INDICATIVE TERM SHEET - FMFIB · INDICATIVE TERM SHEET ... Market Test The process of preliminary...

EUROPEAN UNION European Regional

Development Fund

INDICATIVE TERM SHEET

Technology Transfer Fund

This Indicative Term Sheet is structured of:

Definitions and Abbreviations I. Disclaimer II. Introduction III. Indicative Terms and Conditions

FMFIB Tech Transfer Fund

Draft term sheet December 2016

FOR DISCUSSION PURPOSES ONLY

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Definitions and Abbreviations

BGN Bulgarian Lev – National currency of Bulgaria

CPR “Common Provisions Regulation” - Regulation (EU) No 1303/2013 of the European parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006; OJ L 347/320, 20.12.2013

DA “Delegated Act” - Commission Delegated Regulation (EU) No 480/2014 of 3 March 2014 supplementing Regulation (EU) No 1303/2013 of the European Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund; OJ L 138, 13.5.2014

EC European Commission

EU European Union

ESIF European Structural and Investment Funds

ERDF Regulation Regulation (EU) No 1301/2013 of the European Parliament and of the Council of 17 December 2013 on the European Regional Development Fund and on specific provisions concerning the Investment for growth and jobs goal and repealing Regulation (EC) No 1080/2006; OJ L 347, 20.12.2013

IP Investment Priority

GBER “General Block Exemption Regulation” - Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty; OJ L 187, 26.6.2014

GMO Genetically Modified Organisms

Financial Instrument The Technology Transfer Fund

FMFIB The Fund Manager of Financal Instruments in Bulgaria

FoF The Fund of Funds

Funding Agreement The Funding Agreement signed between FMFIB and the Managing Authority of OPIC on 1 August 2016.




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Market Test The process of preliminary discussions with market participants and evaluation of the market environment for the implementation of the Financial Instrument.

OP Operational Program

OPIC Operational Program “Innovation and Competitiveness” 2014-2020

Follow-on investment Means additional investment in a company subsequent to one or more previous investment rounds.

Pari Passu The implementation of parri-passu prinple means “like risk, like

reward” as further specified in section 2.1.1 of the Guidelines on State aid to promote risk finance investments.

Independent Private Investors

As per art. 2, par. 72 of the GBER and item 52, (xvii) of the Guidelines on State aid to promote risk finance investments1 ‘independent private investor’ means a private investor who is not a shareholder of the eligible undertaking in which it invests, including business angels and financial institutions, irrespective of their ownership, to the extent that they bear the full risk in respect of their investment. Upon the creation of a new company, private investors, including the founders, are considered to be independent from that company

Irregularity Means any breach of Union law, or of national law relating to its application, resulting from an act or omission by an economic operator involved in the implementation of the ESI Funds, which has, or would have, the effect of prejudicing the budget of the Union by charging an unjustified item of expenditure to the budget of the Union

Small and Medium Sized Enterprise (SME)

A micro, small or medium sized enterprise as defined in Commission Recommendation 2003/361/EC2 and in the Annex 1 of the GBER as amended from time to time concerning the definition of micro, small and medium-sized enterprises. For other details please see Annex 1 of this Indicative Term Sheet.

Innovation The Investment of the Fund(s) should promote Innovation as defined in Manuel d'Oslo 3e édition© OECD/EUROPEAN COMMUNITIES 2005), namely: implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organisation or external relations. As a minimum requirement to be classified as an innovation the product, process, marketing method or organisational method must be new (or significantly improved) to the firm. Types of innovation: a) A product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics.

1 OJ C 19, 22.1.2014 2 Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124,

20.5.2003, p. 36).




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b) A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. c) A marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. d) An organisational innovation is the implementation of a new organizational method in the firm’s business practices, workplace organisation or external relations.

Technology Transfer Technology Transfer may include activities carried out by enterprises exploring: - the viability of converting research, development, skills, knowledge, technologies or innovations into commercial applications, products, processes or services; and/or - the transfer of products, processes or services existing in developed markets, into non-developed ones where such activities are currently not yet explored, tested in, adapted or not commercialised. Such activities may take any of the following forms: - Commercial demonstration and commercialisation (including but not limited to development, demonstration, prototyping, market development, scaling up, and support less developed technology transfer infrastructures). - IP out-licensing, IP in-licensing or optimisation thereof, cross-licensing activities (including via project financing), sale of patents. - Creation of new companies, including via spin-outs. - Business planning support, starting spin-offs or joint ventures, and building strategic alliances with other organizations. - Collaboration between universities, research organisations and industry notably via research/consulting contracts.




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I. Disclaimer

The Term Sheet provided herein is prepared for information purposes only. The document summarises the key indicative characterstics of the Financial Instrument “Technology Transfer Fund”, financed by Operational Program “Innovation and Competitiveness” (“OPIC”) and is subject to further changes and amendments. The document is prepared in view of conducting a Market Test for the Financial Instrument (“FI”). The final contents of this document are subject to review and approval by the Fund Manager of Financial Instruments in Bulgaria EAD (“FMFIB”) and the respective managing authorities.

II. Introduction

The Financial Instrument provides support under the Operational Program “Innovation and Competitiveness” (“OPIC”). OPIC contributes to the achievement of the three complementary types of growth according to the "Europe 2020" strategy.

Priority axis 1 “Technological development and Innovation” of the OP is directly engaged in achieving smart growth through investments in developing an economy based on knowledge and innovations.

In accordance with Thematic Objective 1 "Strengthening research and development, technological development and innovation", Priority axis 1 supports the Investment priority under ERDF Regulation related with the promotion of investment in the development of products and services, technology transfer... ". Considering that the priority axis aims at directly contributing to promotion of innovation activity of enterprises in the thematic areas identified in ISSS.

The Ex-ante assessment on the implementation of the FIs under the OPIC, conducted in 2014 has established the need for implementation of financial instruments under Priority axis 1 in order the investments in innovations to be to increased and new funding models to be introduced especially in the areas of commercialization and transfer of knowledge.

Within the Priority axis, an amount of EUR 60 million has been envisaged to be implemented via financial instruments in order to increase the investments in R&D and innovation activities. The implementation of financial instruments to encourage innovation and technology transfer will increase the effectiveness and efficiency of funding due to the application of market-oriented approach to the assessment of innovation and economic relevance of funded activities.

The use of FIs within the Priority axis includes an instrument for equity and/or quasi equity investments in technology transfer, commercialization of scientific results, intellectual property rights, new ideas and products.The expected contribution of the instrument to the specific objective of the investment priority is related with the reducing of gap between science and business, commercial application of the research results, development of a favourable innovation environment, attraction of foreign investments and know –how, the introduction of the Bulgarian enterprises and innovators on the international market.

In order to address the established market inefficiencies and suboptival investment situations, the Managing Authority of OPIC has appointed FMFIB as the manager of the Fund of Funds (“FoF”), according to the Funding Agreement between the Managing Authority of the Operational Program “Innovation and Competitiveness” within the Ministry of Economy and the “Fund Manager of the Financial Instruments in Bulagaria” EAD (“FMFIB”) signed on 1 August 2016 and according to:

- Art. 38, par. 4, (b) of the CPR,

- Art. 5, par. 2 and 3 of the Management of Resources from the European Structural and Investment Funds Act,

- Art. 14, par.1, item 7 of the Public Procurement Act and

- Council of Ministers Instruction No 3 of 22 July 2015 as amended by - Council of Ministers Instruction No 5 of 23 September 2015

In accordance with the Funding Agreement, FMFIB is managing the funds provided by OPIC to the FoF, to be invested as financial instruments by the FoF on behalf of the Managing Authority of




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OPIC. Therefore, FMFIB is implementing a number of processes in accordance with the Funding Agreement, including but not limited to:

a) Identification, evaluation and selection of appropriate Financial Intermediaries which shall enter into Operational Agreements with the FoF for the implementation of the Financial Instrument which includes inter alia:

- Analysis and preparation of indicative term sheet of the Financial Instrument;

- Conducting consultations with market participants and evaluation of the market environment for the implementation of the Financial Instrument (Market Test);

- Prepartion and carrying out of a Selection Process for Fund Manager(s) to invest and manage the Financial Instrument;

b) Negotiating, signing and if needed amending the Operational Agreements for the Financial Instrument with the Fund Manager(s);

c) Management and monitoring of the Financial Instrument;

d) Risk management, operational; and financial reporting.

The Selection Process by which FMFIB will appoint the Fund Manager(s) and the ongoing implementation shall be conducted in an open, transparent, proportional and non-discriminatory manner in accordance with applicable law and regulations including Art. 37, par. 5 of the CPR and Art. 6 and 7 of the DA

The current document includes an indicative term sheet for the Financial Instrument – “Technology Transfer Fund” and outlines the key indicative terms to be used in discussions with market partipants during the Market Test which is expected to continue at the latest until 10 February 2017.




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III. Terms and Conditions of the Operational agreement

The Fund(s) or Financial Instrument

The Fund(s) will be established in accordance with the investment strategy of the Financial Instrument and legal acts governing the operations of the FMFIB and the Financial Instrument including but not limited to EU and national legislation on ESIF, state aid and public procurement rules, relevant standards and applicable legislation on the prevention of money laundering, the fight against terrorism and tax fraud as specified in the respective sections of this Term Sheet.

The Fund(s) shall be established as a closed-ended investment vehicle(s). The overall structure may consist of a General Partner / Investment Manager / Fund Manager, Investment Advisor and related entities, as well as Limited Partners / Investors.

Following discussions with market participants and analysis of the current market environment during the Market Test, one or more investment funds may be established in accordance with the investment strategy of the Financial Instrument, the rules and regulations specified herein and the laws of the country of incorporation of the Fund(s), including laws transposing EU legislation for the requirements to and the supervision of the investment funds.

Following the discussions with market participants during the Market Test, taking into account the the prospective investment strategies and in accordance with the applicable regulations, two types of State Aid Regime (SAR) may be applied:

SAR I: Fund(s) attracting a minimum of 10% commitments from Independent Private Investors and are targeting SMEs which have not been operating in any market are subject to compliance with GBER and/or

SAR II: Funds(s) attracting a minimum of 30% commitments from Independent Private Investors, applying parri passu principle and targeting SMEs and Large enterprises are subject to compliance with the Guidelines on State aid to promote risk finance investments (state aid free).

Fund(s) Objectives

To invest in a diversified portfolio of enterprises focused on supporting the technology transfer and innovation in Bulgaria, in particular:

- supporting the research and development activities of enterprises;

- increasing/establishing the innovation capacity and resources;

- improving the cooperation between enterprises and/or enterprises and research organisations that develop and/or implement new or significantly improved processes and products;

- supporting the commercialisation of innovations resulting into products, processes and technologies;

- acquisition, management and commercialization of intellectual property.

Types of Investments

The Investments of the Fund(s) can be made in the form of equity or quasi-equity.

Target Group of Investees

Target Group of Investees may include: enterprises located in Bulgaria, cooperating with other Bulgarian or European enterprises and/or universities or other higher education institutes and/or research organisations; science and innovation organisations and bodies; innovation and technology intermediaries; R&D-related spin-off organisations and enterprises; innovation and high-tech enterprises; enterprises engaged in research activitites; knowledge-based enterprises and/or; other participants engaged in the innovation ecosystem.




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Eligible Investees / Eligible Investments

The Fund(s) shall invest in Eligible Investees and Eligible Investments:

1. Eligible Investees include enterprises which at the time of the initial investment are not listed and:

i) have an establishment and/or branch and/or headquarters in the Republic of Bulgaria at the moment of investment;

ii) are not manufacturing, processing and marketing of tobacco and tobacco products;

In case SAR I is applied:

iii) are SMEs which have not been operating in any market3;

iv) are not “undertakings in difficulty” according to Article 2, par. 18 of Regulation EU № 651/2014;

v) are not subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market, with the exception of aid schemes to make good the damage caused by certain natural disasters;

In case SAR II is applied:

vi) are not “undertakings in difficulty” according to points 20 and 24 of the Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty (OJ C 249, 31.7.2014);

2. Eligible Investments are:

i) Investments that may be implemented outside of the programme area but within the European Union and where the benefit of the investment is for Bulgaria, subject to all conditions and thresholds as per art. 70 of the CPR are met;

ii) Investments that are not physically completed or fully implemented at the date of the investment decision;

iii) Investments where the total investment amount is up to EUR 5 milion;

iv) Investments where there are property rights in enterprises, the transfer takes place between independent investors;


v) Investments are based on a viable business plan, containing details of product, sales and profitability development, establishing ex-ante financial viability;

vi) Investments that have a clear and realistic exit strategy is envisaged for each equity and quasi-equity investment;

vii) Investments in cases where replacement capital is envisioned support may be provided only if the latter is combined with new capital representing at least 50% of each investment round into the eligible undertakings;

viii) Investments where are envisioned follow-on investments are eligible under following conditions:

a. the possibility of follow-on investments was foreseen in the original business plan;

b. the undertaking receiving follow-on investments has not become linked, within the meaning of Article 3(3) of Annex I of the GBER with another undertaking other than the financial intermediary or the

3 Before the first sale by a company on a product or service market, excluding limited sales to test the market




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independent private investor providing risk finance under the measure, unless the new entity fulfils the conditions of the SME definition;

c. the investment is made before the expiry of the 7 year period after the first commercial sale, otherwise the requirement for 60% private investors participation under art. 21, par.10, (c) of the GBER shall be applied.

Investment Areas / Sectors

The investments of the Fund(s) will be provided to Investees primarily operating in in four thematic areas of smart specialisation that are in line with the Strategic objectives 1 and 2, of the Innovation Strategy for Smart Specialisation of Bulgaria 2014-2020(“ISSS”) https://www.mi.government.bg/en/themes-c141.html, namely:

Mechatronics and clean technologies;

Informatics and information and communication technologies;

Industry for healthy life style and biotechnology;

New technologies in creative and recreational industries;

And;

Support for accelerated implementation of technologies, methods and others, improving the resources efficiency and application of ICT in the enterprises in all industries.

Ineligible Invesments

The Fund(s) shall not invest, complete investments or otherwise support the following activities:

i) the decommissioning or the construction of nuclear power stations;

ii) investment to achieve the reduction of greenhouse gas emissions from activities listed in Annex I to Directive 2003/87/EC;

iii) investment in airport infrastructure unless related to environmental protection or accompanied by investment necessary to mitigate or reduce its negative environmental impact.

iv) the financing of the same expenditure items where the conditions under art. 37, par. 7, 8 and 9 of the CPR are not satisfied;

v) the refinancing or restructuring of existing loans or leases;

vi) the pre-financing of a grant;

vii) any investment affected by an irregularity or fraud;

viii) pure financial activities or real estate development when undertaken as a financial investment activity;


ix) investment directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current costs linked to the export activity;

x) investment contingent upon the use of domestic over imported goods;

xi) investment to facilitate the closure of uncompetitive coal mines, as covered by Council Decision No 2010/787;

xii) investments which are subject to the obligation for the investees to use nationally produced goods or national services;

https://www.mi.government.bg/en/themes-c141.html




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xiii) investments restricting the possibility for the investees to exploit the research, development and innovation results in other Member States.

Excluded sectors The Fund(s) shall not invest in restricted sectors which shall be set out in the agreements and shall include inter alia those activities on the harmonized exclusion list of the European Development Finance Institutions (EDFI). In addition to the above, the financing of projects is excluded, when the following activities form a substantial part of a project sponsor’s primary operations or those of the project:

– Production or trade in (a) weapons and munitions (b) tobacco (c) hard liquor;

– Gambling, casinos and equivalent enterprises;

Production or trade in genetically modified products (GMO).

State Aid regime State Aid regime еnvisaged to be:

(i) In cases where investees consist of SMEs, that have not been operating in any market – subject to state aid scheme under Article 21 of the GBER or;

(ii) In all other cases and in case pari-passu principle is applied – subject to state aid free measure as per Section 2.1 of the Guidelines on State aid to promote risk finance investments.

The elements of the State Aid regimes are incorporated in this term sheet.

Domiciliation / Legal form / Governing law

The domiciliation, legal form, documentation and governing law of the Fund(s), the Fund Manager(s) and related vehicles will be proposed and established by the Fund Manager(s) in the European Union,(unless otherwise agreed with FMFIB) and will be acceptable to FMFIB.

The Fund(s), the Fund Manager(s) and any other entities involved in the implementation of the Financial Instrument shall not be established, and shall not maintain business relations with, or invest in or through, entities incorporated in territories whose jurisdictions do not co-operate with the European Union in relation to the application of the internationally agreed tax standard and shall transpose such requirements in their agreements with Investees.

All relevant documentation in relation to the Selection Process will be in Bulgarian language.

The legal documentation of the Fund(s) shall be in English language or bilingual

with the English version prevailing.

Currency The currency of the Fund(s) shall be BGN.

Fund Size and Fund Closings

The size of the Fund(s) will depend on the proposed terms and the investment strategy of the Fund Manager(s) and will comprise of the aggregate commitments from its Investors. The target fund size and minium size of the First Closing will be determined following discussions with market participants at the Market Test.

The Fund(s) will aim to raise the investment capital in stages (Fund Closings) where two or more Investors will unconditionally commit capital to the Fund(s). Unless otherwise agreed, the Investment Period of the Fund will start from the date of First Closing of the Fund(s) and FMFIB will participate in the First Closing of the Fund(s). After the Final Closing no commitments will be accepted by the Fund(s). The date of the Final Closing will be agreed with the Fund Manager(s).




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Indicative FMFIB Commitment

FMFIB maximum commitment under the financial instrument will be a total of ~BGN 56.5m including Management Fee of the Fund Manager(s).

The commitment of FMFIB will be conditional upon the Fund(s) achieving the conditions precedent to closing the Fund(s) that will be outlined in the operational agreements and the Final Term Sheet.

The FMFIB commitment may be provided in tranches at each closing of the Fund. It will be determined in accordance with the applicable State Aid Regime and may be between 70% and 90% of the Total Fund Commitments in particular:

i) In case of SAR I: FMFIB may commit no more than 90% of Total Fund Commitments to Fund(s) investing in enterprises that are SMEs and have not been operating on any market as outlined in art. 21, par. 5, (a) and par. 10 (a) of the GBER.

ii) In case of SAR II: FMFIB may commit no more than 70% of Total Fund Commitments to Fund(s) investing in all categories enterprises;

Commitments of the Independent Private Investors

The Fund(s) will receive commitments of:

i) In case of SAR I: no less than 10% of Total Fund Commitments from Independent Private Investors in case the Fund will invest only in SMEs under art. 21, par. 5, (a) of the GBER or

ii) In case of SAR II: no less than 30% of Total Fund Commitments in all other cases.

The expected aggregate commitment to the Fund(s) to be attracted from Independent Private Investors shall be indicated in the Selection Process.

Commitment of the Fund Manager(s)

The Fund Manager(s) is expected to make a meaningful financial commitment to the Fund in order to enhance the alignment of interest between the Fund Manager(s)and the Investors in the Fund.

The Fund Manager(s) will include a proposal in relation to the level of financial commitment to the Fund(s) during the Selection Process.

The commitment of the Fund Manager(s) will be considered as a commitment from an Independent Private Investor under the requirements of art. 21, par. 5, (a) of the GBER.

Portfolio diversification

The Fund(s) may not invest more than BGN 9.7 million in a one Investee including follow-on investments. Further diversification limits may be specified in the Final Term Sheet. During the operation of the Fund(s) these limits may be reviewed and waived with the prior approval of the Advisory Committee provide that such amounts may shall not exceed at the amount set out in art. 21, par. 9 of the GBER (in case of aid scheme).

In case the Fund is established under the GBER the Financial intermediary shall ensure an appropriate risk diversification policy aimed at achieving economic viability and efficient scale in terms of size and territorial scope of the relevant portfolio of investments

Fund Term The Fund(s) will have an initial fixed term of 10 years starting from the date of First Closing.

With the approval of Investors, the Fund may be terminated before the end of the Fund Term or the Fund Term may be extended with the approval of Investors by two consecutive one-year periods to provide for the orderly realisation of the Investments.




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Investment Period The Investment Period will run from the date of First Closing and will end at the earlier of:

(i) the end of the fifth anniversary of the date of First Closing;

(ii) 31 December 2023;

(iii) such time when 80% of Total Fund Commitments have been invested or committed pursuant to legally binding documents for investments or have been reserved for follow-on investments, or Management Fee of the Fund(s);

(iv) the First Closing of a successor fund; or

(v) other Investor protection clauses, such as Key-person clause etc.

If the Fund’s capital commitments have not been fully drawn down during the Investment Period, the Investment Period may at the request of the Fund Manager, be extended by up to one year, subject to consent by the Investors and provided that the requested period of extension is before 31 December 2023.

Follow-on Investments

If (a) the Operational Agreement between the Fund(s) and FMFIB was signed before 31 December 2017 and (b) at least 55% of funding committed in the Operational Agreement has been drawn down for investment in Investees or payment of Management Fees until the end of the Eligibility Period, then up to 20% of the total disbursements (less realisations) until the end of the Eligibility Period may be available for follow-on investments for a period not exceeding four years after the end of the Eligiblity Period, subject to the conditions set out in Article 42(3) of the CPR.

Disbursements Fund Commitments will be disbursed proportionately on as needed basis to make investments or to provide funds to satisfy the Management Fee of the Fund(s). Investors will receive a minimum of 10 business days’ prior written notice except for the first drawdown which shall require 20 business days’ notice.

As per Art. 42 and art. 65, par. 2 of the CPR, the FMFIB Commitment should be disbursed to Investees and for payment of Management Fee in full before the end of the Eligiblity Period.

Ranking of FMFIB and the Independent Private Investors

The ranking of FMFIB and the Independent Private Investors in the distribution cascade of the Fund(s) will be “pari-passu”.

Options for assymentric return profiles i.e. potential for upside incentive and/or downside protection for Independent Private Investors can be also considered in case of State Aid Regirme under art. 21 of the GBER and will be determined following the discussions with market participants at the Market Test.

Distribution Cascade

Indicative distribution pari-passu cascade of the Fund(s) is as follows:

After payment of the Management Fee of the Fund(s), any distributions which are made will be made as follows:

(i) First, 100% to the Investors until the Investors (pro rata to the amount of their respective commitments) have received distributions equal to their aggregate capital contributions;

(ii) Second, 100% to the Investors (pro rata to the amount of their respective commitments) until they have received the Hurdle Rate;

(iii) Third, 100% to the Fund Manager until it has received an amount equal to 25% of the Hurdle Rate (“Catch-up”), if any;




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(iv) Fourth, distribution to the Investors (pro rata to the amount of their respective Fund Commitments) and the Fund Manager (“Carried Interest”).

Hurdle Rate - the cumulative annual rate of preferred return to the Investors calculated on the drawn-down contributions that are not yet returned. The rate will be determined in accordance with market practice and the requirements of the Financial Instrument following the discussions with the market participants at the Market Test.

Carried Interest – the split of profits between the Investors and the Fund Manager(s) in the proceeds of the Fund(s) after the amounts in paragraphs (i), (ii), and (iii) above have been satisfied. The percentage split between i.e. rate of Carried Interest to be received by the Fund Manager(s) in the Fund(s) will be proposed by the Fund Manager(s) during the selection process.

The Distribution Cascade may be amended following discussions with market participants at the Market Test.

Management Fee

The Fund Manager(s) shall be entitled to Management Fee which shall be proposed by the Fund Manager(s) during the selection process and outlined in the agreements.

The Management Fee will be paid from First Closing until 31 December 2023 (the “Eligibility Period”), the Fund Manager will receive Management Fee on an annual basis and will be calculated as a percentage of the Total Fund Commitments during the investment period and as a percentage of the invested capital less realisations and/or write-offs and write-downs thereafter (a maximum percentage of Management Fee will be determined prior to launching the Selection Process).

The Management Fee shall include any fees, expenses and costs necessary to set up and manage the Fund(s).

Indicative management costs and expenses may include:

Management costs of Fund Manager(s) related to the operation of the Fund Manager(s). including but not limited to: salaries and remuneration of the investment professionals, office expenses; Fund Manager costs related to the investment business of the Fund(s); costs related to legal, specialised and third-party services etc.;

Fund expenses incurred in relation to the administration and business of the Fund(s) Including its own annual audit and valuation fees, bank charges, legal fees and expenses, reasonable out-of-pocket expenses of the Advisory Committee or Investors’ Meetings, the costs of printing and circulating reports and notices, and costs reasonably and properly incurred and directly related to the purchase, holding or sale of Investees etc.;

Fund establishment costs including third party fees and expenses connection with the organization and formation of the Fund(s).

Fee offset: Any money / fees or other payments (such as, but not limited to director fees, advisory fees, transaction fees, deal closing fees, syndication fees, abort fees, monitoring fees, nominee directors’ fees, investment banking or finder’s fees) received by or paid to the Fund Manager(s), are to be reported to the Investors and offset 100% against the Management Fee.

Management costs and fees to be paid after the Eligibility Period shall not exceed 1.5% per annum of the amounts paid to Final Recipients in the form of equity which have yet to be paid back to the Fund, calculated pro-rata temporis from the end of 31 December 2023 until the earlier of (i) repayment of the investment, (ii) the end of the recovery procedure in the case of defaults, or (iii) the period referred to in Article 42(2) of the CPR - 31 December 2029. The amount corresponding to the




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capitalized (discounted) total value of the funds above at the end of the Eligibility Period should be allocated into an escrow account established by the Fund Manager(s) specifically for that purpose and shall be considered eligible expenses.

To the extent the Fund(s) have realized investments before or after the end of the Eligiblity Period. Proceeds from the Investments may be used for Management Fee before or after 31 December 2029 if required.

Fund Manager(s) The Fund Manager(s) selected by FMFIB will comprise of a team or an institution with dedicated investment professionals with experience and relevant skillset applicable to the management of the Fund(s) and the Fund(s) objectives. The Fund Manager(s) will manage the Fund(s) based on commercial principles and will operate according to best market practices and in compliance with professional standards issued by Invest Europe or Institutional Limited Partners Association or other recognised industry bodies, acceptable to FMFIB. The Fund Manager(s) will be selected as a result of a Selection Process and shall act independently and on behalf of the Investors of the Fund(s).

The Fund Manager(s) shall ensure compliance with relevant standards and applicable legislation on the prevention of money laundering, the fight against terrorism and tax fraud.

The Fund Manager(s) shall implement and maintain internal procedures designed to prevent the Fund(s) or the investees from being involved in money laundering or tax evasion schemes, fraudulent, coercive, collusive or corrupt practices or other criminal or terrorist activities, and will confirm the integrity of the Independent Private Investor, each prospective Investee and the respective individuals associated with them.

The Fund Manager(s) shall fulfil the responsibilities and minimum requirements provided in art. 6 and art. 7, par. 1 of the DA:

i) shall perform their obligations in accordance with applicable law and act with the degree of professional care, efficiency, transparency and diligence expected from a professional body experienced in implementing financial instruments. Shall ensure that: (a) the investees are selected with due account taken of the nature of the financial instrument and the potential economic viability of investment projects to be financed. The selection shall be transparent and justified on objective grounds and shall not give rise to a conflict of interest; (b) the investees shall be informed that funding is provided under programmes co-financed by the ESI Funds, in accordance with the requirements laid down in Article 115 of Regulation (EU) No 1303/2013

ii) is entitled or will procure that the Fund(s) would be entitled to carry out the relevant implementation tasks under Union and national law;

iii) has or will procure that the Fund(s) will have adequate economic and financial viability;

iv) has or will procure that the Fund(s) will have adequate capacity to implement the financial instrument, including organisational structure and governance framework providing the necessary assurance to FMFIB;

v) has or will procure that the Fund will have an effective and efficient internal control system; and an accounting system providing accurate, complete and reliable information in a timely manner;

vi) shall agree to be audited by the FMFIB, Managing Authority, Certifying Authority, Audit Authority, National Court of Auditors, the Commission and the European Court of Auditors;




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vii) shall provide for a due diligence process in order to ensure a commercially sound investment strategy

viii) shall act with the diligence of a professional manager in good faith and avoiding conflicts of interest; best practices(as specified above) and regulatory supervision shall apply;

ix) shall set out an investment strategy, criteria and the proposed timing of investments;

x) shall be able to demonstrate that it operates a mechanism that ensures that all the advantages are passed on to the largest extent to the investees in the form of higher volumes of financing, riskier portfolios, etc.

The Fund Manager(s) will provide an Investment Proposal in order to demonstrate its capacity to be selected for consideration for managing the Fund(s). The Investment Proposal will focus on the following areas:

Market Opportunity

Investment Strategy and Processes

Fund Management Team and Track Record

Fund Raising

Fund Structure and Terms

Corporate Governance of the Fund(s)

Advisory Committee - The Fund(s) will have an Advisory Committee comprising of the most significant Investors in the Fund(s) that are independent of the Fund Manager(s) and are willing to appoint a member to the Advisory Committee. Indicative functions of the Advisory Committee will include – (i) providing overall guidance to the Fund Manager; (ii) reviewing the activities and governance of the Fund; (iii) reviewing and resolving conflicts of interest; (iv) carrying out such other duties that are required and/or specified in the agreements.

The participation of non-investors in the Advisory Committee shall not be allowed. The Advisory Committee will not take part in management decisions.

The Advisory Committee will meet as frequently as required but no less than twice per year or such other frequency as determined by the Advisory Committee and/or outlined in the agreements.

FMFIB will be entitled for so long as it is an investor to nominate one representative to the Advisory Committee. Such nominee my only be removed or replaced at the written request of FMFIB.

Investor Meetings

The Fund(s) will hold annual meetings offering investors the opportunity to review and discuss the Fund’s investment activities.

Investor protection clauses

The operational agreements of the Fund(s) will include investor protection and Fund Manager removal clauses according to market practice, including but not limited to:

- Key-person event clause

- Termination/suspension of the investment period clause

- Removal with/without cause of the Fund Manager clause

The Investor protection clauses will be in principle triggered by relevant events and will take effect following a vote of the members of the Advisory Committee or




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Investors in the Fund(s), and will have respective consequences for the Fund Manager(s), Investors and the Fund(s).

The investor protection clauses will be implemented according to market practices following discussion with the market participants at the Market Test.

Reporting As a general rule, reporting shall be made in a complete and comprehensive manner. Reporting must be made periodically according to Invest Europe Guidelines and will provide all additional information required by the applicable regulations or law, including ESIF and state aid rules, as amended from time to time which will be specifically outlined in the Operational Agreement.

Investors shall receive the following documents within the reporting deadlines set forth below:

Quarterly reports including unaudited financial statements for the Fund, a statement of such Investor's capital account and a report on the Fund's portfolio investments: 45 days after the end of each quarter;

Annual audited accounts audited financial statements for the Fund, which shall include a calculation of the carried interest entitlement: 90 days after the end of the relevant accounting period;

All financial statements will be prepared in accordance with IFRS (International Financial Reporting Standards) or other accounting principles acceptable to FMFIB and consistently applied.

Audit The Fund Manager(s) shall agree on behalf of the Fund(s) to keep all the supporting documents required to ensure an adequate audit trail in accordance witjh art. 9 and art. 25 of the DA, to provide access to their premises and to their documents related tothe Financial Instruments and to be subject to regular monitoring, control and auditing from: FMFIB, European Court of Auditors, European Commission, OLAF (European Anti-fraud Office), the Managing Authority of OPIC, and other EU and national authorities entitled to assess the use of EU Structural and Investment Funds and Financial Instruments to the level of the Fund Investees. The Fund Manager shall arrange similar provisions in each investment agreements with the Investees.

The Fund Manager shall be responsible for keeping documents in order to be made available to the European Commission, the European Court of Auditors and other EU and national authorities upon request with in the time limits of art. 140 of the CPR.

In the case the measure is implemented as a state aid scheme detailed records with the information and supporting documentation necessary to establish that all the conditions laid down in the GBER are fulfilled shall be kept for 10 years from the last aid was granted under the scheme in accordance with art. 12 of the GBER.

Conflicts of Interest The Fund(s) will enter into all transactions on an arm's length basis.

The Fund Manager(s) shall immediately refer and fully disclose to the Advisory Committee any activities which could create an opportunity for actual or potential conflicts of interest to arise and shall seek the advice of the Advisory Committee as to the course of action to be taken.




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Irregularity Management

The Fund Manager(s) shall ensure prevention of Irregularities and take any other necessary actions in compliance with the procedure laid down in the Rules on Financial Instruments.

Technical Support The Financial Instrument may be combined with grant funding that will finance technical support for the benefit of Investees, in particular: analysis and valuation of the potential investments before applying for financing from the Fund mentorship and services in areas of intellectual rights, market analysis and commercialization in relation to the investments.

Technical support may only be provided for the purpose of the technical preparation of the prospective investment and for the benefit of the respective final recipient

PR/ Communication The Fund Manager(s) shall procure that the Fund(s) and the Investees comply with the applicable EU and national regulations as well as with OPIC requirements (as amended from time to time) with respect to publicity, information and public communications including as specified in Annex XII to the CPR.

OPIC Indicators The Fund Manager(s) is expected to achieve the Financial Instrument’s contribution to the following result indicators under the OPIC:

- Number of enterprises cooperating with research institutions;

- Number of enterprises supported to introduce new to the firm products;

- Number of enterprises supported to introduce new to the market products;

- Number of enterprises receiving support




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ANNEX I4

SME DEFINITION

Article 1

Enterprise

An enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal

form. This includes, in particular, self-employed persons and family businesses engaged in craft or other

activities, and partnerships or associations regularly engaged in an economic activity.

Article 2

Staff headcount and financial thresholds determining enterprise categories

1. The category of micro, small and medium-sized enterprises (‘SMEs’) is made up of enterprises which

employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million,

and/or an annual balance sheet total not exceeding EUR 43 million.

2. Within the SME category, a small enterprise is defined as an enterprise which employs fewer than

50 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 10

million.

3. Within the SME category, a micro-enterprise is defined as an enterprise which employs fewer than

10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 2

million.

Article 3

Types of enterprise taken into consideration in calculating staff numbers and financial amounts

1. An ‘autonomous enterprise’ is any enterprise which is not classified as a partner enterprise within

the meaning of paragraph 2 or as a linked enterprise within the meaning of paragraph 3.

2. ‘Partner enterprises’ are all enterprises which are not classified as linked enterprises within the

meaning of paragraph 3 and between which there is the following relationship: an enterprise (upstream

enterprise) holds, either solely or jointly with one or more linked enterprises within the meaning of

paragraph 3, 25 % or more of the capital or voting rights of another enterprise (downstream enterprise).

However, an enterprise may be ranked as autonomous, and thus as not having any partner enterprises,

even if this 25 % threshold is reached or exceeded by the following investors, provided that those

investors are not linked, within the meaning of paragraph 3, either individually or jointly to the enterprise

in question:

(a) public investment corporations, venture capital companies, individuals or groups of individuals with

a regular venture capital investment activity who invest equity capital in unquoted businesses

(business angels), provided the total investment of those business angels in the same enterprise

is less than EUR 1 250 000;

(b) universities or non-profit research centres;

4 Annex to the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and

medium-sized enterprises and to the Commission Regulation (EU) No 651/2014




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(c) institutional investors, including regional development funds;

(d) autonomous local authorities with an annual budget of less than EUR 10 million and less than

5 000 inhabitants.

3. ‘Linked enterprises’ are enterprises which have any of the following relationships with each other:

(a) an enterprise has a majority of the shareholders' or members' voting rights in another enterprise;

(b) an enterprise has the right to appoint or remove a majority of the members of the administrative,

management or supervisory body of another enterprise;

(c) an enterprise has the right to exercise a dominant influence over another enterprise pursuant to a

contract entered into with that enterprise or to a provision in its memorandum or articles of

association;

(d) an enterprise, which is a shareholder in or member of another enterprise, controls alone, pursuant

to an agreement with other shareholders in or members of that enterprise, a majority of

shareholders' or members' voting rights in that enterprise.

There is a presumption that no dominant influence exists if the investors listed in the second

subparagraph of paragraph 2 are not involving themselves directly or indirectly in the management of

the enterprise in question, without prejudice to their rights as shareholders.

Enterprises having any of the relationships described in the first subparagraph through one or more

other enterprises, or any one of the investors mentioned in paragraph 2, are also considered to be

linked.

Enterprises which have one or other of such relationships through a natural person or group of natural

persons acting jointly are also considered linked enterprises if they engage in their activity or in part of

their activity in the same relevant market or in adjacent markets.

An ‘adjacent market’ is considered to be the market for a product or service situated directly upstream

or downstream of the relevant market.

4. Except in the cases set out in paragraph 2, second subparagraph, an enterprise cannot be

considered an SME if 25 % or more of the capital or voting rights are directly or indirectly controlled,

jointly or individually, by one or more public bodies.

5. Enterprises may make a declaration of status as an autonomous enterprise, partner enterprise or

linked enterprise, including the data regarding the thresholds set out in Article 2. The declaration may

be made even if the capital is spread in such a way that it is not possible to determine exactly by whom

it is held, in which case the enterprise may declare in good faith that it can legitimately presume that it

is not owned as to 25 % or more by one enterprise or jointly by enterprises linked to one another. Such

declarations are made without prejudice to the checks and investigations provided for by national or

Union rules.

Article 4

Data used for the staff headcount and the financial amounts and reference period




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1. The data to apply to the headcount of staff and the financial amounts are those relating to the latest

approved accounting period and calculated on an annual basis. They are taken into account from the

date of closure of the accounts. The amount selected for the turnover is calculated excluding value

added tax (VAT) and other indirect taxes.

2. Where, at the date of closure of the accounts, an enterprise finds that, on an annual basis, it has

exceeded or fallen below the headcount or financial thresholds stated in Article 2, this will not result in

the loss or acquisition of the status of medium-sized, small or micro-enterprise unless those thresholds

are exceeded over two consecutive accounting periods.

3. In the case of newly-established enterprises whose accounts have not yet been approved, the data

to apply is to be derived from a bona fide estimate made in the course of the financial year.

Article 5

Staff headcount

The headcount corresponds to the number of annual work units (AWU), i.e. the number of persons who

worked full-time within the enterprise in question or on its behalf during the entire reference year under

consideration. The work of persons who have not worked the full year, the work of those who have

worked part-time, regardless of duration, and the work of seasonal workers are counted as fractions of

AWU. The staff consists of:

(a) employees;

(b) persons working for the enterprise being subordinated to it and deemed to be employees under

national law;

(c) owner-managers;

(d) partners engaging in a regular activity in the enterprise and benefiting from financial advantages

from the enterprise.

Apprentices or students engaged in vocational training with an apprenticeship or vocational training

contract are not included as staff. The duration of maternity or parental leaves is not counted.

Article 6

Establishing the data of an enterprise

1. In the case of an autonomous enterprise, the data, including the number of staff, are determined

exclusively on the basis of the accounts of that enterprise.

2. The data, including the headcount, of an enterprise having partner enterprises or linked enterprises

are determined on the basis of the accounts and other data of the enterprise or, where they exist, the

consolidated accounts of the enterprise, or the consolidated accounts in which the enterprise is included

through consolidation.

To the data referred to in the first subparagraph are added the data of any partner enterprise of the

enterprise in question situated immediately upstream or downstream from it. Aggregation is proportional

to the percentage interest in the capital or voting rights (whichever is greater). In the case of cross-

holdings, the greater percentage applies.




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To the data referred to in the first and second subparagraph are added 100 % of the data of any

enterprise, which is linked directly or indirectly to the enterprise in question, where the data were not

already included through consolidation in the accounts.

3. For the application of paragraph 2, the data of the partner enterprises of the enterprise in question

are derived from their accounts and their other data, consolidated if they exist. To these are added 100

% of the data of enterprises which are linked to these partner enterprises, unless their accounts data

are already included through consolidation.

For the application of the same paragraph 2, the data of the enterprises which are linked to the enterprise

in question are to be derived from their accounts and their other data, consolidated if they exist. To these

are added, pro rata, the data of any possible partner enterprise of that linked enterprise, situated

immediately upstream or downstream from it, unless it has already been included in the consolidated

accounts with a percentage at least proportional to the percentage identified under the second

subparagraph of paragraph 2.

4. Where in the consolidated accounts no staff data appear for a given enterprise, staff figures are

calculated by aggregating proportionally the data from its partner enterprises and by adding the data

from the enterprises to which the enterprise in question is linked.

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