European venture capital appears to be enjoying something of a renaissance. Figures published recently by the BVCA (the UK’s industry association) suggest that returns for UK-based venture funds have improved markedly: the 2016 performance figures show three-year annual returns of 12.5%. At the same time, the European Commission is clearly keen to promote the asset class, and has been working hard to make it easier to raise a venture capital fund, harmonising the regulatory requirements across Member States and offering an EU-wide marketing passport to qualifying venture fund managers.

The regulatory push to facilitate a single European market for “venture capital” fund managers began in earnest in 2013. Whilst the AIFMD dramatically increased burdens for larger private equity fund managers, European legislators simultaneously created a separate, less burdensome and voluntary regulatory regime for fund managers with up to €500 million of assets under management. However, for political reasons, that regime was only made available to managers of funds that invested 70% of their investible commitments in the equity or equity-like instruments of small and medium sized companies (SMEs) – “venture capital funds” as defined by the Commission – but not other private equity funds. So – although the regulation was sensible and proportionate, and the EU-wide marketing passport on offer was helpful (and better than the AIFMD-equivalent given to larger fund managers) – the qualifying criteria were narrowly drawn. Take up was, therefore, disappointingly low.

To its credit, the European Commission has worked with industry associations – most notably, Invest Europe – to improve the regime in an attempt to encourage more venture and growth equity managers to opt in. Last week, the reformed rules cleared their final legislative hurdle when they were approved by the Council, and they will take effect early next year. That should be good news for early-stage managers within the EU, although it will do nothing to help European investors who would like greater access to US (or other non-EU) venture funds.

Among several improvements to the rules was an important liberalisation of the criteria applying to underlying investments. Instead of the more restrictive SME definition applying to limit the portfolio companies that can be targeted by the fund, unlisted companies with less than 500 employees will, in future, be eligible for inclusion in the 70% of investments that must “qualify”. It will also be possible for some listed SMEs to qualify, opening up the possibility for a manager to target small growth companies that have already come to market.

Good news for some (but not all) venture managers using the EU regime will be the harmonisation of the applicable capital requirements, moving from a generic requirement for “sufficient funds”, which has been interpreted differently across Member States, to an amount calculated by reference to a combination of fixed overheads and assets under management – but always subject to a minimum of €50,000. Although that will imply a higher capital requirement for some firms, it will reduce it for others and limit the scope for regulatory arbitrage between national regulators.

Among the other welcome changes is a new maximum period of two months for registration of a new manager, and the express prohibition of national fees for using the passport outside of the firm’s home state (unless some supervisory activity is required). National fees have been criticised by the industry (and were probably illegal even under the existing rules), but were widely levied by individual regulators.

Furthermore, even larger (fully AIFMD-regulated) managers will be able to use the regime for their qualifying venture funds – meaning that they can take advantage of the enhanced marketing passport, allowing them to approach sophisticated retail investors willing to commit at least €100,000 on a passported basis.

All in all, these changes will represent a positive and significant step forward for the regulation of Europe’s venture capital sector, and will help managers with a cross-border marketing strategy. However, there is still no reason to restrict this regime at all: it ought to be made available to all sub-threshold alternative investment fund managers – those not required to get authorised under AIFMD – even if they have a strategy which does not fit within this expanded definition of “venture capital”. And it is also a shame that no attempt has been made to offer cross-border market access to non-EU venture funds, who must still navigate a patchwork of national rules. That latter failure may be a particular problem for UK-based managers after Brexit, unless market access can be preserved for them as part of the UK’s future relationship with the EU.