WR Asset Management: EuVECA – Access to EU marketing passport and retail investors – without a licence

The EuVECA rules (in their current form) came into force in Norway in 2022. They apply to qualifying VCFs, which could be described more accurately as SME funds (as the funds can invest in much more than "venture"). The rules simplify fund establishment and marketing across the EU/EEA, including to retail investors. These funds can also provide loans to portfolio companies, which is an important exception to the credit monopoly under the Financial Institutions Act.

VCFs, as a regulated subset of AIF funds with a specialised investment strategy, can be managed by both licensed and registered managers ("sub-threshold managers"). For Norwegian managers, the benefits of EuVECA must be weighed against the loss of flexibility typical for unregulated AIFs and the simpler regulatory regime for registered managers.

What is a qualifying VCF fund and what is required of the manager?

Qualifying funds

To qualify under EuVECA, the fund must:

• Be a collective investment scheme that intends to invest at least 70% of its total capital in "qualifying investments" (see description below);
• Not use more than 30% of its total capital to acquire assets that are not qualifying investments; and
• Be established in the EU/EEA.

"Qualifying investments" include:

• Equity or quasi-equity instruments issued by a "qualifying portfolio company" (see description below);
• Equity instruments in the secondary market and, under certain conditions, those issued by a majority shareholder of a "qualifying portfolio company";
• Secured or unsecured loans granted to a "qualifying portfolio company" in which the fund has already invested (limited to 30% of the fund's aggregate capital); and
• Units or shares in other VCFs, provided that they themselves have not invested more than 10% of their total capital in other VCFs.

A "qualifying portfolio company" is a company that:

• At the time of investment, is either not listed and has less than 500 employees, or is an SME listed on a growth market for small and medium-sized enterprises;
• Is not a collective investment undertaking, credit institution, MIFID firm, insurance company, financial holding company or mixed activity holding company; and
• Is established in an EU Member State or in a third country that is not on FATF's list of non-cooperating countries and territories and that has signed the OECD Model Tax Convention.

Requirements for the manager

EuVECA funds can be managed by registered or authorised AIFMs, with registered managers subject to additional EuVECA requirements:

• Initial capital requirement of EUR 50,000, with an ongoing capital requirement of 1/8 of the manager's fixed costs from the previous year. For amounts above EUR 250 million, a surcharge of 0.02% applies. However, this is still less than managers with a full licence who have an equivalent capital requirement of EUR 125,000 or 1/4 of fixed costs.
• Requirements for management to be suitable, as well as general requirements for good business practice, equal treatment of investors and management of conflicts of interest. A separate information document about the fund and the investment strategy must also be prepared. Although the requirements are more extensive and explicit than those that apply to registered managers, the regulatory regime is nevertheless simpler than that which applies to managers with a licence.

Marketing of VCFs

Cross-border marketing in the EU/EEA:

• The registration of a fund under EuVECA gives direct access to market the fund throughout the EEA.
• The EuVECA Regulation prohibits host states from charging a fee for registering the fund for marketing, which helps to reduce costs.

Marketing to non-professionals

• EuVECA registration allows the fund to be marketed to both professional and non-professional investors.
• Non-professional investors must, however, invest a minimum of EUR 100,000 and make a declaration that they are aware of the risks of the investment.
• The manager must prepare a key information document (KID) in accordance with the PRIIPS Regulation, which includes information on risks, returns, costs and fees, among other things.

Pre-marketing:

• Under the recently adopted market sounding or pre-marketing rules based on the CBDF Directive, VCFs that have not yet been established or notified for marketing can be pre-marketed to potential investors in the EU to test interest.
• Regular registered managers without EuVECA registration generally do not have this opportunity for cross-border pre-marketing.

Favourable investment conditions:

• Insurance undertakings subject to Solvency II will be able to obtain favourable capital requirements under the market risk module when investing in debt or equity issued by a EuVECA fund, compared to other unlisted investments.
• The EuVECA Regulation also contains a provision that entitles public investors to more favourable treatment if the fund acts as a vehicle for state investment of risk capital, such as the seed investment scheme in Norway.

Pros and cons of EuVECA

Pros

• Cross-border marketing: The EuVECA regulation allows marketing of the fund across the EU/EEA without the need for a full AIFM licence. This provides a significant advantage for smaller managers looking to attract investors from multiple countries.
• Access to a broader investor base: VCFs can be marketed to both professional and non-professional investors, increasing fundraising opportunities.
• Ability to provide loans: VCFs funds can provide loans to portfolio companies that have already received equity investments from the fund, up to 30 per cent of the fund's capital. This is particularly useful in Norway, where lending activities are strictly regulated.
• Reduced regulatory burden: Compared to a full licence under the AIF Act, EuVECA involves less regulatory burden, reducing the cost and complexity of compliance.

Cons

• Limited flexibility: Although EuVECA offers advantages on the marketing side, it may be less flexible compared to unregulated alternative investment funds. Specific investment rules must be complied with, which may limit the fund's investment strategies.
• Additional disclosure requirements: The AIFM must also comply with the PRIIPS Regulation when marketing to retail investors. This involves the preparation and maintenance of Key Information Documents (KIDs), which can be costly and time consuming.
• Regulatory requirements: Although EuVECA entails a reduced regulatory burden compared to a full licence, it still entails registration notification requirements and compliance with specific capital and organisational requirements that are stricter than those applicable to registered managers of unregulated funds.

In summary

The EuVECA Regulation provides a cost-effective and flexible solution for small and medium-sized AIFMs in the EU that want to market funds across borders. For Norwegian managers, EuVECA offers a valuable opportunity due to the permission to provide loans, despite reduced flexibility compared to unregulated funds. With the PRIIPS and CBDF rules, EuVECA ensures a comprehensive framework facilitating fund establishment and distribution in the EEA, despite the regulatory requirements.