We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
03 October 2007
One of the government's main goals has been to develop the national economy, which in recent years has lagged behind the average rate of growth in the European Union. Shortly after coming to power, the government introduced several simplification procedures to make the operation of companies less cumbersome; the removal of administrative burdens has become a flagship initiative for the government. Although it continues to announce simplification mechanisms as part of its Simplex Programme, these often fail to deliver the practical changes which certain legislative instruments urgently need.
One area of commerce viewed as essential for business consolidation and development is venture capital, which is governed by a legal framework that dates back to the enactment of Decree-Law 319/2002. The framework has since been amended by Decree-Laws 151/2004 and 52/2006.
Stakeholders in the corporate finance sector consider that the changes made so far have not been far-reaching enough to allow venture capital to assume the significant role it plays in other European countries. However, in 2007 the government has shown that it intends to address this issue and that it recognizes the importance of venture capital for companies and the economy in general.
In 2006 the Ministry of Finance and the Securities Commission prepared a package of draft amendments to the framework for venture capital companies and funds. A public consultation on the proposals ended in early 2007.
Significant amendments were also made to the decree-law which regulates syndicated funds for venture capital, a type of fund which was created by Decree-Law 187/2002, having first been outlined in the Programme for Economic Productivity and Growth set out in Council of Ministers Resolution 103/2002. The necessary legislative changes were implemented by Decree-Law 13/2007.
Syndicated funds for venture capital were created for use in venture capital transactions - specifically, for investing in company shares and financing the activities of specialized entities in the sector. Article 2(2) of Decree-Law 187/2002 limited syndicated funds' activities to small and medium-sized enterprises.
Capital resources for syndicated funds may take the form of:
The main amendment in this area, as of the entry into force of Decree-Law 13/2007, is that investment and financing opportunities are no longer restricted to small and medium-sized enterprises. Substantial changes have also been enacted to give syndicated funds greater flexibility in their organization and activities.
In respect of their organization, although a management entity(1) is in charge of the day-to-day management of the syndicated fund, the general council may approve its financial plan and decide on general fund activities, as well as approving transactions of which the management entity is the beneficiary. The amendments provide that the general council must convene at least every three months, although it may also convene whenever the president gives notice to the other members or whenever all members are present.
In respect of their activities, syndicated funds can now extend credit to specialized venture capital entities, including venture capital companies, investment companies, regional development companies and venture capital funds. Other entities may also qualify as specialized venture capital entities, provided that they fulfil the criteria set out in Article 8(2) of Decree-Law 187/2002, as amended by Decree-Law 13/2007, which states that such entities must:
At the end of 2006 the commission held a public consultation on a proposal to amend the legal framework for venture capital operations and entities.
Following a public consultation in August 2007, the government finally produced a bill in which the comments received by the commission were taken into account. The final version of the new bill has not yet been disclosed to the public and is awaiting approval by the Office of the President. Although most provisions set out in the bill are expected to remain untouched, some amendments are expected before its entry into force.
In the past, Portugal's venture capital regulations have traditionally been structured around the two main types of entity which may operate in the market.
First, venture capital companies are companies with a mandatory minimum share capital of €750,000 whose main corporate activity consists of: (i) investing for no longer than 10 years in companies with high growth potential, especially by purchasing shares in such companies; and (ii) managing venture capital funds owned by institutional investors.
Second, venture capital funds are incorporated for the purpose of investing for limited periods in companies with high growth potential. Such funds fall into one of two categories: (i) funds for institutional investors, which are owned exclusively by institutional investors; and (ii) funds for the general public, which are venture capital funds whose investment units can be owned by all types of investor.
One of the most significant aspects of the commission's proposal is a new class of investor: namely, venture capital investors, commonly known as 'business angels'. The proposal includes plans to introduce a tax regime for venture capital investors equivalent to that which applies to venture capital funds and companies. In order to qualify for the regime, investors would have to incorporate a single-shareholder private limited liability company in order to keep personal assets and venture capital investments separate. Only natural persons would be allowed to hold shares in a venture capital investor.
If the proposed changes are enacted, venture capital funds will no longer be classified by investor type (ie, into funds for institutional investors and funds for the general public). The proposal provides that subscriptions for investment units in venture capital funds would be subject to a minimum purchase of €250,000. However, no minimum purchase would be required if the investment units were admitted to trading, which would open up the market to smaller investors.
One of the aims of the revised regime is ensure that venture capital activities more clearly reflect their main objectives by improving the definition of the investment policies of venture capital companies, funds and investors. The proposed amendments provide that their total investments in owned capital assets (eg, shares) must be greater than those in borrowed capital assets (eg, loans), and that venture capital companies must have a diversified asset portfolio. The proposals set out the following restrictions:
The maximum period for all other investments remains 10 years; however, the commission may authorize an extension in certain cases.
The amendments also focus on streamlining administrative procedures and propose to:
The government has also taken the opportunity to increase the commission's supervisory powers over venture capital companies and funds and the proposed classification of venture capital investors; the commission would assume general competence to supervise and regulate venture capital investment activity.
In respect of capital requirements, the proposal retains the mandatory share capital threshold of €750,000 for venture capital companies and proposes to increase the minimum capital requirement for venture capital funds from €1 million to €2.5 million.
Although generally well received by the industry, particularly by the recently incorporated Portuguese Business Angels Association, one measure that has been criticized is that market players are still subject to excessive capital requirements.
The implementing decree-law was recently approved by the Council of Ministers, but the final text is yet to be issued. However, a government press release announcing its approval has revealed some of its features and shows that the government has incorporated some of the comments received during the consultation period. For example, the subscription requirement which sets a minimum value of investment units for investors in venture capital funds has been retained, but the threshold value is reduced from €250,000 to €50,000. The press release also announced that venture capital companies may be incorporated with a share capital of €250,000, as opposed to the €750,000 threshold originally proposed in the bill. However, if its share capital is below €750,000, a company's activities are restricted to the management of venture capital funds.
Market rumours suggest that the proposal to increase the minimum capital requirement for venture capital funds from €1 million to €2.5 million will not be included in the decree-law.
Further changes are likely, as the legislative authorities generally make further amendments to bills before they are finally enacted and published in the Official Journal.
The amendments can be seen as an improvement in the government's attempt to create a friendlier business environment by taking steps to provide the Portuguese economy with flexible and valuable sources of investment that will offer new business development opportunities for start-ups, particularly small and medium-sized companies.
For further information on this topic please contact João Caldeira or Paulo Mendonça Duarte at Rui Pena, Arnaut & Associados - Sociedade de Advogados by telephone (+351 21 382 8150) or by fax (+351 21 382 8155) or by email (email@example.com or firstname.lastname@example.org).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.
Paulo Mendonça Duarte