Retail Investors

The EuVECA Regulation restricts financial promotion to retail investors subscribing a minimum amount of €100,000 but there is no such restriction in the agreed text for the ELTIF regulation.

Consideration should be given to eliminating the EuVECA restriction or reducing it to a level consistent with the average investment in an SME raising capital in the UK under the Enterprise Investment Scheme or in a Venture Capital Trust which will be around £15,000- £25,000 per investor. To put this in context, the EIS and VCT schemes now raise a short £2 billion every year for investment in SMEs, are classified as mainstream investments for retail investors by the FCA and make a very significant contribution every year to the creation of growth and jobs in the UK.

It would be marvellous if Lord Hill were able to marry the inspiration and drive behind his Green Paper with the export to other Member States of the UK’s successful model for SME investing by retail investors. I am sure the industry would provide a lot of support for this endeavour both at EIS fund manager and adviser level as well as through its leading representative body, the Enterprise Investment Scheme Association (EISA) the board of which is led by Lord Flight as Chairman and Sarah Wadham as the EISA’s Director General.

Part4A authorisations

SEIS and EIS venture capital funds should be qualifying funds under the EuVECA Regulation provided they are only marketed to professional investors or high net worth investors pursuant to Article 6 of the EuVECA Regulation. Article 16 of the EuVECA Regulation should then apply so that the UK cannot require the manager of such a SEIS and EIS fund to require a Part 4A permission, but, for the reasons stated below, a Part 4A permission would still seem to be required under Article 37A of the RAO as a matter of UK national law.

Paragraph 2.3 of the EuVECA manager registration form http://www.fca.org.uk/firms/markets/international-markets/aifmd/eusef-euveca
requires an applicant who is not currently authorised by the FCA to answer questions 2.4 to 2.10 of the registration form before moving on to complete the rest of the application form, the implication being that it is possible to become a EuVECA manager without the need for any Part 4A permission from the FCA. If this is right then there would seem to be a glitch in the amendment of the RAO which has not yet caught up with the urgency with which the FCA is seemingly keen to join the fray in building an EU capital markets union by the provision of EuVECA registration forms.

The glitch is as follows:

FUND 1.3.7G(3) says that a small AIFM which has applied for registration as a EuVECA manager will not be carrying on a regulated activity in this capacity, but if this is so then on what basis is Article 37 RAO disapplied?

Article 37 of the Regulated Activities Order requires a person to be separately authorised if they will be ‘managing investments belonging to another person in circumstances involving the exercise of discretion’. This is qualified by Article 39, which refers to Article 72AA.

Article 72AA provides that the activities of a person with a Part 4A permission to carry on the activity of managing an AIF under Article 51ZC are excluded from the need to obtain a Part 4A permission for any other activities. This means that if the person is a small authorised UK AIFM he only needs a Part 4 A permission to carry on activities under Article 51ZC and a permission to carry on other activities described under other Articles of the RAO (including under Article 37) is not required because of the Article 72AA exclusion.

But what is the position of a small registered UK AIFM? Article 51ZC is qualified by Article 51ZF which provides that there is excluded from Article 51ZC the activity of managing an AIF if the person carrying on the activity is listed in Schedule 8. Schedule 8 lists a small registered UK AIFM in respect of the AIFs by virtue of which it is entitled to be registered as a small registered UK AIFM. This means that a small registered UK AIFM does not need a Part 4A permission to carry on the activity of managing an AIF under Article 51ZC.

But because the small registered UK AIFM will not have a Part 4A permission to carry on the activity of managing an AIF under Article 51ZC this also means that the benefit of Article 72AA will not apply. This means that a small registered UK AIFM will still need a Part 4A permission under Article 37 if it will be ‘managing investments belonging to another person in circumstances involving the exercise of discretion’.

O’ what a complicated web we weave!