EuVECA – Opportunities and requirements for Norwegian managers
The EuVECA Regulation will soon be implemented in Norwegian legislation. What are the opportunities and requirements for Norwegian fund managers and their fund initiatives?
The EEA Joint Committee decided on 23 March 2018 to implement the EuVECA Regulation into the EEA Agreement. Consequently, the regulation should be implemented in the Norwegian act on management of alternative investment funds relatively quick and verbatim. It enables European registered AIF-managers to market venture-funds on a cross-border basis to professional- and semi-professional investors in the EU without having to apply for full authorisation under the AIFM Directive.
The EU Commission recently proposed amendments of the EuVECA regulation, which includes a widening of managers eligible to establish EuVECA funds, widening the definition of “qualifying investments” and simplifying the registration process. However, the more than overdue EEA-implementation means that the un-amended regulation will enter into force in Norway, and it is unclear when the beneficial amendments will enter into force. In the following, we will describe the main requirements for Norwegian fund managers according to the existing EuVECA regulation when it enters into force.
Qualifying fund managers
The EuVECA Regulation is a voluntary regime, being a sub-category to the AIFM Directive. This means that AIF-managers may opt in to the regime if they manage smaller funds and wants a pan-European marketing passport without the full compliance cost and regulatory burden of the AIFMD. The regulation applies to AIF managers who meet the following criteria:
- Established within the EEA
- Manage portfolios of EuVECAs
- Registered with the Norwegian FSA
- Portfolios of funds consist of unleveraged and close-ended funds, and total assets under management do not exceed mEUR 500
The fund qualification criteria apply on a fund-by-fund basis. As this is a venture regulation, it intends to facilitate for venture and growth capital investments. The regulation expressly says that it is not intended to facilitate for the cross-border marketing of buy-out funds.
A fund qualifies as an EuVECA if it:
- meets the AIFMD definition of an alternative investment fund, and
- intends to invest at least 70% in “qualifying investments”, see below, whereas remaining 30% may be invested in all types of assets (this is referred to as the “70/30-ratio”)
EuVECA funds can invest in “qualifying portfolio undertakings”, which is defined as unlisted companies with fewer than 250 employees and an annual turnover not exceeding mEUR 50 or a balance sheet of less than mEUR 43 (SMEs). The SME must be established in the EEA or in a non-EEA jurisdiction if certain criteria are met. Moreover, the undertaking must not itself be a fund, nor a financial business entity such as bank, insurance company, etc.
The nature of the EuVECA fund’s interest in the qualifying portfolio undertakings must be either equity or quasi-equity as defined in the regulation:
- Equity: shares in the SME which are issued by the SME to the fund or shares acquired by the fund from existing shareholders; secondary market-acquisitions are allowed
- Quasi-equity: secured or unsecured loans by the fund to the company, provided that the fund already holds qualifying investments in that company. Such loans must not exceed 30% of the fund’s aggregated capital contributions and uncalled commitment in the fund.
An EuVECA may also invest in other EuVECAs if the latter have not invested more than 10% of their capital in other EuVECAs.
The manager shall have the “intention” to invest at least 70% of its aggregate capital contributions and uncalled committed capital of the EuVECA fund into qualifying investments. The manager must reflect this in the fund’s constitutional documents. The 30%-element, however, is an ongoing requirement. The fund should never have more than 30% of its capital invested in non-qualifying investments at any point of time during its lifecycle.
The 70% and 30% thresholds should be calculated on the basis of total committed capital minus management fees. Consequently, fees and expenses borne directly/indirectly by the fund investors and outlined in the fund’s constitutional documents shall be deducted from commitments when calculating the amounts investible.
Note that the fund may be leveraged if such does not increase the exposure of the fund beyond the level of committed capital.
EuVECA funds may be marketed to the following investors:
- Investors considered “professional” in accordance with MiFID requirements
- Investors that request to be treated as professional clients and meet certain opt-up criteria set out in MiFID
- Investors that commit to investing a minimum of EUR 100.000 and state in writing that they are aware of the risks associated with the envisaged commitment or investment
- Executives, directors or employees involved in the management of the relevant EuVECA fund
Registration and compliance
The EuVECA regulation entails an easier “go-to-market” regime than the AIFMD. Eligible Norwegian fund managers must notify the Norwegian FSA of their intention to market EuVECA funds and provide certain information such as details about owners and management of the management company, as well as details about investment strategy and marketing intentions. Moreover, the fund manager must provide a description of the arrangements made for ensuring on-going compliance with the EuVECA regulation.
EuVECA managers must provide prospective investors a minimum level of information during the marketing process, such as information about the management company and its service deliveries to the fund, available own funds, investment strategy and types of portfolio undertakings, intended non-qualifying investments, investment restrictions- and techniques to be used, risk profile and valuation procedures.
The EuVECA regulation specifies high-level governance requirements, restrictions on delegation of management tasks, requirements on the handling of possible conflicts of interest and reporting requirements. It also stipulates that the manager must have “sufficient own funds”. There is no set capital adequacy figure, national company law regulations will apply.
The EuVECA regulation is a much lighter regulatory regime than the AIFMD. Registering as an EuVECA manager and establishing internal routines in order to start marketing may be done faster and with a fraction of the cost of establishing and operating a full AIF under the AIFMD.
What to do next?
Do not hesitate to contact Permian if you consider establishing a venture fund initiative under the EuVECA regime when it enters into force in Norway. Permian has gained operational experience with the EuVECA regulation from working with EuVECA funds in Sweden where the regulation has been active since 2013. This brings positive experience to benefit the Norwegian venture fund industry at the time the EuVECA regulation becomes incorporated into the Norwegian legislation.
Stockholm/Oslo, 14 June 2018
Espen Iversen Størseth, Legal Counsel
Axel Høvo Daasvand, COO