European Scrutiny Committee Contents


12 Financial services: European social entrepreneurship and capital venture funds

(a)

(33534)

18491/11

+ ADDs 1-2

COM(11) 862

(b)

(33535)

18499/11

+ ADDs 1-2

COM(11) 860


Draft Regulation on European social entrepreneurship funds




Draft Regulation on European capital venture funds

Legal baseArticle 114 TFEU; co-decision; QMV
DepartmentHM Treasury
Basis of considerationMinister's letter of 18 February 2012
Previous Committee ReportsHC 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 Council20 March 2012
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested

Background

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 enterprises (SMEs).[99]

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,[100] as part of its Social Business Initiative.[101]

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.[102] 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.[103]

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 sheet totals;
  • further detail and clarity in the conduct of business sections;
  • 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.[104]

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 depositaries;
  • 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 says that:

  • 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 position; and
  • 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.

Conclusion

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 under scrutiny.





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

100   For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/social_investment_funds_en.htm.  Back

101   (33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December 2011). Back

102   For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/venture_capital_en.htm.  Back

103   See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF.  Back

104   See headnote. Back


 
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