EU launches consultation on VC passport

Last week the EU Commission opened a public consultation on new rules to allow venture capital funds an EU-wide “marketing passport”. 

The Commission will accept comments until 10 August, intending to put forward a legislative proposal by the end of this year. 

The government is proposing to either create a tailor-made approach to venture capital funds under the existing Alternative Investment Fund Managers directive which is expected to enter force in coming weeks or alternatively create a stand-alone initiative. 

The proposal makes any new rules optional, leaving venture capital fund managers the ability to bypass regulation if they did not want to take advantage of a marketing passport. 

457There is scope for regulatory arbitrage in cases where a member state sought to impose more demanding rules than those required by the pan-European regime458

SJ Berwin

The new rules do not replace national rules, meaning cross-border investing must still comply with each EU member states individual regime. “This may mean that in practice there is scope for regulatory arbitrage in cases where a member state sought to impose more demanding rules than those required by the pan-European regime,” said law firm SJ Berwin in a client memo. 

Managers of venture capital funds and later-stage funds with assets under management north of €500 million could benefit from a European passport under the AIFM directive. Managers under the €500 million benchmark do not benefit from the AIFM passport unless they elect to opt-in which case they have to fully comply with the directive’s requirements. 

Europe’s venture community has long-argued there should be a less burdensome regime for smaller funds which target innovative start-up companies and do not present systematic risk to the economy. 

The Commission, sympathetic to these arguments, has further argued the fragmentation of Europe’s venture capital market along national lines limits the overall supply of capital for small to medium businesses. “Venture capital funds face problems reaching the critical mass they need to spread their portfolio risk and cover their costs”, the body said in its consultation document.