A directive being debated by the European Union (EU) has the potential to undermine the region's startup industry and innovation, but the groups opposing the directive are fragmented and may be not be able to persuade the EU to rethink its policy.
The Alternative Investment Fund Managers Directive was proposed by the European Commission (EC) in April last year in response to the financial crisis.
The EC wanted to bring in regulation to supervise the investment market, and create more transparency in Europe's economy to prevent a similar meltdown occurring again.
Although the directive was designed to regulate European hedge funds, the scope applies to any institution that manages an investment fund, which includes all of Europe's venture capital firms.
Venture capital firms and associations representing the startup industry are opposing the regulation, arguing that a regulated environment will slow down investment in early-stage companies and deter investment from the US.
However, because the opposition parties are so fragmented and lack spokespeople, the impact of their resistance so far has been small.
Particularly damaging parts of the directive for the European startup industry include the so-called 'third country rule', which will restrict European venture capitalists from investing in startups outside the region. The rule will also restrict US venture capital firms from investing in Europe.
The directive puts forward disclosure requirements that will mean all venture backed European startups will have to disclose their investments, strategy and planning information. The paperwork involved in disclosing such information is likely to make it a costly process, according to the British Venture Capital Association (BVCA).
The BVCA said that the disclosure rules will cause owners of startups to opt for the non-venture route to investment, because disclosing their assets would damage them economically and could be a gift horse to more established competitors.
This would unfairly advantage owners of startups that take investment from families or sovereign wealth funds, and disadvantage owners of venture-backed startups.
The directive would also impose capital requirements on fund managers, who will need to set aside 25 per cent of their annual overhead for regulatory capital. The BVCA said this could mean increases from the current £5,000 annual requirement to around £8m.
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