Removing obstacles to cross-border investments by venture capital funds
Small and medium-sized enterprises (SMEs) are seen as key to improving competitiveness and meeting the aims of the Lisbon Strategy for Growth and Jobs. In turn, venture capital has been identified as a crucial way of financing them. However, venture capital investment markets in European countries are very fragmented, which is inhibiting European cross-border venture capital fund investment and fundraising. This Communication from the Commission outlines a number of measures designed to overcome these existing barriers.
Communication from the Commission of 21 December 2007 to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions - Removing obstacles to cross-border investments by venture capital funds [COM(2007) 853 final – Non published in the Official Journal].
In this Communication, the European Commission identifies measures to encourage increased cross-border venture capital investment and fundraising in the Internal Market.
Venture capital funds are an essential form of capital for SMEs in their early stages and those with high-growth potential, a driver of the economy
Venture capital has been identified as an important form of capital for SMEs which experience problems in accessing finance, in spite of their importance for continued economic growth. It presents considerable potential for the growth of innovative SMEs. Companies backed by venture capital tend towards considerable job creation and increased research and development. They contribute to economic growth and environmental sustainability, in the form of venture capital fund investments. However, venture capital markets are currently split along national lines throughout the European Union (EU), which adversely affects both fundraising and investment.
Setting up framework conditions and removing existing barriers
Deficiencies in framework conditions and barriers in the Internal Market are hampering venture capital mobility. In this Communication, the Commission identifies various conditions, at both national and Community level, to overcome current barriers and encourage increased cross-border venture capital investment and fundraising.
Framework conditions to be put in place include:
- developing domestic policies such as public co-funding;
- providing targeted horizontal state aid for new innovative enterprises;
- favouring liquid exit markets in the EU, in particular growth stock markets;
- facilitating the development of supporting clusters to generate new ideas and entrepreneurs. Furthermore, existing Community programmes aim to encourage innovation and entrepreneurs in the context of the renewed Lisbon Strategy for Growth and Jobs, for example:
- the Seventh Framework Programme (FP7) which aims to boost funding for collaborative research in Europe during the 2007-2013 period;
- the Competitiveness and Innovation Programme (CIP), of which €1.1 billion has been allocated to improving access to finance for SMEs, also between 2007 and 2013;
- in the context of JEREMIE (Joint European Resources for Micro to Medium Enterprises), Member States, if they choose it, will be able to use part of their structural funds to support SMEs.
Establishing incentives to increase private sector investment
Policies alone will not be enough, and more investment through private channels is essential. For this to happen, the Commission and Member States need to work together in order to improve the framework conditions for venture capital funds, such as facilitating cross-border operations:
- creating an integrated financial market to ease the free movement of venture capital;
- improving conditions for fundraising by institutional investors by extending the ‘prudent person rule’ and analysing possibilities for setting up a European private placement regime;
- improving the regulatory framework for venture capital funds by reviewing existing legislation and adopting new laws, for greater efficiency and less administrative obstacles for investors;
- reducing tax obstacles – simplifying the current varied, complicated national fund structures and; avoiding double taxation - the Commission has set up a working group to this end;
- mutual recognition of existing national frameworks as the most pragmatic short term approach.
The Commission advocates an exchange of good practices at all levels. It encourages cooperation through a partnership approach between the Member States, the Commission and the industry itself. This is essential for implementing these policies and developing the venture capital market.
Venture capital market development varies across Member States national policies and frameworks differ between the Member States, which hinders fundraising and investment between countries. The result is that cross-border venture capital investment is complicated and thus smaller funds tend to operate only within their own jurisdiction’.