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Venture Capital Funds – Investment Opportunity in Serbia?

Nevena Milošević

Attorney at Law


Two years ago, the Serbian National Assembly adopted the Alternative Investment Funds Act („AIFA“), the first domestic law regulating Venture Capital funds (“VC fund”), that has been applicable since April 2020. Considering the fact that Serbia is well known as a competitive country in the technology field, the expansion of the Serbian Venture Capital market was reasonably expected.

Unfortunately, this expectation was not met. According to the public records, one Venture Capital fund has been established so far.

However, this fact is not surprising bearing in mind that “AIFA” started applying in the moment when the whole world was faced with the Covid-19 pandemic that severely disrupted business plans and investments around the globe. Since the planet is starting to get back to normal, Venture Capital funds became again one of the attractive possibilities for potential business and investment in Serbia.

What Are Venture Capital Funds?

Venture Capital funds are private placement alternative investment funds (“AIFs”), that can be established as open-ended or closed-ended AIFs, investing their capital in startups and other newly established companies or companies that are in the initial stage of development.

What does this practically mean?

  • First of all, a Venture Capital fund is a private placement AIF, meaning that its units cannot be offered through a public offering, but rather through a private offering to professional and so-called semi-professional investors.
  • AIFA distinguishes two forms of AIFs: open-ended and close-ended AIFs. The main difference between these AIFs is that the holders of units of an open-ended AIF may request from AIF to repurchase its units at any time, while holders of units of a closed-ended AIF do not have such right.
  • A Venture Capital fund is a special type of AIF that is established with the main goal to invest in startups and other companies at the initial stage of business development.

Who Can Establish Venture Capital Funds?

venture capital funds

According to AIFA, Venture Capital funds (as well as all other types of AIFs) can only be established and managed by alternative investment funds management companies (“Management Companies”). Management Companies are legal entities headquartered in Serbia whose regular business activity is managing one or more AIFs. It is important to note that AIFA also recognizes close-ended AIFs with internal management, that is at the same time both, AIF and Management Company.

There is no limitation on the number of Venture Capital and other types of funds that one Management Company can establish and manage. One Management Company can establish and manage one Venture Capital fund but also can establish and manage several Venture Capital funds, as well as any other type of AIFs, such as private equity fund or real estate fund. In other words, one Management Company can establish several AIFs, regardless of the AIFs’ type, provided that all conditions defined under AIFA are met.

Depending on the value of AIFs’ assets managed by the Management Company, AIFA distinguishes two types of Management Companies: small and large. Management Company must be established as a large one:

  • If the value of the assets of AIFs managed by the Management Company exceeds EUR 25 million, provided that such AIFs use financial leverage; or
  • If the value of assets of AIFs managed by the Management Company exceeds EUR 75 million, provided that such AIFs do not use financial leverage and the investors do not have the right to request from AIF to repurchase their units for 5 years as of the date of their initial investment.

Consequently, if the value of the assets of the AIFs managed by one Management Company does not exceed the said amounts, it can be organized as a small one.

In order to establish a Management Company,

a license from the Securities Commission (“Commission”) is required. To obtain such a license, both small and large Management Companies must fulfill a set of conditions, defined under the AIFA and applicable bylaws. However, in order to ease the entry into the AIF market in Serbia, AIFA imposes less restrictive requirements for small Management Companies, compared to those large Management Companies must fulfill.

venture capital funds

Also, the AIFA imposes certain capital requirements that Management Companies must fulfill. Depending on the type of Management Company, such capital requirements differ:

  • The minimum monetary capital for the large Management Companies amounts to EUR 125,000.00 (or EUR 300,000.00 for the close-ended AIFs with internal management); and
  • The minimum monetary capital for the small Management Companies amounts to EUR 70,000.00 (or EUR 150,000.00 for close-ended AIFs with internal management).

Management Companies can have non-monetary capital as well, but the above-mentioned monetary capital requirements must be fulfilled at any time.

It is important to note that a small Management Company may become a large Management Company and vice versa, after obtaining Commission’s approval. Namely, it can be expected that a Management Company will be initially established as a small one. However, after a certain period, the value of assets of AIFs managed by such a Management Company may grow and the Management Company will be obliged to transform into the large one. Of course, to obtain a license for a large Management Company it is necessary to fulfill capital requirements from the above, as well as all other requirements defined under AIFA and applicable bylaws.

Does Venture Capital Fund Need a License?

venture capital funds

Yes, the VC fund also needs a license. Prior to establishing a VC fund, the Managing Company must obtain Commission’s license.

For obtaining the license, the Managing Company must provide adequate proofs that the set of conditions defined under AIFA are fulfilled. These requirements can be divided into two groups:

  • Conditions that are related to a VC fund that will be established.
  • Conditions that are related to a Management Company.

Depending on a form of a VC fund (i.e., depending on if a VC fund is established as a legal entity or a separate set of assets) AIFA imposes different requirements that must be fulfilled. In addition to these requirements, each VC fund must have the operating rules, that define all important characteristics of the VC fund, based on which investors can decide whether they will invest in the VC fund or not. Moreover, the Management Company has an obligation to conduct the risk assessment for the VC fund before applying for a license, as well as the investment strategy, and to ensure that the VC fund fulfills all other conditions defined under the law and applicable bylaws.

Despite the fact that the Commission granted a license to the Management Company before it was registered, the Management Company must also provide the Commission with the documentation proving that it has the adequate organizational structure to manage the VC fund.

Who Monitors Venture Capital Fund’s Assets?

Another important player in the Venture Capital funds’ life cycle is a depository – an entity responsible for the safekeeping, cash monitoring, and oversight of the AIF’s assets. Each VC fund (as well as all other of AIFs) must have a depositary that is appointed by the Management Company.

According to AIFA, a depositary may be a credit institution incorporated in Serbia, that has the approval of the Commission for a specific fund. Together with the application for a VC fund license, the Management Company must file a request for issuance of approval for the depository. There is no general approval for depositary, but the Commission decides whether the Managing Company hired an adequate financial institution as a depositary of the specific VC fund.

If the Management Company desires to change a depositary of VC fund, it must obtain prior written approval from the Commission.

Investments by Venture Capital Funds

VC fund is an AIF-a that invests its capital in startups and other companies in the initial stage of business development. The AIFA imposes certain limitations when it comes to the investments of Venture Capital funds. Namely, at least 70% of the VC fund’s assets must be invested in startups, companies that are in the initial stage of development, or other newly established companies, while up to 30% of its assets can be invested in other properties.

VC fund’s investment policy must be determined under the operating rules. Additionally, operating rules must provide information about the asset into which the VC fund will invest, as well as all potential risks and investment limitations.

Who Invests in Venture Capital Funds?

venture capital funds

As we mentioned above, Venture Capital funds are private placement funds. Hence only professional and so-called semi-professional investors can invest in Venture Capital funds. In other words, retail investors cannot invest in VC funds.

Professional investors are persons who are licensed and monitored by a relevant supervisory authority for their operations in the financial market (such as credit institutions, insurance companies, pension funds, collective investment institutions, etc.), Republic of Serbia, autonomous provinces, and local government authorities, as well as other states or national and regional authorities, the National Bank of Serbia and central banks of foreign states, international and supranational institutions (such as the International Monetary Fund, the European Central Bank, the European Investment Bank, and other similar international organizations). Additionally, professional investors are also legal entities that fulfill at least two out of the following three criteria:

  • The total value of assets amounts to a minimum of EUR 20,000,000;
  • The annual business revenue amount to a minimum of EUR 40,000,000;
  • Have funds in the minimum amount of EUR 2,000,000.

Semi-professional investors are retail investors that fulfill the following criteria:

  • Have undertaken to make a one-off investment in an AIF in the minimum amount of EUR 50,000; and
  • The Management Company determined that they have sufficient experience in the capital market and professional knowledge to understand investment risks and to determine whether the AIF meets their investment objectives.

AIFA does not define criteria for semi-professional investors in detail, but it leaves it to the Management Companies to determine whether the retail investor is qualified to be a semi-professional investor or not in each specific case. The Management Company must conduct a detailed check of a potential semi-professional investor and keep the documentation that proves that it has all the necessary qualifications for a semi-professional investor.

Serbia is well known as a country that has highly qualified technology experts with great educational backgrounds and a fast-growing IT market. It can be reasonably expected that during the following years the Serbian Venture Capital funds market will develop into a strong competitive market that will offer attractive investment opportunities. Do you plan to take part in such development?

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