European Scrutiny Committee Contents


15 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
Documents originated7 December 2011
Deposited in Parliament14 December 2011
DepartmentHM Treasury
Basis of considerationTwo EMs of 10 January 2012
Previous Committee ReportNone
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information awaited

Background

15.1 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).[109]

15.2 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.

15.3 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,[110] as part of its Social Business Initiative.[111]

15.4 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. [112] 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.

15.5 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.[113]

The documents

15.6 With the draft Regulation, document (a), the Commission is proposing, 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". Provisions would include:

  • requirements as to the investment portfolio, investment techniques and eligible undertakings that a qualifying social entrepreneurship fund could target;
  • collective investments operating under the designation would have to invest at least 70% of their capital in equity instruments, securitised and unsecuritised debt instruments, units or shares of other funds using the designation, or medium to long term loans in firms not listed on a regulated market, have an annual turnover not exceeding €50 million (£41.77 million) or have an annual balance sheet not exceeding €43 million (£35.92 million) and which were not themselves a collective investment undertaking;
  • the remaining 30% would allow funds flexibility in their investment and liquidity management and secondary trading would be permitted within this portion of the investment — and operational costs could also count as part of this 30%;
  • uniform rules on which categories of investors a qualifying social entrepreneurship fund could target and on the internal organisation of managers that market such qualifying funds; and
  • qualifying funds could only be marketed to individuals recognised as professional investors under the Market in Financial Instruments Directive or to high-net worth individuals committing a single investment of €100,000 (£83,530) to the fund, with certain procedures having been followed by the fund manager to confirm that these high-net worth individuals understood the risks involved.

Managers of collective investment undertakings that operated under the designation "European Social Entrepreneurship Fund" would benefit from uniform requirements for registration and an EU-wide passport. Social entrepreneurship funds that did not wish to operate under that designation 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.

15.7 The Commission's key arguments supporting the creation of this approach to social entrepreneurship funds are:

  • the goal of the Social Business Initiative is the creation, development and growth of social businesses and the AIFM Directive may not necessarily be the ideal instrument for the promotion of the cross-border activity of social entrepreneurship in the EU;
  • the AIFM Directive aims to increase transparency, ensure oversight of such managers and facilitate the monitoring of systemic risk in the field of the alternative investment funds, in line with G20 commitments;
  • the Directive will allow managers of social entrepreneurship funds with assets under management above €500 million (£417.65 million) to benefit from the EU passport provided under the Directive;
  • however, managers below that threshold do not benefit from the passport unless they decide to make use of the opt-in procedure the Directive and become fully authorised, in which case they would have to comply with its full set of obligations and requirements;
  • the majority of the social entrepreneurship funds business in EU lies below the €500 million threshold, so in order to benefit from the passport social entrepreneurship fund managers would have to opt-in under the AIFM Directive regime; and
  • social entrepreneurship funds are not likely to pose significant systemic risk or to create specific investor protections concerns — thus compliance with the AIFM Directive requirements would be disproportionate for social entrepreneurship funds.

15.8 With the draft Regulation, document (b), the Commission is proposing, 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". Provisions would include:

  • requirements as to the investment portfolio, investment techniques and eligible undertakings that a qualifying venture capital fund could target;
  • collective investments operating under the designation would have to invest at least 70% of their capital in equity instruments or quasi-equity instruments in firms not listed on a regulated market, which employ fewer than 250 people, have an annual turnover not exceeding €50 million (£41.77 million), have an annual balance sheet not exceeding €43 million (£35.92 million) and which were not themselves a collective investment undertaking;
  • the remaining 30% would allow funds flexibility in their investment and liquidity management and secondary trading would be permitted within this portion of the investment — and operational costs could also count as part of this 30%;
  • uniform rules on which categories of investors a qualifying venture capital fund could target and on the internal organisation of managers that market such qualifying funds; and
  • qualifying funds could only be marketed to individuals recognised as professional investors under the Market in Financial Instruments Directive or to high-net worth individuals committing a single investment of €100,000 (£83,530) to the fund, with certain procedures having been followed by the fund manager to confirm that these high-net worth individuals understood the risks involved.

Managers of collective investment undertakings that operated under the designation "European Venture Capital Fund" would benefit from uniform requirements for registration and an EU-wide passport. Venture capital funds that did not wish to operate under that designation 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.

15.9 Saying that the goal of the Single Market Act is to increase the access of innovative SMEs to venture capital finance and that its consultation recognised that the AIFM Directive may not necessarily be the ideal instrument for the promotion of the cross-border activity of venture capital in the EU, the Commission presents the same case for this proposal as for that in document (a).

15.10 The Commission proposals are accompanied by impact assessments and executive summaries of them.[114]

15.11 Although the Commission proposes separate Regulations they are meant to be complementary.

The Government's view

15.12 In the first of his two Explanatory Memoranda, on document (a), the Financial Secretary to the Treasury (Mr Mark Hoban) tells us that:

  • the Government welcomes the Commission's consideration of measures to facilitate EU investment funds targeting social businesses, while also working to ensure EU investors seeking to invest in such funds are better able to do so;
  • it is committed to encouraging social investment and wants to accelerate the growth of the social investment market, to ensure social sector organisations can access new sources of finance, enabling them to increase their social impact and contribute to economic growth; and
  • the Government's approach for a thriving social investment market was set out in February 2011.[115]

15.13 The Minister says that the Government broadly supports the Commission's proposals to introduce a "European Social Entrepreneurship Fund" designation and to allow such funds access to an EU-wide passport. He continues that:

  • the Government considers there to be potential for the European Social Entrepreneurship Fund brand to help stimulate cross-border social entrepreneurship investment across the EU and improve financing conditions for social businesses;
  • it welcomes the proportionate approach the proposal takes to setting standards for funds operating under the designation, which is broadly permissive of existing collective investment models and business practices within Member States;
  • it strongly supports the voluntary approach proposed;
  • it welcomes the proposal to broaden eligibility to invest beyond the Market in Financial Instruments Directive definition of professional investors, which excludes investors who commonly invest in venture capital funds, including business angels, family offices, and wealthy individuals, to include individuals willing to commit a minimum of €100,000;
  • it considers there to be a case for broadening eligibility further where individuals can be demonstrated to have the necessary knowledge and experience;
  • it notes that social investment funds which are traded on regulated markets are already available to all consumers and are afforded additional protection through listing and other rules;
  • it believes, therefore, that exempting listed funds from the investor eligibility criteria would further stimulate the EU social investment market while retaining appropriate consumer protection;
  • it supports the proposal's aim of ensuring proportionate protection for European Social Entrepreneurship Fund investors;
  • given eligibility would be extended to beyond professional investors, the Government considers there to be a case for considering whether further protection, for example in assessing whether operators are fit and proper, is desirable beyond the minimum proposed;
  • the Government notes the Commission, by way of delegated acts, would be able to specify the types of services or goods and the methods of production of services or goods that embody a social objective;
  • it agrees that objective criteria should be adopted, but given the diversity and nascent stage of the social investment sector, considers that a permissive and flexible approach should be taken — a non-prescriptive approach to the articulation of principles or basic standards for social impact reporting would be appropriate;
  • it notes that it would be helpful to clarify the interaction between the operation of this proposal and the AIFM Directive and to determine whether funds bearing the European Social Entrepreneurship Fund designation whose assets under management grow beyond €500 million could continue to benefit from that designation.

15.14 In his second Explanatory Memorandum, on document (b), the Minister tells us that:

  • the Government welcomes the Commission's consideration of measures to improve access to venture capital by EU SMEs with high growth potential;
  • it considers a vibrant venture capital market to be an important part of supporting the growth of innovative SMEs; and
  • within the UK the Government has implemented a range of measures to support venture capital, including tax-advantaged venture capital schemes (that is Enterprise Investment Scheme and Venture Capital Trusts), Enterprise Capital Funds and the UK Innovation Investment Fund.

15.15 The Minister says that the Government broadly supports the Commission's proposals to introduce a "European Venture Capital Fund" designation and to allow such funds access to an EU-wide passport. He continues with positive comments in the same vein as those on document (a). However he does not comment on delegated acts. But he does say, additionally, that:

  • the Government also considers there to be a case for broadening the scope of eligible investments to ensure European Venture Capital Funds can thrive and channel their investment better while retaining the focus on SME investment; and
  • this could include allowing funds of venture capital funds to be invested in and considering whether the proposed minimum 70% level of qualifying investments is appropriate and how it is best applied.

15.16 The Minister says that:

  • the Government broadly supports the conclusions of the analyses in the Commission's impact assessments of the two proposals;
  • it has been consulting informally with industry since the Commission's consultations were announced;
  • stakeholder groups are being established which will meet this month;
  • as part of its consultation with these groups, the Government will seek further information on the likely impacts on affected sectors from UK firms; and
  • the Government's provisional assessments of the impact of the proposals will follow his Explanatory Memoranda.

Conclusion

15.17 Although these proposals appear unexceptionable we will defer further consideration of them until we have the Government's promised impact assessments and information about the views of the stakeholder groups. Meanwhile the documents remain under scrutiny.





109   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

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

111   (33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December 2011). Back

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

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

114   For the social entrepreneurship fund proposal see http://ec.europa.eu/internal_market/investment/docs/social_investment/20111207ia_en.pdf and for the venture capital fund proposal see http://ec.europa.eu/internal_market/investment/docs/venture_capital/111207-impact-assessment_en.pdf.  Back

115   See http://www.cabinetoffice.gov.uk/sites/default/files/resources/404970_SocialInvestmentMarket_acc.pdf.  Back


 
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