New Eu Regulation Could Threaten Start Up Vitality

In a worrying move, the European Commission [EC] announced recently that it plans

to create a large number of new regulatory agencies to watch the investment market, in light of the recent financial collapse across the globe. These agencies will have the very broad assignment of creating more transparency in the market and watching for signs of a possible impending meltdown.

The problem is that these agencies will monitor any European business or organisation that manages an investment fund, which includes a broad swathe of European organisations. This includes all of the venture capital firms under EU law and will create a burden for all of these companies, in terms of compliance.

Due to this, a large number of organisations have joined together to oppose the new legislation. Using the platform that this new legislation will curb innovation and damage start-up potential, these groups have proposed that the legislation be modified or scrapped altogether. Unfortunately, the groups are quite fragmented and, as such, have been unable to make any significant headway in preventing the legislation from passing.

The groups do have a number of very specific complaints about the legislation. For example, all venture capital firms will have to publicly disclose strategy, planning, and a complete record of current investments. Not only is this a very costly process, involving as much paperwork as a tax return, but it could be dangerous for a company in a competitive environment. It could easily be the reason that companies go the non-venture route of investing. No one wants their opposition to know their business strategy. And every cent that a company spends doing paperwork is a cent that will not be put towards start-ups.

Also, the directive immensely increase the amount of money that a company has to set aside in their reserves. This is a way to ensure that companies have enough money to pay back investors if a deal goes bad. Unfortunately, the opponents of the new directive say that the new reserve rules are way too high. The new requirement is a 25% reserve. In one case that the opponents modelled, this required a company to increase its reserves from 5,000 to 8 million. None of this money can be spent on start-ups.

And finally, the directive has rules that have caused many to cry foul over international trade. European venture capital firms will no longer be allowed to invest outside the region. And US venture capital firms will no longer be allowed to invest in Europe. Many say that this could have a huge negative effect, as US firms fund a large portion of start-ups in Europe and many European venture firms have ongoing business outside of Europe.

by: Peter Simpson

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