Information from the Commission – State aid and risk capital (Text with EEA relevance)
Date: 2001-08-21
Institutions: European Commission
Subjects: State aid, aid to undertakings, control of State aid, financial aid, intermediate goods, investment

21.8.2001

EN

Official Journal of the European Communities

C 235/3

STATE AID AND RISK CAPITAL

(2001/C 235/03)

(Text with EEA relevance)

I. Introduction

I.1. The Commission has expressed a general policy in favour
of promoting risk capital (1) in the Community. It has, for
example, expressed concern about the risks of Community
enterprises being overdependent on debt finance (2), and
emphasised the potential
for growth and job creation
which an increase in risk capital markets would have (3).
The Commission believes that certain types of enterprises,
or enterprises at certain stages of their existence, may be
better served by equity or near-equity finance than by loan
finance alone, given the costs of servicing debt and the
risk-averse nature of many lending institutions.

I.5. Given the perceived advantages of an increase in risk
capital provision, and also recognising the challenges for
economic operators in undertaking risk capital as an
activity, public authorities have sought to take measures
to promote risk capital markets. The Commission has
identified several measures,
in particular in the RCAP,
which should be taken to encourage the growth of risk
capital markets. These include:

(a) promoting a culture of entrepreneurship;

I.2. A commitment

to risk capital was set out as a wider
Community objective at the Lisbon European Council of
the date of 2003 for
23-24 March 2000, which set
the risk capital action plan (RCAP)
implementation of
and encouraged the
funding towards
support for business start-ups, high-tech firms and micro-
enterprises, as well as other risk-capital initiatives proposed
by the European Investment Bank (EIB).

redirection of

I.3. An equity gap, implying that there is a persistent capital
imperfection preventing supply from meeting
market
demand at a price acceptable to both sides, affects nega-
tively European small and medium-sized enterprises (SMEs)
compared with similar companies in North America. The
gap concerns, on one hand, high-tech innovative and
mostly young firms with high growth potential and, on
the other hand, a wide range of firms of different ages and
sectors with smaller growth potential
find
financing for their expansion projects without external
risk capital.

that cannot

I.4. The provision of equity finance,

in particular to smaller
businesses, presents numerous challenges both to the
investor and to the enterprise. The investor needs to
make a careful analysis not merely of any collateral
being offered (as is the case of a lender) but of
the
entire business strategy. For the enterprise, there is the
challenge of sharing control with an outside investor,
possibly for the first time in its life.

(1) The Commission defined risk capital in its 1998 paper (cid:145)Risk capital:
a key to job creation in the European Union(cid:146) (SEC(1998) 552 final,
31 March 1998) as equity financing to companies in their start-up
and development phases, and the phrase is used with that sense in
the present document. The term (cid:145)venture capital(cid:146) refers essentially to
risk capital provided by investment funds (venture capital funds)
established for that purpose. Such funds often provide a mix of
equity, mezzanine and subordinated loan finance and the term
(cid:145)venture capital(cid:146) refers to the totality of this finance.

(2) (cid:145)Economic reform:

report on the functioning of Community

product and capital markets(cid:146), COM(1999) 10, 20 January 1999.
(3) (cid:145)Risk capital, a key to job creation in the European Union(cid:146),

SEC(1998) 552 final, 31 March 1998.

(b) easing fiscal

less
constraints on equity,
favourable treatment than that given to debt financing;

such as

(c) measures to foster market integration;

(d) easing regulatory constraints, including limitations on
institutions
investments by certain types of financial
(e.g. pension funds) and administrative procedures for
setting up companies.

businesses,

I.6. The Commission has made it clear that the philosophy
underlying the strategy for developing the Community
risk capital market attaches primary importance to the
favourable to creating and
creation of an environment
sustaining new and
through
innovative
structural and horizontal measures such as those shown
above (4). This reflects the fact that risk capital provision is
essentially a commercial activity involving commercial
decisions. Economic and budgetary conditions are such
that public funds on their own will not be able, and
should not attempt, to provide the whole of the increase
in risk capital activity which the Community seeks. The
key challenge is to provide the conditions under which the
large reserves of private capital which exist in Europe will
be used for such investment. This challenge concerns as
much the development of the demand for capital by entre-
preneurs as the supply of capital by investors.

I.7.

In addition, however, the Commission has recognised (cid:145)a
role for public funding of risk capital measures limited
to addressing identifiable market failures(cid:146) (4). Public auth-
orities at national level have used public capital to support

(4) Progress report on the risk capital action plan, COM(2000) 658

final, 18 October 2000, section 3.4.

C 235/4

EN

Official Journal of the European Communities

21.8.2001

that

various schemes for increasing the supply of risk capital.
The Commission itself has proposed, and the Council has
agreed,
in regions eligible for intervention by the
Structural Funds, such intervention may take the form of
co-financing of risk capital funds for SMEs, consistent with
the
the State aid rules. The Commission believes that
replacement of grant
(and also
loan funding) allows the structural
to reach a
larger number of beneficiaries, with a lower cost per job
created, and thus to be more cost-efficient.

finance by risk capital

funds

I.8. Such measures inevitably raise the question of compati-

bility with the State aid Articles of the Treaty (5).

II. Aim and scope of this document and relation to other

texts

II.1. This document has two principal aims:

(a) to set out how the Commission will apply the State
aid definition in Article 87(1) of the EC Treaty to
measures designed to provide or promote
risk
capital ((cid:145)risk capital measures(cid:146));

(b) to provide new criteria under which the Commission
may authorise such measures which do constitute
State aid, even if they are not compatible with the
frameworks or regulations which
other guidelines,
the Commission has adopted.

II.2.

In addition the document aims to explain why State aid
control in this area is necessary, to explain the difficulties
in applying current guidelines to such measures, and to
justify why the Commission considers
the new
compatibility criteria are both necessary and appropriate.

that

II.5. The Commission will pay particular attention to the need
to prevent the use of this communication to circumvent
the principles laid down in existing frameworks and
guidelines.

III. Reasons for controlling public funding to risk capital

measures

that
requirement

the Treaty imposes on the
III.1. Aside from the fact
Commission the
aid
to control State
within the Community, and in common with other
forms of public intervention, national and Community
authorities, when deciding whether to commit or to
for measures designed to
authorise public
promote risk capital, should reduce as far as possible
the following three distinct though connected categories
of risk:

funds

(a) The risk that advantages to the beneficiaries (whether
investors or enterprises) create an undue distortion of
competition relative to their competitors
in the
internal market.

(b) The risk of (cid:145)dead-weight(cid:146), or lack of incentive effect.
Some enterprises funded through publicly supported
measures may have obtained finance on the same
this
terms
In
happening though this is inevitably anecdotal.
that
used
unnecessarily.

in any case. There

evidence of

resources

public

being

event

are

is

II.3. Nothing in this document should be taken to call

into
question the compatibility of State aid measures which
meet the criteria of any other guidelines, frameworks or
regulations adopted by the Commission.

(c) The risk of (cid:145)crowding out(cid:146). The presence of publicly
supported measures may actually discourage other
potential investors from providing capital.

II.4. This document in no way derogates from the provisions
of the Community guidelines on State aid for rescuing
and restructuring firms in difficulty (6).

(5) While the State aid articles of the Treaty only apply to national (or
sub-national) measures, a coherent policy requires that measures
taken at a Community level should not conflict with State aid rules.

(6) OJ C 288, 9.10.1999, p. 2.

III.2. Not all public measures carried out in favour of risk
capital schemes fall within the definition of State aid in
Article 87(1) of
the Treaty and therefore under the
Commission’s State aid control. The next section of
this document therefore provides guidance as to how
the Commission interprets the definition of State aid as
it concerns risk capital measures.

21.8.2001

EN

Official Journal of the European Communities

C 235/5

IV. Applicability of Article 87(1) to risk capital measures

IV.1.

in order

In the case of a measure in the form of a grant or loan, it
is normally obvious which enterprise is potentially the
beneficiary for the purpose of assessing whether State aid
is involved. However, certain constructions devised to
promote risk capital are more complex because the
for one set of
public authorities create incentives
economic operators
to provide
(investors)
finance to another set (for example, smaller enterprises).
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 (7), enterprises at
either or both (cid:145)levels(cid:146) may be beneficiaries of State aid.
in some cases the measure provides for the
Moreover,
creation of a fund or other investment vehicle which
has an existence separate from investors and the enter-
prises invested in. In such cases it is also necessary to
consider whether the fund or vehicle can be considered
to be an enterprise benefiting from State aid.

IV.2. When assessing risk capital measures the Commission
will therefore have to consider the possibility that the
measure may confer aid on at least three different levels:

(i) aid to investors;

(ii) aid to any fund or other vehicle through which the
measure operates (in the case of a (cid:145)fund of funds(cid:146)
there may be more than one such level);

(iii) aid to the companies invested in.

IV.3.

In order for a measure to fall within the scope of Article
87(1) of the Treaty, four cumulative criteria must be met:

(i) the measure must involve the use of State resources;
in the case of the direct financial participation of
public authorities in risk capital measures, or tax
incentives for investors, this is usually self-evident;

It

authorities invest on terms that would be acceptable
to such an investor, no advantage is conferred and
there is therefore no State aid (8).
follows that
where State resources are made available on the
same terms as those applying to private investors
(pari passu) it will normally be possible to conclude
the measure does not confer an advantage.
that
However,
if the State resources are made available
on more favourable terms, then an advantage will
normally be present;

is not

then it

(iii) that advantage must be selective, in that it is limited
to certain undertakings; if a measure applies without
limitation or sectoral or geographical distinction to
all enterprises throughout the territory of a Member
selective (9). However, any
State,
its nature, can only
measure which, because of
apply to a limited number of enterprises, is selective.
Likewise, a measure is selective if
it provides for
investments to be made only in certain enterprises,
for example limited by sector or by region. It should
be noted that a measure which is general as regards
investors (that is, it is available to all investors) may
nonetheless be selective at the level of companies
invested in (10);

(iv) the measure must affect

in favour of

trade between Member
is an activity
States. Since investment of capital
which is the subject of very large trade between
Member States, and since any measure providing
an advantage to investors has the declared aim of
affecting their investment decisions, the Commission
will normally consider that this criterion is met by
risk capital measures
In
investors.
assessing any effect on trade,
the Commission
needs to consider the effects across capital markets
more generally, not merely on investors who may or
may not have been previously operating in the
market for providing equity capital to the enterprises
targeted by the measure. Similarly, unless it can be
investments will be made in enter-
shown that all
the
prises engaged in activities which are not
subject of
the
trade between Member States,
Commission will regard this criterion as met at all
the levels for which the other criteria are fulfilled (11).

(ii) the measure must distort competition by conferring
an advantage on the beneficiary; in accordance with
the case law of the Court, the Commission must
likely to be present
assume that State aid is
whenever State resources are contributed in a
manner which would not be acceptable
to a
private investor operating under normal market
economy conditions. Where by contrast the public

(7) The Court of Justice of the European Communities has held that
Article 87 does not distinguish between the measures of State inter-
vention concerned by reference to their causes or aims but defines
them in relation to their effects. Italy v Commission, Case 173-73
[1974] ECR 709.

(8) Decision of 4 October 2000 in Case N 172/2000 (Ireland) Seed
and venture capital fund scheme (OJ C 37, 3.2.2001, p. 48).
(9) This could be the case, for example, of a tax measure promoting

investment in a certain class of financial instrument.

(10) See for example the Court judgment of 19 September 2000 in Case

C-156/98, Germany v Commission (not yet published).

(11) In this connection the Court of Justice has held that: (cid:145)In the case of
an aid programme the Commission may confine itself to examining
the characteristics of
the programme in question in order to
determine whether, by reasons of the high amounts or percentages
of aid, the nature of investments for which aid is granted or other
terms of the programme,
it gives an appreciable advantage to
recipients in relation to their competitors and is likely to benefit
undertakings engaged in trade between Member States(cid:146) Case
248/84, Germany v Commission [1987] ECR 4013, at paragraph
18 (emphasis added).

C 235/6

EN

Official Journal of the European Communities

21.8.2001

IV.4. There are already a number of published Commission
texts which provide interpretation on whether individual
measures fall within the definition of State aid and which
may be relevant to risk capital measures. These include
capital
the 1984 communication on government
injections (12),
the 1998 notice on the application of
the State aid rules
relating to direct
to measures
business taxation (13) and the notice on the application
of Articles 87 and 88 of the EC Treaty to State aid in the
form of guarantees (14). The Commission will continue to
apply these texts when assessing whether risk capital
measures constitute State aid.

IV.5.

the
In accordance with the principles set out above,
Commission will take the following factors into account
in determining whether State aid is present at each of the
different levels.

(1) AID TO INVESTORS

a market

in the absence of

Where a measure allows investors to participate in the
equity of a company or set of companies on terms more
they had
favourable than public investors, or than if
undertaken such investments
the
measure, then those investors receive an advantage (15).
This remains the case even if the investor is persuaded by
the measure to confer an advantage on the company or
companies concerned. The fact
that owing to the
failure no investors would
existence of
itself
otherwise make such investments,
sufficient
In
effect, the investors are being offered more advantageous
terms to compensate them for the factors which cause
market failure, and the Commission considers that such
compensation must be considered as an advantage, which
will constitute aid if the investors are enterprises and if
the other conditions described above, notably selectivity,
are met. Provided, however, that the advantage is limited
to the amount necessary to overcome the factors which
it may be considered compatible
cause market failure,
with the Treaty, where it meets the principles described
in section VIII below, because of its limited effect.

the presumption of advantage.

is not of

to rebut

(2) AID TO AN INTERMEDIARY VEHICLE OR FUND

In general, the Commission would tend to the view that a
fund is a vehicle for the transfer of aid to investors
and/or enterprises invested in, rather than being an aid
in certain cases, notably
beneficiary itself. However,

(12) Bulletin EC 9-1984,

reproduced in (cid:145)Competition law in the

European Communities(cid:146), Volume IIA, p. 133.

(13) OJ C 384, of 10.12.1998, p. 3.
(14) OJ C 71, of 11.3.2000, p. 14. It should, however, be noted that
guarantees granted by the State in favour of investments in risk
capital are more likely to include an element of aid to the investor
loan guarantees, which are
than is the case with traditional
normally considered to constitute aid to the borrower rather
than to the lender.

(15) This may be the case of measures providing finance to investors for
investment in such participations, where this provision is made on
conditions more favourable than market terms.

measures involving transfers in favour of existing funds
with numerous and diverse investors, the fund may have
the character of an independent enterprise. In that case
aid will usually be present unless the investment is made
on terms which would be acceptable to a normal
economic operator in a market economy and therefore
provides no advantage to the beneficiary.

(3) AID TO THE ENTERPRISES INVESTED IN

Once again the main test is whether the enterprise has
received the investment on terms which would be
acceptable to a private investor in a market economy.
This test can, as an example, be met when the investment
made through the risk capital measures is made pari
passu with such an investor or investors. Where this is
not the case, the fact that investment decisions are being
taken by commercial managers of risk capital funds, or
by representatives of investors, with an interest to ensure
a maximum return for the fund is an important indicator,
but it is not of itself conclusive. The Commission must
also take into account the possibility that any advantages
accorded to investors in the funds are passed on to the
enterprises invested in, when the investments are not
made by the fund pari passu with a private investor in
a market economy. If a risk capital measure has reduced
the risks and/or increased the rewards which investors
will obtain from making a particular investment, then
they may be said no longer
to be operating as a
normal economic operator (16).

IV.6. Whether a measure provides aid, and at what level, will
depend on its design. The Commission has experience of
measures where it has found the measure is a general
measure at the level of investors but provides State aid at
the level of individual enterprises (17), of measures which
provide State aid to investors but not to the enterprises
invested in,
the pari passu
principle described above (18), and of measures which
could provide State aid at more than one level (19).

through application of

IV.7. Where all aid provided to beneficiaries is de minimis
within the meaning of Commission Regulation (EC) No
69/2001 of 12 January 2001 on the application of
Articles 87 and 88 of
the EC Treaty to de minimis
aid (20), then it is deemed not to meet all the criteria of
Article 87(1) of the Treaty. In risk capital measures the

(16) For

example, Commission Decision 98/476/EC (OJ L 212,
the Court

30.7.1998, p. 50). This case was
judgment in Case C-156/98 referred to in footnote 10.

the subject of

(17) See footnote 16.
(18) For example, Decision in Case N 705/99, United Kingdom High

Technology Fund.

(19) Decision 2001/406/EC in Case C 46/2000, Viridian Growth Fund

(Northern Ireland): OJ L 144, 30.5.2001, p. 23.

(20) OJ L 10, 13.1.2001, p. 30.

21.8.2001

EN

Official Journal of the European Communities

C 235/7

the de minimis rule is handicapped by
application of
difficulties of calculation (see also section V below) and
also by the fact that measures may provide aid not only
to the target enterprises but also to other investors.
it
Where these difficulties can be overcome, however,
remains applicable. If a scheme provides public capital
of EUR 100 000 or less to each enterprise over a three
year period, then it is certain that any aid to these enter-
prises is within the limits set by the Regulation.

V. Assessment of

risk capital
measures under the State aid rules: application of
existing texts

compatibility of

the

V.1. Where measures constitute State aid, the Commission is
called to assess whether they can be found compatible
with the common market under Article 87(2) and (3).
could be found to be
Most
compatible only under paragraph 3(a)
(for measures
applying solely in regions eligible for the derogation in
that paragraph), paragraph 3(c), or paragraph (d).

risk capital measures

region. The Commission has

V.2. The immediate objectives of risk capital measures are
likely to include the promotion of SMEs,
in particular
new or innovative firms, or firms with high growth
potential, and/or the promotion of the development of
already
a particular
adopted texts under which State aid with such objectives
can be authorised under paragraphs 87(3)(a) or (c) (21).
The public authority devising the measure may also
have the objective of encouraging more investors to
type of
become involved in the provision of
finance. No text on State aid in this area exists, and
indeed it has not been explicitly recognised up to now
as a Community objective capable in itself of justifying
State aid (22). However, this does not in any way preclude
the compatibility of a measure which meets the terms of
other frameworks or guidelines.

this

V.3. One characteristic of existing frameworks or guidelines
authorising State aid under paragraphs 87(3)(a) or (c) is
that aid is authorised up to a level representing a (cid:145)grant
equivalent(cid:146) of a fixed percentage of certain of the bene-
ficiary
are
costs. These
enterprise’s
in land, buildings, new
principally fixed investments
productive equipment and intangible assets
(patents,
linked to fixed asset
know-how etc)

(cid:145)eligible

labour

costs(cid:146)

costs

(21) Guidelines on National Regional Aids (OJ C 74 of 10.3.1998, p. 9)
and Commission Regulation (EC) No 70/2001 of 12 January 2001
on the application of Articles 87 and 88 of the EC Treaty to State
aid to small and medium-sized enterprises (OJ L 10, 13.1.2001, p.
33).

(22) The fact that an objective is recognised at Community level to be
desirable does not, in itself, suffice to justify State aid proposed in
its pursuit. It should be noted that the conclusions of the Lisbon
European Council called for State aid reduction as well as an
increase in risk capital.

and the

costs of

consultancy services.
investment,
Experience has
capital
risk
shown, however,
measures can frequently not be found compatible under
these rules, for some or all of the following reasons:

that

(a) The difficulty of establishing a (cid:145)grant equivalent(cid:146) of
equity capital. While the Commission has established
rules for determining such equivalents for loans and
guarantees (23),
it has no such formula for equity
capital. Against that, the Commission believes that a
technical difficulty of calculation cannot of
itself
suffice to make a measure incompatible with the
common market. It is examining the options for a
possible methodology in this respect, and in the
meantime will be open to proposed calculation
methods accompanying notifications of risk capital
measures (24).

(b) The difficulty of establishing a link with eligible costs,
in particular under measures which provide incentives
to investors, and notably under measures in the form
of funds. Such a link is not easily reconcilable with
the commercial
fund management which will be
required by investors participating in funds and may
raise verification and enforcement difficulties.

(c) For measures providing aid at the level of investors,
the fact that no current text provides any basis for
authorising such aid.

V.4. The Commission believes that in general there are good
reasons for the (cid:145)eligible costs(cid:146) approach. The approach
provides certainty, predictability and a basis for limiting
aid and for ensuring equal treatment between regions and
Member States. It has served the Community well in the
past and is likely to be the basis of most State aid control
in the future. The Commission believes that good reasons
are needed for departing from it.

V.5.

that

In particular, the risk of departing from the principle is
that State aid may be authorised which is merely
(cid:145)operating aid’,
is, aid to cover normal current
expenses of a business. The Commission believes that
such aid, which may isolate the beneficiary from the
effects of commercial non-viability,
is among the most
distortive types of State aid and is authorised only in
limited circumstances.(cid:146)

(23) For example (OJ C 74, 10.3.1998, p. 19, and OJ C 68, 6.3.1996, p.

6).

(24) This might include a methodology based on the cost of providing a
particular guarantee. See Decision of 28 February 2001 in Case
N 551/2000 (Germany): BTU (cid:151) Beteiligungskapital f(cid:252)r kleine Tech-
nologieunternehmen (OJ C 117, 21.4.2001, p. 14, at p. 17).

C 235/8

EN

Official Journal of the European Communities

21.8.2001

and in particular

existing guidelines,

V.6. However, the Commission also believes that the fact that
risk capital measures cannot be found compatible on the
basis of
the
difficulties listed above, are not in themselves a justifi-
cation for finding the measures incompatible with the
common market.
it has already
taken,
the Commission has had to consider
whether, and on the basis of what criteria, it might be
prepared to authorise them. With regard to the difficulties
listed in the paragraphs above it has noted that:

In certain decisions

therefore,

(a) the

as

costs

under

eligible

regarded

existing
less importance to many young
frameworks are of
or innovative enterprises.
In any case, such costs
will more often be capable of being financed by
loan capital; the need for equity capital is generally
linked not only to assets but also to the need for
working capital during an enterprise’s start-up or
expansion phase;

(b) the lack of a link to eligible costs as defined in current
texts is not necessarily evidence of operating aid,
understood as aid which defrays an enterprise’s
normal operating expenses, and has no effect other
than to keep it running. Aid with a clear incentive
effect to an enterprise’s start-up or expansion cannot
be held to constitute operating aid in this sense, and
could therefore be accepted under certain circum-
stances;

investors,

(c) as regards aid to investors, a measure cannot be
considered incompatible solely because, by involving
it constitutes a
private sector or market
State aid to them as well as
to the enterprises
invested in. In general, where a transfer made by the
State would be compatible with the State aid rules, the
Commission believes that a measure which provides a
minimum incentive to other economic operators to
make that same transfer should also be authorised,
even if
is
involved.

technically an aid to those operators

VI. Basis for authorising risk capital measures under

Article 87(3)(a), (c) and (d) of the Treaty

VI.1. The principal basis on which the Commission may
authorise risk capital measures even though they fall
outside the scope of existing rules is that one of the
main handicaps suffered by SMEs, and in particular
the difficulty in
small enterprises and start-ups,
obtaining capital and credit. The chief causes of
this
are imperfect
the risk-averse nature of
investors and lending institutions and the limited guar-
antees that SMEs are in a position to offer (25). A
particular obstacle to the provision of equity capital

information,

is

can be the high transaction and (cid:145)due diligence(cid:146) costs
relative to the amount of capital being provided.

VI.2. As was stated above (I.7), the Commission has recognised
(cid:145)a role for public funding of risk capital measures limited
to addressing identifiable market
failures(cid:146). A market
failure can be defined as a situation in which economic
efficiency is not achieved owing to imperfections in the
market mechanism. A market failure may manifest itself
either in the inability of the system to produce goods
which are wanted (in this case a risk capital market), or
by a misallocation of
resources, which could be
improved in such a way that some consumers would
be better off and none worse off. The externalities
involved in training and research and development
activity result in a market failure which justifies State
aid in those areas.

the term market

VI.3. As economic theory predicts that markets will usually fail
in some sense except under conditions of perfect
competition,
failure is reserved for
cases where it is believed that a serious misallocation
of resources has occurred. There are two main sources
of market failure relevant to risk capital markets which
particularly affect
and
companies at the early stages of their development and
which may justify public intervention:

to capital by SMEs

access

(a)

asymmetric

imperfect or
information: potential
investors face more difficulties in gathering reliable
information on the business prospects of an SME or
a new company. Particularly if these are involved in
highly innovative projects or risky projects, imperfect
information will
related to
difficulties in the assessment of risk;

aggravate problems

(b) transaction costs: small deals are less attractive to
funds due to relatively high costs for

investment
investment appraisal and other transaction costs.

VI.4. The Commission believes that these factors can cause a
market failure which would justify State aid. However,
caution is needed. The fact that requests for finance, both
debt and equity, have been turned down is not in itself
an indication of market failure. Indeed, the Commission
there is no general risk capital market
believes that
failure in the Community (26). It does, however, accept
that there are market gaps for some types of investments,
lives and possibly for
at certain stages of enterprises’
certain activities covered by Article 87(3)(d).
It also
in
recognises
regions qualifying for assistance under Articles 87(3)(a)
and (c) ((cid:145)assisted areas(cid:146)). These gaps and difficulties are to
some extent already recognised in existing State aid
frameworks, and where these can be applied to risk
capital measures the Commission will be prepared to
continue to do so.

are particular difficulties

there

that

(25) See Commission Regulation (EC) No 70/2001.

final, 18 October 2000, section 3.

(26) Progress report on the risk capital action plan, COM(2000) 658

21.8.2001

EN

Official Journal of the European Communities

C 235/9

VI.5. The Commission will

therefore require provision of
evidence of market
failure before being prepared to
authorise risk capital measures which fall outside the
scope of existing rules. It may however be prepared to
accept this is the case where each tranche of finance for
an enterprise from risk capital measures which are in
turn wholly or partially financed through State aid will
contain a maximum of EUR 500 000, or EUR 750 000
in regions qualifying for assistance under Article 87(3)(c)
or EUR 1 million in regions qualifying for assistance
under Article 87(3)(a) (27). This is because for small trans-
actions the argument that market failure exists through
high transaction costs is more persuasive. The fact that a
market failure is recognised does not however alter the
aid character of a particular measure, nor the need to
assess its compatibility, in particular under the provisions
of section VIII.

VI.6. Where it is recognised that there is a market failure, the
Commission will examine whether any State aid measure
is proportionate to the presumed market failure it is
devised to meet, and will seek to ensure that any
distortion is minimised. It believes that this can best be
achieved by measures which are just sufficient to ensure
that market investors provide capital and which result in
investment decisions being taken on a commercial basis
and on terms as close as possible to those which would
prevail in the normal economy.

VI.7. The diversity of possible models

some of

It has, however,

regard as negative,

the Commission is not

risk capital
for
measures, and the relative novelty of
the
constructions being devised by Member States, mean
in a position to define
that
to
rigid criteria by which to determine whether
authorise such measures.
identified
certain elements which it will regard as positive, and
others which it will
in their
assessment. These are set out in section VIII. The fact
that the criteria are devised in this way reinforces the
importance of all risk capital measures which constitute
or which may constitute State aid being notified to the
Commission under Article 88(3) of the EC Treaty before
being put into effect, unless they are exempted from
notification through a regulation such as that cited at
IV.7 (28). Where the Commission is in possession of a
complete notification which shows
that a measure
contains numerous positive elements, and no negative
the Commission will aim to make a rapid
elements,
assessment of
it within the deadlines laid down in
Council Regulation (EC) No 659/1999 of 22 March
1999 laying down detailed rules for the application of
Article 93 of the EC Treaty (29).

(27) Separate injections of capital within six months of each other
would be considered to be part of the same tranche, as would
different
to which a
injections, even over a longer period,
commitment is made as part of a single transaction.

(28) That is, through a regulation adopted under Council Regulation No
994/98 of 7 May 1998 on the application of Articles 92 and 93 of
the Treaty establishing the European Community to certain
categories of horizontal State aid (OJ L 142, 14.5.1998, p. 1.

(29) OJ L 83, 27.3.1999, p. 1).

VII. Form of the aid measure

section VIII,

VII.1. The Commission believes that the choice of form of an
aid measure lies in general with the Member State. This
applies equally to risk capital measures. However, and as
the Commission’s
further explained at
assessment of such measures will include whether they
encourage market investors to provide risk capital to the
(cid:145)target enterprises(cid:146) and are likely to result in decisions to
invest being taken on a commercial (that is, a profit-
maximising) basis. The Commission believes that forms
of incentives to such investors capable of producing this
result, and therefore of being viewed positively under
the criteria set out in section VIII below where they
constitute State aid, include the following:

(a) Constitution of

investment

((cid:145)venture capital
funds(cid:146)) in which the State is a partner, investor or
participant, even if on less advantageous terms than
other investors.

funds

(b) Grants to venture capital funds to cover part of their

administrative and management costs.

(c) Other financial

instruments in favour of risk capital
funds to provide

investors or of venture capital
extra capital for investment.

(d) Guarantees to risk capital

funds against a proportion of

capital
losses, or guarantees given in respect of
investors/funds for investment in risk capital (30).

investors or to venture
investment
loans to

(e) Fiscal incentives to investors to undertake risk capital

investment.

VII.2. The Commission does not intend to use the criteria in
the following section to authorise measures which may
provide capital to an enterprise solely in the form of
loans (including subordinated loans and (cid:145)equity loans(cid:146))
or other instruments which provide the investor/lender
with a fixed minimum return, whether through funds or
through other means. Such capital provision is not (cid:145)risk
capital(cid:146) in the sense of the definition in footnote 1, and
the Commission regards existing rules, covering notably
the calculation of any aid element and the link to
eligible costs, as adequate to assess such measures.

(30) The second alternative is one means of intervention of the US
small business

Small Business Administration in favour of
investment companies.

C 235/10

EN

Official Journal of the European Communities

21.8.2001

VII.3. The Commission does not intend to use the criteria in
the following section to authorise an ad-hoc measure
providing capital to an individual enterprise.

(ii) to medium-sized enterprises in their start-up or

other early stages (32) or in assisted areas;

VIII. Criteria for assessing compatibility

VIII.1. As was already explained in section VI, the criteria are
(cid:145)positive and negative
form of
expressed in the
elements(cid:146). Not all
the elements have equal weight,
and in the following list the most important elements
are listed first. No single element is essential, nor can
any set of them be regarded as sufficient on its own to
ensure compatibility. In some cases their applicability,
and the weight attached to them, may depend on the
form of the measure. The Commission’s assessment will
take account of the regional specificity of any measure
and will be subject to an overall test of proportionality.

Measures will be assessed at each level. In cases where
the provision of risk capital to an enterprise is linked to
costs which are eligible for aid under an existing
framework or guideline, that text may be applied as
an alternative to the principles below for assessing
the aid to that enterprise, in line with paragraphs II.3
and V.2 above. Where the measure concerned also
provides aid at the level of investors, however, such
aid will still need to be assessed in accordance with
the principles below.

VIII.2. Where the ceilings for transaction sizes set out in VI.5
are met, and when only investors (or an investment
vehicle) are beneficiaries of State aid under
the
measure, such State aid is compatible to the extent
that
to the cost disadvantages
addressed, such as the higher relative costs of analysis
and management of small investments. The provisions
of VIII.3 below will be used to assess whether this is so.

is proportional

it

The Commission will require provision of evidence of
market failure where the ceilings for transaction sizes
set out in paragraph VI.5 are exceeded.

will be regarded as a positive element. Access to
finance for medium-sized enterprises beyond their
start-up or early stages should be subject to a limit
per enterprise on total funding through the measure.
Restriction to smaller transaction sizes (that is to say,
below EUR 500 000 or EUR 750 000 in regions qual-
ifying for assistance under Article 87(3)(c) or EUR 1
million in regions qualifying for assistance under
Article 87(3)(a)) or to a given level of demonstrated
failure will also be regarded as a positive
market
element.

Measures should be focused on risk capital market failure. If
a measure provides for the delivery of the finance to
enterprises principally in the form of equity or quasi-
equity then this will be regarded positively. Where
finance in
measures provide significant amounts of
other
to have a significant
incentive effect
is, where it will support risk
capital investments which would have happened even
in the absence of the measure) this will be regarded
negatively. This
case of measures
providing further finance to an enterprise which has
already received one aided injection of capital.

forms, or appear not
(that

could be

the

Decisions to invest should be profit-driven. A link between
investment performance and the remuneration of those
responsible for investment decisions will be a positive
element. This would be assumed to be met:

target

enterprises

(i) by measures under which all the capital invested in
the
is provided by market
economy investors, who also make the investment
decision, with the aid being solely an incentive for
them to do so; and

VIII.3. Once market

failure has

the
Commission will examine the following elements in
the assessment of a risk capital measure under the
State aid provisions of the Treaty:

been established,

(ii) by other measures with significant involvement of
market economy investors’ capital, being invested
is, only for profit)
on a commercial basis (that
the
directly or
(cid:145)target enterprises(cid:146).

in the equity of

indirectly (33)

Restriction of investments, or failing that of a majority of
funds invested:

(i) to small (31) or even micro enterprises; and/or

(32) The European Venture Capital Association defines

start-up
financing as (cid:145)financing provided to companies for product devel-
opment and initial marketing. Companies may be in the process of
being set up or may have been in business for a short time, but
have not sold their product commercially(cid:146), and other early-stage as
(cid:145)financing to companies still in the stages of research and product
development or that have completed the product development
stage and require further funds to initiate commercial manufac-
turing and sales. They will not yet be generating a profit(cid:146).

(31) Following the Community definition set out

in Commission

(33) (cid:145)Indirectly(cid:146) should be taken to mean investment via funds or other

Recommendation 96/280/EC (OJ L 107, 30.4.1996, p. 4).

investment vehicles.

21.8.2001

EN

Official Journal of the European Communities

C 235/11

In the case of funds, and while each measure will be
regarded on its merits and other aspects will have a
bearing on the Commission’s assessment, provision of
at least 50 % of the fund’s capital would be taken to
constitute (cid:145)significant involvement(cid:146), or 30 % in the case
of measures operating in assisted areas. Further positive
elements would be:

(i) an agreement between a professional fund manager
and participants in the fund, providing that the
manager’s remuneration is linked to performance
and setting out
the fund and
the objectives of
proposed timing of investments;

(ii) the representation of market investors in decision-

making; and

(iii) the application of best practice and regulatory

supervision in the management of funds.

is present

Where no such element
to indicate that
investment decisions will be commercially driven,
then this will be regarded negatively. This will be
taken to be the case of measures which are so small
in size as to be focussed on only a few projects, and
which are not economically viable, or of measures set
up solely or principally to provide finance to a
particular enterprise known in advance.

funds

The level of distortion of competition between investors and
should be minimised. The
between investment
Commission will regard positively a call
for tender
for the establishment of any (cid:145)preferential terms(cid:146) given
to investors, or the availability of any such terms to
other investors. This availability might take the form of
a public invitation to investors at the launch of an
investment fund, or might take the form of a scheme
(such as a guarantee scheme) which remained open to
new entrants over an extended period. The means by
which this positive element could be achieved will
necessarily depend on the form of
the measure in
question. However
the absence of any such check
against overcompensation to investors, or a measure
where the risk of
losses is borne entirely by the
public sector and/or where the benefits flow entirely
to the other investors will be considered as a negative
element.

focus. To the extent that many private sector
Sectoral
funds focus on specific innovative technologies or

information technology,
even sectors (such as health,
culture) the Commission can accept a sectoral focus
where this has a commercial as well as a public
policy logic. In line, however, with the Commission’s
consistently less favourable view of sectoral State aid
in particular in sensitive sectors suffering
measures,
from overcapacity, measures
specifically
exclude the provision of aid to enterprises in the ship-
building and ECSC sectors.

should

Investment on the basis of business plans. The existence for
each investment of a business plan containing details of
product, sales and profitability development and estab-
lishing the ex ante viability of the project is standard
commercial practice in professional fund management
and will be positively regarded. Measures providing no
indirect
(cid:145)exit mechanism(cid:146)
involvement
be
regarded negatively.

for
in individual

the State’s direct or

enterprises would

then the Commission may

Avoidance of
to a single
cumulation of aid measures
enterprise. If a measure provides aid to the enterprises
request
invested in,
commitments from a Member State to assess and set
limits to other forms of State aid to enterprises funded
by the risk capital measure, including under authorised
schemes. For such measures, and unless the Member
State undertakes that these enterprises will receive no
other State aid other than de minimis aid, the Member
State should propose to the Commission for exam-
ination and approval a reasonable evaluation of the
aid element of the measure which will be used for
applying
capital
provided to an enterprise under such a risk capital
measure is used to finance initial investment, research
and development costs or other costs eligible for aid
the Member State should
under other frameworks,
include the aid element in the risk capital measure in
applying the relevant aid ceilings.

rules. Where

cumulation

the

IX. Final observations

The Commission intends to apply the terms of this communi-
cation for five years. However, given that the approach of this
communication represents a departure from previous methods
of State aid control, and that it deals with an area of rapid
development in the Community economy, it reserves the right
to adjust its approach in the light of experience. Where this
would be helpful it may also provide further clarifications of its
approach to particular issues.