Spanish Fund and Venture Capital Regulation Adapts to European Regulations | Jones Day
In Short
The Situation: Spain’s new Law 18/2022 regarding the creation and growth of companies (the so-called “Create and Grow Law”) will facilitate investment in start-ups and includes improvements in foreign financing and investor grouping. The law aims to speed up the incorporation of companies, reduce commercial default, and reduce the obstacles that companies face in their growth, by increasing competition through facilitating companies’ access to financing.
The Development: The Law amends the current regulation to enable the incorporation of a Limited Liability Company with a share capital of one euro and introduces reforms that facilitate and promote the incorporation of these companies in a quick, swift, and digitalised way. This new regulation also includes measures to enhance financing instruments for business growth, making alternate funding mechanisms such as crowdfunding, collective investment, and venture capital more flexible.
Looking Ahead: Until now, there have been many bureaucratic obstacles that made it very difficult for private equity funds to operate supranationally. This slowed down the arrival of European Venture Capital firms (“VCs”), limiting the opportunities for many entrepreneurs, and made it difficult for Spanish platforms to support projects in the European common market. The Create and Grow Law establishes a transitional period to adapt participatory financing platforms (crowdfunding) as well as the new figures of European funds and venture capital entities.
Facilitate the Incorporation of New Companies
The purpose of the elimination of the €3,000 minimum share capital requirement currently in place is to promote the incorporation of companies by reducing their incorporation costs. In most countries, no minimum amount of capital is required to set up a limited liability company, including countries with a Latin tradition more like Spain’s, such as France, Portugal, and Italy.
In recent years there has been an accelerated digitalisation of the Spanish economy. In this context of digital transformation, this law intends to enhance the incorporation of companies in a quick and swift manner and at the lowest possible cost using the Information Centre and Business Creation Network (“CIRCE”) telematic processing system.
Enhance Financing Instruments for Business Growth
Measures are included to enhance financing instruments for business growth, making alternate financing mechanisms such as crowdfunding, collective investment, and venture capital more flexible.
A new legal regime is introduced for participatory financing platforms, or crowdfunding platforms.
EU Regulation 2020/1503 on European crowdfunding service providers (“the EU Regulation”) provides a complete and comprehensive legal regime for crowdfunding platforms. These platforms have been regulated in Spain since 2015, although the new Law seeks to unify regulation at a European level, so that any authorised and supervised crowdfunding platform under EU Regulation may provide its services freely throughout the European Union, without having to obtain a separate authorisation in every Member State in which they wish to provide their services.
Enhance and Improve Collective Investment and Venture Capital in Spain
This is a sector that over the past two years has experienced a remarkable acceleration and dynamization and which necessarily goes hand in hand with investor protection. These are the new developments:
- The so-called European long-term investment funds, which were not regulated in Spain, are now regulated. This is a vehicle that has been created to provide retail investors with access to investment in small- and medium-sized unlisted companies, allowing them to invest in a type of asset (syndicated loans, private debt, quotas and shares, among others), which was formerly restricted to institutional investors.
- Other implemented measures will contribute to improving the competitiveness of the sector, such as the elimination of quarterly reporting requirements or the implementation of electronic means as the default way of communicating with quota holders and shareholders.
- The concept of the debt funds is introduced, implementing additional obligations and requirements for management companies (risk management procedure, warnings on specific risks, among others). Its main purpose is to invest in invoices, loans, credit, and commercial paper commonly used in commercial deals. Debt funds will not be allowed to engage in consumer lending.
- It expressly includes, as the main purpose of venture capital, investment in financial institutions. This activity is primarily based on the application of technology to new business models, applications, processes, or products.
- The initial disbursement of the share capital of a private equity fund is reduced from 50% to 25% of the total committed share capital.
- The regime for nonprofessional investors in venture capital entities is made more flexible. As an alternative to the €100,000 initial investment requirement, retailers will be allowed to trade with a minimum initial investment of €10,000, subject to compliance of certain requirements.
Recognition of Benefit and Common Interest Companies
The concept of Benefit and Common Interest Companies is recognised, being companies that have voluntarily decided to include in their bylaws: (i) their commitment to the explicit generation of a positive social and environmental impact and to taking into consideration relevant stakeholders through their activity; (ii) their submission to greater levels of transparency and accountability in the performance of the aforementioned social and environmental objectives, and the consideration of relevant stakeholders in their decisions; and (iii) criteria and methodology for the validation of this new corporate entity, which will include a verification of the company’s performance with both the criteria and the methodology being subject to the most demanding standards, will be contemplated through regulatory development.
Three Key Takeaways
- Spanish regulation has been brought up to date. In this way, Spain complies with the requirements set forth by the European Regulation as to crowdfunding or participatory financing and overcomes the obstacles that had not been covered, such as the impossibility of serving as a vehicle or facilitating the way for foreign operations.
- The changes included in the Law represent a higher support for investors, especially for the inflow of capital from abroad. Until now, it was very difficult and unattractive to co-invest with foreign venture capital. Authorised platforms will be able to apply for a European passport that will allow them to operate in all markets of the common market. In this way, both national and international companies will be able to finance projects in Spain and the rest of Europe.
- Spain is one of the first countries, along with France’s “Enterprise à Mission“ and Italy’s “Societá Benefit“, to recognise common interest entities. It means that it will be possible to set up companies that are not exclusively profit-oriented. The companies also will be defined by their intentional and determined vocation to generate a positive impact on society and the environment following ESG principles. The regulatory development remains to be seen to validate the success in practice of these types of companies.
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