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European Commission


Brussels, 15 January 2014

State aid: Commission adopts new rules on risk finance – frequently asked questions

(see also IP/14/21)

What is the purpose of the Risk Finance Guidelines?

The guidelines are aimed at ensuring that certain SMEs and midcaps have access to the necessary amount and form of finance, while maintaining a level playing field in the Single Market. This is one of the pre-conditions for their development and ability to create jobs. Where the private finance markets fail to deliver the necessary funding, Member States may provide financial or fiscal incentives for private investors to put money into higher-risk companies that they would not have targeted without such support.

The Commission is in charge of controlling state aid in the Single Market to avoid that Member States grant selective advantages to companies to the detriment of others. This allows companies from all Member States to compete evenly and without undue barriers. The Risk Finance Guidelines set out the criteria under which the Commission will assess aid schemes put in place by Member States to support the access to finance by SMEs and midcaps with high-growth potential. This allows businesses and Member States to rely on stable and transparent rules when designing their support schemes. The guidelines will enter into force on 1 July 2014. They will replace the Risk Capital Guidelines adopted in 2006.

Why was it necessary to review the 2006 Risk Capital Guidelines?

The current rules were conceived in 2006. Since then, the markets have changed and today SMEs face a wider and deeper lack of funding than previously assumed, in particular due to the financial crisis. The existing rules allowed aid for the equity financing of SMEs during their early development stages. This has proved to be too restrictive. The new Risk Finance Guidelines take account of this evolution and of the extent of the market failure affecting SMEs' ability to access finance. This will improve the capacity of European SMEs and midcaps to develop, thereby helping to boost economic growth and job-creation.

What is the relation between the General Block Exemption Regulation and the Guidelines?

The new Risk Finance Guidelines should be seen together with the relevant rules contained in the draft General Block Exemption Regulation (GBER). The GBER exempts certain categories of non-problematic aid from prior Commission scrutiny. Aid schemes that do not fulfil all the conditions of the GBER need to be notified to the Commission, who will assess them on a case-by-case basis in the light of the criteria set out in the Guidelines.

The Commission proposes to include new rules on risk finance aid in the next version of the GBER, which is currently being reviewed (see IP/13/1281). The schemes that comply with the rules set out in the GBER will not have to be notified to the Commission. This will facilitate the granting of aid and reduce red tape for public administrations and industry alike.

Which companies will be able to benefit from the Risk Finance Guidelines?

The current General Block Exemption covers risk capital aid schemes for SMEs (up to 250 employees) in their seed and start-up phases, small companies in the expansion phase and medium-sized companies in the expansion phase that are established in assisted areas (defined by the guidelines on state aid for regional development). Beyond these limits, Member States need to notify their schemes under the Risk Capital Guidelines. Moreover, the current rules did not allow risk capital aid for SMEs in their growth stage.

The new risk finance rules have a radically enlarged scope, covering a wider range of companies, irrespective from their location in assisted or non-assisted areas, including not only SMEs from seed/start up and expansion stages, but also SMEs at later growth stages, small midcaps (up to 499 employees) and innovative midcaps (up to 1500 employees and with R&D and innovation costs representing 10% of total operating costs).

For instance, under the current block exemption, a medium size company in a non-assisted area (i.e. in a large part of the "old" Member States) would only be eligible to receive aided risk capital investment up to its start-up phase, i.e. before its first commercial sale. In the future, such a company could receive aided investment under the block exemption.

What will be the notification threshold?

Under the revised GBER proposed by the Commission, risk finance measures of up to EUR 15 million per SME will be exempted from prior Commission scrutiny. This overall amount has to be seen as a one-off aid covering the full development cycle of the target SME (compared to the current maximum annual tranches of EUR 1.5 million in the current GBER).

In addition, the Risk Finance Guidelines set up compatibility conditions for amounts above EUR 15 million, without imposing any specific cap, as long as the aid measure is justified, as demonstrated in a prior assessment of the market failure. This will enable, for instance, R&D-intensive companies or companies in industries with high upfront investment costs to access the necessary amount of finance right from their creation, through a sequence of investment rounds which will no longer be constrained by the current restrictions on maximum annual tranches (of maximum EUR 2.5 million in the current guidelines).

For instance, an R&D-intensive biotech company that would need EUR 10 million upfront investment to develop its product, would have to wait 7 years under the current block exemption (EUR 1.5 million * 7 years = 10.5 million) or 4 years under the Guidelines (EUR 2.5 million * 4 years = 10 million). Under the future block exemption, this company could receive EUR 10 million upfront, which could further be complemented later by EUR 5 million aided follow-on investments sequenced according to the needs of the company, to help it grow to a sustainable stage where it can attract private financing on its own.

Will capital replacement transactions and buy-outs continue to be prohibited?

Contrary to the current rules, the new regime will better reflect market practices by allowing capital replacement operations, i.e. the purchase of shares from existing shareholders, as long as they are combined with new fresh capital injection into the company. This should facilitate the exit of investors, which in turn will incentivise them to invest at an earlier stage. Buy-outs, i.e. taking over the ownership of a company, will continue to be excluded as under the current rules, because these transactions are not affected by a market failure.

Which financial instruments can be used to channel the aid?

The new rules cater for a wide range of instruments. The current rules require that 70% of the budget is provided in the form of equity. However, companies need different forms of financing, depending on their development stage, sector and the specific interests of the owners. The new risk finance rules therefore abolish the 70% minimum equity requirement, and they allow for a wider range of financial instruments (equity, quasi-equity, loans, guarantees or hybrid instruments). This is better in line with market practices.

What will be the minimum mandatory participation rate by private investors?

The current rules require a minimum flat 50% private capital participation rate in non-assisted areas and 30% in assisted areas. The new risk finance regime abolishes the distinction between assisted and non-assisted areas and introduces a new system whereby the private capital participation ratio is tailored in function of the inherent riskiness of the investee.

For investments into SMEs before their first commercial sale, the private capital participation requirement will be as low as 10%, to take account of the reluctance of private investors to provide funding at this stage. As the target companies become more established, the required rate of private investment increases.

The Risk Finance Guidelines will also allow for lower levels of private participation where Member States have demonstrated that private investors are particularly reluctant to invest in certain territories, irrespective of their assisted/non-assisted status, or sectors. This flexibility will ensure that Member States can support company-creation in a more efficient manner where the private business finance markets fail to provide the necessary financing.

For example, if under the current rules a Member State wanted to set up a block-exempted scheme providing risk capital investments to small, young and innovative SMEs established in a non-assisted area, it would need to attract at least 50% private investment. However, such companies are considered among the riskiest, and therefore it is very difficult, if not impossible in certain Member States, to attract the necessary private contribution. Now Member States will be able to provide as much as 90% of the investment to such companies if they are before their first commercial sale, or up to 60% if they are within 7 years from their first commercial sale, making sure that public support is effectively able to correct the market failures, and help viable companies achieve a development stage where they are more attractive for private investors.

How will the new rules address supply-side market failures?

Recognising the specific constraints on the supply side of the SME-financing market, the Risk Finance Guidelines will set up a new framework to support alternative trading platforms that trade in SME shares.1 In this way, Member States will be able to support the creation of funding channels alternative to traditional bank lending.

How can these rules apply to schemes such as private investor tax incentives?

Tax incentives are more and more used to support private investors, be it natural persons or corporations, in order to channel more private funding into public policy goals.

The current GBER does not cover fiscal incentives to private investors. Although tax incentives can be approved under the current Guidelines, there are no specific compatibility conditions and each measure requires an individual assessment.

The new regime, on the one hand, introduces flexibility by bringing tax incentives to natural persons (including certain business angels) under the scope of the proposed block exemption and, on the other hand, sets out clearer rules (contained in the guidelines) for fiscal incentives to corporate investors that invest directly or indirectly into the equity of eligible SMEs and midcaps, thereby steering the available private investment towards the achievement of the public objectives.

What happens next?

As from 1 July 2014, the Commission will assess notified risk finance state aid measures according to the criteria set out in the new Risk Finance Guidelines. Within six months from that date, Member States should also bring their existing risk capital schemes in line with these new risk finance rules.

The new General Block Exemption Regulation (GBER), which is subject to a public consultation (see IP/13/1281), will include specific provisions exempting Risk Finance aid measures fulfilling certain conditions from the obligation of prior notification to the Commission. This Commission Regulation will be adopted before Summer.

See also the Competition Policy Brief:

and the text of the new guidelines:

1 :

Alternative trading platforms are defined as multilateral trading facilities regulated by Directive 2004/39/EC on markets in financial instruments (MIFID). A new MIFID is currently being discussed with the Council and the European Parliament, including the proposal to introduce a new category of platforms, SME Growth Markets.

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