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Brussels, 19th July 2006

State aid: Commission adopts Guidelines on state aid to support risk capital investments in SMEs

The European Commission has adopted Guidelines to determine when state aid to support risk capital investment in small and medium-sized enterprises (SMEs) is compatible with EC Treaty state aid rules (Article 87). The rules will facilitate access to finance for SMEs in their early stages of development, particularly where alternative means of funding from financial markets are lacking (i.e. market failure). Better access to capital will spur their growth and create more jobs in the EU. The Guidelines form part of the Commission’s efforts, announced in the State Aid Action Plan (SAAP - see IP/05/680 and MEMO/05/195), to encourage Member States to focus state aid on improving the competitiveness of EU industry, in particular through innovation, and on creating sustainable jobs, while minimising distortions of competition. The Guidelines include a ‘safe harbour’ of €1.5 million investment per SME over 12 months (below which a market failure has been found to exist), a light assessment procedure for clear cut cases fulfilling certain conditions and assessment criteria which ensure that state funding will leverage private investment, target market failures and be proportionate.

Competition Commissioner Neelie Kroes said: “The new risk capital Guidelines will allow Member States the necessary flexibility to boost SMEs’ access to risk capital, which will, in turn pave the way towards improved competitiveness and job creation.“

The Guidelines cover risk capital measures for investment in SMEs in their early stages (seed, start-up and expansion), where funding is provided jointly by the state and private investors. The Guidelines replace the 2001 Communication on state aid and risk capital. They will foster access to risk capital, in particular for innovative companies. More investments may also lead to more environmentally friendly production, for instance through energy saving.

An important change in the Guidelines is the investment threshold of €1.5 million per SME over a period of 12 months, an increase of 50% on the previous threshold. For these cases, the Commission accepts that alternative means of funding from financial markets are lacking (i.e. market failure). Above this threshold, because of the greater potential to distort competition, the Commission will make a detailed assessment, and Member States will have to provide evidence of a market failure. Applying different types of assessment on the basis of economic impact is an important change, and implements the SAAP’s refined economic approach. A detailed assessment does not necessarily imply that the Commission will initiate the formal investigation procedure under Article 88 of the EC Treaty.

A light assessment is foreseen for measures fulfilling all the following conditions:

- investments below €1.5 million in an SME over a period of 12 months

- finance up to the expansion stage for small enterprises and for medium-sized enterprises in assisted areas; and up to the start-up stage for medium-sized enterprises in non-assisted areas

- at least 70% of the budget must be used to provide equity or quasi-equity instruments as opposed to debt instruments

- the participation by private investors must be at least 50% in non-assisted areas and 30% in assisted areas

- investment decisions must be profit-driven - i.e. involving private participation, viable business plans and a clear exit strategy

- the management of the fund must follow a commercial logic - i.e. the managers’ remuneration must be linked to the fund’s profits, private investors must be represented, the management must adhere to adequate regulatory standards

- a sectoral focus is possible for funds investing in innovative technologies or sectors.

A detailed assessment will be made for measures:

- providing investment amounts above €1.5 million in an SME over a period of 12 months

- providing finance for the expansion stage of medium-sized enterprises in non-assisted areas

- providing for follow-on investments in SMEs beyond the €1.5 million and their early-growth financing

- providing investment with private participation of less than 50% in non-assisted areas or 30% in assisted areas

- focussing on seed capital for small enterprises with limited or no private participation and/or investing mainly through debt instruments

- involving investment vehicles (i.e. alternative market places)

- covering costs linked to the screening of companies in view of the conclusion of investments (‘scouting costs’).

The Guidelines take account of an extensive consultation and external study on the EU’s equity gap, comments on the SAAP and the Communication on State Aid to Innovation, Member States’ views and written comments from stakeholders.

The Guidelines complement other state aid instruments targeting SMEs:

- the new Regional Aid Guidelines (2007-2013 – see IP/05/1653) include ‘enterprise aid’ for small enterprises in assisted areas for their start-up and early-stage development

- a general Commission block exemption under preparation, whereby Member States will not have to notify certain SME measures

- forthcoming state aid rules for research, development and innovation.
The Guidelines are available at:

See also MEMO/06/295.

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