6 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 7 February 2012
|Previous Committee Reports||HC 428-xlvii (2010-12), chapter 15 (18 January 2012) and HC 428-xlix (2010-12), chapter 9 (1 February 2012)
|Discussion in Council||20 February 2012
|Committee's assessment||Politically important
|Committee's decision||Not 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).
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, as part of
its Social Business Initiative.
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.
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.
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.
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.
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;
- 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
- 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"
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.
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
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
- 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
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