Are VC funds getting the ‘passport’ treatment?

Just months after the private equity industry breathed a sigh of relief when the controversial “passport” rules were agreed on in the EU Directive on Alternative Investment Fund Managers, venture capital firms are up for similar treatment, a huge development for European based VC funds.

Proposals are under consideration in the European Commission that would allow venture capital funds in the European Union to invest anywhere in the EU through a “passport”.

The measure is similar to the EU Directive on AIFM that passed the European Parliament last year. However, the VC proposal differs from the AIFM as the AIFM directive allowed non-EU based private equity firms to “market” their funds to investors in EU member states.

The European Commission’s latest regulatory proposal may not have the global impact of the AIFM, but presents tremendous opportunities for European VC firms.

The VC proposals would create a similar passport for venture capital funds supporting businesses at an early stage of development to invest in different European countries.

The advantages of regulation for European VC funds are clear as a cross-border regulatory framework for making venture capital investments would lower operating costs and risks.

And it’s likely to happen sooner rather than later.

The European Commission is seeking to put in place measures by the end of next year to improve the free movement of capital in the EU.

The UK in particular has been keen to ease cross-border restrictions, according to a New York-based lawyer.

“Take a close look at the [British Venture Capital Association] activities,” said the lawyer. “Marketing to EU neighbors is a priority along with tax incentives.”

The BVCA has called for greater tax incentives toward seed and start-up funding, which has struggled as investors have flocked to safer assets in recent years. Between 2007 and 2009, seed investments have fallen by around two-thirds, while start-up investments have plummeted over 90 percent, according to BVCA statistics.

Whether it’s tax incentives or a favourable regulatory framework, driving investment in the VC asset class is something everyone can get on board with. And while it is not a global proposal, it’s an excellent start.