Defence & Security: SecFund Financing Opportunities

In light of increasing geopolitical tensions, there is consensus that more money should be invested in the defense industry. In line with this, NATO countries recently agreed to the new NATO standard of 5% of GDP. In the coming years, a significant amount of money will be made available in the Netherlands to meet this NATO standard. The Dutch defense and security sector is therefore facing an unprecedented transformation in the coming years. The first steps in this direction are already being taken. In April, the Ministry of Defense, in collaboration with the Ministry of Economic Affairs and the Regional Development Agencies (in Dutch: Regionale Ontwikkelings Maatschappijen, or ‘ROM’), set up a fund with a capital of €100 million to provide financial support to entrepreneurs developing innovations for both civilian and military use, known as the Security Fund (SecFund).[1]  The fund offers start-up capital for start-ups, scale-ups, and SMEs that meet the Ministry of Defense’s innovation needs. In this blog, we will take you through the background, target group, applications, and points of interest of the SecFund.

Background

The need for SecFund stems from a number of developments, in particular the changing threat landscape, strategic dependence, innovative strength among SMEs and, although now subject to change, the traditional reluctance of financiers to invest in the defense industry. The Ministry of Defense, in collaboration with the Ministry of Economic Affairs and the Regional Development Agencies, created SecFund to fill this financing gap and strengthen the innovative power of the Netherlands. SecFund is managed by the Brabant Development Agency (in Dutch: Brabantse Ontwikkelings Maatschappij, or ‘BOM’) and the implementation of the fund is entrusted to the nine ROMs. SecFund provides financing where the market does not independently finance companies. In this way, SecFund contributes to (i) increasing the strategic autonomy of the Netherlands through the development and preservation of crucial dual-use technology, (ii) improving the capabilities of the Dutch Armed Forces, and (iii) increasing the competitiveness of Dutch industry.

Target group

Not all companies are eligible to apply to SecFund. SecFund has a number of criteria that must be met in order to submit a successful investment application:

1. The company must qualify as a startup, scale-up, or (innovative) SME:

     a) Start-up: a start-up is an unlisted company that, at the time of signing the first agreement for the provision of (risk) capital, has been in business for a maximum of five years and has not been created as a result of a merger. Spin-offs or new units of existing companies, provided they are incorporated into a new legal entity that meets the above criteria, are also considered startups;

     b) Scale-up: a scale-up is a company with 10–250 employees, where employment or turnover has increased by at least 60% over the past five years;

     c) (Innovative) SME: SMEs are defined as companies that meet the definition of small, medium-sized, and micro-enterprises (SMEs). These are companies that employ fewer than 250 people and whose annual turnover does not exceed EUR 50 million and/or whose annual balance sheet total does not exceed EUR 43 million.

2. The company must develop innovative dual-use technology. Dual-use refers to technologies, products, or knowledge that can be used for both civilian and military applications. In other words, these are innovations that can be used in the commercial market but may also have strategic or military significance. In this regard, SecFund follows the current European Investment Bank (EIB) guidelines for investing in dual-use technology.[2] The technology must meet a (latent) need of the Dutch Armed Forces and must comply with the security criteria applicable at that time;

3. The company’s head office must be located in the Netherlands, both legally and physically; and

4. The investment required from SecFund may not exceed EUR 5,000,000.

Financing

SecFund invests between EUR 150,000 and EUR 5,000,000 per company. The financing may only be used for the development and upscaling of dual-use technology. Co-investments with private investors are also possible, but only if the private investors lend on identical terms as the SecFund, with the aim of financing a maximum of 50% of the total investment requirement from the SecFund and other public funds. The total financing requirement may therefore exceed EUR 5,000,000, but a maximum of EUR 5,000,000 can be financed from the SecFund.

The Ministry of Defense emphasizes that SecFund does not want to crowd out the market, but rather wants to collaborate with banks, venture capitalists, and other financiers. This offers opportunities for private parties, partly because risk is spread.

Practical cases

The first investments from SecFund have already been made. Drone manufacturer Tective received the first investment from SecFund.[3] In addition, LiveDrop,  which develops technology for fast, secure, and completely offline data transfer via optical coding, raised EUR 2,500,000 in a seed investment round, co-financed by SecFund.[4] Although the fund was only recently established, it has already led to successful results.

The Act on Security Screening of Investments, Mergers and Acquisitions (Vifo Act)

The Act on Security Screening of Investments, Mergers and Acquisitions (Vifo Act) has been in force since June 1, 2023. The Vifo Act was introduced to manage risks to national security that may arise from certain acquisitions, mergers, or investments. In particular, it aims to prevent risks relating to the creation of undesirable strategic dependencies, the impairment of the continuity of vital processes, or the impairment of the integrity and exclusivity of knowledge and information. In order to protect national security, the Vifo Act assesses acquisition activities that lead to changes in control over vital providers or to changes in control over, or the acquisition or increase of significant influence on, companies that possess sensitive technology.

Given the purpose of SecFund, there is a reasonable chance that a SecFund participation will at some point be subject to the Vifo Act. If a transaction falls within the scope of the Vifo Act, it must be reported in advance to the Investment Review Agency, (In Dutch: ‘Bureau Toetsing investeringen’ or ‘BTI’)). This office assesses whether the investment, merger, or acquisition poses risks to national security. The transaction may not be completed without approval. It is advisable to seek advice in advance as to whether a transaction will fall under the Vifo Act.

Conclusion

SecFund marks an important step in strengthening the Dutch defense and security industry. It offers innovative companies access to much-needed growth capital. For private financiers and advisors, it opens up new perspectives in a sector that has long been considered “closed.” However, careful consideration must be given to how this financing should be structured. In addition, given the scope of the Vifo Act, an analysis of the situation prior to the financing application can be of great importance.

Reach out to us

If you have any additional questions following this blog, are curious about how to structure your financing, or are wondering whether the Vifo Act may apply to your situation, please feel free to contact us.

Sanne Hebbink – Swinkels, senior lawyer Banking & Finance

Max Frederiks, lawyer Banking & Finance

[1] https://www.secfund.nl

[2] “Investing in a safe and secure Europe by supporting dual-use products, services, and technologies that benefit both civilian purposes and law enforcement or military applications, with a clear market opportunity.”

[3] Tective eerste investering vanuit SecFund | SecFund.

[4] LiveDrop haalt $2,5 miljoen op in defensiegerichte… | SecFund.