European Union lawmakers approved a draft law on Thursday making it easier to channel funds into start-up companies from next year, inserting a safeguard the venture capital industry fears will make the regime too expensive.
The European Parliament's economic affairs committee voted in favor of the law which creates the first pan-EU "passport" for venture capital (VC) funds, allowing them to market themselves to potential investors across the 27-country bloc.
The sector is currently small, raising only about 4 billion euros ($5 billion) annually because it is fragmented along national lines. There are private placement rules in some countries and none in others, making it harder to persuade investors to step forward and build up funds of size.
Faced with an ailing economy, policymakers hope such funds will help start ups grow into successful firms like internet voice and video service Skype, which was backed by venture capital in its early days.
"It gives an easier passport for venture capital funds to operate across Europe," said Philippe Lamberts, the Belgian Green Party lawmaker who is steering the measure through parliament.
EU states have joint say on the draft law and Thursday's vote allows negotiations on a final text to start with the new rules coming into force by July 2013.
They apply to funds below 500 million euros - those above this threshold will be regulated by the EU's new alternative investments rules which come into force at the same time.
Under the draft law investments will only be redeemable after a specific period to prevent short-term, speculative bets.
The lawmakers also beefed up the law by requiring VC funds to use a depository, an independent body entrusted with keeping the fund's assets safe and noting how the money is being invested and dividends being paid.
The European Private Equity and Venture Capital Association (EVCA), an industry body, said if this requirement makes it into the final law, it will increase costs significantly.
"If there is a depository requirement in the final text, the law will become an empty box. There will be a regulation that nobody will use. The burden compared with the advantages will be just too high," said Erika Blanckaert, head of regulatory affairs at EVCA.
EU states have not insisted that VC funds sign up a depository in their version of the law.
After Wall Street's "Ponzi" scheme scandals like Madoff which affected feeder funds in Luxembourg, the use of depositories is seen by policymakers as helping to reinforce supervision of funds.
($1 = 0.8069 euros)
(Reporting by Huw Jones; Editing by Mark Potter)