The passing of Law 18/2022 of 28 September on the Creation and Growth of Companies (known as the Create and Grow Law) has introduced many new developments to the collective investment industry. These include lowering the minimum investment threshold for venture capital products to give access to retail investors. This was the subject of debate among the participants in the 25th edition of the FundsPeople Legal Debate, who welcomed the initiative, but believe that more proposals are needed to boost investment in these vehicles.
It is worth recalling that, up until now, the minimum investment to access venture capital was €100,000. With the new law, this threshold is lowered to 10,000, opening it up to retail investors, provided they meet three requirements: that they access through the advice of an authorised bank, that their equity does not exceed €500,000 (above this limit, the CNMV does not consider the investor to be a retail investor) and that this investment does not exceed 10% of this equity.
Salvador Ruiz, a partner at Allen & Overy, believes that the new minimum investment is a step in the right direction: "It greatly expands the investment possibilities and provides private equity funds with access to private banking networks". However, he believes that in Spain "they are tweaking these vehicles when in other jurisdictions such as Luxembourg and Ireland they offer more flexibility and more capacity for entry. In addition, they have forgotten about the tax system", he says.
This criticism is echoed by Elisa Ricón, CEO of Inverco: "It's good to have rules, but it's much better if these rules are timely and comprehensive", says the expert, who believes that financial and tax rules should go hand in hand. She believes that addressing financial regulation on the one side and tax regulation on the other means that "new products don't take off". Furthermore, she stresses that the weight of domestic companies in a vehicle is greater when it is managed from within the country than when it is managed from abroad due to local knowledge and proximity to the market. "Penalising the vehicle only brings forth disadvantages. Organised coordination mechanisms should be in place", she suggests.
Although the measure has been generally welcomed by the industry, "it would have been preferable if it had been aligned with the reform proposals (still under discussion) for the Alternative Investment Fund Managers Directive (more commonly known as AIFMD) and the ELTIF Regulation. In particular, the latter eliminates the current minimum investment amount requirements of €10,000", adds Leovigildo Domene, Director of Deloitte Legal. "Protecting investors is, after all, in the DNA of our legislator, but the marketing rules for the different alternative investment vehicles should be aligned with European proposals, should they be approved with their current content", he argues.
It is not surprising that the Spanish regulator defends this supervisory role, especially taking into account that in the domestic market 80% of investment corresponds to retail clients and only 20% to institutional clients, according to Inverco data. In comparison, the European average is 70% institutional and 30% retail.
Despite this, Ricón argues that "investor protection should not be incompatible with market promotion". A large part of the problem, according to experts, lies in the lack of financial literacy. "A clear distinction must be made between savings and investment. In the latter case, more risk is assumed depending on the product and, therefore, losses may be incurred", recalls Alfredo Oñoro, Director of Regulatory Compliance at Cecabank. In his opinion, "opening the world of venture capital to retail investors through these regulated channels is much safer for investors, as these vehicles are subject to specific regulation, which are monitored by supervisors and depositaries and will only be available to retail investors who meet a series of requirements and after these have been verified", he reassures.
In addition, these new developments may encourage "retail investors not to focus exclusively on traditional banking products and turn to alternative investments, with all the safeguards offered by the new regulations (advice and minimum investment)", states Ana Martínez-Pina, Financial Regulatory and Insurance Coordinator at the law firm Gómez, Acebo & Pombo.
Proposals for improvement were put on the table during the colloquium. According to Leovigildo Domene, filters for retail access to venture capital vehicles could be limited to "an assessment of the suitability of the product and a written warning if the investment exceeds 10% of the client's portfolio". Otherwise, the current requirements "may entail a titanic monitoring effort on the part of banks, especially in those cases where the fund manager and the distributor do not coincide", he stresses.
Salvador Ruiz also agrees with this view, saying that it is a matter of information: "When someone buys a product they should read the prospectus and understand the trinomial of return, liquidity and security that the product offers. This is something they are very clear about in Europe", he explains. In this regard, he clarifies that "the role of the CNMV is to verify that the standards of information given to investors are correct".
In this regard, Elisa Ricón comments that in the Draft Bill for the Creation of the Independent Administrative Authority for the Defence of Financial Clients (ADCF) there are a series of exclusions in claims against banks and Inverco has asked that falls in value due to the mere fluctuation of the markets be expressly included.
He explains that, "while it is clear that this does not fall within the scope of claims, we could find ourselves with market downturns and hordes of investors filing claims, which could be fatal for everyone. Financial literacy is based on trust in the financial system. In Spain, we have a system that can be trusted and this is something that has to be conveyed by the public authorities", he justifies.
In this regard, Ruiz issues a warning: "The financial system is a pipeline that carries savings to investment. If the Spanish market does not offer you this conduit, either you go to Luxembourg or you set up unregulated vehicles".
