The creation of a European venture capital fund and of European funds for social entrepreneurship aims to enhance funding opportunities for innovative start up and actors of social entrepreneurship. A better access to financing for SMEs is crucial to improve the good functioning of the European economy.
The new rules on European Venture Capital Funds and European Social Entrepreneurship Funds create a special EU passport for all operators that invest in start-up SMEs and social businesses. The latter are a key driver for growth in Europe but, since the start of the financial crisis, have faced an increasing funding gap. SMEs contribute more than half of the total value added in the ‘real’ economy and have provided 80% of all new jobs that Europe created over the past five years. Social businesses represent 10% of all European businesses and employ over 11 million paid employees.
Ever since the financial crisis of 2008, SMEs, especially those in the early stages of their development, have struggled to get access to the kind of finance they need to grow and prosper. In December 2011, the Commission proposed two new Europe-wide funding schemes facilitating cross-border collection of working capital that benefits those private investment funds that specialise in SMEs and social business (see IP/11/1513 andMEMO/11/880, and IP/11/1512 and MEMO/11/881). The proposals provide a straightforward scheme: once a set of requirements is met, fund managers can market their funds across the EU, cutting through existing rules on ‘private placements’ that are different in every Member State. Two new fund labels were created, one for venture capital funds investing in unlisted SMEs (EuVECA), the other for funds investing in social businesses (EuSEF).
The Venture Capital market in Europe remains relatively small compared to that in the US. Annual funds raised in the US have often been more than five times that in the EU. Where US venture capital funds invested around 4 million euro on average in each company, European funds could only muster 2 million euro on average per company. Funds specifically targeting social businesses are relatively new, and even smaller.
Under the new rules, fund managers will need to register with the competent authority in their home Member State, but then will be able to market their venture capital and social entrepreneurship funds throughout the whole of the EU. They can target either institutional investors or retail investors who are willing or able to invest more than 100 000 euro. The fund managers will not need to register and obtain marketing approval in each Member State. The rules make sure that the funds focus at least 70% of the capital they raise on equity investments in unlisted SMEs or on equity or debt support for social enterprises.
After the vote in the European Parliament, the Council is expected to adopt both Regulations on 21 March. Both Regulations will then enter into force 20 days after their publication in the Official Journal of the European Union which is estimated to be before the summer.