Yesterday, the European Parliament voted overwhelmingly in favour of two new proposals that would create Europe-wide funds for venture capital and social businesses.
According to the European Parliament, 603 (89 percent) out of 676 Members of the European Parliament (MEPs) who casted a vote were in favour of the European Social Entrepreneurship Funds, 27 (4 percent) were against, and 46 (7 percent) abstained.
Similarly, 613 (90 percent) of a total 678 MEPs voted in favour of the European Venture Capital Funds, 24 (4 percent) were against, and 41 (6 percent) abstained.
Following the financial crisis of 2008, small and medium enterprises (SMEs) have been struggling to access the financial capital that they need to grow and flourish.
A joint survey by the European Commission and the European Central Bank in 2011 found that out of the SMEs who have applied for bank loans within a six-month period, 11 percent were rejected, 4 percent were refused because of high costs, and 17 percent received less than they applied for.
In other words, approximately one in three SMEs were unable to access the finance that they had planned to get, despite having created 80 percent of all new jobs in the European economy over the previous five years.
Likewise, social businesses, described as companies that have a positive social impact and social objectives as their corporate aim rather than solely maximizing profit, are growing in Europe. In 2011, they accounted for 10 percent of all European businesses and employed more than 11 million paid employees. But these businesses also face a funding gap.
So the Commission wanted to explore feasible methods to change EU fund rules so that there are no unintended barriers for channeling investments into SMEs and social businesses.
In December of 2011, the Commission proposed two Europe-wide funding schemes: European Venture Capital Funds (EuVECAs) and European Social Entrepreneurship Funds (EuSEFs).
European Venture Capital Funds
Venture capital activity differs between member states in the EU. In some states venture capital is more developed, in others it is less developed. Only nine member states have dedicated rules for venture capital, while the remaining 18 apply company or corporate law to venture capital funds.
If member states were to operate within such diverse rules, high costs and red tape would be among the barriers to venture capitalists raising funds across Europe.
The EuVECAs aims to unlock the potential of venture capital funds to finance SMEs by making it easier for venture capitalists to raise funds across the region. It ensures that member states play by a single rulebook.
The EuVECAs is essentially a designation that venture capital funds and fund managers can use, given that they qualify based on a set of requirements.
These requirements, outlined by the Commission, are that:
European Social Entrepreneurship Funds
Similarly, the EuSEFs aims to unlock financing for social businesses. EuSEFs must focus at least 70 percent of the capital they raise on equity or debt support for social enterprises.
In addition, social entrepreneurship fund managers must comply with the rules set out in the regulation designed to ensure:
To be able to use the designation, the aggregate value of the assets managed in the European Social Entrepreneurship Funds must not exceed €500 million.
Under the new regulations, fund managers will need to register with the competent authority in their home member state and can then market their funds to the whole EU. Only professional investors – either institutional or retail – may invest in their funds, provided that the investor commits a minimum €100,000.
Following the vote in the Parliament, the Council is expected to adopt both regulations on March 21. They 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.
Source: European Commission
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