November 28 2007
Venture capital regulation has changed considerably in recent years. New legislation has boosted the sector and caused a significant increase in venture capital activity.
There is an attractive tax regime for venture capital entities. Under some circumstances there is a 99% partial exemption from corporation income tax.
The role of authorities in the supervision of venture capital entities has changed. The Securities and Exchange Commission has replaced the Ministry of Economy and Finance, which was previously responsible for authorizing the incorporation of such entities.
The new legislation has relaxed the administrative regime regarding incorporation, creating simplified venture capital entities. These entities must comply with certain requirements (minimum investment of €500,000, private placement and maximum of 20 investors), and benefit from a faster incorporation procedure and a less stringent administrative regime. The simplified regime seeks generally to encourage investments by qualified investors.
The new legislation makes it possible for venture capital entities (standard and simplified) to carry on a wider range of business lines and more ancillary activities (eg, providing advice).
The legislative changes have led to an increase in the number of transactions carried out in 2006, which reached 612 within the Spanish territory - 19% more than in 2005. Venture capital investment in the first six months of 2007, which increased by more than 56% when compared to the same period of 2006, has reached a new record of €1.94 billion.(1)
This increase in activity is leading to higher standards of supervision, not only by the Securities and Exchange Commission but also by other authorities. Act 36/2006 established that anti-money laundering legislation also applies to venture capital entities, meaning that venture capital entities have day-to-day obligations regarding the prevention of money laundering and terrorist financing (eg, incorporating in-house control bodies, sending reports to the Financial Analysis Unit and carrying out training activities).
Finally, recent changes to the asset eligible regime of insurance companies (and pension funds)(2) allow them to invest in foreign venture capital entities.
Venture capital is undoubtedly one of the most attractive products in Spain. Although it is still too early to evaluate the influence of the reform, there are great expectations for the future. If the prevailing trend continues during the next few years, this sector should become very important within the financial industry.
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