Communication from the Commission to the Council and the European Parliament on implementation of the risk capital action plan (RCAP)
Date: 2002-10-16
Institutions: European Commission
Subjects: action programme, capital market, economic development, employment policy, financial legislation, innovation, investment promotion, tax system, type of business

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 16.10.2002
COM(2002) 563 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

ON IMPLEMENTATION OF THE RISK CAPITAL ACTION PLAN (RCAP)

1. EXECUTIVE SUMMARY

This  Communication  reports  on  progress  in  the  implementation  of  the
RCAP for the year 2001 and, in some aspects, for the first half of 2002. It
is the fourth since the adoption of the RCAP in 1998. Successive European
Councils have set 2003 as the deadline to complete the Risk Capital Action
Plan.

Market  analysis  suggests  that  the  last  18  months  has  been  a  period  of
adjustment  for  the  European  risk  capital  industry.  The  severe  correction,
which started in mid-2000, still continuous and was particularly significant
in the Accession Countries due to, among other things, their sensibility to
global trends.  In spite of  the negative  trend, however, the  year 2001 was,
for  the  European  industry,  the  second  highest  both  in  terms  of  funds
invested  and  of  funds  raised.  The  decline  in  Europe  has  been  less
pronounced than in the US - although there is a long way  to  go  to match
their industry. The problem in Europe is compounded by the presence of a
still highly fragmented capital market, which the Financial Services Action
Plan  is  addressing.  Furthermore,  the  weakness  and  poor  performance
showed  by  the  EU  high-growth  stock  markets  means  that  the  scope  for
IPOs,  an  important  exit  strategy  for  venture  capital  investors,  remains
largely closed at the moment. Improvements to the functioning, regulation
and liquidity of these markets is necessary for risk capital to grow and for a
sufficient  pan-European  dimension  to  emerge,  through  further  and
necessary rationalization.

The modernisation of the regulatory framework has continued successfully
in a financial environment dominated by the successful introduction of the
Euro  in  physical  form.  Important  advances  can  be  reported  in  the
mandatory introduction of international accounting standards by 2005 and
in the forthcoming legislation on supplementary pension funds. As a result
those institutions may become important sources of risk capital funds as it
is already the case in the US. On the negative side, difficulties still persists
for having an affordable cost-effective European patent.

Entrepreneurship policy is also expanding in importance. The forthcoming
Green  Paper  on  the  subject  should  raise  its  profile  further  and  its  crucial
linkage  with  risk  capital.  Projects  leading  to  a  better  matching  of  supply
and demand  of  risk  capital,  as  the  one  already  under  completion  with  the
help of the Commission, should be encouraged. The objective agreed at the
Barcelona  European  Council 
in  R&D
(approaching  3%  of  GDP  by  2010,  of  which  two  thirds  from  the  private
sector)  requires  increased  investment  by  the  private  sector  and  reinforces
the  role  of  risk  capital,  either  private  or  public,  to  finance  promising
innovative projects and initiatives.

increase  EU 

investment 

to 

This  is  the  fourth
annual report

A period of
adjustment for the
industry

The regulatory
framework is
being modernised
relentlessly

Entrepreneurship
is being
encouraged from
different angles

Concerning  public  funding,  the  adoption  by  the  Commission  of  its
Communication  on  state  aid  and  risk  capital  has  clarified  the  question  of
compatibility of public funding of risk capital measures with the state aid
articles  of  the  Treaty.  The  EIF  has  embarked  upon  a  phase  of  rapid
expansion  and  has  been  able  to  attract,  under  difficult  market  conditions,

Community
funding of risk
capital is proving
successful

2

private investors to early stage funds. Finally, the share of Structural Funds
for  financing  venture  capital  investments  has  been  noticeably  increased.
All  these  recent  policy  changes  show  that  the  accompany  measures  to
develop  European  risk  capital  have  undergone  profound  and  positive
change in the last 4 years.

Compared  with  1998,  risk  capital  markets  have  not  only  grown  but  also
matured.  The  current  effort  to  improve  the  environment  for  risk  capital
investment  should  be  maintained,  and  be  seen  from  a  long-term
perspective, regardless of cyclical considerations.

RCAP should be
seen from a long-
term perspective

2003 will be the final "analysis" year on the RCAP - and a year to reflect
whether further measures are necessary to enhance risk capital post-2003.

2. INTRODUCTION

Since the adoption of the Risk Capital Action Plan (RCAP) in June 1998
by  the  Cardiff  Summit1,  the  Commission  has  published  annual  reports,
addressed to the Council and to the European Parliament2, on the degree of
progress  achieved  in  its  implementation.  This  fourth  progress  report3
covers the last 18 months (year 2001 and, to some extend, the first half of
2002). Moreover, for the first time, there  are  some  analysis on  Accession
Countries. Also for the first time there are some figures on buyouts as well
as some suggestions to go beyond the RCAP.

is 

intended 

remaining 

The  RCAP 
regulatory  and
to  eliminate 
administrative  barriers  at  both  Community  and  national  levels  which
impairs  the  full  development  of  risk  capital  markets4 in  Europe.  The
elimination of all these barriers will play  a  major role in  the  creation  and
development  of  innovative  high-growth  SMEs  and  would  therefore  be
important  to  foster  economic  growth  and  job  creation.  Moreover,  the
timely  completion  of  the  RCAP  will  be  essential  for  the  Community  to
become, as agreed in Lisbon, by 2010 the most competitive and dynamic,
knowledge-based society in the world.

This is the fourth
RCAP progress
report

Barriers should
be eliminated at
both Community
and National
levels

As the 2003 deadline approaches5, the need to know better the situation in
the  Member  States  is  more  pressing.  In  view  of  this  the  information
obtained through the national progress reports in the context  of the 2001-
2002  Broad  Economic  Policy  Guidelines  has  been  complemented  by  the
answers to an  ad-hoc questionnaire sent  to  Member  States  in  April  2002.
They will be presented separately.

The RCAP should
be completed by
end-2003

1Based on “Risk Capital: A key to job creation in the European Union”, SEC(1998)522, April 1998
2The European Parliament has adopted favourable resolutions on these reports, the last on 11 April 2002 (Report

A5-0020/2002 of MEP Peter William Skinner)

3The  previous  ones  were  COM(1999)493  of  20  October  1999,  COM(2000)658  of  18  October  2000  and

COM(2001)605 of 25 October 2001.

4As such the RCAP is a key component of structural reform in  Europe  and,  at  the  macroeconomic  level,  the
expected increase in efficiency  in the overall Community’s product and capital  markets  should translate into
economic growth and (high-quality) job creation.

5This  date  for  the  completion  of  the  RCAP  was  requested  at  the  Lisbon  Summit  (March  2000)  and  has  been

confirmed at the subsequent Spring Summits (Stockholm and Barcelona)

3

                                                
This progress report has been prepared by the Commission Risk Capital
Working  Group  which  includes  representatives  of  the  EIB  and  the  EIF.
Continuous  co-operation  and  consultation  with  the  industry  (EVCA)  has
ensured that their views are also taken into account.

Close contacts
with the industry

3. MARKET DEVELOPMENTS6

3.1. The Venture Capital industry in 2001

The  EU  venture  capital  market  has  experienced  a  severe  correction  since
the second half of 2000. The correction reflects the continuing deflation of
the  bubble  in  TMT  investment  which,  together  with  a  global  economic
slowdown,  has  depressed  equity  markets  and  reduced  incentives  for
venture capital investors. Venture capital investment7 fell by 35% in 2001
relative  to  2000,  while  there  was  a  corresponding  fall  of  24%  in  buy-out
investment.  Altogether,  €12.7  billion  (0.14%  of  GDP)  were  invested  in
venture capital and €10.7 billion (0.12% of GDP) in buy-outs in 2001.

A severe global
correction is
following earlier
excesses

The global venture capital industry is small8 and very sensitive to changes
in  the  economic  environment.  The  annual  flows  into  US  venture  capital
funds increased by a factor of ten in the 1980s, before returns began to fall
and  commitments  went  into  steady  decline.  This  pattern  was  reversed  in
the  1990s,  ending  the  decade  with  record  inflows.  Cumulatively,  US
venture capital investments were multiplied by 20 between 1995 and 2000.

The US venture
capital industry
has gone through
at least two
distinct cycles

As stressed in previous RCAP Communications, this striking US expansion
was  largely  due  to  the  development  of  a  speculative  bubble  in  1999  and
2000. Investment standards slackened amid a rush to build exposure in the
technology  sectors.  When  the  bubble  finally  burst,  investment  collapsed.
End 2001, they were down by 62% relative to the previous year.

Development of a
speculative
bubble

Venture capital investments in the EU and in the US 
1995-2001

in €x1000

120.000

100.000

80.000

60.000

40.000

20.000

0

EU

US

1995

1996

1997

1998

1999

2000

2001

6  EU  figures  are  derived  from  the  survey  conducted  by  PwC  for  the  EVCA  and  published  in  EVCA’s  2002
Yearbook;  US  figures  derive  from  the  survey  conducted  by  PwC  and  Venture  Economics  for  the  NVCA
(MoneyTree Survey). These sources have been preferred to other possible sources as they give data consistent
across countries (even if EU and US figures are not entirely comparable) and across several years.

7Including seed, start-up, expansion, and replacement phases of company development
8Venture capital investments represent only 5% of capital raised on stock markets

4

                                                
Recent fluctuations have been less pronounced in the EU than in the USA.
EU venture  capital investments  were  only  multiplied  by  six  in  the  period
1995-2000. Nevertheless, the correction since the first quarter of 2001 has
been sharp and has resulted in a steep decline in investment rates. On the
positive side, total EU venture capital investment in 2001 was the second
highest level ever recorded. The decline in investment being partly due to a
return of deals’ valuations to more conservative levels.

The downturn has
been less sharp in
Europe than in
the US

Although  the  correction  has  been  less  severe  than  in  the  USA,  the  EU
venture capital industry remains relatively small. Despite the 62% decline
in  2001,  the  US  venture  capital  industry  still  represents  0.36%  of  GDP,
compared  to  only  0.14%  of  GDP  in  the  EU.  In  absolute  terms,  the  US
industry remains three times larger (i.e. €41 billion vs. €12.7 billion). The
contraction  has  concentrated  on  start-up  and  technology,  segments  that
were already relatively under-developed in the EU.

In absolute size
the European
industry remains
dwarfed by the US

The  EU  venture  capital  market  remains  fragmented,  with  marked
differences  between  countries,  in  terms  of  levels  and  trends.  Building  on
several years of significant growth, investment in 2001 expanded further in
Sweden  (+80%),  Denmark  (+67%)  and  Spain  (+26%).  In  contrast,  fell
significantly  in  France  (-60%),  the  United  Kingdom  (-50%),  Greece  (-
50%),  Belgium,  Ireland  and  Portugal  (all  -40%).  Sweden  has  now  the
highest  level  of  investment  within  the  EU  in  terms  of  GDP  (0.43%  of
GDP), although the UK retains the highest level in absolute terms.

Industry
performance
varies between
Member States

Venture capital investments 2000-2001

1,20

1,00

0,80

0,60

0,40

0,20

0,00

2000

2001

A

P

EL

F

I

IRL

B

D

E

FIN DK UK

NL

S

EU14 US

In Sweden, early-stage investment remained slack over the last two  years
while  investment  in  expansion  doubled  in  2001,  as  the  focus  shifted  to
developing  existing  portfolios.  A  similar  trend  was  evident  in  the
Netherlands  where  the  fall  in  investments  was  markedly  bigger  in  early
stage.  Spain  continued  to  focus  on  later  stage  investments,  and  start-up
investments,  already  small,  further  declined  in  relative  terms.  Belgium,
Ireland  and  Italy  experienced  a  particularly  pronounced  decline  in  early-

General decline
in early stages

5

stage  investment.  In  the  United  Kingdom,  start-up  investments  decreased
in  a  proportion  similar  to  later  stage  investments.  But,  although,  UK
investment has been traditionally focused on later-stage  and buy-outs, for
the second year in a row, seed investment almost doubled in 2001 and the
number of seed capital projects increased tenfold. Finland has continued to
invest  heavily  in  early-stage  in  2001,  joined  in  this  trend  this  year  by
Denmark. In Germany and France, all segments were equally affected by a
slump in investment, being stronger in France than in Germany.

The contraction of the venture capital industry was particularly significant
in  the  Accession  Countries.  Their  industry  is  new  and  relatively
underdeveloped  and  is  especially  sensitive  to  global  trends9.  These
countries  also  suffer  from  a  lack  of  exit  opportunities,  as  their  stock
markets rarely offer a realistic possibility of completing an IPO.

Important
contraction in
Accession
Countries

Venture capital investments in 2001
(in % of GDP)

0,50

0,45

0,40

0,35

0,30

0,25

0,20

0,15

0,10

0,05

0,00

A

P

EL

F

I

IRL

B

D

E

FIN

DK

UK

NL

S

EU14

US

Early stage Expansion

While  venture  capital  data  may  not  be  complete  for  the  Accession
Countries,  some  distinct  trends  can  be  identified.  In  the  Czech  Republic,
investment in venture capital fell by 75%, and represented 0.04% of GDP,
and funding fell by 90% in 2001. Banks remained the main investors and
only  12.5%  of  total  investment  was  funded  domestically.  The  bulk  of
funding  (63%)  came  from  other  EU  countries.  The  decline  in  investment
was less pronounced  in  Poland  (-25%)  where  venture  capital  investments
represented  0.07%  of  GDP.  Funding  declined  by  50%  and  came  mainly
from  corporate  investors  and  banks  in  other  EU  countries  (79%).  In
Hungary,  venture  capital  investments  remained  small  (0.05%  of  GDP),
while buy-outs were six times higher than in 2000. Overall private equity
was  almost  entirely  funded  by  other  EU  countries  (99%).  In  contrast,
venture  capital  investment  increased  in  Slovakia  (albeit  from  a  very  low
level  in  2000  and  without  any  significant  increase  in  the  number  of
participants) with over 90% of new funding supplied by non-EU investors.

Different patterns
in different
countries

9The majority of funding is raised abroad, mainly in the EU

6

                                                
While  the  correction  in  the  EU  venture  capital  industry  can  be  seen  as  a
necessary re-adjustment toward sustainable valuations, several aspects give
cause for concern. Notably, the disproportionate impact on early-stage and
high-tech investment. As venture capital funds have focused on  nurturing
their existing portfolio  companies,  the  share  of  investments  in  very  small
companies  has  declined  in  2001.  The  drop  in  the  number  of  companies
financed has been even sharper than the drop in the number of investments
(-23%  vs.  -20%).  Investment  in  seed  and  start-up  projects  has  fallen  by
38%,  while  replacement  investments  have  increased  by  22%.  This  may
lead to a “credit crunch” for the early-stage segment, with adverse effects
on the viability of start-ups and small firms.

Investment in the technology segment has also decreased sharply, by 35%,
to €5.7 billion. This decline was particularly important in France, Portugal
and Spain.  In  the  latter  country,  technology  represented  less  than  15%  of
venture  capital  investments  in  2001.  Internet-related  investments  dropped
sharply.  But  computer-related  investments  remained  the  single  largest
category  of  technology  investments  (despite  a  36%  fall)  and  focused  on
second-stage  funding,  for  the  expansion  of  established  businesses.
Compared  to  the  US,  the  European  market  for  technology  remains  small
(six  times  lower  than  USA  investments  of  €35.4  billion).  However,  as
more deals were done in Europe than in the US (4,340 vs. 3,280), the gap
is  due  to  the  differences  in  the  type  of  investment10.  Sustained  growth  is
not to be expected in the short run. Funds raised in 2001 and earmarked for
investment  in  early-stage  and  expansion  high-technology  companies
decreased by respectively 35% (to €5.6 billion) and 40% (to €4 billion).

3.2. Outlook for the EU venture capital industry

Many  investments  made  late  in  1999  and  in  the  first  half  of  2000  were
overvalued  and  are  now  weighing,  probably  for  some  time,  on  the
performance  of  venture  capital  funds.  In  2001,  23%  of  divestments  were
done  by  write-off11,  as  the  industry  cleaned-up  portfolios.  Returns  have
fallen, with the main drop being seen in early-stage at –9% for the one-year
horizon internal rate of return at the end of 2001. Moreover, the continued
weakness of high-growth stock markets has  led to the near-disappearance
of  IPOs12.  The  inability  for  venture  capital  funds  to  divest  through  IPOs
will  impact  on  their  performance  and  therefore  their  ability  to  raise  new
capital. This will also limit their capability to invest in new companies as
they are forced to stick to their existing portfolio for longer than expected.

Early-stage
investment
particularly affected
by the correction

Investment in
technology also
fell sharply

No short run pick-
up for technology

Correction
probably has
some way to go

In  the  US,  investments  in  2000(Q2)  have  been  decreasing  for  the  ninth
consecutive quarter, and total investments for the year 2002 is expected to
be  well  below  1999,  and  probably  1998,  levels.  And  as  venture  capital
funds have become very selective in their investments,  they handed more
capital  back13  to  their  investors  than  they  raised  from  them.  In  Europe,

Investment in
USA and Europe
continue
decreasing

10For instance, deals in the medical device sector were 33 times greater in the USA than in Europe
11Compared to less than 7% on average over the previous three years
12Trade sales have always been much larger than IPOs in volume terms, but IPOs are key for valuation
13For the first time in US venture capital market history

7

                                                
preliminary  figures  for  2002(Q1)  also  show  a  low  level  of  investment,
focused on follow-on investments rather than on supporting new ventures.

The medium-term prospects for the EU venture capital investment seem to
be relatively favourable, with significant scope to continue financing viable
projects due to the high level of non-invested funds. Inflows of €15 billion
were recorded in 2001 - again, the second highest amount ever - for future
venture  capital  investment  and  €22  billion  for  buy-outs.  A  sign  of
maturity  is  the  greater  diversification  in  sources  of  funding.  In  2001,  for
the second consecutive  year, pension funds were the largest single source
of  private  equity  capital  (27%)  in  the  EU,  ahead  of  banks  (24%)  and
insurance  companies  (13%).  Full  involvement  of  pension  funds,  which
have  longer  investment  horizons,  is  a  pre-condition  for  developing  a
mature venture capital market. The involvement of endowments, charities,
universities, etc, in EU venture capital is also increasing.

Medium-term
prospects seem to
be more
favourable

As  the  EU  venture  capital  industry  has  matured,  it  is  now  significantly
better  equipped  to  weather  economic  downturns.  More  reasonable  entry
valuations  offer  renewed  market  opportunities,  helped  by  the  progressive
development  of  the  industry  as  a  whole  and  the  gradual  emergence  of  a
more  entrepreneurial  spirit  in  the  EU.  However,  expectations  of  a  quick
rebound could be disappointed.

EU industry has
matured and is
better equipped

3.3.      High-growth stock markets

'Growth' stock market indices 1998-2002

9000

8000

7000

6000

5000

4000

3000

2000

1000

0
1/01/98

1/07/98

1/01/99

1/07/99

1/01/00

1/07/00

1/01/01

1/07/01

1/01/02

1/07/02

Nouveau Marché

Neuer Markt

Nasdaq-Europe

AIM

Nasdaq

These  markets  play  a  major  role  in  financing  the  development  of  growth
companies and in offering exit routes for investors. Since the burst of the
TMT  bubble  in  March  2000,  the  prices  of  high-growth  stocks  have
collapsed and primary activity in those markets has come to a standstill.

The events of 11 September further hit already depressed markets. By end
September 2001, Frankfurt’s Neuer Markt had fallen more than 90% from
its  record  highs  of  March  2000.  In  the  same  period,  Euronext’s  Nouveau
Marché fell 91%, Italy’s Nuovo Mercato 92%, Nasdaq Europe – formerly

8

Easdaq  –  93%,  and  Spain’s  Nuevo  Mercado  “only”  83%,  probably
benefiting from the fact that it was established sometime after March 2000.
After  some  sort  of  recovery  end  of  2001  and  beginning  2002,  markets
experienced  a  further  correction  in  April  –  July  2002.  Investor  concerns
reflect four factors: (i) the prospect of lower-than-expected earnings in the
coming quarters because of a sluggish global economy ; (ii) perception that
price-earning ratios in some equity markets remain unsustainably high; (iii)
some loss of confidence in the reliability of the audited accounts (a domino
effect from the US); (iv) lack of liquidity in small stocks. This concern is
particularly high for TMT stocks.

For primary activity, EU “high-growth” markets remained virtually closed
in  2001.  In  total,  only  10  companies  were  listed  on  the  Nouveau  Marché
(compared  with  52  the  previous  year),  11  on  the Neuer Markt  (compared
with  133  in  2000)  and  5  on  the  Nuovo  Mercato  (compared  with  30  in
2000). And in the first six months of 2002, 2 companies were newly listed
on  the  Nouveau  Marché  and  one  on  the  Neuer  Markt.  A  number  of
companies  have  also  decided  to  delist,  especially  from  the  Neuer  Markt
and  Nasdaq  Europe.  Because  of  the  costs  involved,  in  the  case  of  some
foreign  companies,  to  focus  on  their  domestic  markets,  or,  in  general,
because  of  the  crisis  in  confidence  in  the  stock  market.  The  exception  to
this  dismal  trend  was  AIM  (108  new  companies  were  listed  in  2001
compared  with  250  in  2000)  because  it  includes  both  traditional  small
capitalisation companies as well as “high-growth” companies.

At the end of 2001, 629 companies were quoted on AIM, 326 on the Neuer
Markt, and 164 on Le Nouveau Marché. Liquidity has always been low on
these markets and volatility high, two major drawbacks that have increased
in  2001.  Last  year,  less  than  €4  million  was  traded  per  day  on  AIM,  €8
million  on  le  Nouveau  Marché  and  €50  million  on  the  Neuer  Markt.
Liquidity improved late 2001, but has remained low. The decision to close
the  Neuer  Markt  and  re-organise  the  Deutsche  Börse  into  a  two-tier
structure,  as  well  as  the  consolidation  between  the  Paris,  Amsterdam,
Brussels  and  Lisbon  markets  into  Euronext,  which  includes  a  high  tech
segment, may make these markets more attractive to investors and restore
confidence.  Market  practitioners  are  relatively  optimistic  but  uncertainty
on  growth,  corporate  profitability  and  equity  valuation  remains  high,  and
therefore  the  recovery  may  be  delayed.  No  successful  pan-European
platforms  have  yet  emerged,  which  might  improve  the  depth  of  some
markets and widen the pool of investors.

EU high-growth
stock markets
depressed in the
aftermath of the
TMT bubble

Current absence
of liquidity

Uncertainty
remains high

In contrast to the EU markets, there are more than 4000 companies listed
on the Nasdaq. The Nasdaq also suffered significantly from the collapse of
the TMT bubble after 2000, losing more than 60% of its value since early
2000.  Only  144  new  companies  were  listed  in  2001  (compared  to  more
than 800 in 2000) and 815 were delisted. Nevertheless, with an average of
€12 billion traded per day, the market still remains highly liquid.

Nasdaq in
contrast remains
highly liquid

9

4. REGULATORY ISSUES

The modernisation of the regulatory framework, as required by the RCAP,
should  lead  eventually  to  a  barrier-free,  cost-effective  regulatory  system,
encouraging the full development of risk capital markets.  In the last  year,
the  modernisation  process  has  advanced  relentlessly  in  a  financial
environment  dominated  by  the  successful  introduction  of  the  euro  in
physical form which will help market stability.

Successful
introduction of
the euro in
physical form

The Barcelona Summit reconfirmed the 2003  deadline  for the completion
of  integrated  securities  and  risk  capital  markets  (point  35,  second
paragraph  of  Presidency  conclusions).  Another  important  milestone  has
been the agreement found by the Commission on 5 February 2002 with the
Parliament which opened the way for the deployment of the Lamfalussy
procedures.14  These  procedures,  conceived  in  principle  for  securities
markets regulations, might be extended to other financial sectors.

Agreement with
the Parliament on
Lamfalussy
procedures

Implementation of Financial Services legislation

Banks

Insurance

Securities

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

7/9
9/9
7/9
7/9
7/9
7/9
9/9
9/9
9/9
7/9
9/9
9/9
7/9
9/9
9/9
89.6%

September 2002

24/25
24/25
24/25
23/25
24/25
24/25
24/25
24/25
24/25
24/25
25/25
24/25
24/25
25/25
24/25
96.3%

8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
100%

Payment
systems
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
100%

Company
law
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
100%

Total

Position

56/59
58/59
56/59
55/59
56/59
56/59
58/59
58/59
58/59
56/59
59/59
58/59
56/59
59/59
58/59
98.7%

9
3
9
15
9
9
3
3
3
9
1
3
9
1
3
/

As  for  the  FSAP15,  the  Belgian  and  Spanish  Presidencies  have  helped
create  the  necessary  political  momentum  and  as  a  result:  “a  number  of
agreements  have  been  struck,  but  significant  challenges  remain  to
complete  the  Plan  by  2003/5”  (page  2).  As  the  programme  advances  the
center  of  gravity  of  Community  action,  and  therefore  the  priorities,  will
move forward accordingly.

The FSAP is
being completed

14In this context the EP-Economic and Monetary Affairs Committee has created on 24 April 2002 an Advisory

Panel of Financial Services Experts. See ECON online. www.europarl.eu.int/committee/econ_home.htm

15“6th FSAP Progress Report”, COM(2002)267 of 3 June 2002.

10

                                                
4.1. Measures included in the FSAP16

In  most  of  the  regulatory  measures  included  in  both  the  FSAP  and  the
RCAP decisive steps have been completed:

(cid:1)  Measure:  “Upgrading  of  directives  on  prospectuses  to  facilitate

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

The  Commission  has  adopted  an  amended  proposal17  on  prospectuses
which  takes  into  account  Parliament’s  opinion  on  the  original  proposal.
Once  adopted  the  Directive  will  introduce  a  truly  “single  passport  for
issuers”.  This  will  facilitate  IPOs,  including  those  for  listing  in  the
specialised  high-growth  stock  markets.  The  Commission's  new  proposal
has added additional flexibility for SME IPO's. The Danish Presidency and
the European Parliament are striving to find the common ground before the
end of 2002.

(cid:1)  Measure “Adoption of prudential rules to allow institutional investors

to invest in venture capital”

Measures to open
to IPO door are
being accelerated

Two new directives18 on harmonised investment funds (UCITS) have been
adopted.  Regarding  the  Commission  proposal  on  the  activities  and
supervision of supplementary pension funds, negotiations still continue but
important  progress  is  being  achieved.  As  a  result,  investment  by  these
institutions  in  risk  capital  markets  will  be  possible.  In  the  future  they
should be expected to become important sources of risk capital funds.

UCITS adopted
and important
advances in
pension funds
attained

(cid:1)  Measure: “Assess of existing accounting and auditing requirements”

On  6  June  2002  a  Regulation  has  been  adopted  on  the  application  of
International  Accounting  Standards  (IAS)  in  the  EU.  It  requires  all  EU
listed companies, to prepare their consolidated accounts in accordance with
IAS  from  2005  onwards.  Member  States  may  extend  this  requirement  to
unlisted companies. In this context, the Commission adopted a proposal on
3  June  2002  for  amending  the  existing  EU  Accounting  Directives.  This
would  allow  Member  States  which  do  not  apply  IAS  to  all  companies  to
move  progressively  towards  similar,  high  quality  financial  reporting.
Common  accounting  standards  will  facilitate  comparison  of  company
performance  as  well  as  listing  in  high-growth  stock  markets.  Concerning
statutory  audit, 
the  Commission  adopted  on  16  May  2002  a
Recommendation on the independence of statutory auditors in the EU. The
Commission will issue later this year a general communication on statutory
audit  outlining  priorities  for  further  actions.  These  measures  will  favour
reliability of accounts.

(cid:1)  Measure: “Dissemination of best practices in corporate governance”

IAS standards
mandatory by
2005 all over
Europe

16These measures affect primarily the supply side of risk capital.
17COM(2002)460 of 9 August 2002, www.europa.eu.int/comm (internal market)
18Directives 2001/107/EC (JO L41, p.20 of 13.02.2002) and 2001/108/EC (JO L41, p. 35 of 13.02.2002)

11

                                                
Best practices in
Corporate
Governance have
come at the top of
the agenda

The  comparative  study  requested  by  the  Commission  on  corporate
governance  codes  relevant  to  the  EU  and  the  Member  States  was
completed  in  January  2002.  Later  this  year,  and  at  the  request  of  the
ECOFIN Council (April 2002 Oviedo), the High Level Group of Company
Law  Experts  will  provide  a  number  of  recommendations  on  some  key
corporate  governance  issues  which  have  become  relevant  in  the  wake  of
the  latest  US  financial  scandals,  specially  for  TMT  stocks.  Improving
transparency,  disclosure  and  corporate  governance  are  all  essential
components  for  reviving  EU  stock  markets,  including  the  high  growth
markets.

4.2. Measures outside the FSAP19

For  the  RCAP  legislative  measures  not  included  in  the  FSAP  only  some
progress can be reported.

(cid:1)  Measure: “Reform of the legislation on insolvency and bankruptcy”20

To enhance effectiveness of the legal systems and to reduce the stigma of
failure in Europe, in order to provide a second chance to entrepreneurs, the
Commission  together  with  national  experts,  and  following  a  preparatory
study21,  has  proceeded  to  define  a  set  of  performance  indicators  and
benchmarks as a support to Member States for shaping their strategy in this
field. Furthermore, the Commission has published a guide22 which includes
guidelines  for  effective  insolvency  and  creditor  right  systems  and  case
studies on legal issues and support schemes.

The problem of
stigma linked to
failure is being
addressed

(cid:1)  Measure: “Reform of the European Patent System”

Following the Commission proposal23, successive European Councils have
requested  Member  States  to  agree  on  a  clear  and  balanced  package.
However,  negotiations  still  continue.  A  Community  patent  which  is
affordable,  simple,  cost-efficient  and  legally  certain  will  be  particularly
important for innovative high-growth SMEs. This will require satisfactory
jurisdictional arrangements of Community nature24.

An affordable
single patent is
still pending

4.3. Measures beyond the RCAP

As  shown  above,  the  RCAP  foresees  a  number  of  specific  regulatory
barriers,  which  should  be  overcome.  As  the  RCAP  implementation
proceeds,  other  barriers  at  both  Community  and  national  levels,  not
specifically  mentioned  in  1998,  may  become  present.  Examples  are  the
new Basle capital adequacy rules and the new regulation on mergers, both

Scope of the
RCAP should be

19These regulatory measures are intended to boost the demand side of risk capital.
20For an overview of the subject see “The European Restructuring and Insolvency Guide 2002/2003”, White

Page, 2002 ; and “Bankrupcy and Insolvency”, EVCA, May 2002

21 “Bankrupcy and a Fresh Start”, www.europa.eu.int/comm(enterprise)
22 “Helping Business Overcome Financial Difficulties”, www.europa.eu.int/comm(enterprise)
23Regulation for a Community Patent (JO C 337 of 28.11.2000)
24In  this  regard,  the  Commission  has  produced  a  working  document  “On  the  planned  Community  Patent

Jurisdiction”, COM(2002) 480 of 30.08.2002

12

                                                
closely monitored by the industry which fears that, for instance, banks may
reduce their investment in risk capital or that risk capital providers will be
forced to send “unnecessary” notifications.  The industry  in  also  in  favour
of having European fund structures that avoid current inefficiencies due to
prevailing tax rules. The new needs and developments should have also to
be  appropriately  covered  in  order  to  achieve  the  pursued  RCAP  political
objective.

interpreted in a
dynamic fashion

5. TAX ISSUES

The  basic  importance  of  tax  issues  for  the  development  of  risk  capital  is
already a well-established fact and has become a common feature in most
tax-related  publications.  Moreover,  business  sources  emphasise  that,  in
relative terms, the importance of tax issues is increasing.

Importance of tax
issues is
increasing

5.1. Tax environment for risk capital

Risk capital operators and investors are facing two important  types of tax
constraints  :  structural  barriers  (e.g.  the  tax  treatment  of  dividends  and
capital  gains,  of  retail  investment  in  private  equity  vehicles,  of  equity  vs
debt financing and of stock options) and specific obstacles to cross-border
activities. A recent Commission study25 found that tax rate differentials in
the EU are very high and that, in virtually all countries and situations, debt
financing receives a more favourable tax treatment than equity financing26.
For  cross-border  obstacles,  the  study  proposes  a  two  pronged  strategy.  In
the short term, enactment of specific legislation targeted at each particular
obstacle.  In  the  longer  term,  development  of  a  systematic,  comprehensive
solution  to  all  cross-border  issues  providing  companies  with  a  common
consolidated tax base for their economic activities within the EU.

illustrated 

in  previous  Commission  Communications27,  various
As 
Member States have enacted tax legislation which is intended to foster risk
capital and/or R&D. In 2002, this trend has continued. For instance, the UK
has followed the German example  and  now  provides  for  an  exemption  of
capital  gains  arising  on  disposal  of  company  participation.  Concerning
capital  gains  of  “business  angels”,  some  Member  States  such  as  UK  and
France either exempt such capital gains or provide targeted relief for long-
term investment in companies.

Two sets of
constraints

Two pronged
strategy

Tax laws continue
to becoming  more
friendly 
risk
capital

to 

5.2. Specific issues and Commission initiatives under way

There  is  no  EU  legislation  providing  for  the  exemption  of  capital  gains
derived  from  the  transfer  of  shares  or  some  other  method  to  eliminate
double  taxation  or  for  cross-border  loses  relief.  There  is  also  no
harmonisation  whatsoever  concerning 
including
investment institutions such as partnerships or funds.

transparent  entities, 

Scarce EU
legislation

25 “Company Taxation in the Internal Market”, SEC (2001) 1681 of 23.10.2001
26 See also “Tax of Corporate Profits, Dividends and Capital Gains in Europe”, EVCA, May 2002
27 See COM(2000) 658 of 18.10.2000 and COM(2001) 605 of 25.10.2001

13

                                                
Whereas  two  directives  on  direct  taxation  have  been  adopted,  they  are
subject  to  several  shortcomings.  The  Parent-Subsidiary  Directive28
provides  for  the  exemption  of  dividend  payments  between  associated
companies  across  the  EU,  but  it  does  not  apply  to  partnerships  and  other
legal  forms  often  adopted  by  SMEs.  Moreover,  the  minimum  (direct)
shareholding  requirement  of  25%  excludes  a  significant  number  of
holdings from receiving its benefits. The Merger Directive29 is equally not
applicable  to  partnerships  and  does  not  include  the  merger  of  holding
companies. Besides, no rules are provided to avoid double taxation arising
from transactions such as exchange of shares or transfer of assets.

Directives on
direct taxation
have provided
limited results

Concerning  bilateral  tax  treaties,  the  Commission  intends,  following
technical discussions with Member States in 2003, to come forward in 2004
with a Communication on the need to adapt certain provisions  of double
taxation conventions, based on the OECD model30, in order to make them
compatible with Treaty principles31.

Bilateral tax
treaties should be
adapted

Tax treatment of stock options is another important topic for the risk capital
industry (see section 6.4). For instance, employees exercising their right of
freedom  of  movement  may  be  overtaxed  on  this  sort  of  income  since
Member States follow different tax criteria - tax at granting or at exercising
or at vesting - and do not apply double tax treaties consistently.

Stock  options  are
taxed differently

5.3 Tax incentives

Special  tax  regimes  have  been,  and  should  continue  to  be,  used  to
encourage risk capital activities, R&D and innovation, provided they meet
the  requirements  of  the  Code  of  Conduct  on  business  taxation,  EU  State
Aid rules and other commitments of Member States in the EU tax arena.

Special tax
regimes should be
compatible with
prevailing rules

As  regards  R&D  and  innovation,  governments  have  devised  a  variety  of
fiscal  incentives  for  the  benefit  of  the  business  sector32.  The  role  of
economic incentives in this field has been subject to increasing attention in
view  of  the  theoretical  and  practical  developments,  with  multiplicity  of
variables coming into play. Governments have a high degree of leverage on
a large number of these variables (e.g. the economy’s knowledge base, the
framework  conditions  for  R&D  and  innovation,  the  effectiveness  of
networking and knowledge transfer mechanisms). As a general rule, the use
of  economic  incentives  should  concentrate  on  identified  market  failures,
and on minimising the crowding out of private research efforts and possible

Multiple variables
come into play

28“Council  Directive  on  the  common  system  of  taxation  applicable  in  the  case  of  parent  companies  and

subsidiaries of different Member States”, 90/435/EEC of 23.07.1990

29“Council Directive on the common system of taxation applicable to mergers, divisions, transfer of assets and

exchange of shares concerning companies of different Member States”, 90/434/EEC of 23.07.1990

30“Model Tax Convention on Income and on Capital”, OECD November, 2000.
31In a longer-term perspective, this Communication may constitute a first step towards the possible elaboration

of an EU tax treaty model.

32For a detailed analysis see “Corporation tax and innovation : Issues at stake and review of European Union

experiences in the nineties”. EUR 17035 (Commission, Innovation Papers No 19, 2002)

14

                                                
distortions of competition. Therefore, optimising economic incentives calls
for a comprehensive strategy building on the perceived interaction between
the  various  economic  policy  instruments  that  determine  the  quality  of  the
innovation system.

6. ENTREPRENEURSHIP

It  is  already  a  widely  shared  view  that  entrepreneurial  dynamism  is
insufficient in Europe and that there is a  great potential for improvement.
In  order  to  draw  attention  on  the  subject,  the  Commission  intends  to
publish  a  Green  Paper  on  Entrepreneurship  early  in  200333.  The  Green
Paper, which will be presented to the 2003 Spring Summit, will highlight
the  importance  of  entrepreneurs  in  the  knowledge-based  economy  and
analyse 
the  correlation  between  entrepreneurship  and  economic
performance.

Great potential
for improvement

On  the  other  hand,  the  2002  Report34  on  the  implementation  of  the
European  Charter  for  Small  Enterprises35  concludes  that  real  progress
has  been  made  in  implementing  the  Charter,  particularly  in  areas  such  as
start-up  procedures  and  improving  legislation.  On  23  April  2002,  all
candidate  countries  signed  in  Slovenia  the  "Maribor  Declaration”,
supporting the Charter recommendations.

The Charter is
being
implemented

6.1. Informal risk capital financing

The number of business angel networks is increasing rapidly (see annex 4).
But, for the  time being, only the UK can be  considered  a  mature  market.
The Commission has been active in developing business angel financing in
Europe  through  a  pilot  action  (1998-2000)  and  a  benchmarking  project
(2001-2002). The Business Angel Network pilot programme was part of the
Third MAP36 and its evaluation shows that the benefits of network building
are considerable for both companies and local development37. The focus of
the  benchmarking  project  is  on  public  policies  that  are  beneficial  for  the
development of a mature business angel investment market

Business angel
financing
continuous
developing

Even  though  precise  figures  are  difficult  to  obtain,  corporate  venturing
has  also  been  hard  hit  by  the  downturn  in  the  markets,  and  many
companies  have  abandoned 
their  risk  capital  activities  altogether.
According  to  surveys,  strategic  objectives  have  become  more  important
than financial objectives what is likely to cushion the decrease of corporate
venturing investment. To favour this type of activity, some Member States
have introduced incentives such as the UK corporate venturing scheme in
which,  if  a  company  purchases  shares  in  another  company,  20 %  of  the

Increasing
importance of
strategic
objectives

33The European Council took note in Barcelona (15/16 March 2002) of the Commission’s intentions and added
that “the Council will meet before every Spring European Council to assess progress in this area” (Point 15 of
the Presidency Conclusions)

34COM(2002) 68 of 6.02.2002 (This second annual report was presented to the Barcelona Summit)
35The European Charter for Small Enterprises, adopted by the General Affairs Council on 13 June 2000 and
welcomed  by  the  Feira  European  Council  on  19-20  June  2000,  called  upon  Member  States  and  the
Commission to take action to support and encourage small enterprises in ten key areas.

36Third Multiannual Programme for SMEs (1997-2000), 97/15/EC of 9.12.1996 (OJ L 6, 10.1.1997, p. 25-31)
37An evaluation report will be available by the end of 2002.

15

                                                
amount invested can be, under certain conditions, set against the tax bill.

6.2. Matching supply with the demand for risk capital

Information on entrepreneurs and investors should be readily available and
easy matching of both sides may have considerable added value. Business
angel networks are in a crucial position to facilitate that matching. But, to
reach  a  critical  mass,  sustained  awareness-raising  campaigns  will  be
needed and modern ICT tools will have to be fully exploited38. This will be
needed not only at regional or national level, but also at cross-border level,
especially  in  some  high-tech  areas  where  the  number  of  companies  and
knowledgeable investors is limited.

is  supporting39  since  March  2002  an 

To close existing  risk  capital matching  gaps  and  provide  related  services,
the  Commission 
investor
identification  and  guidance  service,  Gate2Growth.com,  for  innovative
entrepreneurs to complement regional and national initiatives. The service
is manned by  a  team of investment analysts  with  a  venture  capital  and/or
entrepreneurial  background.  In  its  first  quarter,  900  entrepreneurs  have
registered  and profiles of  3000  investors in  Europe have  been established
so far. It is expected that this pan-European matching database reaches its
full critical mass by end 2002.

6.3. Entrepreneurship and training

The  notion  of  entrepreneurship  as  a  basic  skill  that  should  be  provided
through  lifelong  learning  is  becoming  widely  recognised.  In  most  EU
countries, initiatives already exist. In the framework of the 4th MAP40 the
Commission  is  running  a  “Best  Procedure”  project  on  education  and
training  for  entrepreneurship  with  the  objective  of  identifying  and
comparing  initiatives  across  Europe  that  aim  to  promote  teaching  of
entrepreneurship  in  the  education  systems,  from  primary  school  to
university.  Earlier  this  year,  the  Commission  published41  the  results  of  a
project on entrepreneurship training including the outcome of a conference
on the subject held in Madrid in 2001.

Investors and
entrepreneurs
should meet easily

An extensive data
base is being
constructed

Entrepreneurial
attitudes and
skills should be
taught

EVCA42  has  established  in  2002  an  Entrepreneurship  Education  Toolkit
which is being made available to 500 European universities and institutions
of higher education to help them teach a one semester class explaining the
basics of, and possibilities provided by, risk capital financing.

An education
toolkit has been
distributed

6.4. Employee financial participation

38In the same vein, the European Parliament has called for a “one-stop shop” risk capital website (point 17 of

the EP Resolution of 11.04.2000, Opus Cit.)

39Under the Gate2Growth Initiative and based on the results of the LIFT Helpdesk pilot project (1999-2001)

for access to finance (www.gate2growth.com)

40“Multi-Annual  Programme  (2001-2005)  for  Enterprise  and  Entrepreneurship”  (Council  Decision

2000/819/EC of 20.12.2000, OJ L 333, 29.12.2000, p. 84)

41“The Development and Implementation of European Entrepreneurship Training Curriculums”, EUR 17047

(Commission, Innovation Papers No 24, 2002)

42With the support of the Commission’s Gate2Growth Initiative (www.cordis.lu/finance/home.html)

16

                                                
In order to analyse further the possibilities provided by the different types
of  employees’  financial  participation,  the  Commission  has  published  a
Communication43  on  the  subject  and  a  working  group44,  made  of
independent  experts,  have  been  created.  On 
the
Commission launched in late 2001 a study45 on employee stock options to
analyse the existing provisions in the Member States  and the USA and to
evaluate the pros and cons of this form of remuneration, with special focus
on SMEs. To help the Commission a group of experts have been created46

the  other  hand, 

7. EUROPEAN AREA OF RESEARCH AND INNOVATION

The Barcelona European Council agreed47 to increase overall EU spending
on R&D with the aim of approaching 3% of GDP by 2010 (up from 1.9%
in  2000),  two-thirds  of  which  coming  from  the  private  sector.  The  EU  is
spending  much  less  in  R&D  than  its  major  trading  partners  and  the  gap
with  the  US  has  been  steadily  growing48.  In  a  recent  Communication49,
the Commission identifies a range of policy areas and issues that need to be
addressed  to  achieve  that  goal.  It  states  that  efficient  and  integrated
financial markets will be crucial to increase and facilitate access by SMEs
to  external  sources  of  finance  and  more  effective  use  of  various  public
financing instruments (direct support, fiscal incentives, guarantee schemes
and  risk  capital)  will  be  needed,  in  particular,  to  stimulate  and  leverage
private investment.

Expert  groups  are  helping  the  Commission  in  identifying  how  public
support  could  be  better  used  to  foster  private  investment  in  R&D,  in
particular by improving access to risk capital and debt instruments. On the
basis of the debate with all stakeholders referred to in the above-mentioned
Communication, the Commission will consider proposing a focused set of
priority  actions  supported  by  a  process  of  open  coordination  in  a  second
Communication, in Spring 2003.

The newly approved50 6th Framework Programme (2002-2006), with an
overall budget of 17.5  billion  euros  (+17% compared to the 5th)  has been
specifically  designed  to  support  the  creation  of  the  European  Area  for
Research and Innovation. New instruments are introduced by the 6th FP to
encourage  the  integration  of  research  capacities,  to  promote  the  co-
ordination of national programmes, to increase the mobility of researchers
and  to  enhance  the  impact  of  research  efforts.  Horizontal  activities  under

Stock options and
other forms of
remuneration are
being analysed

3% of GDP for
research should
be attained by
2010

A second
communication is
under preparation

New instruments
are being
introduced

43“Promoting employee financial participation in the European Union - A framework for Community action”,

COM(2002)364 of 5 July 2002

44The  “High  level  Group  on  transnational  obstacles  to  financial  participation  of  employees  for  companies

having a transfrontier dimension” has met for the first time on 18 September 2002

45“Employee Stock Options in the EU and the USA”, September 2002, www.europa.eu.int/comm (enterprise)
46The experts have been nominated by the Member States and the Candidate Countries, and the group has met,

for the first time, on 22 May 2002.

47 Point 47, first indent, of the Barcelona European Council conclusions, 15 and 16 March 2002.
48 OECD data and Commission estimates value that gap to around 120 billion euros in 2000, of which more than

80% is due to the lower level of business spending

49“More Research for Europe : Towards 3% of GDP”, COM(2002) 499 of 11.09.2002)
50European Parliament and Council Decision of 27 June 2002, www.europa.eu.int/comm(research)

17

                                                
the 5th FP facilitating trans-national technology transfer and the interfacing
investors,  will  be  reinforced.
between  researchers,  enterprises  and 
Investment  fora,  based  on  the  successful  “Biotechnology  and  Finance
Forum”, will be encouraged.

8. PUBLIC FUNDING

8.1. State aid and risk capital

(Spain), 

tecnológica 

The adoption of the Communication on this subject51 has proved to be an
important  development  and  it  has  been  applied  in  other  cases  since  last
year’s report52, including Linea de apoyo a la capitalización de empresa de
the  Sächsische  Beteiligungsgesellschaft
base 
(Germany) and two further UK schemes, one intended to fill the gap in the
provision of risk capital in small amounts to SMEs in the coalfield areas of
England  and  another  to  do  the  same  in  other  communities  suffering
particular  deprivation.  A  particular  issue  arises  in  assessing  measures
where  all  the  funds  invested  are  public  funds.  In  such  cases  it  may  be
harder to establish that investment decisions are profit-driven, which is one
of the criteria laid down by the Communication.

8.2. The“i2i” initiative and the European Investment Fund

As explained in last year’s Communication53, Innovation 2000 Initiative
(“i2i”)  was  launched  by  the  EIB  in  May  2000,  in  response  to  the  Lisbon
EU  Summit  and  as  EIB’s  contribution  to  the  emergence  of  a  more
innovative  and  knowledge-based  society.  The  EIB  Group  (including  EIF,
its  equity  “arm”)  is  dedicating  a  significant  part  of  its  resources  to
encourage investment  in  research  and  innovation.  As  of  September  2002,
loans  approved  under  i2i  for  projects  related  to  research  totalled  €4.6
billion, of which €3.2 billion was signed.

The  largest  share  of  the  venture  capital  resources  managed  by  the  EIF  is
made available by the EIB (including the i2i resources ear-marked for risk
capital  such  as  i2i  audiovisual),  mainly  for  early  stage  financing.  For  the
audio-visual industry a number of venture capital funds have received from
i2i, as of June 2002, a total of €83.5 million of which €48.5 million relates
to investment in content industry and €25 million to high-tech audio-visual
SMEs. The EIF also operates the “ETF Start-up”54 Facility and the “Seed-
Capital  Action” of the MAP. The  first  is targeted  towards  venture  capital
funds, particularly seed funds, smaller funds, regional funds and sectorally
or  technologically  specialised  funds  and  incubators.  The  second  supports
the  investment  capacity  of  those  seed  capital  funds  that  the  EIF  invest  in
through  small  grants  to  help  the  recruitment  of  additional  investment
managers.

The
Communication is
being applied

i2i is active since
May 2000

EIF is the risk
capital arm of the
EIB and also
manages some
MAP schemes

51Communication on “State Aid and Risk Capital”, of 23 May 2001 (OJ C235 of 21.08.2001, p. 3)
52COM(2001) 605 of 25.10.2002 on the RCAP implementation, section 6.1, footnote 39
53Section 6.3 of COM(2001) 605, Opus Cit.
54The Agreement between the Commission and the EIF was signed on 18.12.2001

18

                                                
Since its Reform in June 2000, the EIF has embarked upon a phase of rapid
expansion.  It  handles  a  portfolio  in  excess  of  €2.2  billion55,  invested  in
more than 160 funds. Of them : (i) Funds focused on specific industries or
technologies  (e.g.  biotechnologies,  agro-business,  content 
industries,
nanotechnologies, “enabling technologies”, etc) ; (ii) Regional funds, with
a  view  to  facilitating  the  balanced  development  among  European  regions
(in  2001,  first  operations  were  signed  in  Greece  and  Portugal,  substantial
commitments representing 9% of EIF activity were signed in Spain, and 5
operations  were  concluded  in  the  Candidate  Countries);  (iii)  Funds
financing  the  exploitation  of  R&D  results;  and  (iv)  Pan-European  funds
(11 Hi-Tec Pan-European funds were supported in 2001).

8.3. Co-operation between the Commission and the EIB in R&D

This  co-operation56  aims  at  optimising  complementarity  and  synergy
between  the  Community  Framework  Programme  and  the  i2i  initiative,
thereby  enhancing  their  overall  impact,  and  leverage  effect,  on  private
investment. Three joint working groups57 are active in raising awareness in
the  research  community  of  the  new  financial  opportunities.  The  new
arrangement  will  also  allow  to  better  take  into  account  the  specificity  of
R&D,  and  the  financing  needs  of  different  types  of  companies,  in  the
design  and  implementation  of  EIB  instruments  (e.g.  loan  facility  for  the
the
financing  of  European  strategic  research  projects), 
involvement of national credit and guarantee institutions.

including 

8.4. Regional Policy

EIF focuses on
“early stage”
technology funds

Synergies and
complementarities
will be exploited

The  Commission  Guidelines  for  implementing  Structural  Funds  in  the
Period  2000-200658  requested  to  limit  direct  subsidies  to  SMEs  and  to
substitute  them  by  more  modern  and  active  types  of  financing  such  as
those  provided  by  venture  capital  and  guarantee  funds.  Regional  funds
programming  shows  that  the  guidelines  are  being  followed.  For  instance,
while Structural Fund co-financing of SME investment has remained at the
same  level  as  for  the  1994-1999  period,  that  is  some  €17  billions,  the
amount  estimated  in  the  programming  documents  under  risk  capital
investment has nearly doubled from €600 millions to some €1200 millions.

The new
guidelines are
being followed

On the other hand, the Commission is about to complete its New Guide to
Risk Capital Financing in Regional Policy. It will be made available in all
Community  languages  before  end-2002  and  it  is  expected  to  become  a
useful tool for national and regional operators as well as for final recipients
of regional funds.

The New Guide
soon available

9. CONCLUSIONS

The RCAP was intended primarily to lay the  long-term foundation  of  the
therefore  short-term  cyclical
risk  capital  markets 

in  Europe  and 

We should take a
long-term view

55Of this, the EIF invested EUR 800 million in 57 funds in 2001 alone.
56The Joint Memorandum between the Commission and the EIB was signed on 7 June 2001
57(i) R&D projects ; (ii) Research infrastructure ; and (iii) Risk capital for start-ups and incubators
58Published in 1999, see www.europa.eu.int/comm (regional policy)

19

                                                
considerations  should  not  deter  the  relevant  actors  from  reinforcing  and
consolidating  risk  capital  financing.  Financial  markets,  including  risk
capital  markets,  have  become  lately  subject  to  a  string  of  severe  tests
leading  to  a  deteriorating  financial  climate.  The  destabilisation  effects  of
the 11 September attacks, the ENRON, Tyco and other corporate scandals,
have shaken confidence in financial markets. To re-create a new attractive
scenario  for  investors,  improvements  will  be  needed  in  many  fronts
including the provision of really meaningful accounting figures, net present
values based on realistic future cash flows, effective corporate governance,
and proper supervision.

Professionally organised risk capital financing includes, from the start of a
deal, a strategy for exit. The use of the IPO exit door, which is the key link
between private and public markets, is often part of those strategies and its
availability for flotation, at attractive prices, during the years following the
deals should be expected. But the uncertain and volatile markets prevailing
following  the  internet  bubble  cannot  perform  well  their  basic  function  as
providers of finance for promising companies and projects. As a result, the
scope  for  IPOs  remains  largely  closed,  a  situation  which  should  be
addressed  by  all  parties  concerned,  including  the  high-growth  stock
markets.  Some  pan-European  rationalization  might  be  required  -  as  has
happened in the blue chip sectors.

US59 risk capital investments in 2001 were “only” three times that of the
EU.  This  breaks  the  trend  of  previous  years  (in  2000  it  was  four  times
bigger). But it does not mean further progress in closing the  gap with the
US will be  automatic.  It  follows that the EU  must continue  to  use  all  the
means  at  its  disposal  to  facilitate  and  encouraged  the  expansion  of
European  risk  capital  market.  If  the  EU's  employment  potential  is  to  be
fulfilled  particular  attention  should  be  paid  to  R&D.  The  new  ambitious
goals for R&D expansion in Europe will require new imaginative financing
schemes, in which risk capital should play a primary role. Perhaps the most
encouraging message of this report is that a glance since 1998 shows that
in  almost  every  policy  area  there  has  been  significant  and  positive
accompanying  policies  to  support  the  development  or  risk  capital  in  the
EU. In the EIB, EIF. In research. In entrepreneurship and regional policy.
In  the  regulatory  environment  as  the  Financial  Services  Action  Plan  is
implemented. This augurs well for the future.

O O O O O

A comprehensive
package of
regulatory
improvements will
be needed

The IPO door
should be open
again

Gap with the US
still very big

59An economic impact study released in the US in October 2001 by the NVCA (the US National Venture Capital
Association) shows that venture capital invested in the US, during the past three decades, created 7.6 million
jobs and more than $ 1.3 trillion in revenue (see www.ncva.org)

20

                                                
LIST OF ANNEXES

Annex 1. – Historical data for risk capital in the EU

Annex 2 – Historical data for venture capital investment in the US

Annex 3. – Business Angel Networks in Europe

Annex 4. - Implementation of the RCAP (measure by measure)

Annex 5. - Acronyms used in the RCAP

Annex 6 - Glossary of terms used in the RCAP

21

HISTORICAL DATA FOR RISK CAPITAL in the EU

ANNEX 1

Value in million € of

1998

1999

2000

2001

Investment in Early stage (seed + start-up)

1 566

2 991

6 405

3 988

Investment in Development capital (expansion + replacement)

5 172

8 242

13 226

8 758

Total VENTURE CAPITAL

6 738

11 233

19 632

12 746

Total VENTURE CAPITAL as of % GDP

0.09

0,14

0,23

0,14

Buy-outs

7 333

13 154

13 917

10 743

Total PRIVATE EQUITY

14 071

24 387

33 549

23 489

Total PRIVATE EQUITY as of % GDP

0,19

0,30

0,40

0,27

Funds Raised for PRIVATE EQUITY Investments

19 663

24 613

45 633

36 915

22

HISTORICAL DATA FOR VENTURE CAPITAL INVESTMENT in the US

ANNEX 2

Value in million € of

1998

1999

2000

2001

Investment in Early stage (seed + start-up)

5 365

12 925

29 340

10 643

Investment 
replacement/later stage)

in  Development 

capital 

(expansion 

+

11 742

36 282

78 562

30 158

Total VENTURE CAPITAL

17 107

49 207

107 903

40 800

Total VENTURE CAPITAL as of % GDP

0,22

0,57

1,02

0,36

23

BUSINESS ANGEL NETWORKS IN EUROPE

ANNEX 3

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
EU
Source: EBAN, the Member States.

Year 1999
2
0
1
0
1
3
1
0
1
1
1
0
1
1
49
63 Networks

Year 2002
7
6
40
0
2
31
1
13
1
2
1
1
1
1
50
158 Networks

24

RCAP (RISK CAPITAL ACTION PLAN) APROVED AT THE CARDIFF SUMMIT (JUNE 1998)

LAYOUT BY TYPE OF BARRIER – SITUATION IN OCTOBER 2002

ANNEX 4

The RCAP comprises six (6) categories of barriers to be removed in the EU:

(cid:1) MARKET FRAGMENTATION

(cid:1) INSTITUTIONAL AND REGULATORY

(cid:1) TAXATION

(cid:1) PAUCITY OF HIGH-TECH SMALL BUSINESSES

(cid:1) HUMAN RESOURCES

(cid:1) CULTURAL

25

Measure

Objective

Responsibility/Participation

Situation

BARRIER : MARKET FRAGMENTATION

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

Market monitoring and development
of  information  and  statistics  on  all
levels of venture capital in the EU

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

Prompt  all  the  market  players  to
generate  synergy 
the
effects of fragmentation

to  reduce 

Private sector

Member States

Commission

EVCA

Commission

Market players

Commission

Member States

Market players

The  pilot  action  (1998-2000)
has  been  completed.  The
Benchmarking (2001-2002) is
being completed

On-going

The round table took place on
24 October 1998 in Brussels

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

Obtain  a  clearer  picture  of 
the
difficulties  and  financial  needs  of
firms

Commission

Market players

For  tax  related  analysis  see
Commission  study  referenced
in section 5.1

(banks,  venture-capital  funds,  capital
markets, etc..)

(regulatory  bodies,  new  capital  markets,
venture-capital funds, banks, etc.)

26

INSTITUTIONAL AND REGULATORY BARRIERS

Measure

Objective

Responsibility/Participation

Situation

Transposal  and  implementation  of
all  financial  services  directives  -
monitoring 
single  market
scoreboard

via 

administrative
Simplification  of 
formalities  for  company  formations
(including 
capital
requirements)

minimum 

Venture-capital  funds  :  Assessment
of  whether  there  is  a  need  for
covering
legislation 
Community 
specific closed-end funds

Review  of 
implementation  and
possible  amendment  of  prospectus
directive 
to  facilitate  companies
raising  cross-border  capital  (e.g.
IPO’s)

Create,  along  the  lines  of  Directive
85/611  on  UCITS,  a  European
funds
closed-end 
for 
passport 
(including  venture-capital 
funds),
enabling  them  to  raise  funds  and
offer  their  services  in  all  Member
States without restriction

In these areas, a prospectus or offer
document  approved  in  one  Member
State  should  be  available  for  use  in
all the Member States

27

Member States

Commission

Member States

Commission

(disseminating best practice)

Commission
Council
EP
Industry :
- EFIFC
- EVCA
- Small business

table  (Scoreboard) 

See 
Section 4

in

Figures  and  evolution  were
made  available  through  the
Benchmarking Exercise

UCITS  Contact  Committee
and  industry  representatives
met  on  18  November  1998  in
Brussels.  Consensus  that  an
ad-hoc  directive  was  not
needed

Commission
Council
EP
Capital  markets  (competent  authorities
and small businesses)

Commission adopted
amended proposal on 9
August 2002

INSTITUTIONAL AND REGULATORY BARRIERS (Continuation)

Measure

Objective

Responsibility/Participation

Situation

Adoption  of  prudential  rules 
investors 
allow 
invest in venture capital

institutional 

to
to

Allow  institutional  investors,  acting
in  accordance  with  “prudent  man”
rules, to invest in venture capital

Member States

Commission  (follow-up 
Paper on supplementary pensions)

to 

the  Green

Assess  existing  accounting  and
auditing requirements

Reduction 
of 
requirements for setting up firms

the 

capital

Reform  of 
insolvency and bankruptcy

the 

legislation  on

Allow  companies 
to  draw  up
consolidated  accounts  to  facilitate
access to risk capital (for IPO’s and
listed companies)

Member States

Commission

Accounting Bodies

Facilitate the setting up of firms

Member States

Whilst  protecting  the  interest  of
creditors and consumers, ensure that
entrepreneurs  who 
gone
bankrupt can have a second chance

have 

Member States

Commission 
practice)

(dissemination  of  best

28

(cid:1)  Two  UCITS  Directives

adopted in 2002

(cid:1)  Important  progress  in  the
for  pension

negotiations 
funds

Obligation of using
international accounting
standards adopted in 2002

Figures  and  evolution  were
made  available  through  the
Benchmarking Exercise

of 

set 

A 
performance
indicators  and  benchmarks
has been defined as a support
to Member States

Themes

Issues to consider

Responsibility/Participation

Situation

Taxation of venture capital funds

Double taxation

Member States

BARRIER : TAXATION

Capital gains tax

Impact on venture capital

Member States

Tax arrangements for new firms

Fiscal environment for start-ups

Member States

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

Stock options

Situation in Member States

Member States

Impact on recruitment and company
performance

Member States

29

measures 

have
Several 
already  been 
taken  by  a
number  of  Member  States
Study
Commission 
(See 
referenced in section 5)

Study 
Commission end-2001

launched 

by 

the

BARRIER : PAUCITY OF HIGH-TECH SMALL BUSINESSES

Measure

Objective

Responsibility/Participation

Situation

Development  of  networking  and
universities,
between 
clustering 
research  centres,  financial  backers,
lawyers, 
resources
human 
specialists,  etc.  and  link  them  at
European level

of 

Development 
customised
electronic  commerce  modules  for
small businesses to ease their access
to  electronic  commerce  and  the
internal market

Creation  of  a  pan-European  club  of
high-tech innovatory firms

Private sector

Member States

Commission 
disseminating 
Framework Research Programme)

schemes,
practice,  Fifth

(pilot 

best 

Private sector

Member States

Commission (pilot schemes)

(cid:1)  The Gate2Growth initiative

fosters networks of innovation
professionals, entrepreneurs and
financiers

(cid:1)  The “Biotech & Finance”

Forum continuous successfully
active

Commission adopted a
Communication on
“GoDigital” on 13.03.2001

Facilitate dissemination at European
level  of  examples  of  successes  and
good  practice  :  facilitate  contact
with investors

Market 
players 
venture-capital funds, etc.)

(small 

businesses,

Commission

The  European  Federation  of
High  Tech  Enterprises  was
created in 1999

Reform  of 
system

the  European  patent

Following on from the Green Paper,
simplify  procedures  and  create  a
genuine Community patent

Commission

Member States

Commission proposal
adopted in 2000

EP

30

Measure

Objective

Responsibility/Participation

Situation

BARRIER : HUMAN RESOURCES

Promotion of entrepreuneurship and
innovation  within  educational  and
training systems

Member States

Commission (disseminating best practice)

Determination  of  training  needs  for
venture-capital 
fund  managers,
market  makers,  analysts  of  high-
tech firms

Identify  training  schemes  to  be  set
up  to  make  good  any  shortages  of
skilled staff in these areas

Commission

Market players

Assessment  of  benefits  of  equity
pay 
ownership
employee 
schemes

and 

Begin  study  of  future  at  European
level

Member States

Commission

Social partners

31

With the support of the
Commission, EVCA has
developed an
Entrepreneurship toolkit to be
used in universities and
institutions of higher
education

• Training schemes have been
set up by EVCA.  Courses  are
regularly  offered  to  market
participants

•  “Seed-Capital  Action”,  to
be  managed  by 
the  EIF,
would  concentrate  on  junior
investment managers

A Communication on
employees financial
participation has been
adopted on 5 July 2002

Measure

Objective

Responsibility/Participation

Situation

CULTURAL BARRIERS

Demonstration  of  the  advantages  of
venture  capital  and  promotion  of
entrepreneurship

Private sector

Member States

Commission

Dissemination  of  best  practices  in
corporate governance

Facilitate 
corporate 
demanded by investors

the  dissemination  of
practices
governance 

Private sector

International bodies

Commission

Member States

A  Best  procedure  project  is
being  run  with  the  objective
of  identifying  and  comparing
initiatives across Europe

comparative 

in
study 
A 
corporate 
governance,
requested by the Commission,
was completed in 2002

32

ACRONYMS USED IN THE RCAP

ANNEX 5

AIM :

BEPG

Alternative Investment Market (www.londonstockexchange.com/aim)

Broad Economic Policy Guidelines

BEST :

Business Environment Simplification Task Force. Established by the Commission in September 1997

BSPCE :

The French “Bons de Souscription des Parts et Créateurs d’Entreprises”

CESR :

CVC :

EASDAQ :

EFC :

EIB :

EIF :

EJC :

ESC :

Committee of European Securities Regulators

Corporate Venture Capital

European  Association  of  Securities  Dealer  Automated  Quotation.  Renamed  “NASDAQ-Europe”
(www.nasdaqeurope.com)

Community Economic and Finance Committee

European Investment Bank (www.eib.org)

European Investment Fund (www.eif.org)

The European Court of Justice (www.curia.eu.int)

European Securities Committee. It replaces the High Level Securities Supervisors Committee

EURO. NM :

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

EVCA :

European Private Equity and Venture Capital Association (www.evca.com)

33

FIBV:

FSAP

IAS :

ICT:

ISD :

IT :

MAP

Federation Européenne des Bourses de Valeurs/International Federation of Stock Exchanges (www.fibv.com)

Financial Services Action Plan

International Accounting Standards

Information and Communication Technology

Investment Services Directive (93/22/EEC)

Information Technology

Multi-annual Programme for Enterprise and Entrepreneurship implemented by the Commission

NASDAQ :

The American National Association of Securities Dealers Automated Quotation system (www.nasdaq.com)

R&D

RTD :

SME :

TMT

Research and Development

Research and Technological Development

Small and Medium sized Enterprise

Telecom, media and technology

UCITS :

Undertakings for Collective Investment in Transferable Securities (Investment Funds)

US GAAP :

The American Generally Accepted Accounting Principles

VC

Venture Capital

34

GLOSSARY OF TERMS USED IN THE RCAP

ANNEX 6

 Accounting Directive:

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

 Business Angels:

 Private  individuals  who  invest  directly  in  young  new  and  growing  unquoted  businesses  (seed
finance). In may cases they also facilitates the  finance of the next stage of the life  cycle of  young
companies (start-up phase). 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:

 The manner in which organisations, particularly limited companies, are managed and the nature of
accountability of the managers to the owners. This topic has been of increased 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:

 Corporate  venture  capital*  whereby  a  larger  company  takes  a  direct  minority  stake  in  a  smaller
unquoted  company  for  strategic,  financial  or  social  responsibility  reason.  Predominantly  used  by
large corporates to support external technology development.

 Development capital:

 Financing provided for the growth and expansion of a company.

35

 Early stage capital:

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

 Equity:

 The ordinary share capital of a company.

level 
 High 
Supervisors Committee :

Securities

 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  has  been
replaced by the European Securities Committee (ESC*)

 Institutional investors:

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

 Investment 
Directive:

Services

 Directive  93/22/EEC  (ISD*).  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.

 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.

 Management buy-out:

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

 Market capitalisation:

 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, equity investment in companies not listed on a stock market. It includes
venture capital and buy-out investments.

36

 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.

 Prospectus Directive:

 Documents  drawn  up  according  to  the  rules  of  Directives  89/298/EEC  (public  offers)  and/or
80/390/EEC (listing particulars).These Directives will be replaced by a new one under negotiation
(proposal adopted by the Commission on 30 May 2001)

 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:

 Organised 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  organisation  or
from another shareholder or shareholders.

 Risk capital markets:

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

(cid:1)  Informal investment by Business Angels* and corporates (“Corporate Venturing”*)

(cid:1)  Venture capital.

(cid:1)  Stock markets specialised in SMEs and high growth companies.

Secondary market:

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

Security:

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

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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  or  Stock
Market:

A market in which securities are bought and sold. Its basic 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 managing in-house or third-party funds.
It includes  early  stage*,  expansion*  and  replacement*  finance,  but  excludes  the  financing  of  buy-
outs*.

Venture capital funds

Closed-end funds, created to provide venture capital.

(*) Word defined in the glossary or the acronyms

(cid:1) (cid:1) (cid:1) (cid:1) (cid:1)

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