State aid — United Kingdom — State aid No C 36/2005 (ex N 373/2005 and CP 255/2005) — United Kingdom Investbx — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty   (Text with EEA relevance)
Date: 2005-11-19
Institutions: European Commission
Subjects: State aid, United Kingdom, aid to undertakings, control of State aid, corporate finance, small and medium-sized enterprises

19.11.2005

EN

Official Journal of the European Union

C 288/13

STATE AID — UNITED KINGDOM

State aid No C 36/2005 (ex N 373/2005 and CP 255/2005) — United Kingdom Investbx

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2005/C 288/09)

(Text with EEA relevance)

By means of the letter dated 20 October 2005 reproduced in the authentic language on the pages
following this summary, the Commission notified the United Kingdom of its decision to initiate the proce-
dure laid down in Article 88(2) of the EC Treaty concerning the abovementioned aid measure.

Interested parties may submit their comments on the aid measure in respect of which the Commission is
initiating the procedure within one month of the date of publication of this summary and the following
letter, to:

European Commission
Directorate-General Competition
State aid Greffe
BE-1049 Brussels
Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

TEXT OF SUMMARY

PROCEDURE

By letter dated 26 July 2005, registered at the Commission on
28 July 2005, the United Kingdom notified the aid measure
mentioned above, pursuant to Article 88(3) EC.

The Commission asked for further information on 19 August
2005, following to which a meeting between representatives of
the United Kingdom and the Commission was held on 8
September 2005. During this meeting, additional information
was provided by the United Kingdom representatives.

On 26 September 2005, the Commission received a complaint
from the enterprise PLUS Markets Group plc,
the holding
company for Ofex plc, which operates and regulates the
London-based Ofex market.

DESCRIPTION

The primary objective of the notified project is to create a
means for SMEs in the West Midlands region to raise equity
gap finance. Investbx is being set up to act as an intermediary
exchange facility. It will bring together SMEs and investors to
make it easier for SMEs to raise equity financing by creating a
practical form for exchanging and/or issuing new shares of
between GBP 0,5 million to GBP 2 million on an electronic
platform (‘eBay approach’).

operate Investbx. None of these funds will be transferred to
SMEs or to investors. After the period of five years, AWM will
either sell its shares of Investbx or close it down.

to the United Kingdom,

Pursuant
the measure addresses a
market failure particularly caused by imperfect information on
both the demand and the supply side. SMEs usually face
problems in finding adequate funding on the financial market.
Investors have difficulties to gain appropriate and reliable infor-
mation about potential investees. The United Kingdom claims
that Investbx is a completely novel measure, serving a need
that is currently not offered on the market.

However, following the arguments put forward by the complai-
nant, Ofex, being described as an independent market in the
United Kingdom focussed on trading in shares of SMEs,
is
already operating, and seeking to grow, in the same market-
place as the one in which Investbx will operate. It is further
stated that, contrary to Investbx, Ofex had to obtain equivalent
finance from the private sector on private sector terms whereas
Investbx will be relieved of the costs of such funding. Allegedly,
the public funding of Investbx may lead to an unfair competi-
tion with Ofex as a result of the aid and will damage the
commercial interest of Ofex.

PRELIMINARY ASSESSMENT

AWM — Advantage West Midlands, the regional development
authority, will provide the funding of GBP 3,8 million for a
period of five years. The funding will solely serve to set up and

The Commission considers the measure as constituting State
aid in the meaning of Article 87(1) EC to Investbx, but neither
the investors nor the SMEs using Investbx's services prima facie
seem to be aid beneficiaries.

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Official Journal of the European Union

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However, the Commission wishes to further verify the presence
of State aid at the level of the investors and the enterprises
invested in in the context of a formal investigation procedure.

exchanging and/or issuing new shares. Investbx will also
provide and facilitate the provision of services at market
rates to SMEs to enhance their ability to raise funds.

Although the measure aims at bridging the equity gap for
SMEs, the risk capital communication (1) does not foresee rules
for such kind of measure. As none of the other existing State
aid regulations, frameworks or guidelines seem to be applic-
able, an assessment could be based directly on Article 87(3)(c)
EC.

The Commission at this stage has doubts as to the compat-
ibility of the measure with Article 87(3)(c) EC, particularly in
view of the third party comments.

The Commission wishes to assess further into detail the compli-
ance with Article 87(3)(c) EC and in particular the presence of
a well-targeted market
failure, whether the aid instrument
targets the identified market failure and whether the distortions
of competition and the effect on trade are limited to ensure
that the aid measure is not, on balance, against the European
common interest.

TEXT OF LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
and by a complainant on the ad hoc aid referred to above, it
has decided to initiate the procedure laid down in Article 88(2)
EC.

1. PROCEDURE

(1) By letter dated 26 July 2005, registered at the Commis-
sion on 28 July 2005, the UK notified the aid measure
mentioned above, pursuant to Article 88(3) EC.

(2) The Commission asked for further information on 19
August 2005,
following to which a meeting between
representatives of the UK and the Commission was held
on 8 September 2005. During this meeting, additional
information was provided by the UK representatives.

(3) On 26 September 2005,

the Commission received a

complaint from the enterprise PLUS Markets Group plc.

2. DESCRIPTION OF THE MEASURE

2.1. Primary objective of Investbx

small and medium-sized enterprises (2)

(4) The primary objective of the measure is to create a means
for
(hereafter:
SMEs) in the West Midlands region of the UK to raise
equity gap finance. Investbx is being set up to act as a
catalyst in bridging the equity finance gap. It will bring
together SMEs and investors to make it easier for compa-
nies to raise money by creating a practical forum for

2.2. Innovative and novel measure

(5) Pursuant to the UK authorities, Investbx is a completely
novel measure, for which there is no precedent. While
traditional Venture Capital Funds aim at improving the
supply of equity capital,
Investbx envisages instead to
improve the efficiency with which information can circu-
late on investee companies. Investbx will kick-start the
creation of an effective local equity market, by connecting
companies to investors, offering them a viable, simple,
cost effective solution to raising equity,
trading their
shares and showcasing their activities. This trading facility
will be different to traditional stock markets (namely the
London Stock Exchange with its “Alternative Investment
Market” — AIM) because it will operate through a visible
online electronic auction market, matching buyers and
sellers at a single price with investment via an online
execution-only broker. Online auctions will only be
carried out a few times per month. At the same time
Investbx will encourage a longer term view of investing,
emphasising the main objective of raising money for
than the ability to
SMEs
frequently trade shares as provided by the existing
London based markets.

in the community rather

2.3. Budget and duration

(6) The West Midlands Regional Development Agency AWM
(Advantage West Midlands) will provide the funding of
GBP 3,8 million for a period of five years. After this
period, AWM will either sell its shares of Investbx on the
market or close it down.

2.4. Beneficiary of the measure

(7) The beneficiary of the measure is Investbx. Investbx will
receive GBP 3,8 million by way of grant of AWM. The
grant will cover pre-launch development and a five-year
period of operation. As a not-for-profit enterprise, any
surpluses from Investbx will be reinvested back into
Investbx to benefit the regional economy, all of which
correspond to AWM's mission.

(8) Investbx will not grant funds to any other company. Its
role is purely that of a catalyst for local SMEs to raise
equity gap finance. Companies and investors making use
of Investbx will pay market rates for services received. All
service providers
to Investbx have been selected by
competitive tender procurement process published in the
Official Journal of the European Union.

2.5. Benefits flowing from Investbx

(1) OJ C 235, 21.8.2001, p. 3.
(2) The definition complies with Commission Recommendation of
small and

6 May 2003 concerning the definition of micro,
medium-sized enterprises (OJ L 124, 20.5.2003, p. 36).

(9) SMEs: Access to Investbx will be open to all SMEs located
in the West Midlands Region on a non-discriminatory
basis. Investbx will provide a showcase for these local
SMEs.

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Official Journal of the European Union

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(10) The measure intends to overcome the acknowledged
equity gap of between GBP 0,5 million and GBP 2,0
million and solely addresses SMEs located in the West
Midlands region looking for long-term equity funding.
They have a solid performance, but are often considered
being not profitable as aimed at by Venture Capital funds.
In these circumstances, Investbx may also offer another
exit possibility for VC funds until they qualify for more
senior trading markets like LSE, AIM or the off-market
trading facility Ofex (escalator function).

(11) Investors: Investors will receive improved access to infor-
mation about companies including independent research
reports and news which will be made available through
the website to inform investors'
investment decisions.
Investbx will enable investors to interact directly and
indirectly with companies. In order to provide protection
for investors, companies joining Investbx must meet a set
of regulatory and disclosure requirements.

2.6. Corporate structure of Investbx

(12) There are two distinct roles for Investbx: one to act as a
forum for inclusive discussion and debate around the
whole issue of SMEs across the region raising equity
investment and the other, the trading activities that will
see it contracting with a number of service providers and
with customers (investors and SMEs).

(13) The corporate structure of

roles as follows:

Investbx responds to these
Investbx will comprise two
distinct
limited companies: (i) Investbx 1, a not for profit distribu-
tion membership company, limited by guarantee with all
profits being reinvested and not distributed; and (ii)
Investbx 2, a company limited by shares, which will be
wholly owned by Investbx 1.

(14) The company status allows Investbx 2 to enter into
contracts in its own right. However,
the main reason
behind this structure is the facilitation of a possible
the company in the future.
transfer of
Investbx is
it will become a private sector company
successful,
(Investbx 1 will
time any
outstanding funds from the original grant form AWM will
revert to AWM.

Investbx 2). At

this

sell

If

(15) The classes of members owning Invstbx 1 proposed are:
investee

individual

corporate

investors,

investors,

companies,
intermediaries, AWM and general. Member-
ship liability will be limited to GBP 10 per member.
Members will be required to pay a modest annual fee,
dependant upon the class of member, which has yet to be
determined. The level of this fee will be set such that it is
not considered to be a deterrent to becoming a member.

(16) AWM will retain a strong influence on the board. The
ultimate power of the guarantee company is the ability, as
sole shareholder of the subsidiary company, to control the
Board of
it
complies with policies set out by the Board of the guar-
antee company. In addition, the Board of the guarantee
company will have power over appointments to the
subsidiary Board.

the subsidiary company and ensure that

(17) The Board of Investbx 1 will be the decision making
authority and there will be six directors. The first four
categories will have the right to elect a Board member as
their representative. AWM will have the right to appoint
two directors, with one of these being the Board's chair.
Any Board committees to which the Board delegates
power must include at least one director appointed by
AWM. The general members class would not have the
right to elect a Director, although its interests would be
represented at Board meetings by a special representative.

(18) Investbx 1 will act as corporate director of Investbx 2,
delegating delivery of the business plan to Investbx 2. The
board of
the guarantee company will give operating
guidelines for the board of the subsidiary company.

(19) The AWM appointed Chair of Investbx 1 will also be the
Chair of Investbx 2 and at least one other director of the
guarantee company will also be on the board of Investbx
2. The Chair will have the right to exercise all guarantee
company powers as sole shareholder of the operating
company, including the right to appoint directors.

(20) The board of

Investbx 1 will have responsibility for
appointment and appraisal of the Investbx 2 executive
team in addition to the right to remove members of this
team whose activities divert from or fail to deliver the
agreed business plan.

(21) Investbx 2 will have a small executive team responsible
for delivery of the business plan. Key to delivery will be
establishing an outsourcing relationship with a third party
organisation that has already invested in the infrastructure
and permission necessary to operate Investbx. Procure-
ment of services using this “white label” arrangement has
already taken place with a publication in the Official
Journal of the European Union. The Share Centre was selected
as preferred bidder, who has already the appropriate FSA
permissions to conduct business of this nature.

2.7. The current market in the United Kingdom

(22) The traditional market for buying and selling shares in the
UK is dominated by the London Stock Exchange (LSE),
which is primarily engaged in hosting large stock trades
in a global marketplace. SMEs are increasingly shut out as
blue-chip stocks of larger companies are preferred.

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(23) The LSE sought to cater for this situation by the introduc-
tion of its “Alternative Investment Market” (AIM) in 1995.
This operates as a second tier market targeting new and
smaller companies. Membership requires no minimum
trading record, no minimum assets or profit levels, no
minimum capitalisation and no minimum free float of
shares.

(24) Outside the realms of the LSE and AIM is the off-market
trading facility Ofex. It has been stated in the notification
that Ofex is neither regulated nor a market, but aims to
provide a more cost effective and less regulated alternative
to AIM.

(25) Despite the above developments, the UK claims that there
is still a long-term equity gap for investment in SMEs
located outside the South-East. Some of the lowest levels
of listed companies and total market capitalisation exist in
the Midlands.

(30) It is claimed that Ofex is already operating, and seeking to
grow,
in the same marketplace as the one in which
Investbx will operate. It is further stated that, contrary to
Investbx, Ofex had to obtain equivalent finance from the
private sector on private sector terms whereas Investbx
will be relieved of the costs of such funding. Allegedly,
the public funding of Investbx may lead to an unfair
competition with Ofex as a result of the aid and will
damage the commercial interest of Ofex.

4. PRELIMINARY ASSESSMENT OF THE MEASURE

(31) According to Article 6 of the Procedural Regulation (4),
the decision to initiate the formal investigation procedure
shall summarise the relevant issues of fact and law, shall
include a preliminary assessment of the Commission as to
the aid character of the proposed measure, and shall set
out the doubts as to its compatibility with the common
market.

3. COMMENTS PRESENTED BY THIRD PARTIES

4.1. Presence of State aid pursuant to Article 87(1)

EC

(26) By letter dated 26 September 2005, the company PLUS
Markets Group plc commented as an interested party
pursuant to Article 20(2) of Council Regulation (EC) No
659/1999 (3) on the project under scrutiny. PLUS Markets
Group plc (formerly Ofex Holdings plc)
is the holding
company for Ofex plc, which operates and regulates the
Ofex market, which is described as being an independent
market in the UK focussed on trading in shares of SMEs
from around the world and representing a wide range of
sectors and all stages of development.

(27) Ofex was created in October 1995 as a trading facility for
unquoted and unlisted securities. In 2002, Ofex became a
prescribed market under Section 118 of the Financial
Services & Markets Act 2000, authorized and regulated by
the UK's Financial Services Authority, and Ofex plc took
over the operation of the market.

(28) Ofex Holdings plc changed its name to PLUS Markets
Group plc in 2004 following a process of refinancing and
restructuring, which raised net funds from the private
sector. In 2005, further funds were raised from institu-
tional and other investors.

(29) Pursuant to the third party comments, Ofex has served
over 500 companies, and has not only provided a market
for these companies' shares but also an opportunity to
raise equity-based finance since its launch in 1995. Alleg-
edly, the overwhelming majority of fund raisings were of
amounts considerably less than GBP 1,5 million, with
actually 33 companies raising less than GBP 1 million,
principally form non-institutional investors. It is claimed
that there are currently 137 companies traded on Ofex of
which approximately 10 % are based in the Midlands
region of the UK. It is further claimed that there are also
57 Midlands-based companies traded on the AIM market
of the London Stock Exchange.

(32) In accordance with Article 87(1) EC, any aid granted by a
Member State or through State resources in any form
whatsoever which distorts or threatens to distort competi-
tion by favouring certain undertakings or the production
of certain goods shall, in so far as it affects trade between
Member States, be incompatible with the common
market.

(33) The assessment of the presence of State aid must consider
the possibility that the measure may confer aid on at least
three different levels:

— aid to Investbx,

— aid to investors,

— aid to the SMEs invested in.

4.1.1. Aid to Investbx

(34) The activities of Investbx will be financed through State

resources from AWM.

(35) Investbx will be a new actor in the financial markets busi-
to be considered as an undertaking,
ness and has
performing an economic activity by providing financial
services to investors and SMEs located in the West
Midlands region. It would not have been able to raise the
capital to be used for its activities under the same favour-
able terms under normal market conditions. This is why
the Commission considers that
the grant provided by
AWM to Investbx does not correspond to the behaviour
of a private market investor. The funding provided by
AWM to Investbx is either a grant or an interest-free loan,
i.e. a funding free of charge.
Investbx thus receives
funding that it would otherwise not be able to seek from
private sector sources at market rates. Accordingly, the
undertaking Investbx receives an advantage.

(3) Council Regulation (EC) No 659/1999 of 22 March 1999 laying
down detailed rules for the application of Article 93 of the EC
Treaty (OJ L 83, 27.3.1999, p. 1).

(4) Council Regulation (EC) No 659/1999 of 22 March 1999 laying
down detailed rules for the application of Article 93 of the EC
Treaty (OJ L 83, 27.3.1999, p. 1).

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Official Journal of the European Union

C 288/17

(36) As effects on existing financial services providers such as
Ofex cannot be completely excluded, the measure has the
potential
intra-Com-
to distort competition and affect
munity trade.

the identified market

target
failure and distortions of
competition and the effect on trade should be limited to
ensure that the aid measure is not, on balance, against the
common interest.

(37) Therefore, Investbx is considered to be a beneficiary of aid

pursuant to Article 87(1) EC.

4.1.2. Aid to Investors and/or to the SMEs invested in

(38) Neither

the investors nor

the SMEs using Investbx's
services prima facie seem to be aid beneficiaries as no State
resources will be transferred to them and as Investbx's
services are open to all investors.

(39) However, the Commission will have to further scrutinise
whether the measure involves a transfer of aid to investors
and or SMEs invested in and particularly needs to have
more information on the identity of both investors and
investment phase
SMEs invested in (number; age; size;
etc.) and the remuneration they will pay to Investbx. In
addition,
Investbx 1's investors
benefit
from Investbx 2's envisaged sale also merits
further examination.

the question whether

4.2. Legality of the aid

(40) The UK respected its obligations pursuant to Article 88(3)

EC.

4.3. Compatibility of the aid

(41) Although the measure aims at bridging the equity gap for
SMEs, the risk capital communication (5) does not foresee
rules for such kind of measure. Even if the risk capital
communication allows grants for setting up a venture
capital fund, it has to be noted that Investbx cannot be
regarded as such a fund and does not provide any venture
to SMEs. The measure at stake solely aims at
capital
setting up the infrastructure for an exchange facility for
investors and SMEs and therefore falls outside the risk
capital communication. Also none of the other existing
State aid regulations, frameworks or guidelines seem to be
applicable. It is true that the West Midlands do qualify for
the derogation in Article 87(3)(c) EC (6), and the Commis-
sion also notes that this region has suffered from the
Rover crisis. But the grant to Investbx is not an applica-
tion of an aid scheme for regional development.
It is
rather an ad hoc aid, which does not seem to be limited
to initial investment in the meaning of the regional aid
guidelines (7).

4.3.1. Presence of a well-defined market failure

(43) The measure intends to address an alleged market failure
particularly caused by imperfect information on both the
demand and the supply side. SMEs usually face problems
in finding adequate funding on the financial market.
Investors have difficulties to gain appropriate and reliable
information about potential investees.

(44) The proposed aid addresses the market failure described
by offering an electronic platform enabling the SMEs to
present
themselves and the investors to inform them-
selves. The match-making of investors and SMEs will be
achieved through the electronic auctioning.

(45) Investbx targets equity funding in the area of GBP 0,5
million to GBP 2 million, a deal size range for which an
equity gap was established in several studies put forward
by the UK in the context of the ECF — Enterprise Capital
Funds which was approved by the Commission on 3 May
2005 (8). The question is whether this assessment of an
equity gap in the UK and particularly in the West
Midlands region is still valid.

(46) Accordingly,

the Commission wishes to further verify
whether the arguments presented can justify the presence
of a well-defined market failure, particularly in view of the
above and any further third party comments.

4.3.2. The aid instrument has to target the identified market

failure

(47) The measure intends to change the behaviour of both
investors and SMEs by increasing their information on
their potential matches. In this context it is noted posi-
tively that the measure is limited to five years. AWM will
either sell its shares of Investbx after this period or close it
down.

(48) Compared to usual risk capital schemes, the amount of
public funding used is rather limited. Regional risk capital
schemes covering regions similar in size as the West
Midlands normally involve far higher amounts of aid than
foreseen for this measure (9).

(42) However, an assessment of this ad hoc aid could be based
directly on Article 87(3)(c) EC. Accordingly, a well-defined
market failure has to exist, the aid instrument has to

(49) However, the Commission wishes to further assess any
incentive effect of the aid instrument. Also the relation
between the notified measure and the ECF merits further
examination.

(5) OJ C 235, 21.8.2001, p. 3.
(6) Commission decision of 17 August 2000 on State aid No N 265/
2000 — UK concerning the UK regional aid map for 2000–2006
(OJ C 272, 23.9.2000, p. 43).

(7) OJ C 74, 10.3.1998, p. 9.

(8) See State aid No C 17/2004 — UK, not yet published in the Official

Journal.

(9) Take as example State aid No C 17/2004 — UK (“Enterprise Capital
Funds”) and State aid No C 72/2003 — UK (“Invest Northern
Ireland Venture 2003”).

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4.3.3. Distortions of competition and the effect on trade should
be limited to ensure that the aid measure is not, on
balance, against the common interest

with debt financing from private banks needs to be veri-
fied further, particularly in view of the above and any
further third party comments.

(50) As to the balancing of distortion of competition and
effects on trade,
the existing London based markets,
namely the London Stock Exchange (LSE), its Alternative
Investment Market (AIM) and the off-trading facility Ofex,
may be the potential competitors of Investbx. Another
source of perceived competition could be from traditional
sources of finance such as bank debt, friends and family,
business angels or venture capital funds.

(51) However, LSE, AIM and Ofex use classical market making
mechanisms using bid and offer price, the primary focus
being institutional investors, with retail investors having
no access
traditional
to new issued shares. These
exchanges generate revenues primarily from companies
joining the market and subsequently paying an annual fee
in order to stay on the exchange.

i.e.

(52) Investbx seems, at first sight, to differ from these tradi-
tional markets. It, for instance, has no market makers.
Market makers generate revenues based on the share price
“spread”,
the margin between bid and offer price.
Market makers achieve revenues either by selling large
volumes of shares at
low spread, or by selling low
volumes of shares at high spread. Both of these factors
may contribute to them not working well with SMEs,
which have, for instance, lower volumes of shares to sell.

(53) Investbx furthermore seems to aim, unlike the traditional
markets, also at providing a bridge between the above-
mentioned traditional sources of finance and the more
senior markets LSE, AIM and Ofex (“escalator function”).

(54) However, at

this stage,

the differences to traditional
markets and in particular to Ofex merits further examina-
tion and competition with LSE, AIM and Ofex as well as

5. DECISION

this stage concludes that

The Commission at
the measure
involves State aid pursuant to Article 87(1) EC to Investbx. It
nevertheless wishes to further verify the presence of State aid at
the level of the investors and the enterprises invested in. In
addition, also in view of the third party comments, it currently
has doubts as to the compatibility of the measure with the
common market, in particular the presence of a well-targeted
market failure, whether the aid instrument has an incentive
effect and whether the distortions of competition and the effect
on trade are limited to ensure that the aid measure is not, on
balance, against the common interest.

In the light of the foregoing considerations, the Commission,
acting under the procedure laid down in Article 88(2) EC,
requests the United Kingdom to submit its comments and to
provide all such information as may help to assess the aid,
within one month of the date of receipt of this letter.

The Commission wishes to remind the United Kingdom that
Article 88(3) EC has suspensory effect, and would draw its
attention to Article 14 of Council Regulation (EC) No 659/
1999, which provides that all unlawful aid may be recovered
from the recipient.

The Commission warns the United Kingdom that it will inform
interested parties by publishing this letter and a meaningful
summary of it in the Official Journal of the European Union. It
will also inform interested parties in the EFTA countries which
are signatories to the EEA Agreement, by publication of a
notice in the EEA Supplement to the Official Journal of the Euro-
pean Union and will inform the EFTA Surveillance Authority by
sending a copy of this letter. All such interested parties will be
invited to submit their comments within one month of the
date of such publication.’