EuSEF and EuVECA - Update

On February 3rd 2015 the European Securities Markets Authority ("ESMA") issued its final report (the "Final Report") 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").

"For information on the background please see our related article."

The Final Report sets out ESMA's advice to the European Commission on the implementing measures concerning:

i. the specification of the definition of qualifying portfolio undertaking for a EUSEF;
ii. conflicts of interest for both EUSEF and EUVECA managers;
iii. social impact measurement; and
iv. information to EUSEF investors.

With regard to item No. (i) ESMA's advice is that the primary purpose of the enterprise into which the EUSEF wishes to invest shall be to address a social problem. The social mission of the enterprise should be the basis of its activities. The enterprise shall use its profits primarily to achieve its social objective. Ordinary companies having a positive social or environmental impact, including a corporate social responsibility plan that is incidental to their commercial activities shall not be accepted as a qualifying portfolio undertaking. The goods and services produced shall be addressed primarily to persons that are in a situation of exclusion, disadvantage or marginalisation or that are vulnerable. Where the goods and services are not so addressed this is still acceptable insofar as the primary purpose of the enterprise is to produce a positive social impact by other means.

With regard to item No. (ii) ESMA's advice is that both EUSEF and EUVECA managers shall establish a conflicts of interest policy in writing. The policy shall identify the circumstances that may give rise to a conflict of interest and shall include procedures and measures in order to prevent, manage and monitor such conflicts on an ongoing basis. ESMA provides examples of such measures including separating the supervision of relevant persons whose interest may conflict and removing links in the remuneration of relevant persons engaged in different activities where a conflict may arise. If there are conflicts of interest that cannot be avoided and the relevant manager chooses to carry on business regardless then the manager shall disclose these conflicts promptly to investors prior to undertaking the business on their behalf.

In the case of EUVECA managers they shall develop adequate and effective strategies for determining when and how any voting rights held in the EUVECA portfolio are to be exercised, to the exclusive benefit of the EUVECA concerned and its investors. These strategies should determine measures and procedures for monitoring relevant corporate actions, ensuring that the exercise of voting rights is in accordance with the investment objective and policy of the EUVECA and preventing or managing any conflicts of interest arising from the exercise of voting rights.

With regard to item No. (iii) ESMA advises that the EUSEF manager shall employ procedures to measure the extent to which the qualifying portfolio undertakings achieve the social impact to which they are committed. The measurement shall be performed by the EUSEF manager itself or by third parties. Investors shall be informed prior to their investment decision about the methodologies that the EUSEF manager uses to measure social impacts. ESMA sets out steps which the chosen measurement methodology must follow.

Finally ESMA's advice on the information that the EUSEF manager shall provide to the investors sets out the information to be included on the investment strategy and objectives. Information on the positive social impact targeted and the projections of such outcomes as well as on the methodologies for measuring the social impact shall be presented in a clear and understandable manner.

The next step is for the European Commission to develop the delegated acts on the basis of ESMA's advice. ESMA will provide input as necessary on the development of such acts.