COMMUNICATION FROM THE COMMISSION –

Guidelines on State aid to promote risk finance investments

(2021/C 508/01)

TABLE OF CONTENTS

1. INTRODUCTION 4

2. SCOPE OF THE GUIDELINES AND DEFINITIONS 8

2.1. Scope of these Guidelines 8

2.2. Notifiable risk finance aid 10

2.3. Definitions 11

3. COMPATIBILITY ASSESSMENT OF RISK FINANCE AID 14

3.1. First condition: aid facilitates the development of an economic activity 15

3.1.1. Identification of the supported economic activity 15

3.1.2. Incentive effect 15

3.2. Second condition: Avoidance of adverse effects on trading conditions to an extent contrary to the common interest 16

3.2.1. Basic elements of the ex ante assessment to be submitted by the Member State concerned to the Commission 16

3.2.2. Need for State intervention 18

3.2.2.1. Measures targeted at categories of undertakings outside the scope of the General Block Exemption Regulation 19

(a) Small mid-caps 19

(b) Innovative mid-caps 19

(c) SMEs receiving the initial risk finance investment while they have been operating in any market for longer than the eligibility period fixed in the General Block Exemption Regulation 19

(d) Start-ups and SMEs requiring a risk finance investment of an amount exceeding the cap fixed in the General Block Exemption Regulation 20

(e) Alternative trading platforms not fulfilling the conditions of the General Block Exemption Regulation 20

3.2.2.2. Measures with design parameters not complying with the General Block Exemption Regulation 20

(a) Financial instruments with independent private investor participation below the ratios provided for in the General Block Exemption Regulation 20

(b) Financial instruments with design parameters above the ceilings provided for in the General Block Exemption Regulation 21

(c) Financial instruments other than guarantees where investors, financial intermediaries and their managers are selected by giving preference to downside protection over asymmetric profit-sharing 21

(d) Fiscal incentives to corporate investors including financial intermediaries or their managers acting as co-investors 22

3.2.3. Appropriateness of the aid measure 22

3.2.3.1. Appropriateness compared to other policy instruments and other aid instruments 22

3.2.3.2. Conditions for determining the appropriateness of financial instruments 22

(a) Equity investments 24

(b) Funded debt instruments: loans 25

(c) Unfunded debt instruments: guarantees 25

3.2.3.3. Conditions for determining the appropriateness of fiscal incentives 26

3.2.3.4. Conditions for measures supporting alternative trading platforms 26

3.2.4. Proportionality of the aid 27

3.2.4.1. Conditions for financial instruments 27

3.2.4.2. Conditions for fiscal incentives 28

3.2.4.3. Conditions for alternative trading platforms 29

3.2.4.4. Cumulation 29

3.2.5. Avoiding undue negative effects of risk finance aid on competition and trade 29

3.2.5.1. Positive effects to be taken into account 29

3.2.5.2. Negative effects to be taken into account 30

3.2.5.3. Balancing of the positive effects against the negative effects of the aid 32

3.2.6. Transparency 32

4. EVALUATION 33

5. FINAL PROVISIONS 34

5.1. Applicability 34

5.2. Appropriate measures 34

5.3. Reporting and monitoring 35

5.4. Revision 35

1. INTRODUCTION

1. On the basis of Article 107(3), point (c), of the Treaty on the Functioning of the European Union, State aid designed to facilitate the development of certain economic activities may be considered to be compatible with the internal market, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. The Commission has historically acknowledged the importance to the economies of Member States of the risk finance market and the need to improve access to risk finance for small and medium sized enterprises (‘SMEs’), small middle-capitalisation firms (‘mid-caps’) and innovative mid-caps ( 1 ) , and the consequent need to have a set of guidelines to ensure a consistent approach in assessing risk finance aid measures. In that vein, the Commission adopted the 2006 Risk Capital Guidelines ( 2 ) which were subsequently replaced by the 2014 Risk Finance Guidelines ( 3 ) as part of the State Aid Modernisation package ( 4 ) . The 2014 Risk Finance Guidelines will expire at the end of 2021. However, Member States may continue to see a need to provide risk finance aid, and guidance on how to support risk finance in full compliance with State aid rules remains necessary.

2. In this regard, SMEs are the backbone of Member States’ economies, both in terms of employment and of economic dynamism and growth, and are therefore also central to the Union’s economic development and resilience as a whole. As acknowledged in the SME Strategy for a sustainable and digital Europe ( 5 ) , the Union’s 25 million SMEs employ around 100 million people, account for more than half of the Union’s gross domestic product (GDP) and play a key role in adding value in every sector of the economy. They bring innovative solutions to address challenges like climate change, inefficient use of resources and loss of social cohesion, and they help spread this innovation supporting the green and digital transition and strengthening the Union’s resilience or technological sovereignty. However, to be able to grow and unleash their full potential, SMEs need financing. This is especially true in innovation-oriented, high-tech, high risk sectors. Therefore, an efficient risk finance market for SMEs is crucial for entrepreneurial companies to be able to access the necessary funding at each stage of their development.

3. asymmetric information : start-ups and SMEs, especially when they are young or in new or high-tech sectors, are often unable to demonstrate their credit-worthiness or the soundness of their business plans to investors and banks. In such circumstances, the type of active screening and research that investors undertake for providing finance to larger or more established companies may not be worthwhile in the case of transactions involving SMEs and start-ups because the screening costs are too high relative to the value of the investment. Therefore, irrespective of the quality of their project, the innovativeness of their technology and growth potential, start-ups and SMEs will likely not be able to access the necessary finance as long as they lack a proven track record and sufficient collateral. That problem may be particularly pronounced as regards investments into innovative green, high-tech, digital, or aerospace-based technologies or into social innovations driven by social entrepreneurs Despite their growth prospects, start-ups and SMEs often face difficulties in gaining access to finance, particularly in the early stages of their development ( 6 ) and when they need additional funding to expand. At the heart of those difficulties lies a problem of: start-ups and SMEs, especially when they are young or in new or high-tech sectors, are often unable to demonstrate their credit-worthiness or the soundness of their business plans to investors and banks. In such circumstances, the type of active screening and research that investors undertake for providing finance to larger or more established companies may not be worthwhile in the case of transactions involving SMEs and start-ups because the screening costs are too high relative to the value of the investment. Therefore, irrespective of the quality of their project, the innovativeness of their technology and growth potential, start-ups and SMEs will likely not be able to access the necessary finance as long as they lack a proven track record and sufficient collateral. That problem may be particularly pronounced as regards investments into innovative green, high-tech, digital, or aerospace-based technologies or into social innovations driven by social entrepreneurs ( 7 ) . As a result of that asymmetric information, business finance markets may fail to provide the necessary equity or debt finance to newly-created and potentially innovative and high-growth start-ups and SMEs, resulting in a persistent capital market failure preventing supply from meeting demand at a price acceptable to both sides, which negatively affects SMEs’ growth prospects and undermines the Single Market’s productivity growth and overall resilience of the Union’s economy. In certain circumstances, small mid-caps and innovative mid-caps face the same market failure.

4. The consequences of a company not receiving finance may go beyond that individual entity, due in particular to growth externalities. Many successful sectors witness productivity growth not because companies present in the market gain in productivity, but because the more efficient and technologically advanced companies grow at the expense of the less efficient ones (or ones with obsolete products). Moreover, the economic sectors involved and the overall economy benefit from positive growth externalities linked to the accumulation of knowledge possessed by firms (organisational capital) or by workers (human capital), as well as from the introduction of new goods, in the form of surplus to consumers and/or firms. To the extent that these processes are disturbed by the fact that potentially successful companies may not be able to obtain finance, the wider consequences for productivity growth are likely to be negative. Allowing a wider base of companies to enter the market and scale-up by removing undue obstacles to financing may then spur growth.

5. Therefore, the existence of a financing gap affecting start-ups, SMEs, small mid-caps and innovative mid-caps may justify the deployment of public support measures by Member States in order to facilitate the development of risk finance in their domestic markets. Properly targeted State aid to support the provision of risk finance can be an effective means to alleviate the identified market failure or another relevant obstacle in access to finance and to leverage private resources. In the current context, Member States may also make use of it to foster recovery from the economic crisis caused by the COVID-19 pandemic.

6. Besides being indispensable for domestic economies of Member States, improved access to finance can positively contribute to some of the Union’s central policy objectives. Access to finance constitutes a powerful tool to support the Green Deal ( 8 ) and make Europe fit for the digital age ( 9 ) , as well as to ensure recovery from the economic crisis caused by the COVID-19 pandemic and build a Union that is more resilient also against future crises.

7. The green transition is a core objective of the Union. According to the most recent projections ( 10 ) , achieving the current climate and energy targets for 2030 could require up to EUR 417 billion of additional annual investment, a challenge for which leveraging significant private investment will be key. Promoting sustainable finance requires the right signals to direct financial and capital flows to green investment. To that end, in 2018 the Commission launched the Sustainable Finance Plan ( 11 ) , which has been followed recently by a new Sustainable Finance Package ( 12 ) . One element to promote green finance is improved disclosure on climate and environmental data so that investors are fully informed about the sustainability of their investments. Within that context, a key step has been the adoption of Regulation (EU) 2020/852 of the European Parliament and of the Council ( 13 ) , which classifies environmentally sustainable activities (commonly referred to as the ‘EU Taxonomy’).

8. Concerning the digital transition, the 2030 Digital Compass Communication ( 14 ) underlines the need to support the Union’s development of critical digital technologies in a way that fosters its productivity growth and economic development in full coherence with its societal values and objectives. National spending by Member States is crucial to enable a massive scale-up of investments, alongside relevant Union funds and private investments, in order to achieve that objective.

9. As for the crisis caused by the COVID-19 pandemic, recovery is an urgent priority, using the momentum to make progress on the digital and green transition, which will make the economy more resilient and more competitive. The Recovery and Resilience Facility (‘RRF’) ( 15 ) is the first and most important part of the EU Recovery Package adopted in response to the crisis, making EUR 672,5 billion available for Member States in the form of loans and grants as financial support for the crucial first years of the recovery, upon approval of their draft recovery and resilience plans. In this context, the Commission has identified flagship areas ( 16 ) which it encourages Member States to include in their recovery and resilience plans, given their relevance across Member States, the very large investments required, and their potential to create jobs and growth and reap the benefits from the green and digital transitions.

10. Moreover, as the updated Industrial Strategy ( 17 ) underlined, the Union needs to learn from the COVID-19 pandemic and its impact on the global value chains; improving its single market resilience and addressing strategic dependencies while safeguarding an open, competitive, and trade-based EU economy is at the core of these efforts.

11. Given the importance of effective access to finance for the Union’s core objectives, there is a need to further boost efforts building on Union policies aimed at improving such access, such as the Capital Markets Union (‘CMU’) and the use of the Union’s budget.

12. In this regard, the Commission adopted the first CMU action plan ( 18 ) in 2015 in order to mobilise capital in the Union and channel it to all companies. One of its main objectives was to improve the access of SMEs to finance, in particular to non-banking finance. Since then, the Union has made significant progress, largely delivering on the individual actions announced in the 2015 CMU action plan and its 2017 mid-term review. Many of those actions were aimed at improving access to funding for all undertakings irrespective of size or age, but some of them were aimed, to a great extent, at facilitating access to capital markets specifically for SMEs and small mid-caps ( 19 ) . A new CMU action plan ( 20 ) was launched in 2020 to deepen the Union’s CMU over the coming years in order to continue developing the capital markets and ensure access to market financing, in particular for small and medium-sized businesses. In this context, in accordance with Article 33(9) of Directive 2014/65/EU ( 21 ) , the Commission has also set up a Technical Expert Stakeholder Group on SMEs which was mandated to assess the barriers to SMEs tapping public markets.

13. In view of the importance of improving access to finance for SMEs, the Commission complements the Union’s legislation and policy actions with the Union budget, in order to address structural market failures that limit the growth of start-ups and SMEs. To that end, the use of financial instruments ( 22 ) was enhanced under the 2014-2020 Multiannual Financial Framework (‘MFF’). In particular, the Union funding programmes established by Regulation (EU) No 1287/2013 of the European Parliament and of the Council ( 23 ) (‘Competitiveness of Enterprises and small and medium-sized enterprises’ (‘COSME’)) and Regulation (EU) No 1291/2013 of the European Parliament and of the Council ( 24 ) (‘Horizon 2020’) contributed to improving the use of public resources through risk-sharing funding mechanisms to the benefit of SMEs in their start-up, growth and transfer phases, as well as small mid-caps and innovative mid-caps, with a particular emphasis on actions designed to provide seamless support from innovation to market, including the commercial implementation of research and development (‘R&D’) results ( 25 ) . Furthermore, the European Innovation Council (‘EIC’) has supported start-ups and SMEs since 2018, under the Horizon 2020 programme, and will continue to do so, as well as to support small mid-caps, under the Union’s resarch and innovation funding programme Horizon Europe ( 26 ) , with the aim of enhancing performance of the Union’s venture capital market. The launch of the European Scale-up Action for Risk capital (‘ESCALAR’) ( 27 ) , as a pilot programme by the Commission and the European Investment Fund (‘EIF’), as well as work on the creation of a private-public fund ( 28 ) to help finance initial public offerings of SMEs, reveals the importance attached to facilitating start-up and SME growth as well as the need to further complete the range of existing public support measures at all funding stages. The EIF also activated a ‘fund of funds’ in 2020, with the ISEP (InnovFin Space Equity Pilot) initiative, engaging four private Venture Capital investors to increase equity investment in european aerospace and defence companies. This model is being pursued further by the CASSINI initiative and in particular its planned Growth Fund ( 29 ) . In addition, the Union’s cohesion policy has been contributing increasingly to the financing of SMEs, including via provision of risk capital, since early 2000, reaching EUR 10 billion of support at the end of 2013 and an additional EUR 15 billion of commitments by 23 Member States as of end 2020. Financial instruments under cohesion policy supported about 365 000 SMEs across Europe in the course of 2020 alone. Finally, the new InvestEU Programme ( 30 ) , which will bring together 14 different financial instruments currently available to support investment in the Union, as well as funds contributed from shared management to the Member State compartment, has a specific window dedicated to the funding of small businesses while InvestEU’s three other windows can also fund SMEs within their scope.

14. Both the Commission’s experience in the risk finance aid area (under the 2014 Risk Finance Guidelines as well as the General Block Exemption Regulation ( 31 ) ), and the abovementioned initiatives (see paragraphs 12 and 13) at the Union level aimed at improving access to finance, demonstrate that access to finance continues to be a priority both for the Union and for its Member States. Against this background, it is therefore crucial that the Commission continues to provide guidance to Member States on how it will assess the compatibility of risk finance measures with the internal market. This is also demonstrated by the evaluation that the 2014 Risk Finance Guidelines underwent in 2019 and 2020: the so-called Fitness Check ( 32 ) . The results of the Fitness Check show that as a rule, the Risk Finance Guidelines remain relevant and fit for purpose. Further clarification and simplification of the rules is, however, necessary. These revised Risk Finance Guidelines will facilitate the deployment of adequately targeted risk finance State aid by Member States, taking into account the positive contribution of such aid to the Commission priorities outlined above (see paragraphs 6 to 9), in addition to the positive effects of the aid in ensuring access to finance.

15. Following the adoption in 2016 of the Notice on the notion of aid ( 33 ) and having regard, in particular, to Section 4.2 thereof ( 34 ) , these Guidelines no longer address whether or not a public support measure constitutes State aid, but focus on the conditions under which a State aid measure may be found compatible with the internal market.

16. For these reasons, the Commission has decided to make certain changes to the 2014 Risk Finance Guidelines, to clarify the rules and bring administrative simplification in order to facilitate the deployment of State aid in support of risk finance.

2. SCOPE OF THE GUIDELINES AND DEFINITIONS

2.1. Scope of these Guidelines

17. The Commission will apply the principles set out in these Guidelines to risk finance measures which do not satisfy all the conditions laid down in Section 3 of the General Block Exemption Regulation (‘Aid for access to finance for SMEs’). The Member State concerned must notify those measures (see Section 2.2) in accordance with Article 108(3) of the Treaty and the Commission will carry out a substantive compatibility assessment as set out in Section 3 of these Guidelines.

18. de minimis Regulation However, Member States may also choose to design risk finance measures in such a way that the measures do not entail State aid under Article 107(1) of the Treaty, for instance because they comply with the market economy operator test ( 35 ) or because they fulfil the conditions of the applicableRegulation ( 36 ) . Such cases do not need to be notified to the Commission.

19. These Guidelines do not address the compatibility with the internal market of State aid measures which meet the criteria laid down in other State aid guidelines, frameworks or regulations. The Commission will pay particular attention to the need to prevent the use of these Guidelines to pursue policy objectives which are addressed principally by other State aid frameworks, guidelines and regulations.

20. These Guidelines are without prejudice to the assessment under State aid rules of other types of financial instruments than those covered herein, such as instruments providing for the securitisation of existing loans.

21. The Commission will only apply the principles set out in these Guidelines to risk finance schemes. They will not be applied in respect of ad hoc measures providing risk finance aid to individual undertakings, except in the case of measures aimed at supporting a specific alternative trading platform.

22. It is important to recall that risk finance aid measures have to be deployed through financial intermediaries or alternative trading platforms, except for fiscal incentives on direct investments in eligible undertakings. Therefore, a measure whereby the Member State or public entity makes direct investments in companies without the involvement of such intermediary vehicles does not fall under the scope of the risk finance State aid rules in the General Block Exemption Regulation or these Guidelines.

23. In light of their more established track record and higher collateralisation, the Commission considers that as a rule, large enterprises do not face the same difficulties in accessing finance as start-ups and SMEs do and thus aid to such enterprises should not be covered by these Guidelines. Exceptionally, a risk finance measure in favour of large undertakings may be considered compatible on the basis of these Guidelines where it is targeted at small mid-caps, in accordance with Section 3.2.2.1, point (a), or innovative mid-caps that carry out research and development (‘R&D’) and innovation projects, in accordance with Section 3.2.2.1, point (b).

24. The Commission will not apply the principles in these Guidelines to risk finance aid to companies listed on the official list of a regulated market, since the fact that they are listed on a regulated market demonstrates their ability to attract private financing.

25. Risk finance aid measures without any participation from independent private investors will not be considered compatible under these Guidelines. In such cases, the Member State should consider alternative policy options which may be more appropriate to achieve the same objectives and results, such as regional investment aid or start-up aid permitted under the General Block Exemption Regulation.

26. Risk finance aid measures where no appreciable risk is undertaken by the independent private investors, or where the benefits flow entirely to the private investors, will not be considered compatible on the basis of these Guidelines. Sharing the risks and rewards is a necessary condition under these Guidelines to limit the financial exposure of, and to ensure a fair return to, the State.

27. With the exception of risk finance aid in the form of replacement capital subject to the conditions laid down in Article 21 of the General Block Exemption Regulation, risk finance aid covered by these Guidelines may not be used to support buy-outs.

28. Risk finance aid will not be considered compatible with the internal market under these Guidelines if awarded to: (a) undertakings in difficulty, as defined by the Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty; (37) however, for the purposes of these Guidelines, SMEs that have been operating in any market for no longer than the eligibility period fixed in Article 21 of the General Block Exemption Regulation that qualify for risk finance investments following due diligence by the selected financial intermediary will not be considered as undertakings in difficulty, unless they are subject to insolvency proceedings or fulfil the criteria under their domestic law for being placed in collective insolvency proceedings at the request of their creditors; (b) undertakings which are subject to an outstanding recovery order following a previous Commission decision declaring an aid granted by the same Member State illegal and incompatible with the internal market.

29. The Commission will not apply the principles in these Guidelines to aid to export-related activities towards third countries or Member States, namely aid 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, as well as aid contingent upon the use of domestic over imported goods.

30. Risk finance measures often involve complex constructions creating incentives for one set of economic operators (investors) to provide risk finance to another set of operators (eligible undertakings). Depending on the design of the measure, and even if the intention of the public authorities may be only to provide benefits to the latter group, undertakings at either or both levels may benefit from State aid. Moreover, risk finance measures usually involve one or more financial intermediaries which may have a status separate from that of the investors and the final beneficiaries in which investments are made. In such cases it is also necessary to reflect on whether the financial intermediary can be considered to benefit from State aid. Any aid to the financial intermediary should be limited by passing on the advantage to the final beneficiaries as set out in these Guidelines. The fact that financial intermediaries may increase their assets and their managers may achieve a higher turnover through their commissions is considered to constitute only a secondary economic effect of the aid measure and not an advantage procured by the aid to the financial intermediaries or managers. However, if the risk finance measure is designed in such a way as to channel its secondary effects towards identifiable financial intermediaries or towards identifiable groups of financial intermediaries, those financial intermediaries will be considered to benefit from an indirect advantage.

2.2. Notifiable risk finance aid

31. de minimis Regulations Member States must notify, pursuant to Article 108(3) of the Treaty, risk finance measures which: (i) constitute State aid within the meaning of Article 107(1) of the Treaty (in particular measures that do not comply with the market economy operator test ( 38 ) and fall outside the scope of theRegulations ( 39 ) ), and (ii) do not satisfy all the conditions laid down in Section 3 of the General Block Exemption Regulation (‘Aid for access to finance for SMEs’). The Commission will assess the compatibility of those measures with the internal market under Article 107(3), point (c), of the Treaty. These Guidelines focus on those risk finance measures which are most likely to be found compatible under Article 107(3), point (c), of the Treaty, subject to a number of conditions which will be explained in greater detail in Section 3 of these Guidelines. Such measures fall into one of two categories.

32. The first category covers risk finance measures which target undertakings that do not fulfil all the eligibility requirements for risk finance aid as laid down in Section 3 of the General Block Exemption Regulation. That category encompasses, in particular, measures targeting the following undertakings: (a) small mid-caps; (b) innovative mid-caps; (c) SMEs receiving the initial risk finance investment while they have been operating in any market for longer than the eligibility period fixed in Article 21 of the General Block Exemption Regulation; (d) start-ups and SMEs requiring an overall risk finance investment of an amount exceeding the cap fixed in the General Block Exemption Regulation; (e) alternative trading platforms not fulfilling the conditions of the General Block Exemption Regulation.

33. The second category consists of measures whose design parameters differ from those set out in Section 3 of the General Block Exemption Regulation. That category encompasses, in particular, the following cases: (a) financial instruments with independent private investor participation below the ratios provided for in the General Block Exemption Regulation; (b) financial instruments with design parameters above the ceilings provided for in the General Block Exemption Regulation; (c) financial instruments other than guarantees where financial intermediaries, investors or fund managers are selected by giving preference to protection against potential losses (downside protection) over prioritised returns from profits (upside incentives); (d) fiscal incentives to corporate investors, including financial intermediaries or their managers acting as co-investors.

34. Unless otherwise specified in these Guidelines, all compatibility conditions applicable to risk finance aid under Section 3 of the General Block Exemption Regulation will guide the Commission’s assessment of the categories of notifiable measures.

2.3. Definitions

35. For the purposes of these Guidelines: (1) ‘alternative trading platform’ means a multilateral trading facility as defined in Article 4(1), point (22), of Directive 2014/65/EU where at least 50 % of the financial instruments admitted to trading are issued by SMEs; (2) ‘buy-out’ means the purchase of at least a controlling percentage of a company’s equity from the current shareholders to take over its assets and operations; (3) ‘downside protection’ means a reduced exposure to losses in the event of underperformance of the underlying transaction compared to the public investors; (4) ‘eligible undertakings’ means start-ups, SMEs, small mid-caps and innovative mid-caps; (5) ‘entrusted entity’ means the European Investment Bank, the European Investment Fund, an international financial institution in which a Member State is a shareholder, a financial institution established in a Member State aiming at the achievement of public interest under the control of a public authority, a public law body, or a private law body with a public service mission; the entrusted entity can be selected or directly appointed in accordance with Directive 2014/24/EU of the European Parliament and of the Council (40) or in accordance with Article 38(4), point (b)(iii), of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (41) or in accordance with Article 59(3), point (c) of Regulation (EU) No 2021/1060 of the European Parliament and of the Council (42); (6) ‘equity investment’ means the provision of capital to an undertaking, invested directly or indirectly in return for the ownership of a corresponding share of that undertaking; (7) ‘evaluation plan’ means a document covering one or more aid schemes and containing at least the following minimum elements: (a) the objectives to be evaluated; (b) the evaluation questions; (c) the result indicators; (d) the envisaged methodology to conduct the evaluation; (e) the data collection requirements; (f) the proposed timing of the evaluation including the date of submission of the interim and the final evaluation reports; (g) the description of the independent body that will carry out the evaluation or the criteria that will be used for its selection; (h) the arrangements for making the evaluation publicly available; (8) ‘exit’ means the liquidation of holdings by a financial intermediary or investor, including trade sale, write-offs, repayment of shares or loans, sale to another financial intermediary or another investor, sale to a financial institution and sale by public offering, including an initial public offering (‘IPO’); (9) ‘fair rate of return’ means the expected internal rate of return equivalent to a risk-adjusted discount rate reflecting the level of risk of the investment and the nature and volume of the capital to be invested by the private investors; (10) ‘final beneficiary’ means an eligible undertaking that has received investment under a risk finance State aid measure; (11) ‘financial intermediary’ means any financial institution, regardless of its form and ownership, including funds of funds, private investment funds, public investment funds, banks, micro-finance institutions and guarantee societies; (12) ‘first commercial sale’ means the first sale by an undertaking on a product or service market, excluding limited sales to test the market; (13) ‘first loss piece’ means the most junior risk tranche that carries the highest risk of losses, comprising the expected losses of the target portfolio; (14) ‘follow-on investment’ means additional investment in a company subsequent to one or more previous risk finance investment rounds; (15) ‘fund of funds’ means a fund which invests in or contributes resources to other funds rather than directly in companies or in financial assets such as shares or bonds; (16) ‘guarantee’ means a written commitment to assume responsibility for all or part of a third party’s newly originated risk finance loan transactions such as debt or lease instruments, as well as quasi-equity instruments; (17) ‘guarantee cap’ means the maximum exposure of a public investor expressed as a percentage of the total investments made in a guaranteed portfolio; (18) ‘guarantee rate’ means the percentage of loss coverage by a public investor of each and every transaction eligible under the risk finance State aid measure; (19) ‘independent private investor’ means an independent private investor within the meaning of Article 2 of the General Block Exemption Regulation; (20) ‘innovative mid-cap’ means a mid-cap that meets one of the following conditions: fulfills the criteria to be considered an ‘innovative enterprise’ within the meaning of Article 2 of the General Block Exemption Regulation; has recently been awarded a Seal of Excellence quality label by the European Innovation Council in accordance with the Horizon 2020 work programme 2018-2020 (43) or with Article 2(23) and Article 15(2) of Regulation (EU) 2021/695; or has recently received an investment from the European Innovation Council Fund, such as an investment in the context of the Accelerator Programme as referred to in Article 48 of Regulation (EU) 2021/695; and either has participated to any CASSINI (44) action (CASSINI Business Accelerator or Matchmaking), or has received investment from CASSINI Seed and Growth Funding Facility, or has been awarded a CASSINI Prize, meeting the evaluation thresholds set therein, or has been supported by space-related projects funded by Horizon Europe which has resulted in the creation of a start-up; (21) ‘leverage of private resources’ means the degree to which public investment attracts additional investment from private sources; (22) ‘loan instrument’ means an agreement which obliges the lender to make available to the borrower an agreed amount of money for an agreed period of time and under which the borrower is obliged to repay the amount within the agreed period; it may take the form of a loan, or another funding instrument, including a lease, which provides the lender with a predominant component of minimum yield; (23) ‘mid-cap’ means an undertaking that is not an SME and whose number of employees does not exceed 1 500, calculated in accordance with Articles 3 to 6 of Annex I to the General Block Exemption Regulation. For the purpose of the application of this definition, several entities will be considered as one undertaking if any of the conditions listed in Article 3(3) of Annex I to the General Block Exemption Regulation is fulfilled; (24) ‘natural person’ means a person other than a legal entity who is not an undertaking within the meaning of Article 107(1) of the Treaty; (25) ‘new loan’ means a newly initiated loan instrument designed to finance new investments or working capital, to the exclusion of refinancing of: (i) existing loans or of (ii) other forms of financing; (26) ‘quasi-equity investment’ means a type of financing that ranks between equity and debt, having a higher risk than senior debt and a lower risk than common equity and whose return for the holder is predominantly based on the profits or losses of the underlying target undertaking and which is unsecured in the event of default; quasi-equity investments may be structured as debt, unsecured and subordinated, including mezzanine debt, and in some cases convertible into equity, or as preferred equity; (27) ‘replacement capital’ means the purchase of existing shares in a company from an earlier investor or shareholder; (28) ‘risk finance investment’ means equity and quasi-equity investments, loans (including leases) and guarantees, or a combination thereof, to eligible undertakings for the purposes of making new investments, to the exclusion of entirely private investments provided on market terms and outside the scope of the relevant State aid measure; (29) ‘small and medium-sized enterprise’ (‘SME’) means an undertaking fulfilling the criteria laid down in Annex I to the General Block Exemption Regulation; (30) ‘small mid-cap’ means an undertaking that is not an SME and whose number of employees does not exceed 499, calculated in accordance with Articles 3 to 6 of Annex I to the General Block Exemption Regulation, and the annual turnover of which does not exceed EUR 100 million or the annual balance sheet of which does not exceed EUR 86 million. For the purpose of the application of this definition, several entities will be considered as one undertaking if any of the conditions listed in Article 3(3) of Annex I to the General Block Exemption Regulation is fulfilled; (31) ‘start-up’ means any unlisted small enterprise up to 5 years following its registration, that fulfils the following conditions: (a) it has not taken over the activity of another enterprise; (b) it has not yet distributed profits; (c) it has not been formed through a merger (45). For eligible undertakings that are not subject to registration, the 5 year eligibility period is considered to start from either the moment when the enterprise starts its economic activity or the moment it becomes liable to tax with regard to its economic activity, whichever is earlier; (32) ‘total financing’ means the overall investment amount made into an eligible undertaking via one or more risk finance investments, including follow-on investments, under any risk finance State aid measure, to the exclusion of entirely private investments provided on market terms and outside the scope of the risk finance State aid measure; (33) ‘upside-incentive’ means preferential or prioritised returns from profits compared to the public investors.

3. COMPATIBILITY ASSESSMENT OF RISK FINANCE AID

36. On the basis of Article 107(3), point (c), of the Treaty, State aid to facilitate the development of certain economic activities within the Union may be considered to be compatible with the internal market, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

37. In this Section, the Commission clarifies how it will assess the compatibility of risk finance aid measures which are subject to the notification obligation pursuant to Article 108(3) of the Treaty. More specifically, to assess whether a risk finance aid measure can be considered to be compatible with the internal market, the Commission will determine whether the aid measure: (a) facilitates the development of a certain economic activity (first condition); and (b) does not adversely affect trading conditions to an extent contrary to the common interest (second condition).

38. When determining whether the first condition is fulfilled, namely that the aid facilitates the development of an economic activity, the Commission will consider the following aspects: (a) identification of the supported economic activity (see Section 3.1.1); (b) incentive effect: the aid must change the behaviour of the undertakings concerned in such a way that such undertakings engage in additional activities which they would not carry out without the aid or would carry out in a more restrictive or different manner or location (see Section 3.1.2).

39. When considering whether the second condition is fulfilled, namely that the aid does not adversely affect trading conditions to an extent contrary to the common interest, the Commission will consider the following aspects: (a) need for State intervention: the aid measure must bring about a material improvement that the market cannot deliver itself, for example by remedying a market failure or another relevant obstacle to the provision of risk finance including for instance regional inequalities in access to finance (see Section 3.2.2); (b) appropriateness of the aid measure: the proposed aid measure must be an appropriate policy instrument to meet its objective (see Section 3.2.3); (c) proportionality of the aid (aid limited to the minimum): the amount and intensity of the aid must be limited to the minimum needed to induce the additional investment or activity by the undertakings concerned (see Section 3.2.4); (d) avoidance of undue negative effects of the aid on competition and trade: any negative effects must be limited and not outweigh the positive effects of the aid (see Section 3.2.5); (e) transparency of the aid: Member States, the Commission, economic operators, and the public, must have easy access to all relevant acts and pertinent information about the aid awarded thereunder (see Section 3.2.6).

40. The overall balance (see Section 3.2.5.3) of certain categories of aid schemes may further be made subject to a requirement of ex post evaluation as described in Section 4. In such cases, the Commission may limit the duration of the schemes, with a possibility to re-notify their subsequent prolongation.

41. If a State aid measure, the conditions attached to it (including its financing method where the financing method forms an integral part of the State aid measure), or the activity it finances entails a violation of a relevant provision of Union law, the aid cannot be considered compatible with the internal market ( 46 ) . Such violations include but are not limited to: (a) making the aid subject to the obligation to use nationally produced goods or national services; (b) making the aid subject to the obligation for financial intermediaries, their managers or final beneficiaries to have their headquarters in the territory of the Member State concerned, or to move them to the territory of that Member State, in violation of Article 49 of the Treaty pertaining to the freedom of establishment (47); (c) imposing conditions which violate Article 63 of the Treaty pertaining to the free movement of capital.

3.1. First condition: aid facilitates the development of an economic activity

3.1.1. Identification of the supported economic activity

42. In most cases, risk finance aid measures cover companies from a wide range of economic sectors. Those measures help to ensure that certain SMEs and mid-caps have access to the necessary amount and form of finance to perform or further develop their respective economic activities. The Commission will therefore identify the type of companies (SMEs, small mid-caps or innovative mid-caps) and the sectors covered by the risk finance aid measure.

3.1.2. Incentive effect

43. Risk finance aid can only be found compatible with the internal market if it has an incentive effect. The Commission considers that aid without an incentive effect does not facilitate the development of the economic activity concerned.

44. An incentive effect occurs where the aid induces the aid beneficiary to change its behaviour by undertaking activities which it would not carry out without the aid or would carry out in a more restrictive manner due to the existence of a market failure. At the level of the eligible undertakings, an incentive effect is present where the aid enables the final beneficiary to raise finance that would not otherwise be available in terms of form, amount or timing.

45. Risk finance measures must incentivise market investors to provide funding to potentially viable eligible undertakings above the levels of funding provided in the absence of such incentives or to assume extra risk, or both. A risk finance measure is considered to have an incentive effect if it mobilises investments from market sources so that the total financing provided to the eligible undertakings exceeds the budget of the measure. Hence, a key element in selecting the financial intermediaries and fund managers should be their ability to mobilise additional private investment.

46. If funded debt instruments are used to refinance existing loans, they are not considered to have an incentive effect and any aid element in such instruments cannot be regarded as compatible under these Guidelines.

47. The assessment of the incentive effect is closely linked to the assessment of the need for State intervention discussed in Section 3.2.2. Furthermore, the suitability of a measure to leverage private resources ultimately depends on the design of that measure as regards the balance of risks and rewards between public and private finance-providers, which is also closely related to the question as to whether the design of the risk finance State aid measure is appropriate (see Section 3.2.3). Therefore, once the need for State intervention has been properly identified and the measure has an appropriate design, it can be assumed that an incentive effect is present.

3.2. Second condition: Avoidance of adverse effects on trading conditions to an extent contrary to the common interest

48. Article 107(3), point (c), of the Treaty allows the Commission to consider aid to facilitate the development of certain economic activities or of certain economic areas compatible, but only ‘ where such aid does not adversely affect trading conditions to an extent contrary to the common interest ’.

49. The assessment of the negative effects on the internal market involves complex economic and social assessments. The Commission will explain in this Section how it intends to exercise its discretion in that respect.

50. By its very nature, any State aid measure results in distortions of competition and has an effect on trade between Member States. However, in order to establish if the distortive effects of the aid are limited to the minimum, the Commission will verify whether the aid is necessary (see Section 3.2.2), appropriate (see Section 3.2.3), and proportionate (see Section 3.2.4). To enable it to carry out that verification, the Commission requires that Member States submit evidence in the form of an ex ante assessment as described in Section 3.2.1.

51. The Commission will then assess the negative effects of the risk finance aid in question on competition and trading conditions. More specifically, aid in the field of risk finance can lead to the crowding out of private investors, have distortive effects at the level of financial intermediaries, cause specific product market distortions and have delocalisation effects. The Commission will examine such negative effects of the aid on competition and trade and weigh them against the positive effects of the aid (see Section 3.2.5). If the positive effects outweigh the negative effects, the Commission will consider the aid compatible.

52. Finally, the Commission will ensure that the aid complies with its transparency requirements (see Section 3.2.6).

3.2.1. Basic elements of the ex ante assessment to be submitted by the Member State concerned to the Commission

53. State aid can only be justified if it can bring about a material development that the market cannot deliver itself, for example by remedying a market failure or another relevant obstacle to the provision of risk finance or investment.

54. State aid may be necessary to increase the provision of risk finance in a situation where the market, on its own, fails to deliver an efficient outcome or does not deliver in a timely manner. The Commission considers that there is no general market failure as regards access to finance for start-ups, SMEs or mid-caps, but only a failure related to certain groups of start-ups, SMEs and some types of mid-caps, depending, in particular, on the specific economic context of the Member State concerned, as well as their field of activity (e.g. in some sectors risks may be overestimated).

55. Section 3 of the General Block Exemption Regulation sets out the conditions under which risk finance measures are presumed to address a market failure through appropriate and proportionate means, while having an incentive effect and minimising any distortions of competition. Measures that comply with those conditions do not have to be notified and are deemed compatible with the internal market.

56. Risk finance measures that do not meet the conditions laid down in Section 3 of the General Block Exemption Regulation need to be notified so that the Commission can, among other things, assess whether a market failure or another relevant obstacle to the provision of risk finance exists. Therefore, Member States are required to prove that a specific market failure or other relevant obstacle exists beyond the legal presumption on which the General Block Exemption Regulation is based. In addition, the proposed risk finance measure must meet the compatibility criteria set out in these Guidelines. For those purposes, the Member State should submit to the Commission an in-depth ex ante assessment or, where appropriate, a series of assessments.

57. The in-depth ex ante assessment must be based on objective and up-to-date evidence and on available best practices and methodologies (such as desk research, interviews, online surveys or appropriate quantitative methods). To the extent possible, the evidence then needs to be triangulated and used in a mutually reinforcing way to support the conclusions from the ex ante assessment. The ex ante assessment must date from less than 3 years preceding the notification of the risk finance measure and should preferably be conducted by an independent expert. The ex ante assessment should also take into account lessons learnt from similar instruments and past ex ante assessments carried out by the Member State. In the drafting of the ex-ante assessment, the Member States can use the existing body of evidence, to the extent it is relevant, to prove the market failure when undertaking the ex ante assessment. The ex ante assessment should focus on the specific type of risk finance (for example, equity or subordinated debt) for which an aid measure is proposed.

58. The proposed risk finance aid measure should be appropriate to achieve the intended objective of the aid. Therefore, the ex ante assessment must analyse the existing and, if possible, the envisaged actions targeting the same identified market failure or other relevant obstacle to the provision of risk finance, taking into account the effectiveness and efficiency of other policy tools. The Member State must demonstrate that the identified market failure or other relevant obstacle cannot be adequately addressed by other policy tools that do not entail State aid or by measures falling within the scope of the General Block Exemption Regulation.

59. State aid must be proportionate in relation to the market failure or to the other relevant obstacle which it is intended to address in order to achieve the relevant policy objectives. Aid to increase the provision of risk finance should therefore be limited to the strict minimum necessary to address the market failure or the other relevant obstacle identified in the ex ante assessment, without generating undue advantages for its beneficiaries. For risk finance investments exceeding the cap fixed per eligible undertaking in Article 21 of the General Block Exemption Regulation, the ex ante assessment needs to demonstrate the proportionality of the aid measure in greater detail, as set out in paragraphs 64 and 65 of these Guidelines.

60. ex ante assessment prepared in accordance with Article 37(2) of Regulation (EU) No 1303/2013 or Article 58(3) of Regulation (EU) 2021/1060. The Commission will then assess whether the evidence provided meets the requirements in these Guidelines. Where the risk finance measure is used, partially or entirely, to support undertakings that have recently been awarded a Seal of Excellence quality label by the EIC ex ante assessment. Where the risk finance measure is financed partially from the European Regional Development Fund, European Social Fund or the Cohesion Fund, the Member State may re-use (parts of) theassessment prepared in accordance with Article 37(2) of Regulation (EU) No 1303/2013 or Article 58(3) of Regulation (EU) 2021/1060. The Commission will then assess whether the evidence provided meets the requirements in these Guidelines. Where the risk finance measure is used, partially or entirely, to support undertakings that have recently been awarded a Seal of Excellence quality label by the EIC ( 48 ) , to co-invest with the EIC Fund, or to provide follow-on investment with respect to the Accelerator Programme ( 49 ) , or for undertakings that either have participated to any CASSINI action (CASSINI Business Accelerator or Matchmaking) meeting the evaluation thresholds set therein or have received investment from CASSINI Seed and Growth Funding Facility, or have been awarded a CASSINI Prize, or have been supported by space-related projects funded by Horizon Europe which has resulted in the creation of a start-up, the Commission will accept that the quality label and other evidence from the due diligence procedure carried out by the EIC respectively from the competitive selection processes embedded in CASSINI actions are used as part of theassessment.

61. For risk finance measures that fall outside the scope of the General Block Exemption Regulation, the ex ante assessment must describe the nature of the market failure or other relevant obstacle and demonstrate its presence in as far as it affects one or more of the following: (a) specific categories of target undertakings that do not fulfil all the eligibility requirements under the General Block Exemption Regulation (see paragraph 32, points (a) to (d)); (b) alternative trading platforms not fulfilling the conditions of the General Block Exemption Regulation (see paragraph 32, point (e)); (c) financial instruments with design parameters deviating from those described in the General Block Exemption Regulation (see paragraph 33, points (a), (b) and (c)); (d) fiscal incentives to corporate investors, including financial intermediaries or their managers acting as co-investors (see paragraph 33, point (d)).

62. The ex ante assessment should identify the type of undertakings affected, in particular, in terms of age or development stage, economic sector, and geographic area of activity and demonstrate that such undertakings are affected by the presence of a specific market failure or another relevant obstacle.

63. For risk finance measures that concern financial instruments with independent private investor participation below the ratios provided for in Article 21 of the General Block Exemption Regulation (see paragraph 33, point (a) of these Guidelines), the ex ante assessment should furthermore provide a sufficiently detailed assessment of the level and structure of supply of private funding for the type of eligible undertaking in the relevant geographic area and demonstrate that the identified market failure or other relevant obstacle cannot be addressed with measures which fulfil all the requirements set out in the General Block Exemption Regulation concerning private participation.

64. In addition, for risk finance investments of an amount exceeding the cap fixed per eligible undertaking in Article 21 the General Block Exemption Regulation (see paragraph 32, point (e) of these Guidelines) the ex ante assessment should also quantify the funding gap (that is to say, the level of currently unmet demand for finance from eligible undertakings) due to the identified market failure or other relevant obstacle. The assessment must demonstrate that the funding gap at the level of the eligible undertakings exceeds the cap fixed in the General Block Exemption Regulation. Such quantification should be based on available best practices and methodologies allowing for the estimation of the extent to which there is an unmet demand for finance, from the targeted undertakings.

65. For the quantification of the funding gap, both the structural and cyclical (that is to say, crisis-related) problems leading to suboptimal levels of private funding must be analysed. In particular, the ex ante assessment must provide a comprehensive analysis of the supply side by assessing sources of financing available to the eligible undertakings, taking into account the number of existing financial intermediaries that operate in the target geographic area regardless of the Member State where the intermediary is incorporated, their public or private nature, and the investment volumes targeted to the relevant market segment. The assessment of the demand side should take into account the number of potentially eligible undertakings and average values of required financing. That analysis should be based on data covering the 5 years preceding the notification of the risk finance measure and, where possible, triangulate findings by comparing alternative data sources.

66. For schemes targeting exclusively start-ups and SMEs before first commercial sale, the Commission will apply the requirements regarding the ex ante assessment in a proportionate manner, particularly in terms of the evidence requested.

3.2.2. Need for State intervention

67. State aid should be targeted towards situations where it can bring about a material development that the market cannot deliver on its own. In order to assess whether State aid is effective in reaching the intended outcome, it is first necessary to identify the problem to be addressed. Member States should explain how the aid measure can effectively mitigate the identified obstacle, and in particular any market failure that hinders the provision of sufficient risk finance by the market on its own.

68. The risk finance measure can only be justified if it is targeted at the specific market failure or other relevant obstacle demonstrated in the ex ante assessment. The Commission considers that such market failures or obstacles may exist in particular, but not exclusively, for SMEs in their early stages which, despite their growth prospects, are unable to demonstrate their creditworthiness or the soundness of their business plans to investors. The scope of such market failure or obstacle, both in terms of the affected companies and their capital requirement, may vary depending on the sector in which they operate. Sectors that may be particularly affected by such market failures and obstacles are high-tech, innovative green or digital technologies. Due to information asymmetries, the market may find it difficult to assess the risk/return profile of such start-ups and SMEs and their ability to generate risk-adjusted returns. The difficulties those SMEs experience in sharing information about the quality of their projects, their perceived riskiness and weak creditworthiness lead to high transaction and agency costs and may exacerbate investor risk-aversion. Small mid-caps and innovative mid-caps may face similar difficulties and therefore be affected by the same market failure or obstacle.

69. Therefore, the risk finance measure must be designed in such a way as to address the specific market failure or other relevant obstacle identified in the ex ante assessment, in particular as regards the eligible undertakings in the targeted development stage, geographic area, and, if applicable, economic sector.

70. To ensure that the financial intermediaries involved in the measure target the identified market failures, a due diligence process must take place to ensure a commercially sound investment strategy focusing on the identified policy objective and respecting the defined eligibility requirements and funding restrictions. In particular, Member States must select financial intermediaries which can demonstrate that their proposed investment strategy is commercially sound and includes an appropriate risk diversification policy aimed at achieving economic viability and efficient scale in terms of size and territorial scope of the investments.

3.2.2.1. Measures targeted at categories of undertakings outside the scope of the General Block Exemption Regulation

71. As regards aid for access to finance, the scope of the General Block Exemption Regulation is restricted to SMEs. However, certain undertakings which are not covered by the definition of SME, in terms of headcount, or financial thresholds, or both, may face similar financing constraints.

(a) Small mid-caps

72. Extending the scope of eligible undertakings under a risk finance measure to include small mid-caps alongside SMEs may be justified in so far as it provides an incentive to private investors to invest in a more diversified portfolio with enhanced entry and exit possibilities. Including small mid-caps in the portfolio is likely to decrease the riskiness at a portfolio level and hence to increase the return on the investments. Therefore, it may be a particularly effective way to attract institutional investors to the riskier early stage companies.

73. For those reasons, and provided the ex ante assessment contains adequate economic evidence to that effect, support to small mid-caps may be justified. In its assessment, the Commission will take into account the labour- and capital-intensity of the targeted undertakings, as well as other criteria reflecting specific financing constraints affecting small mid-caps (for example, sufficient collateral for a large loan or the need for significant external capital for development and deployment).

(b) Innovative mid-caps

74. In certain circumstances, mid-caps could also face financing constraints comparable to those affecting SMEs. That may, for example, be the case for mid-caps carrying out R&D and innovation activities alongside initial investment in production facilities, including market replication, and whose track record does not enable potential investors to make relevant assumptions as regards the future market prospects of the results of such activities, as these markets are being developed or contain an advanced technological element of which the risk is difficult to assess (e.g. aerospace and defence). In such cases, risk finance State aid may be necessary for innovative mid-caps to increase their production capacities to a sustainable scale where they are able to attract private financing on their own. In addition, the observation in Section 3.2.2.1., point (a), is also valid for innovative mid-caps: including them in an investment portfolio can be an effective way for a financial intermediary to offer a more diversified set of investment opportunities appealing to a wider range of potential investors.

(c) SMEs receiving the initial risk finance investment while they have been operating in any market for longer than the eligibility period fixed in the General Block Exemption Regulation

75. Certain types of undertakings may be regarded as still being in their expansion/early growth stages if, even though they have been in existence for a considerable amount of time, they have not yet sufficiently proven their potential to generate returns or do not have a sufficiently robust track record and collateral. This may be the case in high-risk sectors, such as the biotech, aerospace, defence, cultural and creative industries, and potentially more generally for innovative SMEs, including those that focus on green or digital technologies or SMEs that pursue social innovation ( 50 ) . Moreover, undertakings that have sufficient internal equity to finance their initial activities may require external financing only at a later stage, for instance to increase their capacity from a small-scale to a larger scale business. This may require a higher amount of investment than they can meet from their own resources.

76. Therefore, it may be possible to allow measures whereby the initial investment is carried out after the eligibility period fixed in Article 21 of the General Block Exemption Regulation. In such circumstances, the Commission may require that the measure clearly defines the eligible categories of undertakings, in the light of evidence provided in the ex ante assessment regarding the existence of a specific market failure affecting such undertakings.

(d) Start-ups and SMEs requiring a risk finance investment of an amount exceeding the cap fixed in the General Block Exemption Regulation

77. Article 21 of the General Block Exemption Regulation sets a maximum total amount of risk finance per eligible undertaking, including follow-on investments. However, in certain industries where the upfront research or investment costs are relatively high, for example in aerospace, defence, life sciences or green technology or energy, that amount may not be sufficient to achieve all the necessary investment rounds and set the start-up or SME on a sustainable growth path. It may therefore be justified, under certain conditions, to allow for a higher amount of overall investment to eligible undertakings.

78. More specifically, risk finance measures may provide support above the maximum total amount specified in the General Block Exemption Regulation provided the envisaged amount of funding reflects the size and nature of the funding gap identified and quantified in the ex ante assessment with respect to the target sectors or territories. In such cases, the Commission will take into account the capital-intensive nature of the targeted sectors and/or the higher costs of investments in certain geographic areas.

(e) Alternative trading platforms not fulfilling the conditions of the General Block Exemption Regulation

79. The Commission recognises that alternative trading platforms are an important part of the SME financing market because they both attract fresh capital into SMEs and facilitate the exit of earlier investors ( 51 ) . The General Block Exemption Regulation recognises their importance by facilitating their activity either through fiscal incentives targeted at natural persons investing in companies listed on those platforms, or by allowing for start-up aid to the platform operator, subject to the condition that the platform operator qualifies as a small enterprise and up to certain thresholds.

80. However, operators of alternative trading platforms may not necessarily be small enterprises when they are established. Equally, the maximum amount of aid permissible as start-up aid under the General Block Exemption Regulation may not be sufficient to support the establishment of the platform. Moreover, in order to attract sufficient resources for the establishment and the roll-out of new platforms, it may be necessary to provide fiscal incentives to corporate investors. Finally, the platform may not only list SMEs, but also undertakings which exceed the thresholds in the definition of SMEs.

81. Therefore, it may be justified, under certain conditions, to allow fiscal incentives to corporate investors, to support platform operators that are not small enterprises, to allow investments for the establishment of alternative trading platforms the amount of which exceeds the limits provided for start-up aid under the General Block Exemption Regulation, or to allow aid to alternative trading platforms where the majority of the financial instruments admitted to trading are issued by SMEs. In such cases, the ex ante assessment must demonstrate the existence of a specific market failure or other relevant obstacle affecting such platforms in the relevant geographic market.

3.2.2.2. Measures with design parameters not complying with the General Block Exemption Regulation

(a) Financial instruments with independent private investor participation below the ratios provided for in the General Block Exemption Regulation

82. The market failures or other relevant obstacles affecting enterprises in particular regions or Member States may be more pronounced due to the relative underdevelopment of the SME finance market within such areas in comparison to other regions in the same Member State, other Member States or globally. This may particularly be the case in Member States without a well-established presence of formal venture capital investors, private equity funds or business angels. In the case of measures aimed at overcoming such structural barriers, the Commission may accept an independent private investor participation below the ratios provided for in Article 21 of the General Block Exemption Regulation subject to the condition in paragraph 25 of these Guidelines.

83. Moreover, the Commission may also accept risk finance measures with independent private investor participation below the ratios set out in Article 21 of the General Block Exemption Regulation in the event of a more pronounced market failure or another relevant obstacle as demonstrated by the Member State, in particular, where such measures specifically target SMEs before their first commercial sale or at the proof-of-concept stage, provided that an appreciable part of the risks of the investment are effectively borne by the participating private investors.

(b) Financial instruments with design parameters above the ceilings provided for in the General Block Exemption Regulation

84. The benefit of the General Block Exemption Regulation is reserved for measures whereby non- pari passu loss-sharing between public and private investors is so designed as to limit the first loss assumed by the public investor. Similarly, in the case of guarantees, the block exemption sets limits on the guarantee rate and the total losses assumed by the public investor.

85. However, in certain circumstances, by taking a riskier financing position, public funding may allow private investors or lenders to provide additional financing. In assessing measures with financial design parameters exceeding the ceilings in the General Block Exemption Regulation, the Commission will take into account a number of factors as outlined in Section 3.2.3.2 of these Guidelines.

(c) Financial instruments other than guarantees where investors, financial intermediaries and their managers are selected by giving preference to downside protection over asymmetric profit-sharing

86. In accordance with Article 21 of the General Block Exemption Regulation, the selection of financial intermediaries, as well as investors or fund managers, must be based on an open, transparent and non-discriminatory process setting out clearly the policy objectives pursued by the measure and the type of financial parameters designed to achieve such objectives. This means that the financial intermediaries or their managers have to be selected via a procedure compliant with Directive 2014/24/EU. If that Directive is not applicable, the selection procedure must be such as to ensure the widest possible choice amongst qualified financial intermediaries or fund managers. In particular, such a procedure must enable the Member State concerned to compare the terms and conditions negotiated between the financial intermediaries or the fund managers and potential private investors so as to ensure that the risk finance measure attract private investors with the minimum State aid possible, or the minimum divergence from pari passu conditions, in the light of a realistic investment strategy.

87. Pursuant to Article 21 of the General Block Exemption Regulation, the applicable criteria for the selection of managers must include a requirement whereby, for instruments other than guarantees, ‘ profit-sharing shall be given preference over downside protection ’ in order to limit a bias towards excessive risk-taking by the manager selecting the undertakings in which the investment is made. This is meant to ensure that whatever the form of the financial instrument set out by the measure, any preferential treatment granted to private investors or lenders has to be weighed against the public interest which consists of ensuring the revolving nature of the public capital committed and the long-term financial sustainability of the measure.

88. In certain cases, however, it may prove necessary to give preference to downside protection, namely where the measure targets start-ups or certain sectors in which the default rate of SMEs is high. This may be the case for measures targeting sectors faced with important technological barriers, or sectors where the companies have a high dependence on single projects requiring large upfront investment and entailing high risk-exposure, such as the aerospace and defence ecosystem, and the cultural and creative industries. A preference for downside protection mechanisms may also be justified for measures operating via a fund of funds and aimed at attracting private investors at that level or for measures targeting SMEs before their first commercial sale or at the proof-of-concept stage.

(d) Fiscal incentives to corporate investors including financial intermediaries or their managers acting as co-investors

89. While the General Block Exemption Regulation covers fiscal incentives granted to independent private investors who are natural persons within the meaning of Article 2 thereof providing risk finance directly or indirectly to eligible start-ups and SMEs, Member States may find it appropriate to put in place measures applying similar incentives to independent private investors who are corporate investors. The difference lies in the fact that corporate investors are undertakings within the meaning of Article 107 of the Treaty. The measure must therefore be subject to specific restrictions (as set out in Sections 3.2.3.3 and 3.2.4.2) in order to ensure that aid at the level of the corporate investors remains proportionate and has a real incentive effect.

90. Financial intermediaries and their managers may benefit from a fiscal incentive only insofar as they act as co-investors or co-lenders. No fiscal incentive can be granted in respect of the services rendered by the financial intermediary or its managers for the implementation of the measure.

3.2.3. Appropriateness of the aid measure

91. The proposed aid measure must be an appropriate policy instrument to achieve the intended objective of the aid, that is to say, there must not be a better placed and less distortive policy instrument or aid instrument capable of achieving the same outcome.

3.2.3.1. Appropriateness compared to other policy instruments and other aid instruments

92. In order to address the identified market failure or other relevant obstacle and to contribute to the achievement of the policy objectives pursued by the measure, the proposed risk finance measure must be an appropriate instrument. The choice of the specific form of the risk finance measure must be duly justified based on the evidence provided by the Member State in the ex ante assessment.

93. As a first step, the Commission will consider whether and to what extent the risk finance measure can be considered as an appropriate instrument compared to other policy instruments aimed at encouraging the provision of risk finance to eligible undertakings. State aid is not the only policy instrument available to Member States to facilitate the provision of risk finance to eligible undertakings. Member States can use other complementary policy tools both on the supply and demand side, such as regulatory measures to facilitate the functioning of financial markets, measures to improve the business environment, advisory services for investment-readiness or public investments that comply with the market economy operator test.

94. As a second step, the Commission will consider whether the proposed measure is more appropriate than alternative State aid instruments addressing the same market failure or other relevant obstacle. In that respect, financial instruments are generally considered to be less distortive than direct grants and therefore constitute a more appropriate instrument. However, State aid to facilitate the provision of risk finance can be granted in various forms, such as selective fiscal instruments or sub-commercial financial instruments, including a range of equity, debt or guarantee instruments with different risk-return characteristics, as well as various delivery modes and funding structures, the appropriateness of which depends on the nature of the targeted undertakings and the funding gap. Therefore, the Commission will assess whether the design of the measure provides for an efficient funding structure, taking into account the investment strategy of the fund, so as to ensure sustainable operations.

95. In that respect, the Commission will look positively at measures which involve sufficiently large funds in terms of portfolio size, geographic coverage, in particular if they operate across several Member States, and diversification of the portfolio, as such funds may be more efficient and therefore more attractive for private investors, compared to smaller funds. Certain fund of funds structures may meet those conditions provided that the overall management costs resulting from the different levels of intermediation are offset by substantial efficiency gains.

3.2.3.2. Conditions for determining the appropriateness of financial instruments

96. To determine the appropriateness of financial instruments whose design parameters fall outside the scope of the General Block Exemption Regulation, the Commission will consider the conditions set out in paragraphs 97 to 121 of these Guidelines.

97. Firstly, the measure must mobilise additional funding from market participants. Minimum independent private investment ratios below those set out in Article 21 of the General Block Exemption Regulation may only be justified in the light of a more pronounced market failure or another relevant obstacle established in the ex ante assessment (see Section 3.2.1). In that regard, the ex ante assessment should, furthermore, provide a sufficiently detailed assessment of the level and structure of the supply of private funding for the type of eligible undertaking in the relevant geographic area (see paragraph 63). Furthermore, it must be demonstrated that the measure leverages additional private resources that would not have otherwise been provided or would have been provided in different forms or amounts or on different terms.

98. ex ante assessment regarding the relevant market failure or other relevant obstacle. In the case of risk finance measures targeting specifically start-ups and SMEs that have not been operating in any market ( 52 ) , the Commission may accept that the level of independent private participation is lower than the required ratios. Alternatively, for such investment targets, the Commission may accept that the private participation is non-independent in nature, that is to say, provided, for instance, by the owner of the beneficiary undertaking. In duly justified cases, the Commission may also accept levels of private participation lower than those established in the General Block Exemption Regulation in respect of eligible undertakings that have been operating on a market for no longer than the eligibility period fixed in Article 21 of the General Block Exemption Regulation, in the light of the economic evidence provided in theassessment regarding the relevant market failure or other relevant obstacle.

99. A risk finance measure targeting eligible undertakings that have been operating on any market for longer than the eligibility period fixed in Article 21 of the General Block Exemption Regulation at the time of the first risk finance investment must contain adequate restrictions, whether in terms of time limits or other objective criteria of a qualitative nature, relating to the development stage of the target undertakings. For such investment targets the Commission would normally require a minimum private participation ratio of 60 %.

100. Secondly, together with the proposed level of private participation, the Commission will also take into account the balance of risks and rewards between the public and private investors. In that regard, the Commission will consider positively measures whereby the losses are shared pari passu between the investors, and private investors only receive upside incentives. The Commission will take due account that loss-sharing on a non- pari passu basis may however be required in view of more severe market failures In principle, the closer the risk and reward sharing is to actual commercial practices, the more likely it is that the Commission will accept a lower level of private participation.

101. Thirdly, the Commission will consider the level of the funding structure at which the measure aims to leverage private investment. At the level of the fund of funds, the ability to attract private funding may depend on a more extensive use of downside protection mechanisms. Conversely, an excessive reliance on such mechanisms may distort the selection of eligible undertakings and lead to inefficient outcomes where private investors intervene at the level of the investment into the undertakings and on a transaction-by-transaction basis.

102. In assessing the appropriateness of the specific design of the measure, the Commission may take into account the importance of the residual risk retained by the selected private investors relative to the expected and unexpected losses assumed by the public investor, as well as the balance of expected returns between the public investor and the private investors. Thus a different risk and reward profile could be accepted if it maximises the amount of private investment, without undermining the genuine profit-driven character of the investment decisions.

103. Fourthly, the exact nature of incentives must be determined through an open, transparent and non-discriminatory process for selecting financial intermediaries, as well as fund managers or investors. By the same token, the managers of the fund of funds should be required to legally commit as part of their investment mandate to determine, via a competitive process for the selection of eligible financial intermediaries, fund managers or investors, the preferential conditions which could apply at the level of the sub-funds.

104. To prove the necessity of the specific financial conditions underpinning the design of the measure, Member States may be required to produce evidence demonstrating that, in the process of selecting private investors, all participants in the process were seeking conditions that would not be covered by the General Block Exemption Regulation, or that the tender was inconclusive.

105. Fifthly, the financial intermediary or the fund manager may co-invest alongside the Member State, so long as the terms and conditions of such a co-investment are such as to exclude any potential conflict of interests. The financial intermediary must take at least 10 % of the first loss piece. Such co-investment could contribute to ensuring that investment decisions are aligned with the relevant policy targets. The ability of the manager to provide investment from its own resources can be one of the selection criteria.

106. Sixthly, risk finance measures making use of debt instruments must provide for a mechanism ensuring that the financial intermediary passes on the advantage it receives from the State to the final beneficiary undertakings, for instance in the form of lower interest rates, reduced collateral requirements or a combination of the two. The financial intermediary may also pass on the advantage by investing in undertakings that, although potentially viable according to the financial intermediary’s internal rating criteria, would be in a risk class where the intermediary would not invest in the absence of the risk finance measure. The pass-on mechanism must include adequate monitoring arrangements, as well as a claw-back mechanism ( 53 ) or an equivalent contractual mechanism.

107. Finally, to ensure that financial intermediaries involved in the risk finance measure deliver the relevant objectives, the investment strategy of the financial intermediary must be aligned with the objectives of the measure. As part of the selection process, financial intermediaries must demonstrate how their proposed investment strategy may contribute to the achievement of the objectives and targets. Furthermore, the Member State must ensure that the investment strategy of the intermediaries remains at all times aligned with the agreed targets, for instance via appropriate monitoring and reporting mechanisms and the participation of representatives of the public investors in the representation bodies of the financial intermediary, such as the supervisory board or the advisory board. An appropriate governance structure must ensure that material changes to the investment strategy require the prior consent of the Member State. For the avoidance of doubt, the Member State may not participate directly in individual investment and divestment decisions.

108. Member States can deploy a range of financial instruments as part of the risk finance measure, such as equity and quasi-equity investment instruments, loan instruments or guarantees on a non- pari passu basis. Paragraphs 109 to 121 set out the elements that the Commission will take into account in its assessment of such specific financial instruments.

(a) Equity investments

109. Equity investment instruments may take the form of equity or quasi-equity investments into an undertaking, by which the investor buys (part of) the ownership of that undertaking ( 54 )

110. Equity instruments can have various asymmetric features, providing a differentiated treatment of investors as some may participate to a larger extent in the risks and rewards than others. To mitigate private investors’ risks, the measure may offer upside protection (the public investor giving up a part of the return) or protection against a part of the losses (limiting the losses for the private investor), or a combination of the two.

111. The Commission considers that upside incentives create a better alignment of interests between public and private investors. Conversely, downside protection whereby the public investor may be exposed to the risk of poor performance may lead to misalignment of interests and adverse selection by financial intermediaries or investors.

113. Equity instruments with non- pari passu loss-sharing features going beyond the limits set out in the General Block Exemption Regulation may only be justified for measures addressing severe market failures, for instance in high-tech sectors, or other relevant obstacles identified in the ex ante assessment, such as measures targeting predominantly start-ups and SMEs before their first commercial sale or at the proof-of-concept stage. To prevent extensive downside risk protection, the first loss piece borne by the public investor must be capped.

(b) Funded debt instruments: loans

114. A risk finance measure may cover the provision of loans at the level of either the financial intermediaries or the final beneficiaries.

115. Funded debt instruments may take different forms, including subordinated loans and portfolio risk-sharing loans. Subordinated loans may be granted to financial intermediaries to strengthen their capital structure, with a view to providing additional financing to eligible undertakings. Portfolio risk-sharing loans are designed to provide loans to financial intermediaries who commit to co-finance a portfolio of new loans or leases to eligible undertakings up to a certain co-financing rate in combination with credit risk-sharing of the portfolio on a loan-by-loan (or lease–by-lease) basis. In both cases, the financial intermediary acts as a co-investor in the eligible undertakings but enjoys preferential treatment compared to the public investor or lender as the instrument mitigates its own exposure to credit risks resulting from the underlying loan portfolio.

116. In general, where the risk mitigation characteristics of the instrument lead the public investor or lender to assume, with respect to the underlying loan portfolio, a first loss position exceeding the cap set out by the General Block Exemption Regulation, the measure may only be justified in case of measures targeting exclusively start-ups and SMEs before their first commercial sale or at the proof-of-concept stage or in the event of a severe market failure or other relevant obstacle which must be clearly identified in the ex ante assessment. The Commission will consider positively measures which provide for an explicit cap on the first losses assumed by the public investor, notably where such a cap does not exceed 35 %.

117. Portfolio risk sharing loan instruments should ensure a substantial co-investment rate by the selected financial intermediary. This is presumed to be the case if that rate is not lower than 30 % of the value of the underlying loan portfolio.

(c) Unfunded debt instruments: guarantees

118. A risk finance measure may cover the provision of guarantees or counter-guarantees to the financial intermediaries, or guarantees to the final beneficiaries, or a combination of the two. Eligible transactions covered by the guarantee must be newly originated eligible risk finance loan transactions, including lease instruments, as well as quasi-equity investment instruments, but not equity instruments.

119. Guarantees should be provided on a portfolio basis. Financial intermediaries may select the transactions they wish to include in the portfolio covered by the guarantee, so long as the included transactions meet the eligibility criteria as defined by the risk finance measure. Guarantees should be offered at a rate ensuring an appropriate level of risk and reward sharing with the financial intermediaries. In particular, in duly justified cases and subject to the results of the ex ante assessment, the guarantee rate may be higher than the maximum rate provided for in Article 21 of the General Block Exemption Regulation, but must not exceed 90 %. This could be the case for guarantees on loans or quasi-equity investments in start-ups or in SMEs before their first commercial sale or at the proof-of-concept stage.

120. In the case of capped guarantees, the cap rate should, in principle, only cover the expected losses. Should it also cover the unexpected losses, the latter should be priced at a level that reflects the additional risk coverage. In general, the cap rate should not exceed 35 %. Uncapped guarantees (guarantees with a guarantee rate, but with no cap rate) may be provided in duly justified cases and be priced to reflect the additional risk coverage provided by the guarantee.

121. The duration of the guarantee should be limited in time, normally up to a maximum of 10 years, without prejudice to the maturity of individual debt instruments covered by the guarantee, which can be longer. The guarantee must be reduced if the financial intermediary does not include a minimum amount of investment in the portfolio during a specific period. Commitment fees must be required for unused amounts. Methods such as the use of commitment fees, trigger events or milestones can be used in order to incentivise the intermediaries to achieve the agreed volumes.

3.2.3.3. Conditions for determining the appropriateness of fiscal incentives

122. As pointed out in Section 3.2.2.2, point (d), Section 3 of the General Block Exemption Regulation is limited to fiscal incentives targeted at investors who are natural persons. Therefore, measures using fiscal incentives to encourage corporate investors to provide finance to eligible undertakings, either directly or indirectly through the acquisition of shares in a dedicated fund or other types of investment vehicles that invest into such undertakings, are subject to notification to the Commission.

123. As a general rule, Member States have to base their fiscal aid measures on the findings of a market failure or other relevant obstacle in the ex ante assessment, and therefore target their instrument towards a well-defined category of eligible undertakings.

124. Fiscal incentives to corporate investors may take the form of income tax reliefs and/or tax reliefs on capital gains and dividends, including tax credits and deferrals. In its case practice, the Commission has generally considered as appropriate income tax reliefs that contain specific limits on the percentage of the invested amount that the investor can claim for the purposes of the tax relief, as well as on the tax break amount which can be deducted from the investor’s tax liabilities. Moreover, capital gains tax liability on disposal of shares can be deferred if reinvested in eligible investments within a certain period, while losses arising upon disposal of such shares may be deducted from profits accruing from other shares subject to the same tax.

125. In general, the Commission considers that fiscal incentives to corporate investors appropriate if the Member State can produce evidence demonstrating that the selection of the eligible undertakings is based on a well-structured set of investment requirements, made public through appropriate publicity, and setting out the characteristics of the eligible undertakings which are subject to a market failure or other relevant obstacle.

126. Without prejudice to the possibility of prolonging a measure, fiscal schemes must have a maximum duration of 10 years. If the Member State proposes to extend a measure to a total duration of more than 10 years (including predecessor schemes, if any), it must carry out a new ex ante assessment, together with an evaluation of the effectiveness of the scheme during the entire period of its implementation.

127. In its analysis, the Commission will take into account the specific characteristics of the relevant national fiscal system and the fiscal incentives that already exist in the Member State, as well as the interplay between those incentives.

128. The fiscal advantage must be open to all investors fulfilling the applicable criteria, without discrimination as to their place of establishment. Member States should therefore ensure adequate publicity regarding the scope and the technical parameters of the measure. They should include the relevant ceilings and caps determining the maximum advantage that each individual investor may draw from the measure, as well as the amount of the maximum investment which can be made in individual eligible undertakings.

3.2.3.4. Conditions for measures supporting alternative trading platforms

129. As regards aid measures supporting alternative trading platforms beyond the limits set out in the General Block Exemption Regulation, the operator of the platform must provide a business plan demonstrating that the aided platform can become self-sustainable in less than 10 years. Moreover, plausible counterfactual scenarios must be provided in the notification, comparing the situations with which the tradable undertakings would be confronted if the platform did not exist, in terms of access to the necessary finance.

130. The Commission will look favourably at alternative trading platforms set up by and operating across several Member States, because they may be particularly efficient and attractive to private investors, in particular to institutional investors.

131. For existing platforms, the proposed business strategy of the platform must show that, due to a persistent shortage of listings, and therefore a shortage of liquidity, the platform concerned needs to be supported in the short-term, despite its long-term viability. The Commission will consider positively aid for the setting up of an alternative trading platform in Member States where no such platform exists. Where the alternative trading platform to be supported is a sub-platform or subsidiary of an existing stock exchange, the Commission will pay particular attention to the assessment regarding the lack of finance that such a sub-platform would face.

3.2.4. Proportionality of the aid

132. State aid must be proportionate to the market failure or other relevant obstacle which it is intended to address in order to achieve the relevant policy objectives. It must be designed in a cost-efficient manner, in accordance with the principles of sound financial management. Therefore, for any risk finance aid measure to be considered proportionate, the aid must be limited to the strict minimum necessary to attract funding from the market to overcome the market failure or the other relevant obstacle, without generating undue advantages.

133. As a general rule, at the level of the final beneficiaries, risk finance aid is considered to be proportionate if the risk finance investment per eligible beneficiary does not exceed the cap fixed in Article 21 of the General Block Exemption Regulation and complies with the conditions set out in this Section. For risk finance measures where the risk finance investment per eligible beneficiary exceeds the cap fixed in the General Block Exemption Regulation, the higher risk finance investment per beneficiary must, furthermore, be commensurate to the size of the funding gap quantified in the ex ante assessment (see paragraph 64).

134. At the level of the investors, aid must be limited to the minimum necessary to attract private capital in order to achieve the minimum leverage of private resources and address the market failure or other relevant obstacle.

3.2.4.1. Conditions for financial instruments

135. Financial intermediaries have to select the eligible final beneficiaries on the basis of a commercially sound investment strategy (see paragraph 70) and a viable business plan that justifies the amount of risk finance that is to be provided. Those elements are a further safeguard to ensure that the aid is necessary and proportionate.

136. The measure must ensure a balance between the preferential conditions offered by a financial instrument in order to maximise the leverage of private resources while addressing the identified market failure or other relevant obstacle and the need for the instrument to generate sufficient financial returns to remain operationally viable.

137. The exact nature and value of the incentives must be determined through an open, transparent and non-discriminatory selection process in the context of which financial intermediaries, as well as fund managers or investors, are called to pre