European Association of Public Banks

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1 - and Funding Agencies AISBL - European Commission Directorate General Internal Market and Services / Unit G4 Asset Management SPA 2 03/013 B-1049 Brussels markt-g4@ec.europa.eu Register-ID: August 2011 Commen omments of the EAPB on the European Commission s consultation on a new European regime for Venture Capital Dear Madam or Sir, The European Association for Public Banks (EAPB) welcomes the opportunity to comment on the European Commission s consultation on a European regime Venture Capital (VC). Our members support the intention of the European Commission to increase the financing possibilities of SMEs through better regulatory conditions for VC investments. Several of the EAPB members do not only provide loans for SMEs but also attempt to establish equity funds that attract Private Equity, especially in the sense of VC. We understand the expectation of the Commission that VC funds would use their professional knowledge to extend their activities geographically, given that there are no obstacles for cross-border investments in the equity of young companies. However, removing such obstacles might not be sufficent to alleviate the raising of capital for SMEs. Further stimuli for the investor or the funds might be necessary. Public financial institutions like development or promotional banks are usually bound to national or regional (budgetary) regulations which determine that investments in SMEs can only be made if there is a (national or regional) public interest. The individual public interest only allows investments in SMEs situated in the specific state or region. The same applies to - 1 -

2 - and Funding Agencies AISBL - cross-border fundraising. Possibilities to diverge from these obligations are under consideration. For the given reasons, we comment only on selected questions. Box 1: a) Yes. Everything that avoids duplication of work facilitates market entry and reduces the risk of committing legal error. However, it must be noted that in some Member States a VC fund is not formally recognized as such. Therefore, preliminary issues have to be solved. b) Main impediment preventing cross-border VC fundraising and investment is the fact that the AIFMD is not tailored to VC in general. c) VC has many specifics and needs a specific set of rules. This could be introduced via a targeted modification of the AIFMD. If all kind of alternative investment funds fall under the scope of the AIFMD, a distinction should not be based on thresholds only. d) No. e) Due to the heterogeneous structure of fund shareholders fiscal questions must be addressed first. Tax issues are optimized in advance. f) By way of defining a clear and binding legal framework. Box 2: a) We agree with the approach of a voluntary registration. The voluntariness should be decisive. b) We expect that such a regime should not have any cost implications because it will reduce the IRR of the fund. c) Potential cost savings of a voluntary registration are not assessable. d) His resume, a list of his track record with achieved multiples and IRR of his investments. e) We would prefer that the national competent authority approves the fund and the managers with the same criteria in all Member States. Box 3: a) We agree with a simple notification procedure. b) Content of the notification should be information on the fund (i. e. the company), its seat, the legal structure, the managing director as well as investment objectives and the targeted SMEs. The information should be up-to-date

3 - and Funding Agencies AISBL - c) The content could consist of parts of the private placement memorandum. Therefore the generation of this data would not cause any additional effort. Box 4: a) There are good reasons why investments in VC funds should only be offered to professional investors. However, in certain Member States funds gather their money from retail investors. Such investments work well and signify tax benefits for retail investors. b) --- Box 5: a) The existing funds report on a quarterly basis which is important for investors since investors have to calculate the value of their share for their own reporting and in some cases for the stock market as well. An annual (audited) financial report is sufficient. b) An annual report is sufficient. It should contain the information that a fund has to publish anyway. c) The annual report should contain the financial information that has to be published anyway according to the relevant accounting rules. The same applies for a report on the activities. d) The financial information of the annual report should only be audited if it has to for other legal obligations, for example for tax reasons. e) A VC fund is, for example, usually obliged to report the acquisition of securities or to publish the (audited) annual financial statement. A VC fund must also inform the investors either quarterly or half-yearly on the developments of the investments and hold an annual shareholder meeting. Reporting obligations always signify an administrative burden. The concrete significance depends on the actual content, particularly if further information than reported for other reasons needs to be gathered. f) The fund manager should not have further reaching information requirements. Box 6: a) At least on European level there should be no need for specifying operating conditions for VC entities. A VC fund management depends on the success to raise money for the fund. They have to handle the shareholders carefully since a fundraising is needed for the next fund as well. This regulates the behavior of the fund managers sufficiently. b) There is no need to specify the compliance of VC entities with rules of conduct when dealing with investors. It is self-evident that conflicts of interest could emerge in this case

4 - and Funding Agencies AISBL - c) No. d) No. The management team has always to demonstrate their track records and present their resumes. If this is not sufficient to convince investors, regulation would not help. e) No. There is always a risk disclosure included in the fund raising memorandum so that investors know about the risks and chances. Box 7: a) From the perspective of a European association, we are in general in favor of a variety of legal forms. We agree that, in the case of common funds, a management company could manage the fund and act on its behalf. b) The legal forms that VC funds might adopt should not be specified in a legislative proposal. c) We do not see any other aspect. Box 8: a) Investment criteria are usually determined by the nature of VC and the tax situation of the country where the investors are located. b) Investment rules for VC funds should not be specified. c) Not for all venture capital funds. In the case of special SME venture capital funds, pure SME-funds as well as 50%-SME-funds would make sense. d) If a compulsory investment percentage of assets is defined, the application should be flexible. Box 9: a) We are not aware of any legal definition of VC. VC usually means equity capital that is invested in SMEs with a high growth potential. VC is particularly risky. It can be provided as equity that is fully liable or a financing similar to equity capital. In general, the following criteria determine VC: - Stake in a young and promising company not quoted at an exchange (start-up); - Return of the investment usually not calculable in the beginning, very risky investment (possibility of a total loss) but with the prospect of a high return; - Temporary nature of the investment; - The exit can be via IPO, secondary sale or company buy-back. b) A definition of a VC investment should include the temporary nature of the investment in any case

5 - and Funding Agencies AISBL - c) In the process of fundraising all funds use a fund prospectus. These prospectuses have clear rules and define the duration of the fund. d) Bridge loans, convertible loans and silent participation agreements should be counted among the means of finance. e) VC funds normally invest in a syndicate with a lead investor and sometimes a co-lead investor. The other investors are not involved in the daily business but support the company. So it cannot be specified. A passive investment of a VC fund should also be considered as a VC investment. f) Other criteria could include the technological focus, the existing unique selling proposition, the leading edge and the upside potential in growth markets. Box 10: a) The described strategies or stages of development are usually compliant with the (existing) national regimes or guidelines. b) Special rules on VC should only apply for investments in the seed, start-up and expansion stages of SMEs. The restructuring phase should not benefit from VC. However, a specialized fund focused on restructuring companies should be possible. It should also be considered that secondary funds buy VC funds. c) --- d) Yes. Box 11: a) We agree with the exception of figure d) (not itself a fund). Secondary funds are important as an exit channel. b) --- c) It can be used for orientation but has to be adapted to the European needs. Box 12: Third country VC funds should register. They should comply with the European regime, those of the concerned Member State(s) and the EVCA guidelines. Box 13: a) We agree with this approach. b) An exemption should not depend on a threshold. c) None

6 - and Funding Agencies AISBL - Box 14: a) A framework could require a voluntary participation that enables VC funds and their managers to obtain a quality standard. If they finally do not play by the rules they should lose the quality standard again. To demonstrate the quality of a fund, supervision is important. b) Supervisors should have access to the annual financial reports, the fund memorandum and the quarterly reports and in case of emergency to the data of the portfolio companies as well. c) Sanctions could include denying the allowance to raise a next fund and prohibiting new investments out of the running fund. Should you have additional questions or comments, please do not hesitate to contact us. Kind regards, Henning Schoppmann EAPB Boris Bartels EAPB The (EAPB) represents the interests of 35 public banks, funding agencies and associations of public banks throughout Europe, which together represent some 100 public financial institutions. The latter have a combined balance sheet total of about EUR 3,500 billion and represent about 190,000 employees, i.e. covering a European market share of approximately 15%