Commission Proposes Cross-Border Investment Measures For Venture Capital

by Carla Johnson, Investors Offshore.com, London

07 January 2008

In order to finance and stimulate innovation of small and medium-sized enterprises (SMEs), the European Commission has proposed measures to boost cross-border investments by venture capital funds.

Until now, venture capital funds, which are vitally important for the financing of growing innovative small companies, have faced problems in overcoming different national regulations for cross-border fundraising and investment.

For this reason, the EC explained, they often don't reach the necessary critical mass. Therefore, the European Commission is advocating a broad partnership with and between Member States, to work towards mutual recognition of the current national frameworks for venture capital funds.

Commission Vice-President, Günter Verheugen, responsible for enterprise and industry, explained that:

“Stimulating cross-border operations will help venture capital funds to specialise and diversify their portfolios. This is particularly important for smaller funds and allows smaller countries to benefit from larger venture capital markets. With the proposed partnership approach, the Commission invites the Member States and the industry to work together for a more integrated European venture capital market."

In Europe, the venture capital market is fragmented, with currently 27 different operating environments. This adversely affects both fundraising and investing. Operating across borders is increasingly complex and smaller funds tend to avoid investing outside their home jurisdictions.

A better regulatory framework will lower operational costs and risks, raise returns, increase flow of venture capital and improve the functioning of venture capital markets. This will particularly benefit innovative SMEs.

The Commission believes that to remove barriers to cross-border venture capital investing and fundraising, venture capital structures that are functioning well could be adopted and recognised in other Member States. The Commission invites the Member States, when reviewing existing or adopting new legislation, to enable cross-border operations and consider mutual recognition of venture capital funds.

National authorities could additionally recognise that funds domiciled in another Member State and operating in their market are already subject to the regulatory regime of their home country.

However, the proposed solution requires that national authorities should have mutually acceptable levels of supervision and transparency on venture capital funds.

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