Communication from the Commission to the Council and the European Parliament - Progress Report on the risk capital action plan
Date: 2000-10-18
Institutions: European Commission
Subjects: business start-up, capital market, development policy, free movement of capital, investment

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 18.10.2000
COM(2000) 658 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE
EUROPEAN PARLIAMENT

PROGRESS REPORT ON THE RISK CAPITAL ACTION PLAN

.

.

EXECUTIVE SUMMARY

This Communication reviews progress in implementing the strategy for developing the EU
risk capital market in light of the conclusions from the Special Lisbon European Council and
the deadline of 2003 set for full implementation of the Risk Capital Action Plan (RCAP).

The EU risk capital market performed very well in 1999 but remains small and fragmented in
comparison to that of the United States. Although there is no evidence of a generalised market
failure, early stage and technology investment remains particularly low. Further development
of the EU risk capital market requires accelerated market integration, the easing of country-
specific constraints on efficient market functioning and, more generally, the promotion of a
more entrepreneurial culture.

Timely implementation of the Financial Services Action Plan (FSAP) will do much to foster a
more integrated EU risk capital market. A wide range of measures included in the FSAP and
relevant
to risk capital have been recently adopted by the Commission or are under
preparation by the Commission services. In addition, the Community patent proposed by the
Commission will do much to lower costs and increase legal certainty for innovative
enterprises wishing to operate outside their own Member State. It is crucial that all relevant
parties co-operate to ensure early agreement on the introduction of these measures into
Community law.

Structural reform to promote risk capital at the national level is proceeding. In several
Member States, regulatory constraints on institutional investment in equity markets have been
relaxed and the administrative procedures for establishing a business have been lightened.
However, little has been done to address the disincentive effects of bankruptcy and insolvency
procedures in most of the Member States. Modest progress is being made in addressing fiscal
obstacles to risk capital investment, with adjustments having been made to the taxation of
corporate profits and capital gains in some of the Member States. However, tax reforms will
need to be accelerated and extended if the RCAP is to be implemented by the deadline.

A series of Community actions to promote a culture of entrepreneurship have been taken.
Entrepreneurship is one of the four pillars of the Employment Guidelines. The Guidelines for
2001 proposed by the Commission call for greater entrepreneurship awareness across the
society, while the European Social Fund finances a series of educational and training
programs in this area. The Commission has also taken actions to promote innovation
throughout the Union, for instance, by highlighting the practices employed in the more
successful regions. Member States also are taking measures in this area, notably promoting
entrepreneurship through funding of relevant disciplines in private and public universities,
promoting technology transfers to SMEs, and fostering co-operation between SMEs,
academics and large enterprises.

The philosophy underlying the strategy for developing the EU risk capital market attributes
primary importance to an environment that is favourable to creating and sustaining a new and
innovative business. Consistent with this philosophy, there is a limited role for public funding
as a means to address identifiable market failures. However, as with all cases for public
funding, the advantages need to be weighed against risks of market distortion and, particularly
in the risk capital area, of displacing or crowding out private sector activity.

Much remains to be done if the EU risk capital market is to be brought onto par with that of
the United States. To this end, it is essential to implement the RCAP by the deadline of 2003.

2

1. INTRODUCTION

Importanceofrisk
capitalinvestmentto
sustainable
economicgrowth
andemployment
creationwas
acknowledgedby
thespecialLisbon
Councilconclusions.

Although small in relation to other financial markets, the risk capital
market1 is of unique importance in providing a source of equity
financing for young and innovative businesses. As indicated in the April
1998 Risk Capital Communication2, several studies suggest a high
employment content in the activities of innovative SMEs, although the
employment effects cannot be quantified exactly. Various surveys have
also highlighted the role venture capital funding and IPOs can play in
the development of high growth companies. In this way, a developed
and efficient risk capital market has a significant role to play in
stimulating sustainable economic growth and employment creation.

Objectiveofthis
Communicationisto
reviewthestrategy
todeveloptheEU
riskcapitalmarketin
lightoftheLisbon
conclusions.

in the conclusions of

The promotion of entrepreneurship and innovation lies at the heart of
the strategy for the creation of a knowledge-based EU economy as set
out
the special Lisbon European Council
(March 2000). Accordingly, the Council identified the development of a
pan-European market for risk capital as a high priority. The Council
also called for the implementation of the Risk Capital Action Plan
(RCAP), as annexed to the April 1998 Risk Capital Communication, by
2003. The RCAP proposes initiatives to be taken at Community and/or
at Member State level in the areas of market fragmentation, institutional
and regulatory barriers, taxation, paucity of high-tech SMEs, human
resources and cultural barriers. The Commission has presented a first
detailed report (October 1999) on the implementation of the RCAP3.
The next implementation report will be based on the monitoring and
benchmarking mechanism described in Annex 14. This Communication
has the more limited objective of reviewing the strategy for developing
the EU risk capital market so as to take account of the Lisbon
conclusions. In particular, it is proposed to establish the priority areas
for action to ensure implementation of the RCAP by the 2003 deadline.

The Communication is structured as follows. Section 2 provides a
for the strategy review by briefly summarising the main
context
developments in the EU risk capital market
in 1999. In Section 3,
progress in implementing the strategy is examined along three main
integration, structural reform
axes,
measures and measures to promote a culture of entrepreneurship. The
role of public funding is also briefly considered. Section 4 presents

i.e. measures to foster market

1

2

3

4

investment and investment

The risk capital market comprises informal investment by “business angels”, more formal venture
capital
in specialised markets for new and potentially high-growth
companies.
"Risk Capital: A Key to Job Creation in the European Union”, SEC(1998)552.
“Risk Capital: Implementation of the Action Plan: Proposals for moving forward”; COM(1999)493 and
its annex, the working document of the services SEC(1999)1725
The Member State authorities have already been consulted on the monitoring and benchmarking
mechanism.

3

some general conclusions.

2. MAIN DEVELOPMENTS IN EU RISK CAPITAL MARKET IN 1999

2.1.A clearly improving trend

The EU risk capital market performed strongly in 1999 and now
accounts for about 5% of the total capital raised on all EU stock
markets. This favourable performance has extended to all segments of
investment by business angels, venture
the risk capital market, i.e.
capital investment and the high-growth equity market. Business angels
are individual investors who invest in small and medium-sized business.
Data limitations make it difficult to monitor the activity of business
angels on a systematic basis, but there is evidence to suggest that the
number of active business angels in Europe is increasing. In 1998 and
1999, the number of business angels networks in the EU has almost
doubled to a total of 110 active networks. However, 80% of the
networks are located in only 3 Member States.

€

Data on formal venture capital investment are more readily available
and indicate an increase of 70% to about
12 billion (0.14% of GDP) in
€
7 billion (0.09% of GDP) in 19985. This very
1999 from about
substantial increase is reflected in the number of investments made (up
by 56%), as well as in the number of companies financed (up by 44%,
some 7300 companies). Although the EU private equity market has
traditionally focused on more profitable later-stage investments such as
management buy-outs (MBOs), it is notable that early-stage investment
3 billion in 1999 relative to 1998 and was ten times
doubled to about
higher than in 1995.6 An analysis of the expected allocation of funds
€
raised in 1999 confirms this trend, with about
5.5 billion (22% of total
funds raised) earmarked for future early-stage investments.

€

Allsegmentsofthe
EUriskcapital
marketperformed
wellin1999.

EUventurecapital
investmentgrewby
70%relativeto
1998.

5

6

These statistics do not include Luxembourg, for which data are not available.
Investment in early stage, a key stage in the development of a company, is high-risk and has tended to
yield lower returns than MBOs. However, the performance of early-stage investments has improved as
the EU venture capital market has matured and the gap relative to returns from MBOs has narrowed.

4

Graph 1: Venture capital investment in the EU

€

m

12,000

10,000

8,000

6,000

4,000

2,000

0

expansion

early stage

1995

1996

1997

1998

1999

Source:EVCA

In reviewing developments in EU risk capital, the performance of the
specialised stock markets for high-growth companies must also be
considered. These markets, which are closely linked to venture capital
activity because they provide an important “exit route” for investors,
experienced significant growth world-wide in 1999. Their development
has been influential
in the progress of a more financial and
entrepreneurial culture in the EU. The EU markets for young and high
growth companies have performed particularly strongly, continuing a
buoyant trend since their creation in the late 1990s. In view of the sharp
increase in share prices the preceding months, the decline after March
2000 can largely be seen as a market correction and a step towards
growing maturity in this type of investment.7 As significant as rising
share prices has been the sharp increase in the number of companies
listed on these markets. The Neuer Markt recently listed its 300th
company, while about 140 companies are listed on Le Nouveau Marché
and about 430 are listed on AIM. Several new specialised markets were
created in 1999 and 2000, e.g. the Nuovo Mercato in Italy and the
10 billion was raised on all EU
Nuevo Mercado in Spain. A total of
specialised markets (some 80% of this on the Neuer Markt) during the
full-year 1999, and a further
13 billion has already been raised in the
first six months of 2000.

€

€

EUstockmarketsfor
youngand
innovative
companieswere
buoyantin1999.

7

These markets are likely to be characterised by considerable price volatility due to the high-risk nature
of the assets involved, their small size and the limited free float weight on their liquidity.

5

Table : Main markets specialising in SME financing as at 30 June 2000

Euro. NM

Le
Nouveau
Marché
(Paris)

Neuer
Markt

NMAX

Euro.NM
Belgium

Nuovo
Mercato

EASDAQ

AIM

tech-
MARK1

NASDAQ

Launch

Mar 96

Mar 97

Mar 97

Mar 97

June 99

Nov 96

June 95

Nov 99

Feb 71

140

281

27

1.2

191

9.5

192

678

37

442

467

15

240

1.7

13.4

0.4

513

116

537

5

+17%

16

0.5

0

31

15

20

2.3

1 340

0.2

53

+26%

+17%

+ 4%

+14%

+2%

62

50

0.3

806

32

429

220

4 843

22.6

1 006

5 818

1.6

3.1

33.2

53

48

4 574

1 201

3 633

76 680

-8%

-11%

-8%

-3%

Sources : Euro.NM, EASDAQ, LSE, NASDAQ, own calculations.

Number of companies
listed (A)

Market capitalisation
€
(billion
) (B)

Capital raised
(current year, billion

€
)

Average capitalisation per
company (million
(B)/(A)

€
)

Capital exchanged
€
/day)2
(million

Performance of index
since 30 December 1999

1 Since launch on 4 November 1999.
2 Average, current month.

DevelopmentofEU
riskcapitalmarket
mustbeviewedin
widercontextof
globalisationand
technological
progress.

2.2.Several forces shaping market developments

financial

The progress achieved in developing the EU risk capital market must be
viewed in the context of profound changes in the functioning of the EU
financial system as a whole. These changes are, in large part, a response
to the wider influence of globalisation. The application of new and
advanced technologies
system has
to the international
introduced a new dimension of competition by removing geographical
barriers and by transforming traditional market structures (e.g.
the
emergence of automated trading systems). Financial markets and
intermediaries have responded to these changes by developing global
market strategies which involve achieving greater size through mergers
and acquisitions and operating on a world-wide basis. Risk capital
markets, although less globalised than other financial markets, have also
the typical structure of
experienced significant change. Notably,
investment projects funded through the financial markets has changed,
with an increased tendency for so-called “new economy” enterprises to
seek direct financing through the specialised equity markets. These
enterprises often need a large capital infusion over a number of years
before becoming profitable but
their high earnings potential has
attracted investors. The most obvious manifestation of this phenomenon
has been in the information technology sector, where there has been a
surge in the number of stock-market listings fuelled by high investor
demand for IT companies' shares.

EUriskcapital
marketalso
influencedby
specificfactorssuch

Within the European Union, the transformation in financial markets –
including risk capital markets – has been intensified by reinforced
efforts to complete the single market for financial services and by the

6

asfinancial-market
integrationandthe
introductionofthe
euro.

introduction of the euro. The combined effect of these more EU-specific
factors will be to accelerate the emergence of deep, broad and liquid
financial markets. More indirectly, the fiscal discipline implied by EMU
is releasing additional capital for private-sector investment by reducing
public borrowing requirements and stimulating a “crowding in” effect.
Privatisation of publicly owned enterprises – often linked to budgetary
consolidation strategies - has increased the offering of equities. In many
Member States including Germany, France and the United Kingdom,
the number of households holding shares has increased sharply in recent
years, fuelled by generally buoyant stock prices as well as by the
continued withdrawal of the public sector from commercial activities. In
this general environment, risk capital activity has also expanded as
investors seek out a higher yield on their investments and reduce the
relative share of banks deposits in their portfolio.

2.3.Still room for improvement

EUcontinuesto
underperformtheUS
intermsofventure
capitalinvestment,
particularlyinthe
technologysectors.

Despite the progress made in 1999, the EU risk capital market remains
small in comparison to that of the United States, particularly in respect
of early-stage investment and investment in technology sectors. US
€
33 billion in 1999, an increase of
venture capital investment rose to
€
150% relative to 1998. Of this total,
13 billion (42%) was in early-
stage investment – more than total EU venture capital investment and
more than four times EU investment in early-stage companies. The
European early-stage venture capital market remains small and lacking
in transparency, with a limited correlation between risk and return. This
unfavourable comparison puts the recent expansion of the EU risk
capital market in perspective and highlights the extent of the challenges
still to be overcome. On the other hand, it should be noted that the
expansion in US venture capital investment in 1999 was largely due to
an increase in the size of individual "deals" rather than to an increase in
the number of investments. The relatively large size of deals in the US
market can be partly attributed to a higher percentage of technology
investment, especially in Internet-based services. In 1999, investments
in technology sectors (mainly software industry, telecommunications
18 billion in the United
and Internet-based services) amounted to
5 billion in Europe8. However, some
States but to little more than
commentators have interpreted the increasing size of US deals as
evidence of a speculative bubble and have questioned the quality of
some recent venture capital investments.

€

€

8

The European and US data are not directly comparable as the European survey includes unsecured debt,
whereas the US survey does not include debt and as the US survey includes technology-related
investments in other non-technology categories (such as the new media category and IT consulting in
the business services category).

7

Graph 2: Comparison between venture capital investments in
Europe and the US in 1999

Communications

Internet Technology

1,098

n.a.

921

3,395

2,107

Netw orking & Equipment

n.a.

Computer related

Electronics related

Medical Instr./Devices

Biotechnology

Other sectors

840

334

1,023

204

977

504

4,899

Europe US

6,899

6,690

15,355
€

m

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Source:PwC,MoneyforGrowth,TechnologyInvestments Report1999

Divergencein
MemberState
performancereflects
fragmentationofEU
venturecapital
market.

The EU risk capital market compares unfavourably with the US market
also in that it is highly fragmented with little cross-border activity. This
in performance
fragmentation is reflected in marked differences
between the Member States. In 1999, the level of venture capital
investment ranged from 0.32% of GDP in the Netherlands to 0.04% of
GDP in Austria. Three groups of Member States can be distinguished:
(i) the Netherlands, Belgium, United Kingdom, and Sweden with
venture capital investment representing more than 0.2% of GDP and
broadly comparable to the US situation a year before; (ii) Finland,
Germany, France, Spain and Ireland with a ratio between 0.1% and
0.2% of GDP; and (iii) Greece, Italy, Denmark, Portugal and Austria,
where the venture capital market remains smaller than 0.1% of GDP. A
similar pattern is observed in respect of early-stage investments with the
notable exception of the United Kingdom, where early-stage investment
represents less than 0.02% of GDP despite the existence of a relatively
large venture capital market. The Member States also differ in relation
to investment in the technology sector, with more than 50% of venture
capital investment devoted to technology in Belgium, France, Ireland
and Sweden but very little technology investment in the less developed
markets of Austria, Greece and Portugal.

8

Graph 3: Venture capital investments in EU Member
States and the US in 1999
(% of GDP)

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

A P DK I EL IRL E F D FIN S UK B NL

EU US

Early stage Expansion

Source:EVCA,PwC

Fragmentationalso
afeatureofthese
specialisedstock
marketswithinthe
EuropeanUnion.

As with the venture capital market, the EU stock market for young and
high-growth companies is fragmented, with marked differences in
performance from Member State to Member State. Cross-border
comparison is made difficult by the specific characteristics of the
national markets. The extent of the differences is illustrated by the
contrast between the Neuer Markt and AIM. The Neuer Markt has an
680 million, 40 foreign listings9 and
average market capitalisation of
70% of all listings are in the technology sector, while AIM has an
average market capitalisation of only
53 million with listings
predominantly UK-based and only 15% in the technology sector. As EU
financial integration proceeds, we can expect the creation of a pan-
European stock market for high-growth companies. The merger of the
Brussels, Amsterdam and Paris exchanges to create Euronext, represents
a step in that direction.

€

€

Despiteprogressin
1999,strategyto
developEUrisk
capitalmarketmust
beimplemented
urgently.

3. THE STRATEGY FOR DEVELOPMENT OF THE EU RISK CAPITAL
MARKET

The favourable performance of the EU risk capital market in 1999 is a
cause for optimism. Nevertheless, the EU market continues to under-
perform that of the United States by a considerable margin. While there
is no evidence of a generalised market failure in the European Union,
the divergence in performance between Member States points to

9

25% being Austrian, as no such market exists in Austria.

9

problems of market fragmentation and to the existence of country-
functioning. More
specific constraints on more efficient market
generally, the underperformance of the EU risk capital market would
seem attributable also to an inadequate entrepreneurial culture in many
of the Member States. All of these factors indicate the need to proceed
with the full implementation of the RCAP by the 2003 deadline at the
latest.

In this section, the strategy to develop the EU risk capital market is
revisited along three main axes. These are: (i) measures to foster market
integration; (ii) structural reforms to address country-specific market
constraints; and (iii) measures to promote a culture of entrepreneurship
within the Member States. Attention is focused both on progress to date
and on measures outstanding under the RCAP, while distinguishing
between those measures under Community responsibility and those
under the responsibility of the Member States. The role of public
funding in developing the EU risk capital market
is also briefly
considered.

3.1.Measures to foster market integration

The removal of exchange risk between euro-area countries has made
current matching requirements between assets and liabilities obsolete
and suggests that portfolio allocation decisions should be increasingly
“sector-driven” rather
than “country-driven”. The economic policy
convergence implied by EMU is further expected to diminish country-
specific factors influencing investment decisions. However, evidence
from company valuation to date does not indicate a major shift toward
sector-specific valuation. A likely explanation for this is the continued
fragmentation of EU financial markets. Accordingly, measures to foster
an appropriate degree of market integration are a central element of the
Lisbon strategy for stimulating more efficient financial markets in
general and more efficient risk capital markets in particular.

The Lisbon European Council provided an important impulse to the
integration of EU financial markets and EU risk capital markets in
particular. Paragraph 20 of the Presidency conclusions states that “it is
essential … to push forward the integration of EU financial markets”
and recognises that “efficient risk capital markets play a major role in
innovative high-growth SMEs and the creation of new and sustainable
jobs”. Paragraph 21 is more specific and requires that steps should be
taken to complete the implementation of the Financial Services Action
Plan (FSAP) before 2005 and of the RCAP before 2003. Furthermore,
the paragraph underlines the importance of some FSAP priority action
areas,
(i)
facilitating the widest possible access to investment capital on EU-wide
basis, including for SMEs by means of a “single passport” for issuers,
and (ii) facilitating the successful participation of all investors in an
in pension
integrated market by eliminating barriers to investment
funds.

including two that are highly relevant

the RCAP:

for

Market
fragmentation
meansinvestment
decisionsarestill
mainlycountry-
driven.

Timely
implementationof
FinancialServices
ActionPlanto
ensureEUfinancial
marketintegration.

FSAPoncoursefor

Implementation of the FSAP (into which all measures of financial

10

implementationby
2005.

CommitteeofWise
Mentofocuson
practical
arrangementsfor
applyingEUrules.

Arangeofmeasures
havebeenrecently
adoptedbythe
Commissionorare
underpreparationby
theservicesinareas
suchascommon
prospectuses,
corporategovernance,
accountingand
auditingprocedures,
prudentialrulesfor
institutionalinvestors
andreformofthe
patentsystem.

it will

regulatory nature in the RCAP have been integrated) is proceeding at a
reasonable pace. Two progress reports have already been presented to
the Council (November 1999 and May 2000)10. A third progress report
will be presented to the Council of 27 November 2000. Following a
include two new
request from the Council of 17 July 2000,
elements: (i) a priority-related "critical path" to achieve the objectives of
the FSAP by 2005, and (ii) possible indicators (benchmarks) to measure
progress towards realising the economic benefits of an integrated EU
financial services sector. The FSAP priority-related critical path will
take into account the Lisbon deadline for the implementation of the
RCAP (2003). Of particular importance for the development of the EU
risk capital market will be the timely adoption of the Directive on the
the two
prudential supervision of supplementary pension funds,
Directives on UCITS, the amendments of the prospectuses Directives
and the
follow-up to the EU accounting strategy
Communication.

legislative

The Council of 17 July 2000 took another important decision which
should facilitate the integration of EU financial markets. This was to set
up a “Committee of Wise Men”11, chaired by Mr. Alexandre
Lamfalussy. As a follow-up to the FSAP, this Committee will focus on
the practical arrangements for implementing Community rules and will
propose scenarios for adapting current practices in order to ensure
greater convergence and co-operation between regulators.

Progress on the relevant actions included in both the FSAP and the
RCAP includes:

• Upgrading of directives on prospectuses to facilitate companies

raising cross-border capital (e.g. IPOs)

The Commission is preparing a proposal in close co-operation with the
Member States and, in particular, with FESCO (Forum of European
Securities Commissions).The ad-hoc working group of FESCO, where
the Commission is an observer, completed its work in mid-2000. The
objective of the working group is not only to provide for improved
(simpler, cheaper, faster) cross-border procedures but also to facilitate
the introduction of modern features such as “shelf registration” 12. The
Commission intends to table a proposal on this subject before end-2000.
In addition, there is a broad consensus that access to cross-border capital
by SMEs would be facilitated by agreement at EU level on which
a
investors

professionals.

qualify

regard,

should

this

as

In

10

11

12

See htpp://europa.eu.int/comm/internal_market (financial services, action plan section)
See htpp://europa.eu.int/comm/internal_market (financial services, general matters section)
ie prospectus prepared in a two-step procedure: a “reduced” prospectus containing everything except for
the information concerning the specific securities involved in the issue, which isfiled once a year with
the competent home authority. Then, when the time is right for an issue, the companies prepare the
“issue note” describing the characteristic of the offer and of the securities. Belgium, Spain, France, the
UK and Italy already make use of the shelf-registration procedure.

11

Communication on the distinction between “sophisticated” and “retail”
investors is expected to be adopted by the Commission before end-2000
as part of the FSAP.

• Dissemination of best practices in corporate governance

The Commission has launched13 a review of existing codes of corporate
governance with a view to identifying any legal or administrative
barriers which could frustrate the development of a single market in
financial services. The results of this review should be available in the
second half of 2001.

• Assessment of existing accounting and auditing requirements

On 14 June 2000,
the Commission adopted a Communication on
financial reporting strategy. A central feature of the new policy is the
introduction of a requirement for all EU-listed companies to prepare
their consolidated financial statements in accordance with International
Accounting Standards (IAS). This requirement would enter into force at
the latest from 2005 onwards. Appropriate legislation will be proposed
by the Commission before end-2000. Concerning statutory audit, the
Commission will issue before end-2000 a Recommendation on external
quality assurance, based on the work of the EU Committee on Auditing.

• Adoption of prudential rules to allow institutional investors to invest

in venture capital

Substantial progress has been made in the year 2000 with regard to
investment
funds (UCITS). Following the adoption of amended
proposals by the Commission (30 May 2000), the Council is expected to
reach political agreement on the first proposal in October 2000. Political
agreement on the second proposal is expected to be reached before
March 2001. This should pave the way for an early adoption of the two
new directives. With regard to pension funds, the Commission has
adopted (11 October 2000) a proposal for a directive on the prudential
supervision of supplementary pension funds14. This proposal takes into
account the diversity of pension funds operating in the European Union
and covers authorisation, reporting, fit and properness, and rules on
liabilities and solvency. Investment rules will be based on the “prudent-
man” principle and ensure that pension funds can invest in risk capital
markets.

• Reform of the European Patent System15

On 5 July 2000, the Commission adopted a proposal for a Regulation
for a Community patent to give inventors the option of obtaining a

13

14

15

call for tender published on 21 March 2000
COM(2000)507prov
This measure is not part of the FSAP but is highly relevant to risk capital markets.

12

€

single patent legally valid throughout the European Union. Under the
Commission proposal, Community patents to be issued by the European
Patent Office would be both affordable and legally certain. In particular,
it is expected that a Community patent would reduce translation costs to
some
2,200 by not requiring any translation beyond that already
foreseen in the Munich Convention for the granting of the patent.
Concerning legal certainty,
the Commission suggests that a new
centralised Community tribunal within the framework of the European
Court of Justice should be set up to deal with disputes related to the
question of infringement and validity of Community patents. This
would require an amendment of the Treaty.

3.2.Structural reforms to address country-specific constraints

Efforts to foster a more integrated EU risk capital market need to be
supported by appropriate and timely structural reforms to address
country-specific constraints on the efficient functioning of risk capital
markets. These reforms are mainly the responsibility of Member States
and will, of course, vary with national circumstances. However, two
main categories of structural reforms - regulatory and fiscal - to develop
risk capital markets in the Member States were emphasised in the
context of the RCAP.

3.2.1. Easing regulatory constraints

Regulatory constraints on the development of risk capital markets are of
two types. The first type relates to legal provisions limiting the scope for
institutional investment in risk capital and tend to impact negatively on
the supply side of the market. Only four of the Member States (i.e.
Finland, Ireland, the Netherlands and the United Kingdom) have no
legal restrictions - beyond a general requirement for prudence - on
investment
insurance companies and pension
funds. Constraints on institutional investment may not be the only
the US
barrier
following the decision to relax the “Prudent Man
experience
Regulation” (1978) suggests that the removal of quantitative constraints
could provide a major boost to the development of risk capital in the
EU.

in risk capital16, but

in equities by banks,

to institutional

investment

Structuralreformsto
befocusedon
regulatoryandfiscal
constraintsatthe
nationallevel.

Limitsoninstitutional
investmentinequity
marketsreducerisk
capitalsupply.

The proposed EU Directive on occupational retirement provision (see
in respect of supplementary
above) addresses this type of barrier
institutional
pension funds, which are among the more important
investors. The Directive stresses that national investment rules must
ensure that pension funds, inter alia, can invest in risk capital markets in
accordance with the “prudent-man” principle. Meanwhile, many of the
Member States have already taken actions to allow specific institutional

16

as highlighted by the review of institutional investment launched by the UK Treasury (May 2000) to
investigate the factors distorting institutional investor’s decision making.

13

In France,

investors to invest in unquoted companies. In Sweden, a new regulatory
framework for pension provision allows insurance companies and
pension funds to increase their investment allocation to private equity
and these institutional investors are now the main suppliers of venture
the introduction of the so-called “DSK” life-
capital.
insurance contract (1998) provides tax incentives for insurers to invest
50% of their portfolio in equity, including a minimum investment of 5%
in unlisted securities, while the regulation applying to the main French
venture capital vehicle, the “Fonds Communs de Placement à Risques”
has been improved, allowing for the creation of funds of funds and of
“light”17 funds for professional investors. In Italy, some limitations on
investment rules for closed-end funds have been removed (1998) and
domestic mutual funds in Spain have been authorised (1997) to invest
up to 10% of their assets in unlisted securities. Denmark is also
considering the possibility of raising the proportion of private pension
savings which can be invested in non-quoted stocks. Despite these
measures, removal of quantitative constraints on investment in equity
capital – including risk capital – needs to be given higher priority.

The second type of regulatory barriers to the development of risk capital
markets includes administrative procedures for setting up a company,
procedures following bankruptcy and insolvency, etc. These barriers
tend to impact on the demand side of the market by increasing the cost
of business creation. In most of the Member States, significant progress
has been made in simplifying administrative procedures, through the
creation of one-stop shops for example. The period necessary to register
a company has been generally reduced. For example, a company can
now be established in 24 hours in France (although a period of 2 to 3
days is more likely), in 5 days in Ireland, in 12 days in Denmark, and 3
weeks in Portugal (3 months previously). In contrast, there has been
little progress in improving the application of laws on bankruptcy and
insolvency so as to ensure that the consequences of business failure are
not so severe as to discourage desirable risk taking. 18 Indeed, many of
the cultural barriers (see section 3.3) that have been identified as major
impediments to entrepreneurship and risk taking within EU Member
States continue to be reinforced by the current legal environment. The
necessity to reform procedures following bankruptcy and insolvency has
been long recognised and should now become a clear priority for the
Member States.

Reduced
administrative
burdenshouldboost
demandforrisk
capitalbutstilllittle
improvementin
bankruptcyand
insolvency
procedures.

Capitalgainstax
mattersfor
investment,
particularlyinhigher-
riskactivity.

3.2.2. Easing fiscal constraints

The structure of taxation can act as barrier to the development of risk
capital in several ways.

First, the tax structure can have a negative impact on investment if the

17

18

Applying a simplified procedure.
The UK government has begun consultation on these matters.

14

after-tax rate of return to the investor is deemed too low. In this context,
the most relevant feature of the tax structure for the development of risk
capital markets is the rate of capital gains tax. It is notable that US risk
capital investment accelerated in the early 1980s following a reduction
in capital gains tax (1978), but decelerated after the 1986 Tax Reform
Act in which capital gains tax was increased. Against this background it
appears worthwhile examining whether reductions of capital gains taxes
could play an equally positive role in promoting the development of EU
capital markets. Clearly, the issue of capital gains taxation is related to
many other aspects of tax law (e.g. inheritance tax) and of the overall
tax structure (e.g. relative weight of labour taxation), so that
this
assessment needs to take account of the broader implications of capital
gains taxes within a given tax system. The taxation of stock options is
also an area that can be looked into, inter alia, from this perspective.

Second, the tax structure may hinder investment in equity by granting
relatively favourable treatment to debt financing. A study of the EU
effective tax burden by Baker & McKenzie (1998)19 concluded that debt
financing is a more tax-efficient means to develop a company than the
use of retained earnings or new equity capital. With the exceptions of
Finland and Italy, all of the Member States favour the use of debt over
equity financing in their tax structures although it must be recalled that
other factors such as availability and cost of financing will play an
equally important role in a company’s financing decision. The Finnish
tax system affords equal treatment to new equity and debt and Finnish
SMEs would seem to have a high and increasing ratio of own funds
relative to SMEs in other Member States. The Italian tax system has
actually favoured equity financing since 1998 but Italian SMEs remain
relatively indebted. The future evolution in the financial structure of
Finnish and Italian SMEs should act as a test case in assessing the
potential to develop risk capital via a more balanced tax treatment of
debt and equity financing. The Commission services are examining
these questions indepth in the context of an ongoing comprehensive
study on company taxation in the EU. The results of this study will be
available early in 2001.

Third, the tax structure may hinder cross-border investment by creating
specific tax obstacles or even discriminating against foreign investors. A
comprehensive response to such barriers might be achieved most
effectively through co-ordinated action on EU-level. In any event,
Member States have to make sure that tax treaties and/or other tax law
instruments prevent double taxation of dividends in cross-border
investments. The above-mentioned Commission company tax study will
among other things look into these questions in some depth.

Taxstructureoften
disadvantages
equityfinancing
relativetodebt
financing,
constrainingrisk
capitalactivity.

Taxstructuremay
putbarrierstocross-
borderinvestment

MemberStateshave
embarkedontax

Tax reform was identified as a key priority in the context of the RCAP

19

« Survey of the effective tax burden in the European Union », Baker & McKenzie, January 1999, study
commissioned by the Dutch Ministry of Finance.

15

reformsbutmore
needstobedoneto
reducedisincentive
effectson
entrepreneurship.

Boththe
Commissionandthe
MemberStateshave
beenactivein
promotingaculture
ofinnovationand
entrepreneurship.

and reform efforts are already underway in many of the Member States.
Germany is to reduce its corporate and income tax rates and to eliminate
corporate tax on the sale of shares of other companies held in the
portfolio by corporation from 2002.20 France is also to reduce its
corporate and income tax and has increased tax benefits granted to
reinvesting business angels. Italy is to grant favourable tax treatment to
closed-end investment funds and Spain has granted tax incentives to
registered venture capital investors. Several of the Member States have
also made progress in reducing the tax disincentives to business
creation. It
that Member States design their tax
systems so to ensure that the taxation of share ownership and stock
options do not act as a disincentive to entrepreneurship21. In the United
Kingdom and Ireland – where the tax environment is already largely
supportive of risk capital investment - taxation of share options has been
reformed.22 In France, the application requirements for the system of
"Bons de Souscription des Parts et Créateurs d’Entreprises (BSPCE)"
have been expanded and extended to the end of the year 2001 although
the reform of stock option plans has still to be completed.

is also important

3.3.Promoting a culture of entrepreneurship

Europe still faces a backlog in innovation and innovative companies. In
its recent communication “Towards a European research area23”, the
Commission stressed the importance of encouraging and facilitating the
creation of new firms by researchers. Both the Commission and the
Member States have been strengthening their action to promote
technology transfer to SMEs and foster the creation of firms as well as
cooperation between SMEs, academics and large enterprises.

The Communication on Innovation in a Knowledge-Driven Economy24
adopted by the Commission on 20 September presents the current
situation of high-tech enterprises and proposes a strategy for innovation
in the future. The Trend Chart on Innovation Policy is providing
instruments to follow up and design innovation policy initiatives. Three
reports25 to be released in the autumn will contain indicators on human
resources, knowledge
transmission and application of
knowledge,
innovation, output and markets. The reports will also
examine some 60 measures implemented by the Member States last year
In the
to support venture capital, seed capital,

incubators, etc.

creation,

20

21

22

23

24

25

if these shares have been held for at least a year.
The Commission staff working paper annexed to the October 1999 Risk Capital Communication
(SEC(1999)1725) highlighted the benefits of employee ownership schemes such as stock options, and
gave some examples of good practices.
i.e. deferral of the tax liabilities until the shares are sold in Ireland, along with a “Save As You Earn”
scheme; “All Employee Share Ownership Plan”, and “Enterprise Management Incentive” schemes in
the UK.
COM(2000)6
COM(2000)567
(i) the "European Innovation Scoreboard for the Knowledge Economy"; (ii) the monitoring report on
"Start-up and technology based companies", and (iii) the monitoring report on "Innovation Finance".

16

framework of Community research programs, various actions have been
undertaken and will be pursued to foster the creation of technology-
based firms and interfacing between researchers, entrepreneurs and
investors. For instance, the “Biotechnology & Finance Forum”, set up
jointly by the Commission Life Science programme and the European
Association of Security Dealers (EASD), organised two conferences
(1998 and 1999) to promote networking between relevant actors in the
area of biotechnology. A third conference will take place in November
2000.

Under the PAXIS action, 15 innovative economic areas in Europe have
been selected to establish a network promoting best practices. In
November 2000, the second forum for innovative enterprise will take
place in Lyon, allowing entrepreneurs to give feedback on policies
(regional, national or EU-wide) that are to be put in place to help
Europe achieve a knowledge and innovation-based society.

As venture capital funds still face difficulties in recruiting skilled
investment managers (capable of analysing innovative businesses based
on recent R&D findings), the Commission has launched an action under
the I-TEC initiative to extend the exchange of experience and good
practice between venture capital operators, technology incubators, and
industrial liaison offices linked to research institutes and universities
across Europe. In addition, through its support to new business angels
networks at European, national, and regional level, the Commission
facilitates the matching of informal investors and start-up businesses.

autumn the

to publish this

The Commission is
first BEST
Implementation report bringing together all aspects of policy affecting
entrepreneurship and competitiveness at European and Member State
level. Entrepreneurship is one of the four pillars of the Employment
Guidelines and the Commission’s proposed Guidelines for 2001 call for
greater entrepreneurial awareness across society and in educational
curricula. The European Social Fund finances a series of educational
and training programs in this area, while some Member States have
taken direct measures to overcome cultural barriers to entrepreneurship
by introducing the teaching of entrepreneurship in schools and funding
(publicly or with the private sector) chairs for entrepreneurship at
private and public universities.
for
entrepreneurs now operate in a number of Member States.

In addition, award schemes

Aroleforpublic
fundinglimitedto
addressing
identifiablemarket
failures.

3.4.The role of public funding

The philosophy underlying the strategy for developing the EU risk
capital market attributes primary importance to the creation of an
environment favourable to creating and sustaining new and innovative
businesses. The measures contained in the RCAP to facilitate market
integration, to ease market constraints and to promote a culture of
entrepreneurship are in keeping with this philosophy. Consistent with
this approach, there is a role for public funding limited to addressing
identifiable market failures. However, as with all cases for public
funding, the advantages need to be weighed against risks of market

17

In the state aid rules,

distortion and, particularly in the risk capital area, of displacing or
the
crowding out private sector activity.
Community has a mechanism and a procedure to follow which allows
this balance to be struck. Member States are obliged to ensure that all
measures are consistent with the state aid rules. This may mean
notification to the Commission under Article 88(3) of the Treaty so that
the Commission can assess the measure’s compatibility with the
common market.

A range of financing instruments are available at EU level, managed by
the EIB, the EIF and the Commission. It will be recalled that the Lisbon
conclusions mandate the Commission to review the coherence of EIB
and EIF financing of risk capital activity. This matter is dealt with in a
separate Communication.26

4. CONCLUSION

There is increasing evidence to suggest that the long-term performance
of an economy is positively related to the level of development of its
financial system. More specifically, a growing number of studies point
to a relationship between economic growth and the ready availability of
innovation financing27. Thus, access to risk capital can play a key role
in sustaining economic growth and employment creation by allowing
for the development of new and innovative businesses.

Despite the favourable developments in 1999, the European risk capital
market is still lagging behind the US market. In response, action has
been taken at EU and Member State level to improve the structural and
regulatory environment conditioning the development of risk capital and
entrepreneurial firms. The Commission has tabled or is preparing
several
legislative measures to improve the efficiency of the EU
financial market. Timely adoption of the FSAP, especially, will do
much to foster a more integrated EU risk capital market. In drafting the
Broad Economic Policy Guidelines, it has stressed the importance of
structural reforms. Member States have also responded with a series of
structural reforms and actions to promote entrepreneurship. However,
more needs to be done if the RCAP is to be implemented by the
deadline of 2003 set by the special Lisbon European Council.

Implementation of the RCAP requires action on many fronts, but
priority should be given to three areas - all of which fall under Member
State responsibility. These are (i) the easing of quantitative constraints
on institutional investment in equity capital (to be replaced by “prudent

26

27

See reference.
For example, see “How do financial systems affect economic performance ?”, W. Carlin and C. Mayer ,
July 1999.

18

man “ legislation28); (ii) the softening of bankruptcy laws to allow failed
entrepreneurs a second chance (while affording adequate protection of
creditors’ rights); and (iii) the development of a fiscal framework more
conducive to investment and entrepreneurship. Substantial progress in
these priority areas, combined with accelerated progress of financial
integration will do much to ensure the economic and legal environment
necessary for a thriving EU risk capital market.

28

A principle to be introduced into Community legislation for supplementary pension funds (cf. the
Commission proposal of 11 October on supplementary pension funds).

19

BENCHMARKING AND MONITORING OF THE RISK CAPITAL ACTION PLAN

ANNEX 1

A.

BACKGROUND

An efficient market for risk capital plays an important role in the development of innovative,
high-growth SMEs and, in this way, contributes significantly to sustainable economic growth
and employment creation. Having identified a need to foster the further development of risk
capital in the EU, the Commission adopted a Communication and an Action Plan (April 1998)
to this end. A first analysis of the implementation of the Risk Capital Action Plan (RCAP)
was carried out in October 1999 and revealed that, while some progress had been made, the
EU still suffered weaknesses in the availability of risk capital. Further to this analysis, the
ECOFIN requested that the Commission should prepare a monitoring and benchmarking29
mechanism for the RCAP. This mechanism is expected to facilitate implementation of the
RCAP before the deadline of 2003 agreed by the Lisbon European Council.

The RCAP proposed a wide range of measures to foster the development of an efficient risk
capital market within the EU. These measures, to be taken by the Commission and by the
Member States, relate to six different areas i.e. market fragmentation,
institutional and
regulatory barriers,
taxation, paucity of high-tech SMEs, human resources and cultural
barriers. Several of the measures contained in the RCAP are also elements of current EU
policies to stimulate innovation, to improve the single market in financial services and to
promote entrepreneurship and competitiveness. There is, therefore, a substantial overlap
between the actions proposed under the RCAP and those included in the Commission’s action
plans on innovation, financial services and entrepreneurship. Accordingly, it is intended that
the monitoring and benchmarking mechanism for the RCAP should draw upon corresponding
mechanisms already in place to follow the implementation of the “Action Plan to Implement
the Framework for Financial Markets30” (FSAP),
“Action Plan to Promote
Entrepreneurship and Competitiveness31” (BEST) and the “Innovation Action Plan32”. In
addition, the mechanism for the RCAP will be closely co-ordinated with the benchmarking
exercise - also requested by the Lisbon European Council - to create a friendly environment
for starting up and developing innovative business, especially SMEs. Finally, the mechanism
should benefit from the work underway in preparing a broader analysis of structural indicators
in connection with the BEPG and the Synthesis Report. By exploiting the information

the

29

30

31

32

Benchmarking is a continuous, systematic process for comparing the performance of organisations,
enterprises, economies etc. against a chosen standard. It is a learning process aimed at identifying and
implementing best practice. The main steps of a benchmarking process are:
- Identification of a target to be improved;
- Development of a specific performance indicator(s), i.e. benchmark(s), for comparison;
- Comparison of own performance against the benchmark;
- Analysis of best practice and potential for improvement;
- Implementation of best practice;
- Continuous monitoring.
COM(99)232
COM(98)550
COM(96)589

20

available from these and other sources, it should be possible to limit the number of new
indicators required specifically for monitoring the RCAP.

Some of the actions included in the RCAP have now been taken and can be assessed directly.
Other actions have a longer-term perspective and their impact on the risk capital market may
not be measurable directly. Moreover, any monitoring mechanism for the RCAP must take
account of the fact that these markets are evolving rapidly. At this stage, it is proposed that
the monitoring and benchmarking mechanism of the RCAP should include:

(1)

(2)

a set of indicators of developments in risk capital markets

for each of the actions contained in the RCAP,

– a summary of progress to date,

– whenever relevant, an analysis of best practices,

– whenever possible, the development of specific performance indicators

The mechanism should be designed to allow for regular updating of the RCAP by
identification of those actions that are no longer relevant and possibly the inclusion of new
actions.

B.

DEVELOPMENT AND MONITORING OF INDICATORS OF THE RISK CAPITAL MARKET.

Risk capital is the generic term for a set of equity financing instruments for companies in their
early stages of growth. It covers three types of financing: informal investment by business
angels, venture capital, and raising of capital on stock markets specialised in high growth
companies (the so-called “new markets”). The monitoring of risk capital markets will be
based on monitoring of these three main forms of equity financing. It will also refer to
indicators of financial structure, as equity financing is to be analysed in relation to other forms
of external financing for a company. Special attention will be given to SMEs’ financing.
Comparison will be made with the US market.

In May 1997, at the request of the Industry Council, a pilot initiative on benchmarking of
framework conditions for European industry was launched jointly by the Commission and the
Member States. One of the four projects under this initiative concerned benchmarking the
financing of innovation and was co-ordinated by the Danish Ministry of Business and
Industry. The RCAP made use of the output from this project and included several of its
recommendations. It seems appropriate, therefore that the monitoring mechanism for the
RCAP should use, whenever relevant and possible, the indicators proposed in that project.

Proposed indicators of development of the risk capital markets

Indicator

Data availability

SMEs financial structure
- own funds ratio
- ratio of financial indebtedness

BACH database. Problem: time lag and coverage
(the data bank currently covers 11 Member states,
the US and Japan). For some countries (mainly,
Germany and Austria), the sample is limited only to
incorporated businesses.

21

Indicator

Data availability

No comprehensive data presently available. Some
fragmented information available from the European
Business Angels Network (EBAN)

EVCA, yearly; from 2000, will be available twice a
year. (PwC for US data).

to GDP;

The ratio of number of companies having received
seed and start-up financing to the number of
companies created within the year will not be
comparable between Member States as data on
business birth rates are not yet harmonised.

FIBV, yearly;

Investment by business angels

Access to venture capital:

of VC investments

Ratios
breakdown by:
- investment stage
- industry/sector

Number of companies having received seed
and start-up financing; to be compared with
number of companies created within the year

Access to stock markets for high-growth
companies:
- Capitalisation (relative to GDP)
- Number of companies quoted (relative to

population)

- Share turnover (value of share trading)
- Number of IPOs (relative to population)
- Capital raised (relative to GDP)

C.

MONITORING OF THE MEASURES PUT FORWARD IN THE RISK CAPITAL ACTION
PLAN

C.1. Market fragmentation

The structure of risk capital markets is evolving rapidly. Before monitoring the impact of the
measures put forward in the RCAP to reduce market fragmentation, it is necessary to analyse
the impact of broader developments e.g.: Euronext, ECNs, etc. More specifically in relation to
risk capital, a set of indicators on market integration should also be used:

Indicator

Data availability

Proportion of cross-border VC investments

EVCA

Proportion of cross-border
growth stock markets

IPOs on high-

FIBV

Proportion of VCC exits by IPO

EVCA

Number of venture-backed IPOs

Stock markets

C.1.1. Measures under the Commission’s responsibility

• Market monitoring and development of information and statistics on all levels of venture

capital in the EU

The main source of information on venture capital in the EU is EVCA’s yearly private equity
survey. In the framework of the implementation of the BEST Action Plan, the Commission
has received some complementary information from the Member States. The “trend chart on

22

innovation” (established in the framework of the Action Plan for Innovation) will also, among
other things, gather information on the history and results of national and EU policy measures
to support venture capital. Additional sources of information are the study “corporate
venturing in Europe” commissioned by the Commission in 1999 to gauge the resurgence in
corporate venture capital activity in Europe and the study on the typical growth paths taken by
biotechnology and information technology firms and the role that different types of financiers
play in this regard.

• Round table on the impact of the fragmentation of the European risk capital market

This action has been completed. The round table was organised at the end of November 1998.
It contributed to a better understanding of the role played by risk capital markets in fostering
economic growth and job creation. It also highlighted the importance of breaking down
cultural barriers to entrepreneurship in Europe and the need for a more integrated EU risk
capital market. (Report published in Euro Papers, n° 32, January 1999).

• Detailed examination of the cost to European firms of raising debt and equity finance

A study of this issue has been launched by the Commission and will be completed by end
2000. Based on this study, it may be possible to define some indicators of the cost of debt and
equity financing. An indicator of the cost of capital would be very useful, but no such
indicator is presently available in the EU.

C.1.2. Measures under the responsibility of the Commission and Member States

• Develop networks of business angels at regional, national and Community levels

Business angel networks have been created in most of the Member States, sometimes with
public support. The European Commission supports the development of such networks
through its support to EBAN (the European Business Angels Network) as well as through the
financing of feasibility studies and specific projects.

Indicator

Data availability

Number of active business angel networks

The European Business Angels Network (EBAN)
database (only limited coverage). The data are
available from 1998.

• Public financial support to develop venture capital, innovation finance and improve access

to stock exchanges33

The Risk Capital Communication from the Commission (April 1998) focused on improving
the framework for risk capital financing through the removal of barriers to market access. It
did not include any specific recommendation concerning financial support by the State.
However, several of the reports sent by Member States (early in 1999) on the implementation
of the RCAP included reference to public financial instruments aimed at developing venture
capital and innovation finance. Several Member States also made reference to these
instruments in their Cardiff reports on product and capital markets. The subsequent Risk
Capital Communication (October 1999) highlighted the role of State support as a catalyst to

33

Measure not specifically included in the April 1998 Risk Capital Communication

23

the provision of risk capital. While structural reform of the market and the efficient use of
public funding can be complementary, it is important that government intervention should not
distort the functioning of capital markets and should respect the rules on state aids.

The Commission services are currently preparing a review of the Community financial
instruments in support of venture capital. Reference will be made to the results of this review
in the context of monitoring the RCAP.

C.2.

Institutional and regulatory barriers

C.2.1. Measures under the Commission’s responsibility

These are mainly legislative actions that cannot be monitored readily by means of indicators.
However, once adopted, the transposition and implementation of legislation by the Member
States can be monitored via a scoreboard.

• Venture-capital funds: Assessment of whether there is a need for Community legislation

covering specific closed-end funds

The Commission convened the UCITS Contact Committee at the end of 1998 to consider
whether it would be appropriate to extend Community legislation on investment funds to
cover venture capital funds. Representatives from the venture capital industry, the stock
exchanges specialised in fast-growing SMEs, and the SMEs’ associations participated in the
meeting. The consensus was that such a directive is not desirable.

• Review of implementation and possible amendment of prospectus directive to facilitate

companies raising cross-border capital (e.g. IPOs)

A draft proposal for a directive is under preparation, in close co-operation with FESCO.
Member States are consulted through various committees, The adoption of the directive is
expected to take place before end-2000. The objective is not only to improve cross-border
procedures but also to introduce modern features such as “shelf registration”34Cross-border
activity of SMEs would also benefit greatly from a common agreement at EU level on which
investors should qualify as professionals. The Commission is co-operating with FESCO on
this subject. The ad-hoc working group of FESCO completed its work in May 2000. As part
of the FSAP,
the Commission will issue a Communication on the distinction between
“sophisticated” investors and retail investors before end-2000.

• Assess existing accounting and auditing requirements

In order to accelerate the completion of a single and competitive securities market, the Lisbon
European Council requested urgent action in the field of financial reporting in particular to
enhance comparability of financial statements. In June 2000, the Commission adopted a

34

Shelf-registration is a prospectus prepared in a two-step procedure. First, companies prepare, at the
same time as they prepare their annual reports, a “reduced” prospectus (the RD – Reference document)
containing everything except for the information concerning the specific securities involved in the
issue. This is filed once a year with the home competent authorities. Then, when the time is right for an
issue, the companies prepare the SN (securities or issue note) describing the characteristic of the offer
and of the securities. Investors, instead of the classical prospectus receive the RD, the SN and all the
information concerning recent relevant news. Belgium, Spain, France, the UK and Italy already make
use of self-registration procedures.

24

communication on financial reporting in Europe. A legislative proposal should be adopted by
the Commission before the end of 2000.

A central feature of the new policy is the introduction of a requirement for all EU listed
companies to prepare their consolidated financial statements in accordance with International
Accounting Standards (IAS). This requirement will enter into force from 2005 onwards. The
IAS to be applied by listed companies will be identified by an endorsement mechanism to be
set up at EU level. The new policy also puts strong emphasis on the need for proper
enforcement of the standards. Main actions in this area will concentrate on disseminating
implementation guidance, encouraging high audit quality and reinforcing co-ordinated
regulatory oversight. Member States may extend the application of IAS to unlisted companies
and to individual accounts.

In order to ensure that the Accounting Directives can remain the basis for financial reporting
for all
introduce a proposal for the
modernisation of the Accounting Directives before the end of 2001.

limited liability companies,

the Commission will

In order to make it possible for EU companies to apply IAS without coming into conflict with
the Accounting Directives, the Commission introduced (24 February 2000) a proposal to
amend the Accounting Directives so as to allow the application of fair value accounting for
certain financial assets and liabilities.

Concerning statutory audit, the Commission will issue Recommendations on external quality
assurance later this year, on the basis of the work of the EU Committee on Auditing. Further
Recommendations on auditor independence and auditing standards will follow at a later date.
These Recommendations constitute the implementation of actions announced in the 1998
Communication on “statutory audit within the EU” and aim to ensure a harmonised high
quality statutory audit practice in the EU.

C.2.2. Measures under the responsibility of Member States

• Transposition and implementation of all financial services directives - monitoring via

single market scoreboard

Progress in removing institutional and regulatory barriers to the integration of risk capital
markets can be assessed on the basis of the Commission’s single market scoreboard. The
situation as of May 2000 is reproduced below:

25

Banks

Insurance

Securities

Payment
systems

Company
law

Total

Position

B
DK
D
EL
E
F
IRL
I
L
NL
A
P
FIN
S
UK
EU

22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
100%

22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
100%

14/14
14/14
14/14
14/14
14/14
14/14
14/14
14/14
13/14
14/14
14/14
14/14
14/14
14/14
14/14
99.52%

2/2
2/2
2/2
2/2
2/2
1/2
2/2
0/2
1/2
2/2
2/2
2/2
2/2
2/2
2/2
86.66%

15/15
15/15
14/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
99.56%

75/75
75/75
74/75
75/75
75/75
74/75
75/75
73/75
73/75
75/75
75/75
75/75
75/75
75/75
75/75
99.46%

1
1
12
1
1
12
1
14
14
1
1
1
1
1
1
/

State of play including the infringement procedures for non-conformity:

Banks

Insurance

Securities

B
DK
D
EL
E
F
IRL
I
L
NL
A
P
FIN
S
UK
EU

22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
22/22
21/22
22/22
22/22
22/22
22/22
99.69%

20/22
22/22
21/22
22/22
22/22
20/22
22/22
22/22
21/22
22/22
22/22
22/22
21/22
22/22
22/22
97.87%

14/14
14/14
14/14
14/14
14/14
14/14
14/14
14/14
13/14
14/14
14/14
14/14
14/14
14/14
14/14
99.52%

Payment
systems
2/2
2/2
2/2
2/2
2/2
1/2
2/2
0/2
1/2
2/2
2/2
2/2
2/2
2/2
2/2
86.66%

Company
law
15/15
15/15
14/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
99.56%

Total

Position

73/75
75/75
73/75
75/75
75/75
72/75
75/75
73/75
72/75
75/75
74/75
75/75
74/75
75/75
75/75
98.75%

11
1
11
1
1
14
1
11
14
1
9
1
9
1
1
/

• Simplification of administrative formalities for company formations (including minimum

capital requirements)

Several Member States have undertaken reforms in this area, but major progress is still
necessary as stressed by the Lisbon European Council. Indicators to follow-up on this

26

progress would be particularly useful. However no comprehensive and up-to-date data is
presently available. The Commission continues to work on this issue.

Indicator

Data availability

Delays and cost for company registration

Capital requirements for setting up firms

the

are
in

No data presently available. The only data
study
from the Logotech
available
on
commissioned
European
by
1997
Commission. Data refer to the situation in 1996 and
the
are totally outdated.
implementation of the BEST Action Plan, MS have
been asked to provide more recent data to the
Commission. The Lisbon European Council
specifically asked the Commission and the Council
to benchmark this issue.

In the framework of

The

data

presently

available.

No
only
comprehensive data available are from the Logotech
study commissioned in 1997 by the European
Commission. Data refer to the situation in 1996. This
indicator is not
included in the follow-up to the
BEST Action Plan. No updated data is expected
from MS.

• Reform of the legislation on insolvency and bankruptcy

In the absence of comprehensive data, it is difficult to set up a monitoring mechanism under
this heading. However, the Commission services will highlight examples of good practices on
the basis of the information to be provided yearly by the Member States in their national
reports on products and capital market reforms.

C.2.3. Measures of Commission’s and Member States’ responsibility

• Adoption of prudential rules to allow institutional investors to invest in venture capital

In July 1998, the Commission adopted two proposals modifying the UCITS Directive. One
proposal would remove barriers to cross-border marketing of units of collective investment
funds by widening the scope of assets in which those funds can invest. The other proposal
would provide the European passport to management companies and would widen the range
of activities that they are allowed to undertake (e.g. they may also be authorised to provide
portfolio management services). Technical discussions on these proposals are progressing in
the Council, while the European Parliament completed its first reading on 17 February 2000.

Regarding pension funds, the Commission has proposed on 11 October 2000, a directive on
the co-ordination of laws, regulations and administrative provisions relating to institutions for
occupational retirement provision. Investment rules will be based on the “prudent-man”
principle and ensure that pension funds can invest in risk capital markets.

Many Member States have taken or plan to take action to remove quantitative restrictions that
impede pension funds from using the most efficient and sound investment policies. The
importance of this issue has been stressed in the 2000 BEPG. Member States should report on
progress made in this area in their national reports on products and capital markets reforms.

Comparison will be made with institutional investment in the US.

27

Indicator

Institutional
GDP

investment as a proportion of

EUROSTAT / OECD.

Data availability

Institutional
proportion of GDP

investment

in equity as

a

Ratio of funds raised by VCFs from pension
funds and insurance companies to total funds
raised

Prudential investment rules for institutional
investors

EVCA; whenever possible, a distinction will be
non-domestic
made
institutional investors.

domestic

between

and

Data to be updated. The pilot 1998 study
“Benchmarking financing of innovation” contained a
table listing the main prudential rules and constraints
for institutional investors. It will need to be regularly
updated through the information to be collected in
the yearly national reports on products and capital
markets reforms.

C.3.

Taxation

• Taxation of venture capital funds ( issue of transparency to avoid double taxation)

• Capital gains tax

• Stock options

• Tax arrangements for new firms

• Taxation of low-risk capital (e.g. bank deposits, bonds) compared with venture capital

Actions in the fiscal and taxation area are to be taken at national level; however,
the
Commission can play a role in analysing the situation and highlighting examples of best
practice. The fiscal issues are key to the development of risk capital in the EU, but it should
be noted that any preferential tax schemes may give rise to state aid issues.

The monitoring of the fiscal framework is difficult, as tax regulations are complex and subject
to regular change. No comprehensive indicator could be defined for this section. However,
reference could be made to the implicit tax rate on other factors of production: (taxes on self-
employed persons + taxes on capital)/net operating surplus of the economy (i.e. capital and
entrepreneurial income).

To benchmark fiscal issues, use will be made of existing studies such as

– Taxation of corporate profits, dividends and capital gains, EVCA, 2/99;

– Breaking the barriers, report on multinational share schemes, European Centre for

Employee ownership, 4/99 (includes analysis of the taxation);

– Effective tax burden in the EU, study commissioned by the Dutch Minister of Finance,

1/99).

28

The review of Member State’s national reports on product and capital market reforms should
also provide examples of best practices

The work underway in the Commission services on company taxation will also be helpful.
Two panels of experts have been set up to review the issues of company taxation in Europe
and fiscal barriers to the Single Market. They are expected to report in autumn 2000.

C.4.

Paucity of high-tech small businesses

C.4.1. Measures under the Commission’s responsibility

• Creation of a pan-European club for high-tech innovative firms

Progress under this heading will be monitored on the basis of growth in the European
Federation of High Tech Enterprises created in 1999.

• Reform of the European patent system

The Commission has proposed on 5 July 2000 a Regulation, to introduce a patent that would
be unitary and valid throughout the EU. The court jurisdiction with regard to this EU-wide
patent will be centralised both in the first and second instance. Developments in this area
could be monitored by using an indicator on world share of European and US patents.

C.4.2. Measures under the responsibility of the Commission and Member States

• Development of networking and clustering between universities, research centres, financial

backers, lawyers, human resources specialists etc., and link them at European level

Several actions have been undertaken by Member States and by the Commission in this area.
Based on information already transmitted or to be transmitted to the Commission by Member
States in the framework of the BEST and Cardiff exercises, examples of best practices will be
highlighted.

No indicator is proposed yet to monitor these actions. In the future, use could be made of
some of the indicators proposed by the Commission in the framework of the benchmarking of
national research policies, especially the indicator proposed on the monitoring the number of
spin-offs generated by universities and research centres.

• Development of customised electronic commerce modules for small businesses to ease

their access to electronic commerce and the internal market.

It will be impossible to monitor progress under the very specific heading of development of
customised electronic commerce modules for SMEs. Member States' reports in 1999 show
various initiatives in favour of e-commerce but nothing as specific as the development of
customised e-commerce modules. The Commission is to publish a report on electronic
commerce and SMEs. Reference could be made to the number of SMEs using the Internet for
commercial purposes (data is available for 1998, further surveys are to be launched in the
future)

29

C.5.

Human resources

• Promotion of entrepreneurship and innovation within educational and training systems

No indicator can be used in this regard. The Commission will report on progress in projects
it has launched in this area, such as the project (launched in June 1999) on the
that
development of European entrepreneurship training modules,
in collaboration with
universities, business schools, as well as investors and financiers, and the project to set up a
training
Business Education Network of Europe (BENE) which will bring together
organisations with proven experience in training for entrepreneurship to exchange
experiences, identify best practice and adjust the courses and curricula to changing demand. It
will also highlight examples of fruitful actions undertaken by the Member States in this area.
The Member States' National Action Plans on employment include a presentation of progress
made in this area. Although the NAPs do not provide standardised data across all Member
States, they may offer input for actions/practices to be further developed.

• Determination of training needs for venture-capital fund managers, market makers,

analysts of high-tech firms

No indicator can be used. The Commission will report on the results of the study it launched
to determine training needs for venture-capital fund managers, market makers, and analysts of
high-tech firms, as well as on some other initiatives undertaken in this area.

• Assessment of benefits of equity pay and employee ownership schemes

The Commission staff working paper (SEC (1999) 1725) on the implementation of the RCAP
included an analysis of the economic and financial impact of employee stock ownership and
stock option schemes, as well as the necessary conditions for development of these schemes
in the EU. The importance of employee ownership and stock option schemes has been
stressed in the BEPG 2000. The Commission will report on the result of a study that it has
commissioned on “a company perspective on financial participation in the EU; objectives and
obstacles”. In addition, Member States should report on developments in this area within the
framework of the yearly national reports on product and capital market reforms.

C.6.

Cultural barriers

• Demonstration of the advantages of venture capital and promotion of entrepreneurship

This issue is linked with the above-mentioned actions on promotion of entrepreneurship.

• Dissemination of best practices in corporate governance

Corporate governance has been identified by the Commission as one of the issues to be
examined in the context of creating deep and liquid European capital markets. A series of
corporate governance codes have been adopted over the past decade with the aim of better
protecting the interests of shareholders and/or stakeholders. A number of projects in this area
are still in the preparation phase. Differences in corporate governance arrangements may
create unnecessary uncertainty and complexity for both cross-border issuers and cross-border
investors who might not benefit
from the same rights everywhere. Based on these
observations, the Commission decided to launch a review of existing codes of corporate
governance with a view to identifying any legal or administrative barriers that could frustrate
the development of a single market in financial services. The results of this review Are
expected to be available in the second half of 2001.

30

D.

CONCLUSION

The Member States authorities, consulted on this mechanism, have expressed their support to
the proposed scheme, as well as to the chosen indicators. They have also given some useful
data for some indicator for which comprehensive data is presently not available. Likewise,
representatives of the industry have welcomed the monitoring and benchmarking of the Risk
Capital Action Plan. As the mechanism is set, data will be collected, and will be presented
and analysed in the next Risk Capital Action Plan Implementation Report.

31

ANNEX 2

ACRONYMS USED IN THE RCAP

Alternative Investment Market [London]

European Investment Bank

European Investment Fund

European Association of Securities Dealer Automated Quotation
[Brussels]

(Frankfort) + Nouveau
Nouveau Marché (Paris) + Neuer Markt
Marché (Brussels) + Nieuwe Markt (Amsterdam) + Nuovo Mercato
(Milan)

AIM :

EIB :

EIF :

EASDAQ :

EURO. NM :

EVCA :

European Venture Capital Association

FESCO :

Forum of European Securities Commissions

FIBV:

IAS :

ICT:

ISD :

IT :

Federation Européenne des Bourses de Valeurs
Federation of Stock Exchanges

International

International Accounting Standards

Information Communication Technology

Investment Services Directive (93/22/EEC)

Information Technology

NASDAQ :

National Association of Securities Dealers Automated Quotation
system

RTD :

SOEC :

SME :

UCITS :

Research and Technological Development

Statistical Office of the European Communities

Small and Medium sized Enterprises

Undertakings for Collective Investment
(Investment funds)

in Transferable Securities;

US GAAP :

US Generally Accepted Accounting Principles

32

Annex 3

GLOSSARY OF TERMS USED IN THE RCAP

Accounting Directive:

Directives 78/660/EEC and 83/349/EEC.

Business Angels:

Private individuals who invest directly in new and growing
unquoted businesses. Business angels usually provide finance in
return for an equity stake in the business, but may also provide
other long-term finance. This capital can complement the venture
capital* industry by providing smaller amounts of
finance
(generally under EUR 150 000) at an earlier stage than most
venture capital firms are able to invest.

Capital market:

A market in which long term capital is raised by industry and
commerce, the government and local authorities. Stock exchanges
are part of the capital market.

Corporate governance:

in which organisations,

The manner
particularly limited
companies, are managed and the nature of accountability of the
increased
managers to the owners. This topic has been of
importance since the beginning of the 1990’s, the providers of
external finance to a company wanting to ensure management is
not acting contrary to their interests.

Corporate venturing:

Provision of venture capital by a company for another company.

Development capital:

Financing provided for the growth and expansion of a company.

Early stage capital:

companies before

commercial
Financing to
manufacturing and sales, before they be generating a profit.
Includes seed* and start-up* financing.

they initiate

Electronic commerce:

Direct marketing of trading using a computer or a TV screen.

Equity:

The ordinary share capital of a company.

33

level

High
Securities
Supervisors Committee :

Informal advisory group created in 1985 by the Commission and
the EU Securities Supervisory Regulators with the purpose of
dealing with co-operation and cross border matters. It will be
replaced by the Securities Committee

Institutional investors:

This term refers mainly to insurance companies, pension funds
and investmentfunds collecting savings and supplying funds to the
markets, but also to other types of institutional wealth (e.g.
endowment funds, foundations, etc).

IPO:

Initial Public Offering (flotation, going public) : the process of
launching a public company for the first time by inviting the
public to subscribe in its shares.

Investment
Directive:

Services

Directive 93/22/EEC. It provides a European “passport” for
investment firms (brokers, dealers, etc.) and gives the right to
electronic exchanges to place their terminals in other Member
States.

Management buy-out:

Financing provided to enable current operating management and
investors to acquire an existing product line or business.

Market capitalization:

The price of a stock multiplied by the total number of shares
outstanding. The market’s total valuation of a public company. By
extension, the total valuation of companies listed on a stock
market.

Primary market:

Market into which a new issue of securities is launched.

Private equity:

As opposed to public equity; investment in equity stake by private
investors in companies not listed on a stock market.

Prospectus:

A formal written offer to sell securities that sets forth the plan for
a proposed business enterprise, or the facts concerning an existing
one that an investor needs to make an informed decision.

34

Prospectus Directive:

Documents drawn up according to the rules of Directives
80/390/EEC (listing

offers)

and/or

89/298/EEC (public
particulars).

Prudent-man regulation: Obligation of pension managers to invest as a prudent investor
would do on his own behalf, in particular by carrying out sensible
portfolio diversification, with no limits to portfolio distribution
other than on self investment for pension funds financing defined
benefit plans. NL, UK, Ireland USA, Canada, Australia have such
a legislation.

Regulated markets:

Organized markets where buyers and sellers meet
to trade
according to agreed rules and procedures. Markets meeting the
conditions set under article 1.13 of the ISD.*

Replacement capital:

Purchase of existing shares in a company from another venture
capital investment organization or from another shareholder or
shareholders.

Risk capital markets:

Markets providing equity financing to a company during its early
growth stages (start-up* and development*). In the framework of
this communication, it covers three sorts of financing:

-

Informal investment by Business Angels*

- Venture capital.

-

Stock markets
companies.

specialized in SMEs and high growth

Secondary market:

to
Market where securities are bought and sold subsequent
original issuance. The existence of a flourishing, liquid, secondary
market creates the conditions for a healthy primary market.

Word defined in the glossary or the acronyms.

35

*
*
Securities Committee :

replace

To be created. It will have both consultative and comitology roles
and will
the High Level Securities Supervisors
Committee. In the securities area it will have the same role as the
Banking Committee in banking and the Insurance Committee in
insurance.

Security:

stocks,
A financial
debentures, bonds, unit trusts and right to money lent or deposited.

government

including

shares,

asset,

Seed capital:

Financing provided to research, assess and develop an initial
concept.

Start-up capital:

Provided to companies for product development and initial
marketing.

Stock exchange

(Stock Market):

in which securities are bought and sold. Its basic
A market
function is to enable public companies, governments and local
authorities to raise capital by selling securities to investors.

Stock option:

Option given to employees and/or managers to buy shares at a
fixed price.

Venture capital:

Investment in unquoted companies by venture capital firms who,
acting as principals, manage individual, institutional or in-house
money. Four main financing stages are identified in relation to the
stages of development of a venture-backed company : early
stage,* expansion*, replacement* and buy-out.* In the USA, the
word “venture capital” does not include most of the buy-out deals.

Venture capital funds

Closed-end funds, created to provide venture capital.

Word defined in the glossary or the acronyms.

36

*