Italian 
Government, foresees tax incentives for venture capital funds, which are defined as 
harmonized  funds  under  the  AIFMD  that  invest  more  than  75  %  of  their 
commitments  in  seed,  start  up,  early  stage  or  expansion  financing  in  unlisted 
companies  (target  companies  must  be  established  in  the  EU,  must  have  been 
established  for  less  than  36  months  and  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 appreciation potential; (2) Acquire, by assignment 
or  subrogation,  credits  on  companies  in  which  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 participate; (4) Apply their treasury surpluses in 
financial instruments; (5) Conduct any foreign 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 portfolio: 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  has  invested  VC  after  the  first  year  of 
operation.  Qualifying  investment  instruments  include  Equity,  Quasi  Equity, 
Convertible loans and guarantees, mezzanine capital. Qualifying investment targets 
are  unlisted  SMEs  and  there  is  no  geographical  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 rate 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 principatory 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  publicity),  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  investment  VCEs  (but  max  40%  of  assets  in  one 
VCE). 

United Kingdom: VCTs are companies whose shares 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  their  qualifying  activities  in  the  UK)  ,  (ii) 
VCTs  will  also  be  able  to  be  listed  outside  of  London  on  any  European  exchange, 
170

 
 
(iii) VCT can invest in loans to investee companies as opposed to equity. For older 
VCT funds the maximum is 70%, but from this 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  million  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. 

171

 
 
 
15. 

Annex XV:  Examples of Member States 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 unlisted 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  company'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  three  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)  Shareholders'  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 individual 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 persons involved in the management of a 
SICAR/SIF may invest in the respective SICAR/SIF. 

EN 

172 

 
 
 
 
 
 
 
 
 
 
United Kingdom 

Investors  who  do  not  meet  the  definition  of  MiFID  professional  investor  can  be  offered 
venture capital funds under certain conditions:  

(i) these investors must have signed a  certificate 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 

EN 

173