COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Date: 2011-12-07
Institutions: European Commission
Subjects: aid to undertakings, corporate finance, fund (EU), investment, small and medium-sized enterprises, venture capital

EUROPEAN COMMISSION 

Brussels, 7.12.2011 
SEC(2011) 1516 final 

COMMISSION STAFF WORKING PAPER 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a  
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

European Venture Capital Funds 

{COM(2011) 860 final} 
{SEC(2011) 1515 final} 

 
 
 
 
  
 
1. 

INTRODUCTION 

Venture  capital  funds  are  operators  that  provide  mostly  equity  finance  to  companies  that  are 
generally  very  small,  in  the  initial  stages  of  their  corporate  development.  These  firms  are  often 
innovative and demonstrate a strong potential for growth and expansion. In the EU, venture capital 
funding  has  high,  but  largely  unexploited,  potential  for  the  development  of  small-  and  medium-
sized enterprises (SMEs)1. SMEs  that rely on venture  capital financing  fare  better  than  those  that 
receive no venture capital backing. 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. Supporting venture capital can thereby drive the real economy.  

In Europe, raising funds for venture capital finance remains at sub-optimal levels. The small size of 
an average European venture capital fund (€ 60 m illion) 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,  a  prerequsite  for  the  specialisation  necessary  to  operate  a 
successful venture capital fund.  

The  focus  of  the  impact  assessment  is  on  the  appropriate  regulatory  measures  to  provide  deeper 
capital pools for venture capital funds and allow European venture capital funds to expand assets 
under  management.  The  underlying  policy  aim  is  to  make  such  funds  into  a  more  important 
financing  tool  for  innovative  start-up  companies.  In  pursuing  this  aim,  the  impact  assessment 
focused on rules govering the 'private placement' of venture capital funds to potential investors.  

2. 

PROBLEM DEFINITION  

Driver  1:  Regulatory  fragmentation.  Compared  with  competing  global  centres  of  high-tech  and 
innovation, most notably the United States, the rules that govern the marketing of venture capital 
investments  are  fragmented  and  dispersed.  Nine  out  of  27  Member  States  have  adopted  specific 
rules  on  the  operation  of  venture  capital  funds,  the  composition  of  their  investment  portfolio, 
qualifying  investment  instruments,  qualifying  investment  targets,  the  geographic  location  of 
investment targets, the types of investors that are eligible in such funds. All of these rules diverge in 
their substance on some or all of the above mentioned points. This has prevented the emergence of 
a  uniform  concept  of  what  constitutes  a  venture  capital  fund.  Eighteen  Member  States  have  not 
adopted  specific  rules  on  the  fundraising  activities  conducted  by  venture  capital  operators.  They 
apply general rules on company law and prospectus obligations to funds that wish to market 'private 
placements'2 of venture capital. Compliance with this heterogeneous set of rules causes additional 
cost and complications.  

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  the  marketing  of  venture  capital  funds,  the 

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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) 
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. 

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procedural and preparatory steps (identification or local rules, seeking of legal advice, cost/benefit 
analysis prior to targeting the market) necessary to raise venture capital become more complex as 
the number of targeted jurisdictions increases.  

Driver  3:  Raising  venture  capital  funds  abroad  involves  costs  that  are  not  incurred  when  raising 
capital domestically. In order to ensure compliance with the various legal requirements that apply to 
the  marketing  of  venture  capital  funds,  the  fund  manager  needs  to  undertake  'due  diligence' 
ensuring proper identification of all applicable rules and requirements. Costs related to adapt legal 
documentation  to  the  requirements  of  different  national  private  placement  rules  may  amount  to  € 
500  to  €  1,000  for  each  jurisdiction.  If  the  venture  capital  fund  sponsor  wanted  to  raise  capital 
across the EU, these costs would rise from € 13,500 to € 27,000.  

Driver 4: Several jurisdictions apply prospectus rules to venture capital offerings. Major costs are 
associated with national prospectus requirements. For example, 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. A prospectus registration for one host Member State alone (Germany) would 
cost around € 40.000 . Prospectus requirements and prior approvals have been identified for Austria, 
Belgium, the Netherlands, France, Sweden and the United Kingdom.  

Driver  5:  Several  jurisdictions  require  local  registration  and  a  local  distribution  presence.  Many 
Member  States  require  that  a  local  and  licensed  marketing  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  marketing  agent.  The  costs  for 
obtaining a distribution license range from € 20.000  to € 40.000 3. The annual costs for maintaining 
a regulated “local presence”, e.g., in the United Kingdom, would be at least € 25.000  per year. This 
figure does not including costs for personnel.  

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 four different jurisdictions exceeded 0.4% of the total capital committed to this fund.  

3. 

ANALYSIS OF SUBSIDIARITY  

A  solution  based  on  action  by  Member  States  has  already  been  tested,  and  failed  to  achieve  the 
intended goal. The Commission, in 2007, proposed mutual recognition of venture capital funds that 
are  legally  marketed  in  another  Member  State.  However,  in  a  report  of  December  2009  the 
Commission  concluded  that  mutual  recognition  in  itself  has  not  contributed  to  opening  host 
Member  States  markets  to  venture  capital  fund  mangers  legally  established  in  one  jurisdiction. 
Therefore,  only  targeted  harmonisation  of  key  requirements  applicable  to  enture  capital  funds  at 
European level will allow cross-border marketing.  

4. 

OBJECTIVES 

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

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Estimates provided by an EVCA legal advisor on 25 October 2011.  

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The overarching objective  is to  make  European SMEs  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.  

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. The proposed course 
of action therefore focuses on the development of deeper capital markets for venture capital funds.  

Operational objectives 

Establish  a  notion  of  what  constitutes  a  'qualifying  venture  capital  fund'.  In  order  to  enhance  the 
practical operation of cross-border fundraising, a common understanding of the concept of 'venture 
capital' is necessary. It is therefore proposed to harmonise the essential features of a venture capital 
fund.  

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  uniform  framework  that 
applies when qualifying venture capital funds are marketed in the Community.  

Create  a  network  of  administrative  cooperation  for  the  effective  introduction  and  supervision  of 
managers  of  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 uniform rules that apply to venture capital funds.  

5. 

POLICY OPTIONS 

With respect to substantive policy options, the impact assessment considers how best to define the 
essential  features,  in  terms  of  portfolio  investment  thresholds,  target  undertakings  and  qualifying 
investment  instruments,  which  characterise  a  venture  capital  fund.  Options  assessed  ranged  from 
instituting  an  investment  threshold  of  50%,  70%  or  up  to  90%  of  committed  capital  in  favour  of 
eligible target undertakings (unlisted SMEs). Instruments assessed include equity and quasi-equity 
instruments.  In  terms  of  eligible  investors,  options  assessed  included  funds  open  to  professional 
investors  (as  defined  in  Mifid),  funds  open  to  the  larger  population  of  family  offices,  angel 
investors, management teams and wealthy individuals or funds open to all retail investors.  

Several options on legal form are assessed. These included options whereby special venture capital 
fund  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  thereof, 
'private placements'.  

6. 

ASSESSMENT OF IMPACTS  

The assessment of impacts revealed the merits of an intermediate approach. An approach whereby 
an  intermediate  target  of  70%  of  committed  capital  has  to  be  invested  in  equity  or  quasi-equity 

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issued by the eligible SME, offers the highest likelihood that a distinct European brand for 'venture 
capital funds' would emerge without the risk of dilution of the new brand. With respect to eligible 
investors,  the  favored  approach  is  to  create  a  scheme  limited  to  professional  investors  that,  upon 
certain  conditions,  is  also  open  to  investments  by  family  offices,  angel  investors,  management 
teams and wealthy individuals, but not to retail investors. This approach would capture the typical 
venture capital investor base without requiring a fully fledged retail framework.  

In respect of the legal instrument, the impact assessment favours the stand-alone approach. Options 
creating  uniform  rules  on  venture  capital  funds  within  the  existing  AIFMD  framework  are 
considered  as  causing  friction  within  the  AIFMD  framework,  a  directive  which  would  have  to 
accommodate a strict supervisory approach vis-à-vis a heterogeneous population of alternative fund 
managers. Also, in the absence of a higher level of regulatory convergence between Member States, 
an option based on 'mutual recognition' of lawfully marketed venture capital funds is not considered 
effective  in  reaching  the  first  operational  aim  (a  common  understanding  of  what  constitutes  a 
venture capital funds and the creation of uniform conditions for their marketing).  

7. 

COMPARISON OF OPTIONS AND POLICY CHOICE  

The  final  comparative  analysis  of  all  substantive  and  procedural  options  concludes  that  the 
preferred  option  is  a  stand-alone  harmonisation  instrument  that  would  create  uniform  conditions 
under which a fund manager may market of qualifying venture capital funds in the Community.  

The  chosen  approach  appears  the  most  efficient  because,  in  practical  terms,  a  fund  manager  who 
complies with all of the uniform requirements set forth in the proposed instrument would be able to 
market  uniform  funds  in  the  entire  Community  without  :  (i)  having  to  opt  into  the  regulatory 
framework  provided  in  Directive  2011/61/EC  or  (ii)  comply  with  the  residual  –  and  very 
heterogeneous - national rules on either venture capital funds, private placements, prospectuses or 
requirements on local distribution.  

8. 

COSTS AND BENEFITS 

Compliance  with  the  uniform  criteria  is  not  expected  to  result  in  significant  compliance  costs  or 
administrative  burden.  The  harmonization  of  quality  requirements  that  apply  to  venture  capital 
funds  would  considerably  reduce  existing  costs  linked  with  having  to  comply  with  different  and 
very heterogeneous national rules that would apply in the absence of harmonization.  

While a venture capital fund is likely to incur some costs linked to adapt its reporting and disclosure 
standards  to  align  with  the  uniform  rules,  these  costs  are  likely  to  be  a  fraction  of  the  operating 
expenses that arise under the 'business as usual' scenario where funds have to comply with a variety 
of national provisions governing reporting and disclosure.  

It  is  not  expected  that  the  cost  of  supervising  compliance  with  the  uniform  framework  would  be 
significant, as all alternative investment funds are, if they were not registered under the proposed 
framework, subject to the general registration and disclosure requirements stipulated in Article 3(3) 
of the Alternative Investment Fund Managers Directive (AIFMD).  

Certain  requirements  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 

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borne  under  business  as  usual,  as  it  is  a  precondition  for  portfolio  companies  that  seek  venture 
capital financing to be 'investment ready'.  

Creating a European venture capital framework, based on a common notion of what constitutes a 
qualifying  venture  capital  fund,  is  expected  to  improve  efficiency  in  cross-border  fundraising, 
promote  competition  among  venture  capital  fund  managers  and  increase  opportunities  for 
specialization.  From  the  perspective  of  investors,  uniform  rules  governing  venture  capital  funds 
would create more trust in this particular asset class and -- in combination with improved access to 
funds  --  would  aid  investors  in  allocating  their  capital  more  efficiently.  Finally,  a  uniform 
framework  for  venture  capital  funds  will  channel  more  capital  to  innovative  and  high-growth 
potential companies. 

9. 

MONITORING AND EVALUATION 

In  line  with  the  objectives  underpinning  the  Commission's  policy  choice,  the  post-adoption 
monitoring  and  evaluation  will  focus  on  three  issues:  (1)  has  the  new  framework  established  a 
notion  of  what  constitutes  a  'qualifying  venture  capital  fund',  (2)  has  the  new  framework 
contributed to a common regulatory approach governing qualifying 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.  

Monitoring of these issues will be done in close cooperation with ESMA who will be tasked with 
maintaining  a  central  register,  publicly  accessible  by  internet,  which  lists  all  qualifying  venture 
capital fund managers registered in the Union in accordance with the proposed Regulation.  

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