EuSEF and EuVECA - Update

On September 26th 2014 the European Securities Markets Authority ("ESMA") issued a consultation paper (the "Consultation Paper") on ESMA's technical advice to the European Commission on the implementing measures of the Regulations on European Social Entrepreneurship funds ("EUSEF") and European Venture Capital Funds ("EUVECA").

A number of provisions in the EuSEF and EuVECA Regulations empower the European Commission to adopt Level 2 measures.

For EuSEFs, Regulation 346/2013 provides for Level 2 measures specifying:

  • the types of goods and services or methods of production for goods and services embodying a social objective, taking into account the different kinds of qualifying portfolio undertakings and those circumstances in which profits may be distributed to owners and investors to ensure that any such distribution of profits does not undermine its primary objective;
  • the types of conflicts of interest managers of qualifying social entrepreneurship funds need to avoid and the steps to be taken in that respect;
  • the details of the procedures to measure the social impacts to be achieved by the qualifying portfolio undertakings;
  • the content and procedure for provision of information for investors.

For EuVECAs, Regulation 345/2013 provides for Level 2 measures specifying the types of conflicts of interest that managers of qualifying venture capital funds need to avoid and the steps to be taken in that respect.

The Consultation Paper sets out the proposed advice to the European Commission on all of the above items and invited interested stakeholders to submit their responses by December 10th last. The aim is that ESMA will submit their technical advice to the European Commission during April 2015.

Of note in the Consultation paper is the fact that ESMA have allowed the inclusion of some environmental funds into the scope of the EuSEF. The definition of qualifying portfolio undertaking (being an entity in which a EuSEF may invest) does not refer to undertakings concerned with environmental protection but recital 14 of Regulation 346/2013 refers to activities which "may also concern environmental protection with a social impact." ESMA have interpreted this broadly to propose that where an enterprise produces goods or services that have a positive environmental impact like, for example, biodiversity conservation, pollution prevention and waste management and water resources management, it be considered an enterprise embedding a social objective and therefore may be considered (provided certain other conditions are met) as a qualifying portfolio undertaking.

"In relation to the steps to be taken to avoid conflicts of interest the Consultation Paper differentiates between the EuSEF and the EuVECA."

Since, generally, EuVECA managers are very active in the management of the companies in which the EuVECA is invested the specific conflicts of interest arising from such situation should be taken into account. Therefore ESMA proposes specific rules on the strategies for the exercise of voting rights held in the EuVECA portfolio, similar to those set out in article 37 of the Level 2 AIFM Regulation.