Documents considered by the Committee on 8 February 2012 - European Scrutiny Committee Contents

6   Financial services: European social entrepreneurship and capital venture funds




+ ADDs 1-2

COM(11) 862




+ 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 7 February 2012
Previous Committee ReportsHC 428-xlvii (2010-12), chapter 15 (18 January 2012) and HC 428-xlix (2010-12), chapter 9 (1 February 2012)
Discussion in Council20 February 2012
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


6.1  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).[14]

6.2  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.

6.3  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,[15] as part of its Social Business Initiative.[16]

6.4  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.[17] 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.

6.5  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.[18]

6.6  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).

6.7  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.

6.8  We have considered these proposals twice, in the context of the Government's broad support for the proposals, of a number of detailed issues it mentioned to us, of further issues raised by to stakeholder groups the Government had consulted and of its impact assessments of the proposals. Our initial reaction was that these proposals appeared unexceptionable. Whilst that remained our view when we considered the matter again earlier this month, we said that before examining the draft Regulations again we wanted to hear about progress in negotiation of the issues mentioned to us previously and of those raised by the stakeholders. Meanwhile the documents remained under scrutiny.[19]

The Minister's letter

6.9  The Financial Secretary to the Treasury (Mr Mark Hoban) writes now to tell us that:

  • the Competitiveness Council will consider the draft Regulations on 20 February 2012;
  • generally other Member States have welcomed the proposals, although, as the social investment sector is less mature and widespread across the EU, there have been some questions as to the value of the EuSEF proposal; and
  • all of the main issues he has previously flagged to us have been considered by the Presidency in working groups.

He then continues with information about six matters.

Eligible investors

6.10  The Minister says that:

  • Member States are in agreement that venture capital and social entrepreneurship funds should have strict criteria restricting the extent to which they can be marketed to retail investors;
  • there is, however, a divide as to whether the criteria as drafted by the Commission are too restrictive or not; and
  • the Government anticipates this being discussed further in the coming weeks, when it will expand on the UK's position that the ability to make a single lump sum investment for venture capital does not in itself denote an investor to be sufficiently knowledgeable and that criteria based around minimum annual income and existing investment portfolio would provide a better safeguard and better reflect traditional venture capital investors.

Definition of a social business

6.11  The Minister, reporting that given the relative immaturity of this investment sector, few contributions have been made regarding a definition of a social business, says that:

  • those Member States that have provided an opinion have called for a broad definition and one that includes investment in environmental projects;
  • there has been some receptiveness to broadening the definition to allow a variety of social businesses to qualify;
  • there has been clarification that some profits may be distributed — of particular importance to industry in seeking investors;
  • it is unlikely that the definition of a social business will be extended beyond SMEs, or that the limits on turnover and balance sheet totals of social businesses will be removed or increased, as stakeholders requested;
  • a number of Member States have rejected the Commission's suggestion that only social businesses based in a Member State should be eligible as investment targets;
  • there has been little discussion of measurement procedures for social impacts, but it has been highlighted that they differ by social businesses and that one methodology will not be effective for measuring all social impacts; and
  • methodologies for measuring social impacts will be explored with supervisory authorities and industry stakeholders in preparing delegated legislation.


6.12  The Minister tells us that:

  • Member States agree that for funds and regulators to operate with certainty, further detail and clarity needs to be included in the conduct of business sections;
  • a limited number of Member States have called for particularly heavy levels of regulation, although most are in alignment with the UK position that a proportionate approach should be taken to ensure the frameworks provide an attractive option for funds to participate in; and
  • the Government's suggestion of a specific provision on assessing whether operators are "fit and proper" secured general agreement for this and the Presidency has included similar text in its compromise proposal.

Venture capital qualifying investments

6.13  The Minister reports that:

  • there has been a general agreement, with little opposition, that debt financing should be permitted by participating funds;
  • industry was split on the importance of this point although none opposed it and some argued for it;
  • the Financial Services Authority has not raised regulatory concerns on this point;
  • there have been a significant number of calls for a fund of funds structure to be permitted under the Regulation, in line with the structure to be permitted under the EuSEF Regulation — industry has been calling for this, albeit it is a lesser priority; and
  • with only a single exception so far, that called for a lower amount, Member States appear broadly content with a maximum of 30% of investments being in non-qualifying investments.

Use of the "EuSEF" and "EVCF" brands

6.14  The Minister says that whether a qualifying fund can continue to use the "brand" if it grows beyond the €500 million threshold is being explored by the Commission, as part of a wider consideration on scope and interaction with the AIFM Directive.

Listed funds

6.15  The Minister comments that, although it would be desirable for listed funds to be covered by these Regulations, there are questions around the requirements they would have to fulfil and the interaction with the Prospectus Directive, which need to be resolved before the Government can press for this. He says that the Commission Legal Service is currently exploring this issue.


6.16  We are grateful to the Minister for the further information he gives us and note that the proposals are to be considered at a Council on 20 February 2012. However, we understand that it is not the Presidency's intention that there should be agreement on revised texts of the draft Regulations at that meeting.

6.17  From the Minister's letter we understand the following points to be outstanding at the moment:

  • 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 presume the Government's assessment of the acceptability of the revised texts will depend on what further progress is made on these matters. Additionally, we are unsighted as to what the position is 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.

6.18   So before considering the draft Regulations further we should like to hear about developments on these matters. Meanwhile the documents remain under scrutiny.

14   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

15   For the consultation document and a summary of responses see  Back

16   (33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December 2011). Back

17   For the consultation document and a summary of responses see  Back

18   See  Back

19   See headnote. Back

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Prepared 14 February 2012