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IntroductionThe European Venture Capital Fund (“EuVECA”) regulation and the European Social Entrepreneurship Fund (“EuSEF”) regulation (collectively, the “Regulations”) were published in the Official Journal of the European Union (“EU”) on 25 April 2013, and came into effect on 22 July 2013.

The Regulations introduce a harmonised set of rules for qualifying venture capital and social entrepreneurship funds, and permit certain alternative investment fund managers (“AIFMs”) to market their qualifying venture capital and social entrepreneurship funds under the designation of “EuVECA” or “EuSEF” throughout the EU pursuant to a passport, without opting into full compliance with the directive on alternative investment fund managers (“AIFMD”).

The Regulations prescribe which AIFMs and which venture capital and social entrepreneurship funds qualify for the new regime; the permitted investments; eligible investment instruments and techniques; eligible investors; and organisation, conduct and transparency requirements for AIFMs managing funds under the brand EuVECA or EuSEF. The purpose of this briefing note is to summarise the application of the Regulations, and to clarify their interaction with the AIFMD.

Background: The AIFMD, the Regulations and Below-Threshold AIFMsThe AIFMD imposes harmonised conditions and requirements on the structure and operation of AIFMs, in return for which authorised AIFMs can, for the first time, avail of a passport to market alternative investment funds (“AIFs”) to professional investors across the EU, and to manage AIFs domiciled in member states other than the AIFM’s home member state. The term AIF is defined broadly in the AIFMD to include all collective investment schemes that are not regulated under the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive - and therefore it includes venture capital and social entrepreneurship funds.

Under the AIFMD, there is a distinction between managers which are either above or below certain thresholds specified in the AIFMD. These thresholds are defined by reference to assets under management (“AUM”), with the effect that smaller managers are not subject to the full rigours of AIFMD. Instead, they have a less onerous obligation to register with, and provide information to, their competent authorities. A registered AIFM is therefore an AIFM which only acts as AIFM to AIFs which are smaller than the threshold sizes set out in the AIFMD, and registered AIFMs are not required to comply with all of the regulatory requirements that apply to an “authorised” AIFM. Under the AIFMD, a registered AIFM will manage (a) AIFs with total AUM under €100 million where leverage is employed, or (b) AIFs with total AUM under s500 million with no leverage and a five year lock-in period. A smaller AIFM which is below these thresholds but looking to sell AIFs cross border throughout the EU does not have a right to passport its AIFs throughout the EU, unless it chooses to “opt-in” to the full requirements of AIFMD and become an authorised AIFM.

Turning to the Regulations, the significant facility offered to smaller managers of qualifying venture capital or social entrepreneurship funds is an alternative route to a European marketing passport without opting into full AIFMD compliance. This option is open to AIFMs with unleveraged AIFs falling within (b) above, ie AIFMs managing less than s500 million in unleveraged AIFs with a lock in period of five years. By registering under the EuVeCA or EuSEF Regulations, and complying with the rules thereunder, such AIFMs may avail of EU-wide marketing for their qualifying venture capital funds and qualifying social entrepreneurship funds, but without the more burdensome requirements which would be triggered by opting into full AIFMD compliance in order to gain a passport. In terms of contextualising the “smaller manager” threshold utilised in the Regulations, data published by the European Commission (the “Commission”) suggests that 98% of European venture capital fund managers have a portfolio of funds with assets under management below €500 million, while the average social entrepreneurship fund has assets under management below €20 million. In view of this, the Regulations are welcomed as complementary to the AIFMD to increase access to European markets for smaller AIFMs with qualifying funds.

Which AIFMs can avail of the Regulations?The Regulations may be availed of by of managers of AIFs which:

• are established in the EU;

• do not exceed a threshold of total AUM of €500 million in AIFs with no leverage and a five year lock-in period;

• are subject to registration in their home member state in accordance with the AIFMD; and

• manage portfolios of “qualifying venture capital funds” or “qualifying social entrepreneurship funds” as defined in the Regulations. These terms are explained below.

The Regulations do not have mandatory application; this means it is up to the eligible AIFM to proceed to register under the Regulations with its home state authority. Once an eligible AIFM is registered locally as a manager of a qualifying venture capital fund or a qualifying social entrepreneurship fund, this registration is valid across the EU and permits the manager to market those funds under the branding EuVECA / EuSEF respectively throughout the EU. ESMA is required to maintain a central database, which is publicly accessible on the internet, listing all registered managers and the qualifying funds that they market, in addition to the countries in which those funds are marketed. The marketing passport operates pursuant to a notification process set out in the Regulations, and implementing regulations laying down implementing technical standards to determine the format of the notification came into force on 7 June 2014.

Briefing Note: The European Venture Capital Fund and European Social Entrepreneurship Fund Regulations


EuVECA: What venture capital funds qualify? A qualifying venture capital fund is a collective investment undertaking that intends to invest at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are “qualifying investments” within a time frame laid down in its rules or instruments of incorporation. The fund can be internally or externally managed and it must be established within the EU, although note that the EuVECA Regulation provides for the Commission to review, by 22 July 2015, the possibility of allowing third country funds to use the designation EuVECA.

Assets other than qualifying investments can be acquired, up to a maximum of 30% of aggregate capital contributions and uncalled capital investments. This threshold and the 70% threshold are calculated on the basis of amounts investible after deduction of all relevant costs and holdings of cash and cash equivalents. The intention behind the 30% allowance is to give a certain degree of flexibility in investment and liquidity management. Holdings of cash and cash equivalents are not taken into account in calculating the 30% threshold on the basis that these are not considered to be investments. The exposure of a qualifying venture capital fund cannot be increased beyond the level of its committed capital whether through borrowing of cash or securities, the engagement of derivative positions or by any other means - managers of qualifying venture capital funds may only borrow, issue debt obligations or provide guarantees at the level of the fund where such borrowings, debt obligations or guarantees are covered by uncalled commitments.

In order to better understand the application of the EuVECA Regulations, two key terms which arise ie, “qualifying investments” and “qualifying portfolio undertaking”, are explained below.

Under the EuVECA Regulations, qualifying investments cover:

• Equity or quasi-equity instruments that are issued by:

• a qualifying portfolio undertaking and acquired directly by the qualifying venture capital fund from the qualifying portfolio undertaking;

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

• an undertaking of which the qualifying portfolio undertaking is a majority-owned subsidiary and which is acquired by the qualifying venture capital fund in exchange for an equity instrument issued by the qualifying portfolio undertaking.

• Secured or unsecured loans granted by the qualifying venture capital fund to a qualifying portfolio undertaking in which the qualifying qualifying venture capital fund already holds qualifying investments, provided that no more than 30% of the aggregate capital contributions and uncalled committed capital in the qualifying venture capital fund is used for such loans.

• Shares of a qualifying portfolio undertaking acquired from existing shareholders of that undertaking.

• Units or shares of one or several other qualifying venture capital funds, provided that those qualifying venture capital funds have not themselves invested more than 10% of their aggregate capital contributions and uncalled committed capital in qualifying venture capital funds.

• Under the EuVECA Regulations, a qualifying portfolio undertaking is defined as an undertaking that:

• At the time of an investment by the qualifying venture capital fund:

• is not admitted to trading on a regulated market or on a multilateral trading facility (“MTF”) as defined in MiFID;

• employs fewer than 250 persons; and

• has an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million.

The European Venture Capital Fund and European Social Entrepreneurship Fund Regulations


• Is not itself a collective investment undertaking.

• Is not a credit institution, investment firm, insurance undertaking, financial holding company, or mixed-activity holding company.

• Is established within an EU member state, or in a third country provided that the third country:

• is not listed as a Financial Action Task Force (“FATF”) non-cooperative country and territory (NCCT); and

• has signed an agreement with the home member state of the qualifying venture capital fund manager and with each other member state in which the units or shares of the qualifying qualifying venture capital fund are intended to be marketed to ensure that the third country fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention and ensures an effective exchange of information in tax matters, including any multilateral tax agreements.

EuSEFs: What social entrepreneurship funds qualify?The application of the EuSEF label is intended to satisfy investor demand for a regulated product which aims to generate a positive social impact. In order to be eligible for the EuSEF designation, the fund must invest at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are “qualifying investments” within a time frame laid down in its rules or instruments of incorporation. The fund can be internally or externally managed and must be established within an EU member state. However, similar to EuVECA, the EuSEF Regulation provides for the Commission to review, by 22 July 2015, the possibility of allowing third country funds to use the designation EuSEF.

As with an EuVECA, an EuSEF can acquire assets other than qualifying investments up to a maximum threshold of 30% of aggregate capital contributions and uncalled capital investments. This threshold and the 70% threshold referred to above are calculated on the basis of amounts investible after deduction of all relevant costs and holdings of cash and cash equivalents, as cash and cash equivalents are not considered to be investments. Also in line with the rules for EuVECA, the exposure of a qualifying EuSEF cannot be increased beyond the level of its committed capital whether through borrowing of cash or securities, the engagement of derivative positions or by any other means, and managers of qualifying EuSEFs may only borrow, issue debt obligations or provide guarantees at the level of the fund where such borrowings, debt obligations or guarantees are covered by uncalled commitments.

In the context of understanding the application of the EuSEF Regulations, it is important to understand what is meant by the terms “qualifying investments” and “qualifying portfolio undertaking”, and these are explained below for ease of reference.

For EuSEFs, qualifying investments cover:

• Equity or quasi-equity instruments that are issued by:

• a qualifying portfolio undertaking and acquired directly by the qualifying social entrepreneurship fund from the qualifying portfolio undertaking;

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

• an undertaking of which the qualifying portfolio undertaking is a majority-owned subsidiary and which is acquired by the qualifying social entrepreneurship fund in exchange for an equity instrument issued by the qualifying portfolio undertaking.

• Securitised and unsecuritised debt instruments, issued by a qualifying portfolio undertaking.

• Units or shares of one or several other qualifying social entrepreneurship funds, provided that those qualifying social entrepreneurship funds have not themselves invested more than 10% of their aggregate capital contributions and uncalled committed capital in qualifying social entrepreneurship funds.

• Secured or unsecured loans granted by the qualifying social entrepreneurship fund to a qualifying portfolio undertaking.

• Any other type of participation in a qualifying portfolio undertaking.

For EuSEFs, a qualifying portfolio undertaking is defined as an undertaking that:

• At the time of an investment by the qualifying social entrepreneurship fund is not admitted to trading on a regulated market or MTF.

• Has the achievement of measurable, positive social impacts as its primary objective in accordance with its articles of association, statutes or any other rules or instruments of incorporation establishing the business, where the undertaking:

• provides services or goods to vulnerable or marginalised, disadvantaged or excluded persons;

• employs a method of production of goods or services that embodies its social objective; or

• provides financial support exclusively to social undertakings as defined in the two bullet points above.

Note that the Commission is empowered to adopt delegated acts specifying the types of goods or services, and the method of production thereof, which embody a social objective.



• Uses its profits primarily to achieve its primary social objective in accordance with its articles of association, statutes or any other rules or instruments of incorporation establishing the business and with the predefined procedures and rules therein, which determine the circumstances in which profits are distributed to shareholders and owners to ensure that any such distribution of profits does not undermine its primary objective.

• Is managed in an accountable and transparent way, in particular by involving workers, customers and stakeholders affected by its business activities.

• Is established within an EU member state, or in a third country provided that the third country:

• is not listed as a FATF NCCT; and

• has signed an agreement with the home member state of the manager of a qualifying social entrepreneurship fund and with each other member state in which the units or shares of the qualifying social entrepreneurship fund are intended to be marketed to ensure that the third country fully complies with the standards laid down in of the OECD Model Tax Convention and ensures an effective exchange of information in tax matters, including any multilateral tax agreements.

To whom can EuVECAs and EuSEFs be marketed?EuVECAs / EuSEFs may only be marketed to investors who are professional clients under MiFID; or who may on request be treated as professional clients pursuant to MiFID; or to investors that commit a minimum of €100,000 and confirm in writing that they are aware of the risks associated with the investment. This marketing restriction is disapplied for management personnel of the AIFM when investing in the EuVECAs / EuSEFs they manage. By 22 July 2017, the Commission is required to review the possibility of an extension which would enable marketing to retail investors. Within this timeframe, the Commission is also required to review the appropriateness of complementing the Regulations with an appropriate depositary regime.

Rules at manager levelThe Regulations require the AIFM of an EuVECA or an EuSEF to comply with common provisions on conduct of business and conflicts of interest, organisation, delegation, valuation of assets, own funds, disclosure to investors, the provision of an annual report to the national regulator to include audited financial accounts. For EuSEFs, the AIFM must employ procedures to measure the extent to which the qualifying portfolio undertakings in which each fund invests achieve the positive social impact to which they are committed. The Commission is empowered to adopt delegated acts to detail these procedures.

Where the AUM of the AIFM to an EuVECA or EuSEF subsequently exceed the €500 million threshold and, further to AIFMD rules, the AIFM becomes subject to AIFMD authorisation, although the AIFM is permitted to continue to market using the EuVECA / EuSEF brand, it must comply in full with the AIFMD together with the specific requirements in the Regulations relating to qualifying venture capital / social entrepreneurship funds.




Next StepsIn February 2015, ESMA published a final report setting out technical advice on implementing measures under the Regulations. In relation to the EuSEF Regulation, the implementing measures will specify the types of goods and services or methods of production of goods and services embodying a social objective; the types of conflicts of interest managers of qualifying EuSEFs need to avoid and the steps to be taken in that respect; details of the procedures to measure the social impacts to be achieved by the qualifying portfolio undertakings; and the content and procedure for provision of information to investors. The implementing measures under the EuVECA Regulation will specify the types of conflicts of interest that managers of qualifying venture capital funds need to avoid and the steps to be taken in that respect. The Commission is expected to adopt the implementing measures during 2015.

CommentThe Regulations provide an alternative for smaller fund managers managing venture capital and social entrepreneurship funds that do not intend to opt into the AIFMD but wish to market using a pan-European marketing passport. These Regulations, together with the AIFMD, mean that private equity / venture capital type funds are now regulated at a European level. In view of this, it will be necessary to give consideration as to whether certain structures, which were previously unregulated, are now impacted by the regulatory requirements and the passporting benefits offered by these measures.

If you are interested in receiving further information in relation to this area, and if you wish to discuss the specific application and operation of the EuVECA and EuSEF Regulations or the AIFMD, please do not hesitate to get in touch with your usual Asset Management and Investment Funds Group contact or any of the contacts listed in this publication.

The EuVECA Regulation may be accessed here.

The EuSEF Regulation may be accessed here.

Full details of the Asset Management and Investment Funds Group, together with further updates, articles and briefing notes written by members of the Asset Management and Investment Funds team can be accessed at www.matheson.com.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:115:0001:0017:EN:PDF

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:115:0018:0038:EN:PDF


Matheson’s Asset Management and Investment Funds Group: Key Contacts

Shay LydonPARTNER DUBLIN OFFICE

D +353 1 232 2735E [email protected]

Liam CollinsPARTNER DUBLIN OFFICE


Joe BeashelPARTNER DUBLIN OFFICE


Dualta CounihanPARTNER DUBLIN OFFICE

D +353 1 232 2451 E [email protected]

Michael JacksonPARTNER DUBLIN OFFICE


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Elizabeth GracePARTNER DUBLIN OFFICE


Anne-Marie BohanPARTNER DUBLIN OFFICE


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Pictured from left to right in the above photo are Matheson’s 10 asset management and investment funds partners, as follows:

This material is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter.

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