12 Financial services: European social
entrepreneurship and capital venture funds |
+ ADDs 1-2
+ ADDs 1-2
Draft Regulation on European social entrepreneurship funds
Draft Regulation on European capital venture funds
|Legal base||Article 114 TFEU; co-decision; QMV
|Basis of consideration||Minister's letter of 18 February 2012
|Previous Committee Reports||HC 428-xlvii (2010-12), chapter 15 (18 January 2012), HC 428-xlix (2010-12), chapter 9 (1 February 2012) and HC 428-l (2010-12), chapter 6 (8 February 2012)
|Discussion in Council||20 March 2012
|Committee's assessment||Politically important
|Committee's decision||Not cleared; further information requested
12.1 The Commission promotes, partly in the context of the Europe
2020 Strategy, the value of the Single Market Act, the Small Business
Act and the Innovation Union in support of small and medium-sized
12.2 One of the levers identified in 2011 by the
Commission in re-launching the Single Market Act was the encouragement
and development of social entrepreneurship. It defines a social
business as an enterprise with the primary objective of achieving
a social impact rather than generating profit for owners and shareholders,
which operates in the market through the production of goods and
services in an entrepreneurial and innovative way, and which uses
surpluses mainly to achieve these social goals.
12.3 One of the priority initiatives identified in
the Single Market Act was the "setting up of a European framework
facilitating the development of social investment funds"
so as to contribute to a favourable financing framework for social
businesses. The aim is to improve the effectiveness of fundraising
by investment funds that target these businesses. In July 2011,
the Commission launched a consultation on promoting social investment
funds, as part
of its Social Business Initiative.
12.4 In April 2011 the Commission said it would consider
adoption of new rules to ensure that by 2012 venture capital funds
established in any Member State could operate and invest freely
throughout the EU. In June 2011, it launched a consultation on
a European venture capital regime.
The aim was to address the fragmentation of the EU's venture capital
markets along national lines, that the Commission considered could
limit the overall supply of capital for innovative SMEs, and to
create a real single market for venture capital funds in the EU.
12.5 Currently the managers of social enterprise
and capital venture funds have to comply with the Alternative
Investment Fund Managers (AIFM) Directive, Directive 2011/61/EU.
12.6 With the draft Regulation, document (a), the
Commission has proposed, in order to encourage the growth of social
entrepreneurship across the EU, uniform requirements for the managers
of collective investment undertakings that would operate under
a designation "European Social Entrepreneurship Fund"
(EuSEF). With the draft Regulation, document (b), the Commission
has proposed, in order to encourage the growth of venture capital
across the EU, uniform requirements for the managers of collective
investment undertakings that would operate under a designation
"European Venture Capital Fund" (EVCF).
12.7 Managers of collective investment undertakings
that operated under the designations or brands EuSEF or EVCF would
benefit from uniform requirements for registration and an EU-wide
passport. Social enterprise and capital venture funds that did
not wish to operate under those designations would not have to
comply with the requirements of the Regulation and would not benefit
from the EU-wide passport, unless the manager were authorised
within the scope of the AIFM Directive.
12.8 We have considered these proposals three times
in the context of the Government's broad support for the
proposals, of a number of detailed issues it had mentioned to
us, of further issues raised by to stakeholder groups the Government
had consulted, of its impact assessments of the proposals and
of progress in negotiation of various issues in the proposals.
Our initial reaction was that these proposals appeared unexceptionable.
Whilst that has remained our view, when we considered the matter
last, earlier this month, we said that we understood the following
points to be outstanding:
- criteria for eligible investors;
- definition of social businesses, including the
issues of extension beyond SMEs and limits on turnover and balance
- further detail and clarity in the conduct of
- provision for a fund of funds structure for EVCFs;
- use of the "EuSEF" and "EVCF"
brands by funds which grow beyond 500 million; and
- interaction of the proposals with the Prospectus
Directive in relation to listed funds.
We commented that we presumed the Government's assessment
of the acceptability of the revised texts would depend on what
further progress was made on these matters. Additionally, we said
we were unsighted as to what the position was in relation to social
impact bonds as qualifying investments in the EuSEF Regulation
and to the possibility of ECVF managers having to appoint a depositary.
So, we asked, before considering the draft Regulations further,
to hear about developments on these matters. Meanwhile the documents
remained under scrutiny.
The Minister's letter
12.9 The Financial Secretary to the Treasury (Mr
Mark Hoban) writes now to tell us that since his last letter there
have been several official level discussions of the proposals
and that the Presidency has now indicated that it is seeking a
final agreement on 20 March 2012 at the Competitiveness Council.
The Minister then responds to our questions.
12.10 On interaction of the proposals with the Prospectus
Directive in relation to listed funds the Minister says that:
- the Government is still forming
its legal opinion on this issue, however it is now the view of
the Commission that this draft Regulation could not override the
requirements of the Prospectus Directive and any listed fund choosing
to participate would have to fulfil the full requirements of both
the draft Regulation and the Directive;
- as it would already receive a passport under
the Prospectus Directive the only benefit it would receive by
taking on the additional requirements of this proposal would be
to adopt the European brand; and
- it is unlikely that the benefit of this brand
would be sufficient to attract listed funds to take on the additional
requirements of this proposal.
12.11 In relation to use of the "EuSEF"
and "EVCF" brands by funds which grow beyond 500
million the Minister tells us that the Commission has agreed that
it was not its intention to strip successful EuSEFs and EVCFs
of their status and there has been no opposition to this from
other Member States and the Government expects the Presidency
to add provision for this in its compromise text.
12.12 On provision for a fund of funds structure
for EVCFs the Minister reports that there has been broad support
for this idea from Member States and provision for this has now
been included. And in relation to further detail and clarity for
conduct of business he says that some additions have been made
to conduct of business rules which provide further clarity and
investor protection, noting that venture capital and social investment
funds typically operate by contract between the investors and
manager and overly prescriptive rules would be damaging.
12.13 In relation to depositary requirements the
Minister comments that:
- Member States are equally divided
on depositary requirements for venture capital funds;
- the Commission and Presidency have indicated,
however, that they are very reluctant to include such a provision;
- UK venture capital funds do not currently use
- this requirement would force heavy and costly
restructuring, thus deterring funds from participating and making
those that do less competitive;
- a depositary requirement would be inappropriate
as venture capital funds do not deal in financial instruments
in any significant amount; and
- the Government will continue working to ensure
this requirement is not included in the Regulation.
12.14 On criteria for eligible investors the Minister
- the Government has suggested
alternative criteria for eligible investors based around annual
income and assets tests;
- while there was some support, the majority of
Member States appear to favour the 100,000 minimum subscription
as a test; and
- the Government is continuing to press its case.
12.15 Regarding the definition of a social business
the Minister tells us that:
- the Government has suggested
provisions which would broaden the definition of a social business
and bring it more in line with the Government and industry's agreed
- a provision for including investment in businesses
whose activities concern environmental protection with a social
impact has now been included and the position on distribution
of profits has been clarified so that this would now be allowed.
12.16 Finally the Minister says that the Government
has suggested a provision to include social impact bonds as a
qualifying investment and it is following up to ensure that it
is understood what these are.
12.17 We are grateful to the Minister for this
further information he gives us. We would like, however, the Minister's
assessment of the acceptability of the compromise texts of the
draft Regulations that the Presidency expects to put to the Council
for agreement on 20 March 2012. Meanwhile the documents remain
99 The Commission's latest documents on these policies
are (32702) 9283/11 (32691) 9040/11, (32560) 7017/11 and (33505)
18244/11 + ADD 1: for the first three see HC 428-xxvii (2010-12),
chapter 7 (18 May 2011) and HC 428-xxi (2010-11), chapter 6 (23
March 2011); we will be considering the fourth shortly. Back
For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/social_investment_funds_en.htm.
(33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December
For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/venture_capital_en.htm.
See headnote. Back