The Regulation On Venture Capital:A Study Of West And East Africa And The European Union

Venture Capital(VC)regulation is an area of interest and concern in many parts of the globe.Different procedures and practices have emerged in the VC sector over years,in an environment characterized by uncertainty and information asymmetries among key agents.According to WordWeb dictionary,VC is wealth available for investment in new or speculative enterprises.Venture capitalists are particularly oriented towards financing the early stages of an enterprise's existence,including seed financing,start-up and spin-off of new products,services or processes,mainly in sectors that are strong in scientific research or technology.VC firms are experts at solving problems of moral hazard and asymmetric information and thereby earn their keep by bridging the gap between financiers and entrepreneurs.VC provides finance to undertakings that are generally very small,that are in the initial stages of their corporate existence and that display a strong potential for growth and expansion.In addition,venture capital funds provide undertakings with valuable expertise and knowledge,business contacts,brand equity and strategic advice.It is easier to begin the description of VC by explaining what venture capital is not.It is essential to emphasize on the difference between VC and other forms of financial investments(?).The loan that a bank makes to a business is not VC.The stocks and bonds an investment company buys on the New York stock Exchange do not involve venture capital.A real estate investment company buying apartment buildings,shopping centers,and so on is not investing in VC.A subsidiary of a bank that makes investments in small business could be using venture capital.Some investment companies that buy new issues of public traded companies might also be considered investors of VC.If a group of friends get together and put some money into a small business to get it off the ground,the investment may be a type of venture capital.If someone buys stock in a private company that is starting to manufacture a new type of machine,the money invested is traditionally known as high technology venture capital.The equity money put up to buy a business is considered VC.The money invested in a new company that shows a potential for fast growth is venture capital.In simple words,a VC investment is characterized by high risk.It does not matter how the investment is structured,whether it is an equity investment that generates long term capital gains,or a high risk,loan that gives the venture capitalist a 25 percent return on his investment.If high risk loans qualify,then you might ask yourself ‘what is the difference between a finance company and a venture capital company? A venture capitalist will be more involved in the business than a finance company.He frequently reviews company operations and constantly makes suggestions.He is,in essence,a business partner.Note that institutional money is now considered as venture capital and there are many institutions with the sole function of investing in venture situations.In view of the above definition of VC,it's obvious that this specific area of business and finance cannot progress without a clear and organized regulation.This is particularly true because of the risky character of VC but also because it always involves obligations between two or many parties.Therefore,it is necessary to discuss the ramifications of VC regulation.Some of the most important regulatory institutions in VC are discussed in this paper specifically in Europe and some parts of Africa.Before we engage in a discussion of the regulation,we need to define and understand what a regulatory system is.In fact,it's a system designed to police certain individuals,practices,firms or markets.In the case of VC,the reason for a regulatory system,is to bring investors,investees and all other actors into conformity with rules designed to create fair practice.An example is the Financial Conduct Authority(FCA)in the UK.The regulatory system is thus,administrated by company law and financial law.While VC is commonly associated with America's Silicon Valley and other western economies that have embraced to varying degrees economic liberalism,its footprint is recognized on the African continent as well.AVCA(African Venture Capital Association)represents the private equity and venture capital industry in Africa and serves as a regulatory body for Africa.AVCA was established in 2002 and its head office is in Yaoundé,Cameroon.AVCA's membership is drawn from across Africa and internationally.AVCA's objectives are to represent the industry within Africa and internationally,stimulate the growth and expansion of the industry throughout Africa,stimulate professional relationships and co-operation,provide opportunities for professional development of industry practitioners,research,publish and circulate industry information and insights,provide policymakers with proposals to improve the corporate,fiscal and legal environment for the industry,maintain high ethical and professional standards and contribute to the management development of investors,investees and other stakeholders.At the European Union level,a series of amendments and introductions of new rules have been designed to facilitate the mobilization of funds into Venture capital and Private Equity.New regulations such as the Eu VECA Funds Regulation whose purpose is to facilitate access to finance for small and innovative firms,were introduced in the EU.The regulation has set new measures consisting of making it free for venture capital firms to market their funds across Europe making it a phenomenon.Three countries within the EU,hosted the world's top 10 best performing startups in 2018,which is an indication that the VC industry in the EU will continue to perform well in the next couple of years.A lot of these results were made possible by favourable regulations in the EU.This paper examines VC regulation in Africa and in Europe.It is based on a mixed-methods study of three representative cases across two geopolitical entities.Using the European Union,East Africa and West Africa,this paper analyzes venture capital regulation employing a rather comparative lens.Due to the lack of data on the African side,we used Germany,Kenya and Nigeria as a representation for each region we analyse.Therefore,this research succeeded in providing sufficient results considering the lack of scholarly research on the African continent with respect to venture capital and therefore lays the platform for robust engagement with the subject.Despite the lack of investments in Africa,the VC industry is growing with great challenges such as low competitiveness.In contrast,venture capital in the European Union has enjoyed a longer lifespan.However,the experiences and performance of VC in that part of the world have tended to vary with some economies doing much better than others.In regulatory terms,this has not had much effect because concerns are generally similar across the regions.It is the institutional differences which however appear to tip the scales in favor of one region over another,resultantly;it is advisable to attend to such institutional issues for better growth.This study discussed quickly,the Chinese policy changes towards VC as it constitutes a reference for economic growth and organizational governance.Many developing countries in West and East Africa could follow the reforms adopted by China to develop the Venture Capital industry.Another big issue evaluated by investors in venture capital was the security of intellectual property.Therefore,the study asked whether there was a regulatory system for patents to protect startups and what would be the role of VC firms in this regard.Normally,a solid position in patents is desired and the questions of intellectual property must be included,especially when the inventor performs research in a university or another research establishment.VC investors must also consider all potential costs linked to patents and to their protection.To take into account these factors,startups need a strong intellectual property protection to remain competitive worldwide especially at a time when technological innovation is crucial to economies.The Organisation for economic Cooperation and Development(OECD)showed that the positive changes initiated in the legal and regulatory framework of the regimes of patents in Europe for example drew an increase in the number of new patents.This paper addresses the real effects of VC regulations on Direct Investments.I studied how incentives and investor protection can both increase the number of investors and stimulate the creation of new firms.That's a positive implication of the regulatory system because the application of the rules whether in business or any area of finance would have a positive impact on companies and economic growth.Most importantly this research discusses the legal side by analyzing the regulatory environment and tries to shed light on some problems that discourage investors.I have demonstrated throughout the paper,what the role of the regulation is and how to facilitate investment procedures as well as the many requirements especially in the East and West African region.The results found that there is a profound link between an unsupportive regulatory environment and the decision of VC firms to come in those countries as investors.Throughout the research we found a couple of issues that are linked to corruption at some level,mismanagement of projects,small domestic deal sizes and the bankable deals in the Sub-Saharan region.There is a huge need for funding,but a lot of work is being done by governments to attract investors notably in VC firms and incubators.Another issue found was the language barrier;VC seems to work better for English speaking countries.The reason being that most VC firms are from English speaking countries where the VC culture is more developed and naturally feel more comfortable being in an English speaking environment,at least for Africa this is valid.It is also found that VC is not reliant on complex financial wizardry for its success but on experienced specialists who know very well the industry they are investing in and what decisions to take.Some of the solutions are a better promotion of the potential that Africa has to offer and an improvement of the climate of affairs by applying new policy reforms in these countries in order to attract more investors.Moreover the contribution of pension funds and High Net Worth Individuals is crucial to the development of VC in Africa.Finally,this research observes that effective institutions may not be an obstacle to capital but instead are a catalyser for innovation and economic growth.With the correlations found in this paper,between capital and investor protection as well as capital and taxation levels,a case is made for the need in new reforms and regulatory institutions especially in East and West Africa.