The communication emphasises that risk-capital markets, which provide equity financing to small and medium-sized enterprises (SMEs) and high-growth companies, play a crucial role in business start-ups and their further development, and thus in job creation, within the European Union.
A comparison with the United States reveals that risk-capital markets are still significantly underdeveloped in the European Union. This is the case not only for the stock exchanges specialised in financing high-growth companies, but also for risk-capital investment at the start-up or development stage of new enterprises or in high-technology companies. Other noticeable differences include the degree to which US pension funds contribute to the provision of venture capital in the United States and the tendency there toward geographical concentration of operators with a stake in the entrepreneurial process (such as venture capitalists, researchers, entrepreneurs).
European entrepreneurs do not have adequate access to the capital they need to start and develop their businesses. Moreover, there is a lack of good investment opportunities for risk-capital investors. This lack of dynamism adversely affects the capacity of the EU to exploit its own innovative ideas and realise its job-creating potential.
The communication identifies six categories of barriers to the creation of risk-capital markets at European level:
- capital markets in Member States are still extremely fragmented, reducing market capitalisation and liquidity;
- institutional and regulatory barriers persist owing to the lack of a satisfactory regulatory framework at either European or national level. This is especially the case as regards the regulation of venture capital funds, institutional investors (insurance companies, pension funds), investment services, cross-border issues/listing and accounting rules;
- the national tax systems of the Member States seem to penalise risk-capital investment. Firstly, revenue from direct participation in companies (dividends) tends to be taxed at higher rates than income resulting from capital invested free of risk in bonds and accounts deposits (interest). Secondly, it is important that taxation of capital gains should not be a brake either on investment or on the use of stock options as part of remuneration packages. Thirdly, there is a general lack of clarity as regards the tax regimes applicable to venture capital funds;
- in the high-technology sector, there is an acute shortage both of start-up SMEs and of the investment opportunities that result from them. These deficiencies are accentuated by the rarity of networks or geographic concentrations of high-technology SMEs and by a legal and regulatory environment (intellectual property rules, administrative requirements for starting a company) scarcely conducive to innovation and business start-ups;
- there are insufficient human resources (entrepreneurs and qualified experts) available for venture capital investment projects;
- "cultural" factors, such as the attitude of investors to risk and the absence of an enterprise culture in schools and universities, hamper the formation of a new generation of European entrepreneurs.
The communication proposes an action plan to remove these barriers and so improve the conditions for the development of risk capital in the European Union. Some of the measures proposed (such as the reform of the European patent system) require a response at the level of the European Union, while others (e.g. the clarification of the tax environment for companies) should be handled by the Member States themselves.
Commission Communication to the Council and the European Parliament on implementation of the risk capital action plan (RCAP) [COM(2003) 654 - Not published in the Official Journal]
This communication reports on progress in the implementation of the RCAP for the year 2002 and, where possible, for the first three quarters of 2003. As it is the fifth and final report of its kind, the Commission also takes stock of progress over the RCAP implementation period as a whole (1998-2003). It reports considerable progress, with all political, as well as many technical, objectives attained.
Although the gap with the US remains, with investment there still double that in Europe, the disparity has been cut by half since 2000. While the European market is still fragmented on account of the persisting differences between Member States, the European risk capital industry is now much larger, more mature and more professional than in 1998. The regulatory framework has improved considerably, with tax issues remaining its weakest point.
Awareness by enterprises and public authorities of the strategic importance of this sector and the possibilities provided by this type of financing is now well enshrined in Europe. The RCAP has played a political role in supporting those directly or indirectly involved in risk capital activities. It has permeated other regional, national and Community policies and programmes. In order to keep up the momentum, the Commission will continue to follow the European risk capital markets closely. In 2004 it must analyse the areas where there are still inefficiencies with a view to putting forward recommendations and proposals, as appropriate, with the Lisbon 2010 deadline in mind.
Commission Communication to the Council and the European Parliament of 16 October 2002 on implementation of the risk capital action plan (RCAP) [COM(2002) 563 - Not published in the Official Journal].
This communication is the fourth annual report on progress in the implementation of the RCAP since it was adopted in 1998. It reviews the progress made in 2001 and, on some points, in the first half of 2002, in the knowledge that the end of 2003 is the cut-off date for completion of the action plan.
The communication stresses that the European risk capital sector is going through a period of adjustment during which, certain areas, in particular, the operation, regulation and the liquidity of the stock markets, or the pan-European dimension of the risk capital market must be further rationalised. It also notes that modernisation of the regulatory framework has continued in a financial environment dominated by the successful introduction of euro notes and coins. Significant progress is being made towards the compulsory application of international accounting standards by 2005 and future legislation on supplementary pension funds. Moreover, it stresses that the Structural Funds have significantly increased their participation in the financing of risk capital.
In conclusion, the communication considers that the accompanying measures designed to develop risk capital in Europe have undergone profound and positive changes during the last four years. It feels that improvement of the environment for this type of investment should be a long-term objective, leaving aside any short-term consideration, and proposes that new measures should be considered for promoting risk capital in the following years.
Commission Communication to the Council and the European Parliament of 25 October 2001 on implementation of the risk capital action plan (RCAP) [COM(2001) 605 final - Not published in the Official Journal].
This text reviews the progress made in 2000 and 2001 in implementing the risk capital action plan and takes stock at half-way point (the plan is due to be completed in 2003). While it welcomes the spectacular performance of the risk capital markets in Europe and the fact that all Member States have benefited from such growth, the Commission stresses that major disparities remain and the European market is still fragmented. The fall in stock markets, the downturn in economic growth and the events of 11 September 2001 in the United States have impacted negatively on the growth of the risk capital industry in Europe. Although progress in setting up a proper regulatory framework for risk capital has continued, many difficulties still subsist, such as the absence of a single patent and the discriminatory effect of certain tax rules. The introduction of the euro should make it easier to remove barriers to cross-border transactions. The development and promotion of European entrepreneurship has been pursued and important steps have been taken in the area of public funding: the Commission has for example clarified its policy towards state aid.
In conclusion, despite the progress achieved risk capital markets need to be strengthened much more before Europe can become a world leader in this field as advocated in Lisbon.
Commission Communication to the Council and the European Parliament of 20 October 1999 entitled "Risk capital: Implementation of the action plan - Proposals for moving forward" [COM(1999) 493 - Not published in the Official Journal].
In the Communication, the Commission outlines the measures taken to remove obstacles to the rapid growth of risk capital since the adoption of the action plan in March 1998. It maintains that the process should be speeded up and developed and proposes taking stock regularly of progress made on the basis of a comparative evaluation system whereby the best practices are identified.
Commission communication of 11 May 1999 entitled "Implementing the framework for financial markets: Action plan" [COM(1999) 232 - Not published in the Official Journal].
This action plan, presented at the request of the European Council, is based on the framework for action published by the Commission in October 1998 and on the deliberations of the Financial Services Policy Group. It contains a series of policy objectives and specific measures designed to improve the single market in financial services over the next five years. In particular, it proposes indicative priorities and a time-frame for adopting legislative and other measures with a view to attaining three strategic objectives:
- a single wholesale financial services market;
- open and secure retail markets;
- state-of-the-art prudential rules and supervision.
The action plan also recommends that the Council and European Parliament adopt the proposed Directives on UCITS, distance selling of financial services and electronic money before the end of 1999.