2008/126/EC: Commission Decision of 20 December 2006 on the aid to Investbx C 36/2005 which the United Kingdom is planning to implement (notified under document number C(2006) 5808) (Text with EEA relevance)
Date: 2006-12-20
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, corporate finance, investment, investment income, small and medium-sized enterprises

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Official Journal of the European Union

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II

(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

DECISIONS

COMMISSION

COMMISSION DECISION

of 20 December 2006

on the aid to ‘Investbx’ C 36/2005 which the United Kingdom is planning to implement

(notified under document number C(2006) 5808)

(Only the English version is authentic)

(Text with EEA relevance)

(2008/126/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Commu-
nity, and in particular the first subparagraph of Article 88(2)
thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1) and having regard to
their comments,

Whereas:

1. PROCEDURE

(1)

(2)

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

further

The Commission asked for
information on
19 August 2005, following which a meeting between
representatives of the United Kingdom and the Commis-
sion was held on 8 September 2005. During this meeting,
additional information was provided by the UK represen-
tatives.

(3) On 26 September 2005,

the Commission received a
complaint from the undertaking PLUS Markets Group plc
(formerly Ofex Holdings plc) (hereinafter ‘Ofex’).

(4)

(5)

(6)

(7)

By letter dated 20 October 2005,
the Commission
informed the United Kingdom that it had decided to
initiate the procedure laid down in Article 88(2) of the EC
Treaty in respect of the measure.

By letter dated 11 November 2005, the Commission sent
its Decision to initiate the procedure laid down in
Article 88(2) of the EC Treaty to the interested party Ofex.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union (2).
The Commission called on interested parties to submit
their comments.

the
By letter dated 21 November 2005, registered at
Commission on the same date,
the United Kingdom
submitted a response to the Commission's Decision to
initiate the procedure.

(8)

The Commission received observations from 20 interested
parties:

(a)

from The Share Centre by letter dated 10 November
2005, registered at the Commission on 23 November
2005;

(1) OJ C 288, 19.11.2005, p. 13.

(2) See footnote 1.

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(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(l)

from Ofex by letters dated 25 November 2005,
registered at the Commission on the same date and
15 December 2005, registered at the Commission on
the following day;

from Mazars by letter dated 24 November 2005,
registered at the Commission on 5 December 2005;

from Sir Albert Bore by letter dated 30 November
2005, registered at the Commission on 6 December
2005;

(r)

(s)

(t)

from Confederation of West Midlands Chambers of
Commerce, dated 20 December 2005, registered at
the Commission on 3 January 2006;

from Advantage Growth Fund, dated 5 January 2006,
registered at the Commission on 10 January 2006;

from the University of Warwick, dated 16 December
2005, registered at the Commission on 16 January
2006;

from Quoted Companies Alliance by letter dated
16 December 2005, registered at the Commission on
the same day;

(9)

The representatives of Ofex explained their position at a
meeting with the Commission on 16 December 2005.

from Hembury Associates Ltd, dated 16 December
2005, registered at the Commission on 19 December
2005;

from Hamilton Pratt, dated 13 December 2005,
registered at the Commission on 19 December 2005;

(10) By letters dated 22 December 2005, 13 January 2006 and
19 January 2006,
the Commission forwarded the
observations from interested parties to the United King-
dom in order to give the United Kingdom the opportunity
to react.

from Regione Emilia-Romagna, dated 15 December
2005, registered at the Commission on 20 December
2005;

(11) At

the meeting between the UK authorities and the
Commission on 30 January 2006 the UK authorities
provided explanations. The Commission asked for further
information.

from JP Jenkins, dated 13 December 2005, registered
at the Commission on 20 December 2005;

from Aston Science Park, dated 14 December 2005,
registered at the Commission on 22 December 2005;

(12) This information as well as the opinion from the United
Kingdom in response to the comments of third parties was
received by letters dated 3 February 2006, registered at the
Commission on the same date, and 7 February, registered
at the Commission on 10 February 2006.

from Robert Huggins Associates, dated 13 December
2005, registered at the Commission on 22 December
2005;

from Catapult Venture Managers, dated 12 December
2005, registered at the Commission on 22 December
2005;

(13) The Commission requested further information from the
United Kingdom by letters dated 15 February 2006 and
6 April 2006. The United Kingdom provided this
information by letters dated 2 March 2006, registered at
the Commission on the following day, and 7 April 2006,
registered at the Commission 12 April 2006.

(m)

from EEF West Midlands, dated 14 December 2005,
registered at the Commission on 23 December 2005;

(14) The United Kingdom provided further information by
letter dated 3 May 2006, registered at the Commission on
11 May 2006.

(n)

from Ofex, dated 19 December 2005, registered at
the Commission on 23 December 2005;

(o)

(p)

(q)

from CEBRE, dated 16 December 2005, registered at
the Commission on 23 December 2005;

from West Midlands Business Council, dated
22 December 2005, registered at the Commission
on 3 January 2006;

from Birmingham Forward, dated 19 December
2005, registered at the Commission on 3 January
2006;

(15) By e-mail and letter dated 25 May 2006, containing the
same information and registered at the Commission on
respectively 29 and 30 May 2006, Ofex claimed that
Advantage West Midlands (hereinafter ‘AWM’) was taking
preparatory steps in relation with Investbx and requested
the Commission to postpone the adoption of the Decision
until Ofex would be able to supply further information. By
e-mail dated 31 May 2006 and registered on the same date,
Ofex requested to be informed before the Decision would
be adopted and to receive the Decision before it would be
published. By e-mail dated 9 June 2006, registered on the
same date, and by letter dated 9 June 2006, registered at
the Commission on 13 June 2006, Ofex repeated its
request to postpone the adoption of the Decision.

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(16) By two e-mails dated 4 July 2006, registered at

Commission on 6 July 2006,
submitted further information to the Commission.

the
the United Kingdom

(17) By e-mail dated 12 May 2006,

the
Commission on 13 May 2006, Ofex informed the
Commission that an internet site of Investbx was publicly
accessible.

registered at

(18) By letter dated 26 July 2006, registered at the Commission
on 1 August 2006, Angelbourse claimed that it is a trading
facility for smaller companies and Investbx constitutes
unfair competition. This letter was received more than
seven months after the deadline for comments of third
parties and its allegations were not substantiated, therefore
the Commission has not taken it into account.

(19) By e-mails dated 3 August 2006,

the
Commission on the same date, Ofex informed the
Commission of the existence and activities of Angelbourse.

registered at

(20) By letter dated 7 August 2006, the Commission requested

further information from the United Kingdom.

(21) By e-mails dated 23 October 2005, registered at

Commission on the same date,
submitted a response to the request of the Commission.

the
the United Kingdom

2. DETAILED DESCRIPTION OF THE MEASURE

(22) Based on the information provided by the United King-
dom, the Commission summarises the description of the
notified measure as follows.

2.1. Objective of Investbx

(23) The primary objective of the measure is to create a means
for small and medium-sized enterprises (3) in expansion
stage (4) (hereinafter ‘SMEs’) in the West Midlands region of
the United Kingdom to raise equity gap finance (5). It will
bring together SMEs, service providers and investors to

(3) The definition complies with Commission Recommendation of
6 May 2003 concerning the definition of micro, small and medium-
sized enterprises (OJ L 124, 20.5.2003, p. 36).

(4) SMEs in expansion stage are SMEs as defined in point 2.2 (h) of the
Risk Capital Guidelines (Community Guidelines on State Aid to
Promote Risk Capital
Investments in Small and Medium-Sized
Enterprises, OJ C 194, 18.8.2006, p. 2).

(5) Equity gap finance refers to the investments in the equity gap range

of GBP 0,5 to 2 million.

make it easier for companies to raise money by creating a
practical forum for issuing and exchanging new shares.
Investbx will also provide and facilitate the provision of
services at market rates to SMEs to enhance their ability to
raise funds.

(24) The measure intends to overcome the market failure for
provision of equity financing between GBP 0,5 million and
GBP 2.0 million for SMEs in the West Midlands. The UK
authorities declared that the ceiling for fundraising will be
GBP 2 million per annum during the initial five-year stage
in order to focus the measure tightly on combating the
market failure in SME fund raising. They are concerned,
however, that the market failure is changing over time as
private equity is increasingly drawn to bigger scale projects.
The CBI report (6) estimates the market failure between
GBP 0,25 million and GBP 3 million. A GBP 2 million
ceiling might therefore, according to the UK authorities,
create real barriers to the success over time of the Investbx
project, excluding certain SMEs which may require a higher
level of investment. If this proves to be the case, AWM will
gather the evidence and notify an amendment to the
Commission asking for the ceiling to be raised.

(25)

Investbx aims at providing a bridge between private
investors, including business angels and venture capitalists,
to whom it will provide an additional exit opportunity, and
more senior established markets.
Investbx will prepare
investees for the listing on the more senior established
markets, namely the Alternative Investment Market (here-
inafter
‘the AIM’) and the London Stock Exchange
(hereinafter ‘the LSE’).

2.2. Legal basis of the measure

(26) The legal basis of the measure is the regional Development

Agencies Act 1998 (7), Section 5.

2.3. Budget and duration

(27) A government body, the West Midlands Regional Devel-
opment Agency, (‘AWM’), will grant Investbx funding of up
to GBP 3 million for a period of at most five years. The
amount may be lower and/or the period may be shorter if
the project becomes self-sustainable. Investbx will use this
grant to cover its investment and other start-up costs that
may not be covered by the revenues of its activity. Investbx
will use the grant according to a financial plan, which
projects an increasing number of SMEs to be served by
Investbx over the initial five-year period (totalling 47 by
the end of the five-year period), and foresees an increasing
revenue generation and lowering use of the grant for loss
compensation until, in five years at the latest, Investbx
breaks even.

(6) Confederation of British Industry:

‘Improving access to finance —

Enabling the enterprise revolution’ (July 2006).

(7) http://www.opsi.gov.uk/acts/acts1998/19980045.htm.

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(28) The projections foresee a part of the grant to serve as a
reserve. After
repay the
remaining unused funds to AWM and AWM will either
sell shares of Investbx on the market through an open and
non-discriminatory public tender or close it down.

Investbx will

this period,

(35) There are a number of service providers in the United
Kingdom that trade non-listed shares or raise equity, like
The Share Centre (Fast Track Service), Univits, JP Jenkins,
or Investor Champions.

2.4. Beneficiary of the measure

(29) The direct beneficiary of the measure is Investbx. Investbx
will receive up to GBP 3 million by way of grant of AWM.
Any surpluses from Investbx will be reinvested back into
Investbx to benefit the regional economy, which corre-
sponds to AWM's mission. AWM will retain a strong
influence on Investbx.

(36) Despite the above developments, the United Kingdom
claims that there is still a long-term market failure for
equity investment in SMEs located in regions outside the
South-East such as the West Midlands. Among the lowest
level of listed companies and total market capitalisation
can be found in the West Midlands. AWM asked Ofex
whether they could address the market failure in the West
Midlands region, in which case AWM would abandon its
Investbx project. However, Ofex did not react.

(30)

Investbx will be a company limited by shares. The company
status will allow Investbx to enter into contracts in its own
right. Being a separate legal entity from AWM will facilitate
a possible transfer of the company in the future. If Investbx
is successful, it will be sold and become a private sector
company. At that time any outstanding funds from the
original grant will revert to AWM.

(31)

Investbx will have an executive team of 6 to 8 persons
responsible for the delivery of the business plan. A non-
executive board will comprise West Midlands professionals
specifically appointed for their knowledge and experience
of working with SMEs and target investors.

2.5. The current market in the United Kingdom

(32) According to the United Kingdom, the traditional market
for buying and selling shares in the United Kingdom is
dominated by the LSE, which is primarily engaged in
hosting large stock trades in a global marketplace. SMEs
larger
are increasingly shut out as blue-chip stocks of
companies are preferred.

(33) According to the United Kingdom, the LSE sought to cater
for this situation by the introduction of its 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.

2.6. Activities and pricing of Investbx

Investbx envisages

(37) According to the UK authorities, Investbx is a completely
novel measure, for which there is no precedent. While
traditional venture capital funds aim at increasing the
supply of equity capital,
instead
improving the efficiency with which information on
investee companies can circulate. 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 LSE with its AIM), as well as Ofex, 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 platform. Unlike
at mainstream markets, such 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 SMEs
in the community rather than the ability to frequently
trade shares as provided by the existing London based
Investbx will have three distinct
markets. Accordingly,
roles:
fund raising or primary funding, bundling of
support services for SMEs and providing a secondary
auction based trading platform for shares once they are
admitted for trading.

(38) Companies wishing to raise equity gap finance will be
assisted by locally based financial and legal advisers and by
the Investbx West Midlands-based team.

(34) According to the United Kingdom, outside the realms of
the LSE and the AIM is the trading facility Ofex which is
regulated by the United Kingdom's Financial Service
Authority (hereinafter ‘FSA’). It aims to provide a more
cost effective and less regulated alternative to the AIM.

(39) The trading platform will be at the online Investbx portal
(www.investbx.com), which will also contain a range of
integrated services, open online 24/7, specifically designed
to meet the needs of SMEs, either quoted or unquoted.

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(40)

Investbx will not provide funding to the SMEs. Neither will
Investbx provide directly funds or guarantees to the
investors or the investees. All equity finance will be
provided from market investors to private target investees.
The function of Investbx is merely to facilitate transactions
among private market players.

on the Investbx website will contain all the template
documents that an SME will need during the process of
capital raising and joining the trading platform. These
templates have been developed with the local professional
community and are simplified in order to be appropriate
and cost effective for SMEs.

2.6.1. Fund raising

(41)

Investbx will assist the fundraising of SMEs. It will be
marketing suitable SME's in the region to advisers in search
of SMEs to invest in. Fund raising, also called primary
funding, will consist of selling shares which have been
newly issued by the target SMEs, under the assistance of
Investbx, directly to interested investors. The UK author-
ities have declared that the ceiling for fundraising will be
GBP 2 million per annum and SME during the initial five
years stage.

(42) According to the professional advisors, who assist SMEs at
fund raising and who have been consulted during the
whole process of designing the Investbx project, there is a
potential in the West Midlands to finance more than 10
SMEs per year on the basis envisaged for
Investbx.
According to its financial plan, during the first five years
of its existence, it should raise at least GBP 70 million for
at least 47 companies.

(43) The SMEs will be charged a commission of 6 % of the
funds raised. This fee was determined from the financial
model in a way that should enable Investbx to break even
within the five-year term of the grant funding agreement.
Furthermore, it was evaluated by benchmarking the fees
against existing case studies for fund raising. This showed
that 6 % is more than what is required by some other
operators. However, the UK authorities also note that such
a benchmarking exercise has limited value given that there
are no adequate comparators for Investbx following its
unique nature. Investbx will be different to any one of the
existing providers of fund raising services in the West
Midlands. Therefore it is considered that Investbx will be
i.e. at least the rate
able to charge a 6 % commission,
charged by existing corporate advisors.

(45) Any SME seeking to raise funds at Investbx will be assessed
by Investbx. This will include assessments of its potential
to attract investors for primary funding and of whether the
due diligence brought to light any facts that would speak
against admission. After a favourable assessment,
the
investors and syndicate
contact
Investbx team will
partners (8), who may have a number of
their own
investors that wish to participate in the new issue.

(46) During the fund raising process Investbx will provide
research and marketing services at market costs, which it
will outsource. Investbx will maintain a list of independent
legal advisers, reporting accountants,
financial advisers,
financial public
and independent
relations
research providers who have the appropriate experience
and regulatory approvals and from which the SMEs may
choose any services they need for fund raising.

advisers

the

(47) All SMEs joining Investbx will have independent research
published. Investbx will make available on its website to all
potential investors or financial advisors a presentation of
each SME containing summary information from the full
admission document,
and
research. The independently carried out
independent
research will contain both quantitative and qualitative
detailed and in-depth information about that company.
This type of research is rarely available to anyone other
than institutional fund managers. Such data is usually
prepared only for larger stocks of shares and available only
to institutional investors. The research will also provide a
detailed commentary about each area of the business.

admission document

(48)

SMEs will pay any advisers' professional fees for assisting
them to join Investbx. The individual professional fees will
be at market prices charged by private market operators
that do not receive any financial benefits from Investbx.

2.6.2. Bundling of support services for SMEs

2.6.3. Secondary trading

(44) According to the UK authorities,

Investbx will bring
together various service providers that will assist the SMEs
in the process of fund raising as well as during the period
when their shares will be traded. Investbx will provide a
transaction coordinator to each SME that decides to raise
funds through Investbx. A secure document sharing facility

(49)

Investbx will also provide an online order driven auction-
based secondary market trading platform. The purpose of
this platform is to provide some liquidity in shares of the
companies subsequent to raising capital
in the primary
market and being admitted to trading on Investbx.

(8) A syndicate partner is a group of investors that act together when

investing into a company.

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(50) An order driven market relies on owners of shares in an SME
registering that they would like to sell some of
their
shareholding and disclosing the price that they would be
prepared to accept for them. Interested buyers of shares in
the SME will also register their interest together with the
price that they are willing to pay for the shares.

2.7.

Indirect beneficiaries

(55) All primary and secondary trading at Investbx will take
place among private market players, the investors and
investees, who may only indirectly benefit
from the
measure.

(51) Both buyers and sellers are able to see all bids and offers
for shares in the SME on the Investbx website 24/7 and can
change their orders up to an hour before the auction takes
place. Auctions take place at a frequency set by the
company based on the amount of interest that is shown in
trading its shares, possibly weekly or monthly. This,
according to the UK authorities, encourages a longer term
view of investing in SMEs as it is not possible to buy and
sell shares immediately.

(52)

(53)

It will

In the auction based system shares are sold directly between
individual investors, by matching buyers and sellers at a
single price.
thus eliminate the market-maker
margin, which is the difference between the bid and the
offer prices in the usual market-maker quote driven system
(the LSE, the AIM and Ofex are established market-maker
based markets as explained below, hereinafter called
‘established markets’). This difference is typically higher
for shares that are traded less often and in smaller
amounts. According to the UK authorities, at Ofex the
highest spread was up to 75 % and the average share price
spread of the six West Midlands based companies traded
on Ofex over the preceding 12 months before Septem-
ber 2006 was 16 %.

Investbx will outsource the costly and complex functions
involved in regulation and trading to an FSA authorised
firm. Such a firm, The Share Centre, has been appointed as
preferred bidder for this role following a non-discrimina-
tory selection process published in the Official Journal of the
European Union. The Share Centre's role will include: FSA
authorisation and associated compliance; providing the
online stock-broking product; receiving agent services
(collecting money from the investors subscribing for new
issue shares), employee share scheme administration,
provision of
the
periodic auctions.

the trading facility and running of

(54) The UK authorities confirmed that the fees charged by
Investbx to the investee SMEs as well as to the investors on
services connected to the secondary trading will be equal
to the market rates charged by The Share Centre to
individual companies. Investbx will profit from a discount
from The Share Centre.

2.7.1. Investors

(56) Taking into account the tendency of institutional investors
to invest into larger deals, the UK authorities believe that
these investors will not be interested in using Investbx.
Investbx expects therefore to raise funds mainly from
including high net worth
individual private investors,
individuals. Investbx will target mainly but not exclusively
investors from the West Midlands region, as the UK
authorities believe that these are more likely to invest into
the West Midlands based target SMEs.

(57) The investors may be approached directly by Investbx or
through intermediaries or syndicate partners. In any case,
no investors, independently from where they are or if they
are institutional or individual private investors, will be
excluded from or disadvantaged by using Investbx.

(58)

Individual private investors will be able to participate in
the primary funding during the fund-raising process and
gain access to presentation and independent research on
the investees. These opportunities are, according to the UK
authorities, usually obtained only by institutional investors.
All investors will be able to apply for new issue shares
directly online or via financial intermediaries.

2.7.2. Investee SMEs

least

(59) Only SMEs from the West Midlands with viable business
plans and at
two years trading records seeking
‘expansion capital’ (9) are eligible for using Investbx.
Investbx may exceptionally consider SMEs that do not
have a two-year trading record if the SME has received
investment from a venture capitalist whilst developing its
products or services. The UK authorities have confirmed
that SMEs will not raise more than GBP 2 million per year
and they will not be beyond the stage of expansion capital,
as defined in point 2.2(h) of the Community Guidelines on
State Aid to Promote Risk Capital Investments in Small
and Medium-Sized Enterprises (hereinafter referred to as
‘Risk Capital Guidelines’) (10).

(9) As defined in Community Guidelines on State Aid to Promote Risk
Capital Investments in Small and Medium Sized Firms, OJ C 194,
18.8.2006, p. 2.

(10) OJ C 194, 18.8.2006, p. 2.

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(60)

In order to provide protection for investors, companies
joining Investbx must meet a set of
regulatory and
disclosure requirements
in accordance with the FSA
regulation.

INVESTBX

OFEX

Up to GBP 2 million per
annum

No limit

2.8. The selection procedure for the service provider
of the measure

Services provided

(61) The main service provider to Investbx, The Share Centre,
has been selected by a competitive and non-discriminatory
selection process published in the Official Journal of the
European Union (11). Three undertakings submitted formal
offers: Ofex, Univits and The Share Centre. A panel of
three independent expert advisers and three internal AWM
assessors reviewed the selection based on 18 selection
evaluation criteria. Based on these criteria, the Univits
proposal scored lowest. The best bidder, The Share Centre,
and the second best bidder Ofex were invited to an
interview. The Share Centre scored significantly better than
Ofex in the assessment and, according to the UK
authorities, it was therefore selected as the preferred bidder.

(62) Due to the technical complexity of the project and the
importance of the market operator role to the success of
the business, an additional independent evaluation of both
finalists was commissioned, which also resulted in The
Share Centre being the preferred bidder.

(63) According to the UK authorities, all parties were advised of
the decision in February 2004. Ofex sought information as
to why it had not been selected and this was duly provided.
No formal complaint or legal challenge followed this.

Primary objective is
primary capital for SMEs

raising

Primary and secondary trading
market. Broker dealers
raise
money

of

Provision
independent
research is pre-requisite for
joining

No such requirement

Order driven trading platform,
periodic
auctions matching
buyers and sellers at a single
price

Quote driven market; real time
trading with one price at which
to buy and another price at
which to sell which generates
the share price spread

Regulatory landscape

Investbx will be an Appointed
Representative of The Share
Centre which operates
an
Alternative Trading System

Ofex is currently an Alternative
Trading System directly author-
ised by FSA

2.9. Comparison Investbx vs. Ofex

3. GROUNDS FOR INITIATING THE PROCEDURE

(64) Based on the

information provided from the UK
authorities, which was not contradicted by the submissions
of interested parties, Investbx and Ofex can be distin-
guished as follows:

(65)

In its Decision to initiate the procedure the Commission
identifies aid to Investbx. Moreover, it announces further
scrutiny of possible aid to investors and SMEs.

INVESTBX

OFEX

(66)

Geographical area of operation

from West Midlands

National and International

SMEs
only

Dedicated West Midlands
based team of 6-8 people

1 business development man-
ager, based in London covering
all 9 UK regions

Target market

SMEs in expansion stage only

Any size of company

In that Decision the Commission states that, although the
measure aims at bridging the equity gap for SMEs, it does
not fall within the scope of the risk capital communica-
tion (12). Since Investbx does not provide any venture
capital to SMEs, it cannot be regarded as a venture capital
fund. The measure aims at setting up the infrastructure for
an exchange facility for investors and SMEs. The grant to
Investbx does not qualify as aid under the regional aid
guidelines. Also no other State aid regulations, frameworks
or guidelines are applicable. Therefore in the Decision to
initiate the procedure the Commission states that
the
assessment of the aid to Investbx could be based directly
on Article 87(3)(c) of the EC Treaty. Accordingly, a well-
defined market failure has to exist, the aid instrument has
to target
failure and the distortion of
competition and the effect on trade must be on balance
outweighed by the common interest.

that market

(11) OJ S 206, 25.10.2003, No 186003.

(12) OJ C 235, 21.8.2001, p. 3.

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(67)

(68)

its doubts about

the compatibility of

In the Decision to initiate the procedure the Commission
expresses
the
measure, specifically about whether the market failure in
the area of GBP 0,5 million to GBP 2 million, which was
identified in the Commission Decision on the Enterprise
Capital Funds (13), is still valid in the United Kingdom and
particularly in the West Midlands region.

the Commission wishes to further

Finally,
investigate
differences between Investbx and the traditional markets,
in particular Ofex. It announces an examination of any
competition with the LSE, the AIM and Ofex, as well as
with debt finance providers. The purpose is to verify
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.

(72)

(69) Only after consideration of third party comments could
the Commission decide whether the measure proposed by
the United Kingdom targets a well defined market failure
and whether it affects competition and trading conditions
to an extent contrary to the common interest.

4. COMMENTS FROM INTERESTED PARTIES

(70) The Commission received comments from 20 interested
parties, pursuant to Article 20(2) of Council Regulation
(EC) No 659/1999 (14). 17 of these 20 interested parties
were supporting the Investbx measure. Support was
received from West Midlands businesses, professional
community and venture capitalists, West Midlands busi-
ness organisations, West Midlands universities and aca-
demic experts, West Midlands stockbrokers as well as a
European region. Apart
from Ofex, also JP Jenkins
Stockbrokers and the Quoted Companies Alliance gave
critical comments on the Investbx measure.

4.1. Supporting comments

(71) The majority of the 17 positive comments confirmed the
existence of market failure in the provision of equity in the
range between GBP 0,5 and 2 million, with one party
claiming the market failure to be up to GBP 3 million. The
market failure is claimed to be on the demand as well as on
the supply side and not to be resolved either by business
angels, who provide lower amounts, or by private venture
capital funds, which concentrate on larger deals, or by
established markets such as the AIM or Ofex, which are
claimed to be concentrated on the London and the South-
East regions while not being interested in developing a
local West Midlands market. The SMEs using the existing
platforms suffer from low interest by investors because of

transactions and a
the relatively small amounts of
consequently lower coverage by research on the SMEs.
According to several parties Investbx is useful and needed
to overcome the market
failure, to serve as a bridge
towards more senior established markets. By providing an
exit possibility, it will thus stimulate interest by business
angel investors.

Several parties reaffirm the need for a local market that will
concentrate on the market failure left by larger operators
and that will profit from local knowledge, expertise and
personal networks. Some parties mention that the State aid
is necessary as pure private sector provision of equity fails
at local level. A case study forwarded by the University of
Warwick highlights an SME in one case that had to look to
the Australian market to raise equity for growth in light of
funding gap in the West Midlands and high cost of
entering the present markets. It is argued that since it is not
economically viable for investors to visit regularly other
regions for deal finding and monitoring,
Investbx will
improve the situation by raising capital mainly from local
investors, in particular from high net worth individuals.
Investbx is praised as an innovative, cost effective design,
which has the potential to assist the competitiveness of
SMEs and to improve the situation in the West Midlands
after a series of economic shocks, one of them being the
collapse of MG Rover.

(73)

Parties from other Member States express their support to
Investbx and believe that it will serve as a pilot project
from which lessons and good practices may be learned for
other European Communities regions.

4.2. Critical comments

(74) The Quoted Companies Alliance (hereinafter ‘QCA’) claims
that a local exchange would dilute the liquidity from other
markets and that they ‘just don't see how a small
local
exchange
regulations] without
these
could meet
enormous taxpayers’ subsidies'.

[extensive

(75)

JP Jenkins, an independent execution-only stockbroker that
specialises in matching trades in shares, claims that
Investbx will be its direct competitor and that the state
aid will distort competition and prejudice JP Jenkins'
position.

(13) Commission Decision C(2005)1144, OJ L 91, 29.3.2006, p. 16.
(14) 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, 27.3.1999, L 83, p. 1.

(76)

Jamie Whitehorn, General Counsel of Ofex considers the
identification by the United Kingdom of the reasons for,
and existence of an alleged market failure in the range of

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Official Journal of the European Union

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GBP 0,5 million to GBP 2 million both incorrect and
unproven. As to the imperfect information on both the
demand and supply sides, he considers that there is no
evidence on, firstly, lack of information for SMEs on how
to access equity funding, secondly, failure of the West
Midlands companies with viable business plans to raise
equity at Ofex or the AIM, and thirdly, that investors lack
‘appropriate and reliable information about potential investees’.

(77) According to Ofex and QCA, at present services to SMEs
seeking to raise equity finance are offered by Ofex, the
AIM, JP Jenkins Limited, broker networks and investor
mailing lists. Furthermore, equity could be raised using the
register of ‘qualified investors’ maintained by the Financial
Services Authority.

(78) Ofex expressed its concerns that some of the information
on which the Commission's preliminary assessment is
based is incomplete, outdated and/or inconsistent with the
way UK equity markets work in practice.

(79) Ofex considers that the studies put forward by the United
Kingdom in the context of the Enterprise Capital Funds to
which the Commission refers are out of date in so far as
the service provided by Ofex is concerned. Over the last
two years, the Ofex market has been radically improved.
This has been reflected in the increased number of
admissions of SMEs on Ofex in 2005 compared to 2004,
with all of the fund raisings in the sub GBP 2 million
range.

(80) Even assuming the existence of market failure, Ofex claims
that Investbx would not resolve the underlying problems.
Investbx is not in the position to remedy information
deficit as due to regulatory constraints it could not provide
more information than what is currently available at Ofex
or the AIM. Transaction costs, that is professional fees and
due diligence costs are equal at all markets and Ofex and
the AIM fees only represent a small proportion in the
overall costs of raising equity.

(81)

Furthermore, Ofex believes that the measure is not an
appropriate instrument, because,
if closed down within
five years the trading platform would disappear and the
contact between the SME and its shareholders would be
lost. Consequently, the investors could be locked in, which
would lead to uncertainty towards the end of the five-year
period.

(82) Moreover, Ofex claims that there are limitations of an
auction-based system that make it less suitable for trading
as compared to market-maker based systems. Firstly, a
double coincidence between the seller and buyer at a
specific time would be required for realisation of sale.

Secondly, such a system will not generate sufficient depth
of orders that could reliably inform the investors about the
share price. In the market-maker system, however, deals
can be done at any time.

(83) Ofex claims that the escalator function is fully covered by
Ofex,
the AIM and the LSE. According to Ofex the
announced objective of bridging the perceived market
failure for SMEs would either not be achieved or/and there
already exists a number of competitive alternatives in the
market that offer comparable means for raising equity.

(84)

Furthermore, Ofex argues the proposed state aid targets
the operating costs of Investbx rather than the enterprise
costs of SMEs. Also the aid proposed is neither for the
benefit of potential investors in SME companies nor for the
SME companies seeking to raise capital but for the vehicle,
through which the measures operate. Ofex
Investbx,
considers it significant
the proposed instrument
that
allegedly does not operate through a mechanism acknowl-
edged by the Risk Capital Communication.

(85) Ofex submits that the proposed aid will not have the
alleged incentive effect. If companies wish to seek capital
and believe this could be best achieved through a share
trading facility for their shares, there are existing markets
already available. Companies in the Midlands have already
taken the advantage of these facilities.

(86)

Furthermore, referring to the HM Treasury Report ‘Bridging
the Finance Gap’ (December 2003), Ofex claims investors
are not influenced by geographical location but by the
business proposition itself.

(87) Ofex claims that on its platform retail investors do have
access to, and subscribe for, new issues of shares by SMEs.
Given the proportion of companies that raise capital
amounts below GBP 2 million at Ofex,
Investbx will
directly compete with it, rather than complement it. Ofex
is further concerned that Investbx would risk ‘crowding
out’ other providers as a result of the provision of state aid
to Investbx, namely discouraging other potential investors
from providing additional capital
to other existing or
potential share trading markets. They argue this is because
the grant of state aid would excuse Investbx from the need
to make profit, thereby allowing it to adopt a revenue
model
intended simply to meet any surplus costs not
covered by the state aid. In contrast, its competitors (such
as Ofex) are funded by private sector investors who expect
a financial return, and such competitors would therefore
need to achieve a sufficient margin to generate profits. It is
claimed that in this context Investbx may actually restrain
innovation in financial markets. A platform supported by
state aid which is not profit driven will not, it is suggested,
have the same commercial
imperatives to improve its
services or introduce new services for the benefit of
customers.

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Official Journal of the European Union

20.2.2008

(88)

In summary, Ofex claims the proposed aid measure cannot
be considered to be in the common interest.

(89)

(90)

5. COMMENTS FROM THE UNITED KINGDOM

5.1. Comments to the Decision to initiate the
procedure

to the Decision to initiate the
In their comments
procedure,
the whole
the UK authorities argue that
premise of Investbx is based on the existence of a well-
acknowledged market failure in the provision of equity
finance between GBP 0,5 million and 2 million in the West
Midlands. Despite the establishment of a number of
publicly-backed venture capital
there allegedly
remains a shortage of
funding for SMEs. The UK
authorities note that all the available evidence points to
the conclusion that the market failure will not be addressed
by the private sector, thus the only way to resolve this
problem is to stimulate the market by public intervention.

funds,

In order to address the market failure, Investbx is intended
to be a regional catalyst for the bringing together of SMEs
and investors via an online share trading exchange,
coupled with a bundle of complementary services focusing
on raising funds for SMEs. To the UK authorities' best
knowledge, nothing like Investbx currently exists anywhere
in the Community. It is an innovative and unique pilot
project and offers potential benefits to all regions across
the Community by allowing them to observe its progress
in rectifying the market failure and to explore whether
this nature are
stock exchanges of
online regional
sustainable and helpful to regional economies.

(91) The UK authorities submit that AWM publicly selected The
Share Centre, using a selection procedure via the Official
Journal of the European Union, for the market operation
of Investbx. It is further stated that Ofex supported the
project both before
it was
unsuccessful in winning the contract for the running of
Investbx.
the selection
procedure was conducted in an objective manner and at no
stage has the fairness of the procedure been called into
question.

It was further submitted that

and immediately after

(92) The UK authorities believe that Investbx will attract a new
kind of
investor and as such Investbx will not be
competing with Ofex for funds. Investbx will operate as
a stepping stone to the more senior markets rather than
act as a competitor.

(93) The UK authorities state that the improved services for
investors as mentioned in the Decision to initiate the
procedure are not currently available. As a result, there
would be no possible distortion of competition. The UK
authorities say that Investbx will make new issue shares
available to the public, which is in contrast to the practice
of more senior markets where new issue shares are
traditionally made available to a few institutions.

(94) The UK authorities confirm that Investbx will have a dual
role (by acting as a forum for inclusive discussion and by
trading activities), neither of which is currently fulfilled by
Ofex or any other organisation. The structure of Investbx
was chosen because it safeguards the effective control of
Investbx by AWM, and it ensures that no benefit from
funds will be leaked to third parties and any benefits
realised from the sale of Investbx will ultimately revert to
AWM if the venture proves successful.

(95) The Investbx business plan forecasts primary fund raising
for a minimum of 47 SMEs in the West Midlands over a
period of five years, raising a minimum of GBP 70 million.
In comparison with Ofex, the following was concluded by
the UK authorities in their letter of 21 November 2005:

UK level

— Within five years since 2000 at Ofex only GBP
43,3 million primary funding was raised within the
GBP 0,5 million to 2 million range for 39 companies
based all over the United Kingdom.

— When removing secondary funding from the total
funds raised, Ofex companies only raise modest
amounts via primary issues.

West Midlands

— The 10 West Midlands based companies listed on
the total number of

Ofex represent only 7 % of
companies at Ofex (November, 2005).

— When only West Midlands based companies are
considered, at Ofex a total of GBP 12 million
(primary and secondary) has been raised over a five-
year period between 2001 and 2005, representing
only 4,1 % of the total raised UK-wide by Ofex. Over
50 % of the funding raised by Ofex for West Midlands
based companies was in favour of one company.

— Only GBP 3,5 million of primary funding for
5 companies based in the West Midlands has been

20.2.2008

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Official Journal of the European Union

L 45/11

raised at Ofex over a five-year period since year 2000.
Of the 20 new admissions to Ofex in 2004 only one
company was based in the West Midlands.

‘Bridging the
Treasury budget consultation document
Finance Gap’, the UK Presidency Discussion Paper published
in advance of
and the
Confederation of British Industry SME Trends Survey).

the Risk Capital Summit

(96)

In their letter of 21 November 2005 the UK authorities
state that Ofex's fund raising activity is UK-wide,
in
contrast to Investbx which is very definitely targeted at one
region, the West Midlands. Of over 300 000 SMEs in the
West Midlands it is claimed that only 57 are traded on the
AIM, 10 on Ofex and between 5 and 10 are helped each
year by each major venture capitalist. The UK authorities
are not convinced that Ofex or any other provider has the
resources or specific plans to address the market failure in
the West Midlands, or is willing and interested to do so.
Indeed, at two separate meetings Ofex executives were
invited to present their plans for addressing the market
failure in the West Midlands, but Ofex did not do so. From
the available evidence the UK authorities conclude that
Ofex did not fulfil at all the role envisaged by Investbx in
the past, and either could not or would not do so in the
future. The UK authorities conclude that establishing
Investbx will not disadvantage Ofex in any way. A
principle aim of Investbx is to act as a sort of feeder
exchange where companies would become ‘accustomed’ to
the requirements of being a floated company and prepare
them for eventual transition to established markets.

(97) According to the UK authorities, there will be no transfer
of aid to SMEs or investors. SMEs will engage advisers
directly and will pay market rates for the services provided
by the advisers.

it

(98) The UK authorities agree that Investbx is a beneficiary of
aid. In order that the aid could be considered compatible, a
well-defined market failure has to exist. The most severe
equity finance gap for small businesses is considered to be
in the region of GBP 0,5 million to GBP 2 million. The UK
authorities state that
is supported by a wealth of
independent research, by the Commission in previous
cases and also by the Risk Capital Guidelines themselves.
They have found no evidence that the assessment of the
market failure which was re-confirmed in the Enterprise
Capital Funds Decision (15) has changed in the meantime.
The UK authorities quote a number of statements by senior
players in the broad professional community in the West
Midlands, supporting the need for Investbx. A regionally
based Venture Capitalist suggested that of the 500 to 750
propositions received by them in a year, less than 1 %
receives funding. Most of the companies which are rejected
have viable business plans and while not suitable for VC
investment, they may qualify for Investbx. To emphasise
that there remains an unequivocal gap in the market, the
UK authorities refer to further documents (such as the HM

(15) Case No 2006/250/EC — United Kingdom — ‘Enterprise Capital

Funds’, OJ L 91, 29.3.2006, p. 16.

(99) Although the UK authorities initially did not exclude
transactions of up to GBP 5 million according to a market
failure acknowledged by them up till this level, at a further
stage of the proceedings, they confirmed that transactions
at Investbx during the initial five years would be limited up
to GBP 2 million per annum and any transactions above
GBP 2 million would be notified to the Commission.

(100) In the opinion of the UK authorities, the aid instrument
notified does target the market failure, and goes beyond
the traditional means in the way it addresses this difficulty.
Investbx is designed to be complementary to other funding
providers and to attract and utilise for the benefit of SMEs
a further source of funding. The UK authorities find the
the project clear in the sense that
incentive effect of
without public intervention,
Investbx would not be
created.

(101) The UK authorities consider that the creation and initial
Investbx will not distort competition, and
funding of
rather will help to rectify a market failure which is not
currently being addressed. Even if the measure could be
argued to be potentially distortive, the limited amount of
funding over a maximum of five years, combined with the
fact that Investbx's impact will be confined to only one
region of
the United Kingdom, means that any such
distortion is more than compensated by the potential
benefits to all regions across the Community. At the end of
the five-year period Investbx must be self-sustaining, and
when the business is hopefully sold, any returns made will
revert to AWM.

(102) The UK authorities consider that Investbx will have a
limited possible effect on competition and no discernable
effect on trade, as it seeks to work only in one of the nine
English regions. It will act as a regional player, so by
definition it cannot distort any economic activity outside
the West Midlands.
Investbx proves
In addition,
successful, similar projects in other parts of the Commu-
nity would induce private sector interest and would not
require public intervention.

if

(103) If the project is a success and the market failure alleviated,
then this will have been an excellent way of achieving it
with minimal public spending or distortion of competi-
tion. If the project fails then similarly competition will not
have been distorted, but it will be known that either the
Investbx model was not a viable means of tackling the

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Official Journal of the European Union

20.2.2008

market failure, or the way in which AWM sought to
implement the model was not the appropriate way to do it
and that an alternative approach should be considered.

5.2. Observations by the United Kingdom on the
critical third parties' comments

(104) Concerning comments from JP Jenkins, the UK authorities
strongly differentiate between Investbx and this company.
They state that JP Jenkins Stockbrokers operate an entirely
different business model to that of Investbx. JP Jenkins
Stockbrokers is an execution-only stockbroker and market
maker, matching trades in unlisted and unquoted securities
off-exchange. There is no regulatory obligation for this
market. The primary objective of Investbx is to raise funds
for SMEs; JP Jenkins Stockbrokers do not perform this
function.

(105) The UK authorities responded to the comments from the

QCA and Ofex as follows.

failure, such as:

(106) A comprehensive and factual account of the market failure
is featured in the UK authorities' state aid notification of
26 July 2005. In addition they quote studies demonstrat-
ing the continuing market
the HM
Treasury, Pre-Budget Report on 5 December 2005; DTI Small
Business Service, A Mapping study of Venture Capital
Provision; CBI, Enabling the Enterprise evolution. There are
over 300 000 SMEs in the West Midlands and on average
only one West Midlands based company per annum has
joined Ofex over the last five years. Similarly, whilst a
network of private investors already exists, comments from
that SMEs need an incremental
third parties suggest
funding instrument to provide the missing step on the
finance escalator, as the step to join an established market
is evidenced to be too onerous
stage of
development.

their

for

(107) The UK authorities accept that it is the overall aggregate
costs of the transaction which often prevent the SME from
raising funds on the established markets. Third-party
comments highlight the cost of floatation to be judged to
represent too high a proportion of the funds raised. The
UK authorities' intervention has facilitated local competing
professional
firms to work together on a compliant
process of trading on an Alternative Trading System and
on preparation of standard templates, which lower the cost
of raising funds. The aggregate cost should not be a barrier
to joining Investbx.

It

investment.

is prepared on stocks that
institutional
institutional investors will be interested in, which will be
further used by stockbrokers' sales teams in order to attract
institutional interest in the stock and generate trade. Such
research information is not however available to individual
institutions are not
investors. What is more,
interested in smaller
is
insufficient volume of shares available for them to hold a
significant position. On the contrary, Investbx will provide
data on SME stocks, but in addition independent research
will be commissioned by the SMEs at market rates in order
to furnish the investor with detailed information about the
company in support of their investment decision.

company stocks,

financial

there

as

(109) In reply to the argument

that

Investbx would dilute
liquidity, the UK authorities state that, whilst ‘the market
technology 25 years ago was unable to support geographically
diverse markets, as quoting the same share on different markets
the
was understood to fragment market
advent of the internet delivers the opportunity to reverse the
situation and channel
investors’ money into local
companies to benefit the region.’ A West Midlands exchange
would not fragment liquidity, instead it would encourage
ongoing pooling of liquidity through the movement of a
larger amount of shares at a single trade price on a weekly
or monthly basis.

liquidity. However,

regional

(110) In reply to the comment about the investor protection, the
UK authorities set out the investor protection measures in
place in the United Kingdom and applicable to investors
investing at Investbx. Companies joining Investbx must
meet a set of regulatory and disclosure requirements
appropriate for an Alternative Trading System. As noted
above, Investbx will comply with FSA Investor Protection
obligations with an experienced compliance facility, out-
sourced to The Share Centre, monitoring all aspects of the
Investbx operation in this respect. The FSA regulated firm,
The Share Centre, will police the Investbx operation and
will ensure Investbx operates the appropriate best practices
as set out in the FSA's Code of Business Practice. In addition
to the statutory information Investbx will give investors far
more information about SMEs than is usually possible.
This falls outside of the regulatory regime and is indicative
of Investbx's innovative approach.

(108) According to the UK authorities research information is
available for stocks on senior markets which attract

(111) Auction-based systems are an acknowledged alternative to
quote driven systems, and better suited to trading in
smaller stocks, as evidenced in the ‘Regional Stock exchanges
in the UK’ paper by Dr Robert Huggins. The target investor
for Investbx listed SMEs is interested in the medium to

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Official Journal of the European Union

L 45/13

long-term opportunities and that is why the provision of
enhanced information about the prospects of the company
is important. This profile of investor does not require the
same ability to continuously trade as would an institu-
tional trader. However, data relating to the next auction
can be viewed or orders changed 24/7 at any point up to
the auction.

that is why the funding is needed. However it still needs to
make profit in order to be self-financing and viable in the
long-term once AWM's limited funding expires. The
difference is that the profits will be reinvested rather than
being taken out by shareholders. Investbx will be measured
by the UK authorities on its ability to succeed and to make
new services commercially available for West Midlands
based SMEs.

(112) The shareholder structure of Ofex is primarily stock-
brokers and financial
institutions which both use and
benefit significantly from the quote-driven market-maker
system. As evidenced by the data provided on Ofex, in
order to maintain the ability to trade at any time on a
quote driven market, large spreads of up to 75 % can be
experienced. In contrast, the Investbx model will match
buyers and sellers at a single price, benefiting both the
SMEs, who will be able to trade small amounts of shares,
and the investors, who will not suffer from the spread
between the bid and offer price.

(113) The UK authorities suggest that Ofex is becoming a more
senior market. In recent press statements Ofex acknowl-
edged that it raised equity to finance the changes to its
trading platform in order to facilitate trading stocks in
direct competition to the AIM and the LSE. The new
platform gives Ofex the capacity to trade substantially
higher volumes of certain listed and unlisted securities
with existing quotations elsewhere in London.

(114) The UK authorities argue that investors would not be
locked in if Investbx had to be closed. Exit from the
Investbx project is defined by the funding agreement. In
case Investbx had to be shut down,
the SMEs could
continue to be traded on the platform of The Share Centre
at the same conditions.

(115) The authorities consider that the aid to Investbx is the
minimum necessary to address a market failure in access to
equity finance for SMEs in the West Midlands. Investbx will
not grant funds directly; it will not discriminate selection
of SMEs based on their subsequent performance and their
valuation on the Investbx trading platform. Investbx does
not
receive any remuneration based on the future
valuation of an SME as would a venture capitalist. Without
the aid the project will not happen. It is too risky a venture
to be attempted with purely private backing, as there is no
precedent for this business model.

(116) The UK authorities disagree with the susceptibility of the
not-for-profit business model to restrain innovation in
financial markets. The UK authorities would like to see
Investbx establish and build a new profitable business, but
submit that in its early stages it will not be profitable and

6. ASSESSMENT OF THE MEASURE

(117) The Commission has examined the measure in light of
Article 87 of the EC Treaty and in particular on the basis of
the Risk Capital Guidelines. The results of this assessment
are set out below.

6.1. Legality

(118) The UK authorities notified the measure. They declared
that Investbx has not been incorporated, did not start its
operations and did not receive any grant or funds.

(119) The UK authorities further stated that AWM recruited a
person for the future role of Chief Executive of Investbx,
however presently this person works as a staff member of
AWM on a variety of projects, one of which is the
preparatory work for Investbx. The preparatory work for
development of the future Investbx website portal has
been commenced. Due to a technical problem, this site,
which is clearly labelled as under development, was
accessible. This problem was resolved and the site cannot
be publicly viewed.

(120) Investbx has not been established yet as an undertaking
and has not received any financing. Consequently, no aid
has been granted yet.

(121) The UK authorities committed themselves not to grant the
aid before the Commission's approval. Therefore, they have
complied thereby with their obligations under Arti-
cle 88(3) of the EC Treaty.

6.2. Existence of State aid

(122) Following the Decision to initiate the procedure,

the
presence of aid was verified at three levels: at the level of

— Investbx as marketplace,

— the investors, and

— the SMEs to be invested in.

This assessment shall be done according to the Risk Capital
Guidelines.

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6.2.1. Aid at the level of Investbx

(123) The investment as well as current expenditure will be
financed through state resources through the State-owned
development agency AWM. According to the United
Kingdom authorities, no private investor was interested
in investing into Investbx. Under normal market condi-
tions the initial capital received in the form of a grant
would not have been raised under the same favourable
terms. This is why the provision of funding does not
correspond to the behaviour of a private market investor.
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 advan-
tage from state resources. As the measure may have effects
on other financial service providers, particularly on Ofex,
as discussed below, the measure has the potential to distort
competition. In general capital and related services may be
provided across borders. This is evidenced by the example
put forward by the University of Warwick citing an SME
from the West Midlands that received financing on the
Australian market as well as by the efforts of Ofex to offer
its services abroad. Although there is a low probability that
West Midlands SMEs seeking equity financing of up to GBP
2 million would seek and receive services from abroad, this
cannot be excluded. Thus the measure has a potential of
affecting intra-Community trade. The measure therefore
encompasses aid to Investbx within the meaning of
Article 87(1) EC.

6.2.2. Aid at the level of investors

investors are not willing to develop an undertaking
equivalent to Investbx shows that the project is risky. This
activity implies important overhead costs, which can only
be covered if Investbx can reach a given volume of activity;
however, it is uncertain that this volume will be achieved.
Normally the price to be paid by the investees should
reflect this high risk. Although the majority of the services
that Investbx offers are outsourced to market providers and
Investbx receives a profit margin on them, the price that
Investbx charges the investees for the bundle of services
provided is too low to ensure that it will cover its overhead
costs during the initial period of up to five years, or until a
critical mass of companies is using its services. This
proposition was not accepted by any market investor.
Consequently, the measure may confer an advantage to the
SMEs that use Investbx for financing, as due to Investbx's
pricing structure, SMEs arguably receive services at more
advantageous terms than as if they were offered by existing
market players individually. The United Kingdom has
shown that services related to the use of a trading platform,
employee share scheme,
independent
research and marketing services will be outsourced to
private providers at market conditions. The advantage
stems from the bundling of these services as well as from
raising funds from investors interested in SMEs in the West
Midlands. This advantage is granted from state resources as
it is the state financed setting up and maintaining of
Investbx that only enables the creation of Investbx that
provides the services, which otherwise would not be
provided at the same terms by the market. As the investees
are likely to be active in markets that are open to
competition at Community level, the measure has the
potential to distort competition and affect intra-Commu-
nity trade. In conclusion, SMEs to be invested into will
receive aid in the sense of Article 87(1) of the EC Treaty.

share account,

(124) Investbx offers an online auction system that gives the
possibility to invest into SMEs to all investors, institutional
Investors could
as well as individual private persons.
possibly benefit from the provision of information and
services by Investbx, which they would otherwise not
receive. Any investor interested, unless excluded by the
legislation on investors' protection, will be able to use
Investbx under the same conditions. There is no minimum
threshold for investment by a single investor. Therefore,
independently of whether
an
advantage to the investors, it is not selective at this level
and thus for investors it does not constitute aid in the
sense of Article 87(1) of the EC Treaty.

the measure

accords

6.2.3. Aid at the level of SMEs

(125) SMEs will benefit from the measure insofar as they will be
able to raise private equity capital under conditions that
otherwise would not be present on the market. The bundle
of services provided by Investbx is currently not provided
together by any market provider. The fact that private

6.3. Compatibility of the measure

(126) In so far as the measure constitutes state aid within the
meaning of Article 87(1) of the Treaty, its compatibility
must be assessed in the light of the exceptions provided for
in Article 87(2) and (3) of the Treaty. The exceptions
provided for in Article 87(2) of the Treaty, which concern
aid of a social character granted to individual consumers,
aid to make good the damage caused by natural disasters
or exceptional occurrences and aid granted to certain areas
of the Federal Republic of Germany, do not apply in this
case. Neither does the measure qualify for the exception
allowed by Article 87(3)(a) of the Treaty for aid to promote
the economic development of areas where the standard of
living is abnormally low or where there is
serious
underemployment. In the same way, the measure cannot
be considered to be an important project of common
European interest or to remedy a serious disturbance in the
economy of
the United Kingdom, as provided for by
Article 87(3)(b) of the Treaty; nor does it have as its
objective the promotion of culture and heritage conserva-
tion as provided for by Article 87(3)(d) of the Treaty.

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(127) Article 87(3)(c) of the Treaty provides for the authorisation
of aid to facilitate the development of certain economic
activities or of certain economic areas, where such aid does
not adversely affect trading conditions to an extent that is
contrary to the common interest. The Commission notes
that the measure at stake aims at setting up a market place
and granting aid for five years to the online exchange
facility for investors and SMEs. Thereby the measure aims
at establishing an investment vehicle that may facilitate the
matching between investors and target SMEs, for which it
may therefore improve access to risk capital

the Risk Capital Guidelines,

(128) Article 87(3)(c) of the Treaty in the field of risk capital is
applied according to the Risk Capital Guidelines. These
guidelines apply to all notified risk capital measures in
respect of which the Commission must take a decision
after the guidelines are published in the Official Journal of
the European Union, even where the measures, such as the
present one, were notified prior to the publication of the
guidelines. (16) Investbx facilitates the matching of inves-
tors and target SMEs for which it may therefore improve
the access to risk capital. Consequently, it is an investment
vehicle in the sense of point 5.1(f) of the Risk Capital
Guidelines. According to that point a measure constituting
aid to an investment vehicle is subject to a more detailed
assessment under section 5 of
the guidelines. When
assessing the compatibility of the measure under section 5
the Commission is
of
following the approach announced in the State Aid Action
Plan (17) which was further specified and concretised in the
subsections 5.2, 5.3 and 5.4 of the Risk Capital Guidelines.
It will assess whether the aid measure is aimed at a well-
defined objective of common interest, in particular at the
alleviation of market failure, whether the aid is appropriate
to deliver the identified objective of common interest,
whether it is necessary and has an incentive effect, whether
the distortions of
and whether
it
competition and the effect on trade are limited to ensure
that the aid measure is not, on balance, contrary to the
common interest. The Commission will thereby look at a
number of positive and negative elements. According to
point 5 second paragraph of the Risk Capital Guidelines,
no single element is determinant, nor can any set of
elements be regarded as sufficient on its own to ensure
compatibility. In some cases their applicability, and the
weight attached to them, may depend on the form of the
measure.

is proportional

(129) None of the other existing State aid regulations, frame-
works or guidelines are applicable. It is true that parts of
the derogation in
the West Midlands do qualify for

Article 87(3)(c) of the EC Treaty (18), and the Commission
also notes that this region has suffered from the Rover
crisis. However, the grant to Investbx is not an application
of aid for regional development.

6.3.1. Is the aid measure aimed at a well-defined objective of

common interest?

(130) According to point 5.2.1 of the Risk Capital Guidelines the
Commission assesses whether the aid measure is aimed at
a well-defined market failure. For measures specifically
involving an investment vehicle, the Commission requires
additional evidence of the market failure. Such evidence
must be based on a study showing the level of the market
failure and the evidence must concern the supply of risk
capital and significance of the venture capital industry.

(131) As stated in point 1.3.2 of the Risk Capital Guidelines, the
Commission considers that the main source of market
failure in risk capital markets relates to information
asymmetries. Regarding the access to capital of small and
young enterprises, the main difficulties of equity financing
are the high transaction and agency costs as well as the risk
aversion of investors related to risk capital investments. In
general, market failure arises when, due to the inefficient
matching of supply and demand of risk capital, the level of
risk capital becomes too restricted and enterprises do not
obtain funding despite having a valuable business model
and growth prospects.

(132) The objective of the present aid measure is to address a
market failure in the equity financing of SMEs in the range
of GBP 0,5 million and GBP 2 million in the West
Midlands region.

(133) In order to demonstrate that the level of risk capital in this
range is limited, despite the demand for equity financing by
viable businesses, point 5.2.1 of the Risk Capital Guide-
lines lists an indicative set of elements. In the following
assessment on market failure, the Commission takes into
the profitability of private
consideration in particular
equity investments,
the development of private equity
investment in the United Kingdom over the past years and
the distribution of investment by categories of amount of
investment linked to the stated range of market failure. The
Commission also examines data relating to the West
Midlands region, in particular the regional apportionment

(16) Risk Capital Guidelines, point 7.2 third paragraph.
(17) Commission Communication COM(2005) 107 final, from 7 June

2005.

(18) Commission decision of 26 July 2000 on State aid N 265/
2000 — United Kingdom concerning the UK regional aid map for
2000 — 2006 (OJ C 272, 23.9.2000, p. 43).

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the demand for equity
of private equity investment,
funding and the extent to which this demand is met at
established capital markets. For this purpose the Commis-
sion analyses studies submitted by the UK authorities.

and this assessment is supported by the following factors,
as stated in a report conducted by ECOTEC (24):

(134) It is noted additionally that the aid measure will also
support a region undergoing structural changes by setting
up an online regional equity market place for SMEs.

6.3.1.1. Evidence of the market failure to be targeted by
the measure

(135) Investbx targets equity funding in the West Midlands
region in the area of GBP 0,5 million to GBP 2 million.
This is the range where the market failure is perceived to be
the most severe by the market players according to the
United Kingdom and many third-party comments. They
consider that this range of investment size is too high for
most informal investors such as business angels who have
access to limited financial resources (19), and too low for
most formal venture capital investors who find the cost of
evaluating potential
investments prohibitive when a
business is seeking only a modest amount of equity
finance (20).
In line with the financial projection of
Investbx, as presented by the UK authorities, the average
size of funding is expected to be at GBP 1,66 million by
the fifth year of operation.

(136) In its Decision on the Enterprise Capital Funds scheme (21),
the Commission concluded the existence of a market
to GBP
failure in the GBP 250 000 (EUR 357 000)
2 million (EUR 2,9 million) range in the United Kingdom,
upon the data provided by the Performance Measurement
Survey 2003 (22); Report on Investment Activity 2003 (23),
upon information provided by the United Kingdom and
upon third party comments that confirmed the existence
of the market failure.

(137) According to the UK authorities the market failure exists in
the United Kingdom and particularly in the West Midlands,

(19) Business angels generally invest between GBP 10,000 and GBP
250,000 in start-up or early-stage businesses with growth potential.
CBI: Improving Access to Finance: Enabling the Enterprise Revolution (July
2006).

(20) HM Treasury: Bridging the Finance Gap: next steps in improving access to

growth capital for small businesses (December 2003).
(21) State aid case C 17/2004, OJ L 91, 29.3.2006, p. 16.
(22) PricewaterhouseCoopers: ‘BVCA Private Equity and Venture Capital —

Performance Measurement Survey 2003’ (2004).

(23) PricewaterhouseCoopers: ‘BVCA Report on Investment Activity 2003’

(2004).

— private equity finance companies cannot achieve the
level of returns they require on investments below
GBP 2 million;

— the market failure in the range GBP 250,000 to GBP
2 million is real and was created post 1999/2000 as
venture capital moved on to larger deals;

— very few private equity investments are being made in
the region in the range GBP 250,000 to GBP
2 million;

— there is significant demand for funding from SMEs in

this market failure range.

6.3.1.1.1. Returns for investors in private equity and venture
capital investments in the United Kingdom

in different

investment categories

(138) The profitability of private equity and venture capital
investments
is an
indicator for the analysis of the market failure, as low
profitability of investments in the market failure range will
make investors switch to more profitable large invest-
ments. According to the latest data from the British
‘BVCA’) (25),
Venture Capital Association (hereinafter
returns on private equity and venture capital investments
in the United Kingdom have developed in 2004 as follows.
Similarly to 2003, mid-sized management buy-outs (here-
inafter ‘MBOs’) (with GBP 10 million to GBP 100 million
of equity invested) and large MBOs (with more than GBP
100 million of equity invested) have shown far higher
returns on investment over the short and medium term
than early-stage and development-stage investments. (E.g.
in 2004 the three-year returns were - 13,2 % in early-stage
investments, - 5,3 % in development stage investments,
while they reached 13,7 % in mid-sized MBOs and 16,1 %
in large MBOs.) As a result, among private equity
investments, it is more attractive for investors to invest
in MBOs above GBP 10 million of equity invested than in
early or development-stage investments.

(24) ECOTEC Research and Consulting Limited:

‘Advantage Enterprise &

Innovation Fund: Analysis of Market Demand’ (2004).

(25) PricewaterhouseCoopers:

‘BVCA Private Equity and Venture Capital
Performance Measurement Survey 2004’
(2005) and ‘BVCA Private
Equity and Venture Capital Performance Measurement Survey 2005’
(2006).

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(139) Although in the 2005 report from BVCA on returns on
investments in the
private equity and venture capital
United Kingdom the methodology changed (26),
in the
early and venture-stages returns in the medium term
continued to be negative. Development-stage and small
MBOs medium-term returns have been far below the
medium-term returns of mid and large MBOs.

decreasing trend in the United Kingdom (23 % in 2005,
25 % in 2004, 25 % in 2003, 30 % in 2002 and 31 % in
2001) according to the BVCA study. In absolute terms, in
2005 the number of companies invested in the GBP 0,5
and 2 million range was at its lowest of the past five years
(302 in 2005, 321 in 2004, 317 in 2003, 361 in 2002
and 399 in 2001).

6.3.1.1.2. Private equity investment activity in the United

Kingdom

(140) According to the BVCA study on the private equity
investment activity in the United Kingdom (27), the average
size of investment in the United Kingdom has grown in
2005, to a level of GBP 5,2 million, (compared to GBP
4,1 million in 2004, GBP 3,2 million in 2003, GBP
3,7 million in 2002 and GBP 3,6 million in 2001).

(143) The UK authorities referred to several papers and surveys
indicating the existence of the market failure in the United
Kingdom, such as:

(141) According to the above mentioned BVCA study,

the previous years

the
amount of private equity received by UK companies
(GBP
increased substantially over
6 813 million in 2005, GBP 5 336 million in 2004,
GBP 4 074 million in 2003). However,
the amount
invested in the GBP 0,5 million and GBP 2 million range
did not show such an increase but instead declined in
2005 (GBP 313 million in 2005, GBP 330 million in 2004
and GBP 286 million in 2003). In 2005, 2 % of the total
amount of private equity received by UK companies was
made in investments under GBP 0,5 million, 5 % was
invested in the GBP 0,5 and 2 million range and the
remaining 94 % was made in investments with a size
above GBP 2 million. The proportion of
the amount
invested in the GBP 0,5 and 2 million range compared to
total investments was lower in 2005 than in previous years
(5 % in 2005, 6 % in 2004, 7 % in 2003, 10 % in 2002
and 2001).

(142) In terms of the number of companies invested in, their
proportion in the GBP 0,5 and 2 million range compared
to the total number of companies invested in also shows a

(26) In the 2005 Report, statistics were split into funds that first closed
before and after 1996. Funds that first closed after 1996 were
reclassified to categories of venture (including seed, start-up and
early stages of development), small MBO (MBOs/MBIs below GBP
10 million and expansion stage investments), mid MBO (MBOs/MBIs
for GBP 10-100 million) and large MBO (MBOs/MBIs above GBP
100 million).

(27) PricewaterhouseCoopers: ‘BVCA Report on Investment Activity 2004’
(2005) and ‘BVCA Report on Investment Activity 2005’ (2006).

— the HM Treasury budget consultation document
‘Bridging the Finance Gap’ (28) confirmed the gap in
the area of GBP 0,25 million to GBP 2 million. The
report was based on surveys, BVCA data and with
reference to academic studies (29). As regards surveys,
97 % of the respondents to the ‘Bridging the finance
gap’ consultation agreed that SMEs continue to face a
significant market failure, and many of them argued
that the severity of the gap varies according to the
size, sector and stage of development of the business.
‘The consultation responses to Bridging the finance gap
made it clear that there remains a key group of small and
medium-sized enterprises (SMEs) which are not suited to
debt finance, and which are currently not able to access the
equity capital that they need to thrive. Businesses seeking
modest sums of investment to modernise or diversify their
activities are also affected.’ The report argues that some
SMEs are ‘not suited to debt finance’, and when an
enterprise is not yet generating sufficient revenues to
repay interest on debt, and/or
is
developing new technologies or products with a
substantial growth potential but also with significant
risk, raising equity capital may be a more appropriate
form of financing. As stated by the report, equity
investors can face significant costs in identifying
suitable investment opportunities, in particular with
regard to the search, due diligence and monitoring
costs of investments in smaller and younger firms. ‘In
comparison to large companies that are quoted on public
small,
stock markets,

information about

the business

the flow of

(28) HM Treasury: Bridging the Finance Gap: next steps in improving access to

growth capital for small businesses (December 2003).

(29) Harding, R. Cowling, M. and Murray, G.:

‘Assessing the Scale of the
Equity Gap: Report
to H.M. Treasury and Small Business Service’
(November 2003) and ECOTEC: ‘Advantage Enterprise and Innovation
Fund: Analysis of Market Demand, a final report to Advantage West
Midlands’ (2004).

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unquoted companies seeking investment is limited.’ The
report argues that due to information asymmetry,
potential
investors may not perceive correctly the
profit-risk profile of businesses and may become
to invest
reluctant
in risk capital. The report
that high transaction costs and the
concludes
proportionally higher costs of obtaining information
about smaller firms make investors shift their focus
on larger investments. The structural constraint on
the provision of funds and venture capital expertise
that
to smaller and riskier companies
venture capital investors will shift their focus further
towards larger, later-stage deals.

suggests

— Research undertaken by ECOTEC (30) restated the
existence of a market failure between GBP 0,5 million
to GBP 5 million, with the most severe constraints
being businesses seeking up to GBP 2 million of
growth capital.

— Recent

reports by the Confederation of British
Industry (‘CBI’) concluded that there continues to be
a clear gap for access to finance. ‘There are still market
failures and anomalies in the system that need to be
addressed.’… ‘Over the past few years, evidence indicates
that there is a growing market failure in the GBP 500,000
to GBP 3 million range. Recent data by the BVCA
provides no indication that the gap is diminishing, with the
average amount of
continuing to
increase.’ (31)

investment

equity

— In a research article by Brian Zivicky (32) reference is
made to the fact that in the United Kingdom few
smaller quoted companies are followed by analysts as
there is insufficient volume of trading to justify the
cost of the research being produced.

— A report carried out by Jaffe Associates on behalf of
the Quoted Company Alliance (33) states that smaller
quoted companies are competing for a small and
decreasing proportion of institutional equity invest-
ment in the United Kingdom. The ability to deal in
large volumes is a key driver in investment decisions,
which automatically penalises smaller companies.

— A survey conducted by SWR worldwide (34) estab-
lished that there was a clear awareness among issuers
and investors that current mechanisms for providing
to SMEs could be improved,
services
financial
particularly with respect
to bringing issuers and
investors together. As a result of the survey, the most
important factor when making investment decisions
proved to be the quality and quantity of information.
fund managers, high-net worth
A majority of
investors and venture capitalists surveyed said that
current stock exchanges do not do a good enough job
providing access to SMEs or providing liquidity for
securities offered by SMEs.

Some studies argue that there is a market failure even
below GBP 0,5 million and above GBP 2 million. However,
no study disputes the existence of
the market failure
between GBP 0,5 and 2 million, which is the range of
equity financing targeted by Investbx. This is perceived to
be the range with the most severe constraints.

(144) The UK authorities also quoted a number of studies and
surveys regarding different aspects of the disadvantage that
small companies face when they want to get listed at a
stock exchange:

requirements of

— A paper written by Tim Mocroft (35) describes that
‘…listing and regulatory
traditional
exchanges are expensive but given the size of companies
involved and the sums of money being raised, costs can
usually be accommodated. Both factors, however, impose a
floor on the size of company that can effectively access the
main markets that serve in the United Kingdom — namely
the official list of the London Stock Exchange and the AIM

(32) Newex Research, Brian Zivicky (2000).
(33) Jaffe Associates on behalf of Quoted Companies Alliance:

‘Institu-

tional investment and trading in UK smaller quoted companies’ (2002).

(30) ECOTEC: ‘Advantage Enterprise & Innovation Fund: Analysis of Market

(34) SWR Worldwide: ‘Views of Issuers and Investors across Great Britain on

Demand’ (2004).

Investment Issues’ (2001).

(31) CBI:

‘Improving Access to Finance: Enabling the Enterprise Revolution’

(35) Tim Mocroft: ‘Bridging the equity gap: a new proposal for virtual local

(July 2006).

equity markets’ (2001).

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[…] Typically an IPO on either market will cost in the
region of GBP 500,000; with such costs, it is uneconomic
to raise relatively small sums of capital.’

— The Deloitte report ‘Improving Access to Finance for
Small and Medium Sized Enterprises’ (36), found from
stakeholder interviews that the general knowledge
and awareness of finance options by SMEs is poor.
The interviews revealed that poor investment readi-
ness was the main barrier to accessing finance across
the West Midlands
readiness
region.
encompasses business attitude to finance, the quality
of business documents and the general investability
of a project. This has both demand and supply
implications: it may deter businesses from applying
for finance due to the expectation of being turned
down, and may restrict supply as a potential investor
faces an increased level of risk if it considers an
insufficient level of investment readiness.

Investment

6.3.1.2. The market failure in the West Midlands

(145) While the information presented above regards a UK-level
analysis, the subject of the Commission assessment is
whether there is a market failure in the target region of
Investbx — the West Midlands. In this context, in addition
to the above elements, further aspects of the supply and
demand of investment at regional level were taken into
account.

the market

(146) Most of the third-party comments supported the existence
of
failure in the West Midlands region.
Moreover, in their reply to the third party comments, the
UK authorities submitted evidence, based on an estimate
made by regionally based venture capitalists supporting
the existence of the market failure between GBP 0,5 and
the 500 to 750
2 million and claiming that of
propositions received by them a year,
less than 1 %
receives funding, even though most of the companies
rejected have viable business plans and could receive
funding if there were a mechanism like the one proposed
by Investbx.

6.3.1.2.1. Regional apportionment of investment

(147) According to the data published in the BVCA Report on
investment activity in 2005, the total amount of private
equity investments in the West Midlands region was 4 % of
the total UK level, while the South East and London
regions together had 44 % of total UK investments. As
regards early-stage investments, the proportion of the West
Midlands was 1 % of the total UK amount invested at early

stage, while in the South East and London regions it
amounted to 49 %. In terms of expansion stage, invest-
ment in the West Midlands represented 2 %, in South East
and London 42 % of the total UK expansion investments.
These data have to be seen in the context of the GDP
contribution by the different regions to the total UK level,
about which the latest available data from Eurostat is from
2003, which shows that the West Midlands contributed
with 8 %, while the South East and London together with
34 % to the UK GDP in 2003. This shows that in the West
Midlands the provision of equity in early and expansion-
stage investments relative to economic activity is much
lower than in the South East and London area.

(148) According to an analysis (37) of

the

total market
capitalisation of firms listed on the LSE and the AIM
across regions, some of the lowest levels of total market
capitalisation exist in the Midlands. In 2003 the regional
market capitalisation as a proportion of GDP reached in
the London area as high as 621 %,
in the South East
139 %, for the total UK 153 %, while only 25 % in the
Midlands region. Relative to its economic performance, the
Midlands region has a low level of market capitalisation
among the UK regions.

6.3.1.2.2. Demand for equity funding from SMEs in the West

Midlands

(149) It

is difficult

to verify from statistical data whether
unsatisfied demand of companies with viable business
plans for finance exists. In order to overcome this problem,
surveys proved to be the best possible means of research
on the demand of companies with viable business plans for
equity finance.

(150) The UK authorities have carried out a number of
consultations, workshops and surveys about the demand
for equity capital among the West Midlands SMEs. In April
2003 a survey took place, where out of
the 41
respondents from the regional business community 73 %
felt that access to capital markets was a significant problem
for SMEs and 88 % felt that established capital markets did
not meet the funding needs of SMEs. Moreover, 68 % of
respondents felt that Ofex was a little used source of capital
for SMEs and 73 % of them were interested in being
involved with the Investbx project.

(151) In November 2003 a meeting about Investbx took place in
Birmingham which 81 representatives of
the business
community attended. A subsequent meeting took place in
London at the Centre for Study of Financial Innovation

(36) Deloitte & Touche: ‘Improving Access to Finance for Small and Medium

Sized Enterprises’ (2002).

(37) Robert Huggins, Robert Huggins Associates:

‘Regional Stock
Exchanges — A Viable Option for Wales and Other UK Regions?’ (2003).

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the business
(CSFI) at which 27 representatives of
community were invited to attend. Feedback from the
CSFI was almost unanimous support for the project. In
May 2004, 21 firms of professional advisers were
approached in order to obtain their detailed input into
developing the Investbx proposition and gauge how many
of their clients may be suitable for joining Investbx. 13
firms indicated that they would expect to propose between
1 and 6 clients from their portfolio to join Investbx per
year. Given that only a small proportion of firms were
involved in the workshops, the UK authorities consider
that equity financing for 10 SMEs per annum in the
Investbx financial projections is a conservative estimate of
demand. Since professional advisers are paid only if
it is in their best
companies successfully raise capital,
interest to propose only companies with viable business
plans in order that only those companies seek to join
Investbx that they believe will be attractive to investors.

(152) As regards raising equity finance for SMEs in the West
Midlands in the area of between GBP 0,5 and 2 million —
which is the primary objective of Investbx — the existing
market places which offer equity financing to SMEs do not
sufficiently meet
the demand according to the UK
authorities and thus do not resolve the market failure.
Although they mediated equity investment into a number
of SMEs in the West-Midlands, they do not provide a
sufficient coverage in the West-Midlands region, and none
of them has a regional focus on SMEs. The UK authorities
consider that all available evidence points to a conclusion
that the market failure will not be addressed by the private
sector. At two separate meetings, initiated by AWM, Ofex
executives were invited to share their plans for addressing
the market failure in the West Midlands, but according to
the UK authorities, Ofex were either unable or not
interested to do so.

(153) At Ofex 7 enterprises from the West Midlands are
presently listed and only 5 out of them are traded (38).
The United Kingdom does not consider that Ofex has
resolved the market failure, nor does it consider that Ofex
covers the presently estimated demand in the region of at
least 10 companies per year. At Ofex the number of newly-
listed SMEs from the West Midlands was only one in 2005
and one in 2004, while Investbx is expected to list 5-12
new West Midlands companies per year.

Conclusion on market failure

(154) The Commission considers that in line with 5.2.1 of the
Risk Capital Guidelines, sufficient evidence based on
several studies has been provided to conclude that there

(38) http://www.plusmarketsgroup.com/region.shtml?

region = West

Mids, on 6 November 2006.

exists a market failure in the West Midlands region in the
range of GBP 0,5 million and GBP 2 million.

6.3.2. Is the aid instrument appropriate to deliver the objective of

the common interest?

(155) According to point 5.2.2 of the Risk Capital Guidelines the
Commission assesses whether the measure is capable of
alleviating the established market failure. Furthermore, the
Commission takes account of any impact assessment and
examines the possibility to achieve the same objectives
with other means.

6.3.2.1. Targeting the market failure

(156) Considering the aid at the level of Investbx, the proposed
aid addresses the market failure described above by setting
up an online regional electronic trading platform that will
enable the SMEs to present themselves, to raise capital and
to trade their shares. At the same time it will enable the
investors to view directly detailed and independently
certified information on the SMEs. Thereby Investbx will
increase information efficiency and will enable a better
perception of risk-reward relationship in SMEs by investors
and will decrease
transaction costs of getting
information about SMEs for investors by making research
documents on all SMEs publicly available.

the

(157) Investbx aims at raising equity specifically for SMEs in the
West Midlands region. The Investbx business plan forecasts
primary fund raising for a minimum of 47 SMEs in the
West Midlands over a period of
five years, raising a
minimum of GBP 70 million. In comparison with Ofex,
which argues that it is also present in the West Midlands
and its transaction size is similar,
the following was
concluded by the UK authorities in their comments to the
Decision to initiate the procedure:

— In five years since year 2000, at Ofex only GBP
43,3 million of primary funding was raised within
the GBP 0,5 million to 2 million range for 39
companies in the entire United Kingdom.

— When removing secondary funding from the total
funds raised, Ofex companies only raise modest
amounts via primary issues (E.g. GBP 0,8 million
UK-wide in 2004)

— When only West Midlands based companies are
considered, at Ofex a total of GBP 12 million
(primary and secondary) have been raised over a five
year period, between 2001 and 2005.

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— Only GBP 3,5 million of primary funding for 5
companies based in the West Midlands was raised at
Ofex since 2000.

(158) Investbx offers a regional focus with a local network of
service providers and investors, which is particularly
important for the equity investment into expansion SMEs.
Such investment often requires a close follow-up and direct
relationship between the investor and the investee SME.
According to theoretical and empirical studies it must be
noted that
the investor's proximity to the financed
company is a relevant variable in investing choice. (39) It
may even be argued that, conceivably, a local investor may
be encouraged to invest into a local firm not only for a
plausible informational advantage, but also as they will be
able to provide to the investees a particular advantage by
connecting them to their local networking, as well as to
take advantage of externalities on other businesses or even
because of regional patriotism. The regional focus is shown
by the fact that Investbx serves SMEs from the West
Midlands only, has a West Midlands based team of 6-8
people, as well as a non-executive board comprising West
Midlands professionals experienced in working with SMEs.

(159) Investbx will offer

integrated services,
to the SMEs
including fund raising, marketing and independent
research, as well as a connection to a network of local
professionals that shall support SMEs to enter successfully
the equity trade platform. To join Investbx, unlike for the
established market places, SMEs must provide an inde-
pendent and standardised research report, which will
facilitate the collection of information on SMEs relevant
for investors. This bundle of services together with the
independent report always available to the investors will
improve the chances of SMEs to effectively raise capital at
Investbx.

(160) Furthermore, Investbx brings an innovative concept of
secondary trading, which differs from established equity
market places in many respects. While the LSE, the AIM
and Ofex use
classical market-making mechanisms
through a quote-driven system, with bid and offer pricing,
Investbx has no market makers, which would generate
revenues based on the margin between bid and offer prices
either by selling large volumes of shares or by selling at
high spread. The match-making of investors and SMEs will
be achieved through the online electronic auction market
at a single price, which enables the exclusion of transaction

(39) This factor is analyzed both by Harald Hau, who shows how traders
investing in closely located firms tend to achieve higher trading
profits compared to other traders located further, and by Degryse
and Ongena, who analysed bank loan contracts and discovered that
banks offer better loan conditions to clients located more closely.
Harald Hau: Location Matters: An Examination of Trading Profits, The
Journal of Finance, (2001) Vol. 56, No. 5, pp. 1959-1983; Hans
Degryse, Steve Ongena: ‘Distance, Lending Relationship, and Competi-
tion’, EFA 2003 Annual Conference Paper No. 260 (2002).

costs that would otherwise be generated by the margins
between bid and offer prices. Moreover, as compared to
Recognised Investment Exchanges (RIE) such as the AIM and
the LSE, Investbx, being an appointed representative of an
Alternative Trading System (The Share Centre), is subject to
a lighter regulation by the FSA. This status requires lighter
statutory compliance and allows easier and, in proportion
to the amounts raised up to GBP 2 million, less costly
access for SMEs to a trading platform.

(161) The overall costs of raising small quantities of equity will
be lower
than in case of more senior established
marketplaces. The United Kingdom illustrates this fact by
giving an example that for raising GBP 2,5 million, the
total costs of
the equity received are about 10 % at
Investbx, while 24 % at the AIM. The UK authorities
further state that the kind of services received for this price
varies, e.g. commissioning independent research subse-
quently made available to private investors does not take
place on any of
the established markets. Whilst it is
important to keep costs to an affordable level, costs are not
likely to be the sole or even the main driver behind SMEs
choosing to join Investbx. The choice for many West
Midlands SMEs will be Investbx or nothing. The availability
of research to investors is qualitative improvement of
Investbx that is expected to increase the chances of SMEs
to receive funding. Nevertheless, Investbx will in several
aspects be more cost efficient than Ofex. This will be in
particular due to lower research and marketing costs,
linked to the standardised templates and adjustment of the
services to the SMEs needs in the primary funding stage
and to the elimination of bid and offer spread in the
secondary stage.

(162) Investbx will make available admission documents and
detailed independent research on all SMEs to all potential
investors or financial advisors. This information will be on
Investbx's website. Such information is usually prepared
only for larger stocks of shares and available only to
institutional investors. This non-discriminatory provision
of detailed information and in particular of the indepen-
dent research to all
investors is, according to the UK
authorities, one of the key factors for the expected success
of the measure.

(163) In improving the information and transaction efficiency
Investbx addresses a cause of the market failure rather than
its consequences.

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(164) Investbx furthermore aims at providing a bridge between
the first sources of finance and the more senior established
markets, whereby it has a so called ‘escalator function’. This
function would be beneficial not only for the investees, but
also for the investors in adjacent markets by providing exit
routes for their investments. The available evidence does
not show that Ofex acts as an escalator towards more
senior markets in the West Midlands region. On the Ofex
website it is stated that 54 companies moved from Ofex to
the AIM, between 2001 and 2004. However, between
2003 and 2005 only one company from the West
Midlands region left from Ofex to the AIM.

(165) Its capacity to increasing information transparency for
investors and reducing certain costs of fundraising and
trading of shares compared to more senior markets
demonstrates the suitability of Investbx to alleviate the
market failure.

(166) Considering the aid at the level of SMEs, the measure will
facilitate the provision of SMEs with equity capital,
which — due to the market failure — is difficult for them
to obtain despite having viable business plans.

6.3.2.2.

Impact assessment and use of alternative

means

(167) According to the financial plan of Investbx, during the first
five years of
least GBP
70 million for at least 47 companies. SMEs having raised
equity capital will be admitted to the trading on the
Investbx trading platform.

it shall raise at

its existence,

failure with the help of

(168) According to the United Kingdom, once unsatisfied
demand was established by surveys, prior to setting up
the measure the UK authorities sought to alleviate the
market
the existing market
structure. Ofex representatives were invited to meet
AWM on 12 July 2005 at which point they were asked
to demonstrate that they could address the market failure
occurring in the West Midlands. In that event AWM would
stand aside. Ofex decided not to provide the information
and AWM therefore concluded that either Ofex had no
specific plans to address the market failure, or that they did
not have sufficient resources to address it, or a combina-
tion of both. In the absence of private interest to tackle the
failure, a state intervention appears to be necessary.

6.3.3. Incentive effect and necessity of the aid

(170) According to point 5.2.3 of the Risk Capital Guidelines the
Commission assesses the incentive effect and the necessity
of the aid. The measure has an incentive effect if it induces
a change of behaviour in favour of the overall increase of
risk capital. In the Risk Capital Guidelines the Commission
announces that it will also take into account the profit-
driven character of the investment decision, in particular
the commercial management (point 5.2.3.1 Risk Capital
Guidelines),
the presence of an investment committee
(point 5.2.3.2 Risk Capital Guidelines), the size of the
measure (point 5.2.3.3 Risk Capital Guidelines) and the
involvement of business angels at the seed stage (point
5.2.3.4 Risk Capital Guidelines).

(171) The present case concerns an investment vehicle that
facilitates the matching between private investors and
target SMEs. The investment decision is made entirely by
private investors and the SMEs will only receive private
equity. The investment decisions related to SME fund-
raising will be entirely profit-driven.

(172) Being an equity marketplace, the functioning of Investbx is
different from that of risk capital funds. In the case of risk
capital funds, the management plays an important role in
investment decisions. Investbx itself does not provide any
funding to SMEs neither does
it make investment
decisions. Therefore, these criteria are of less relevance.

(173) Concerning the commercial management (point 5.2.3.1
Risk Capital Guidelines) on the one hand, since the
management of
Investbx will not make investment
decisions as regards SME fundraising, this aspect is not
relevant here. On the other hand, the United Kingdom
assured that the management of Investbx will consist of
professionals who have proven experience and track
record in capital market
investments, which is to be
regarded positively.

(174) Concerning the presence of an investment committee
(point 5.2.3.2 Risk Capital Guidelines), it comes from the
nature of Investbx that no investment committee will be
involved in the decision-making on SME investments. At
the same time, the Commission regards positively that the
Investbx project was developed with the involvement of
experts from the West Midlands professional community.

(169) The Commission regards positively that

in line with
point 5.2.2 of the Risk Capital Guidelines the measure is
capable of alleviating the established market
failure.
Furthermore, the Commission takes into consideration
that other means have been considered but
failed to
provide the desired results, and notes that the measure is
expected to have a positive impact on the alleviation of
market failure.

(175) Concerning the size of the measure (point 5.2.3.3 Risk
Capital Guidelines), the Commission notes that Investbx
will not provide funds to SMEs from its own budget. For
fund raising it will reach to the market. According to the
financial plan, the aid amount is expected to be sufficient
to enable Investbx to reach, within five years, the critical
size to use the economies of scale, and to become
profitable. This is regarded positively.

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(176) Concerning the involvement of business angels at the seed
stage (point 5.2.3.4 Risk Capital Guidelines), on the one
hand, the present measure does not involve seed-stage
investments, and therefore this criterion does not apply.
On the other hand, potential business angels as any other
investors may use Investbx for investing into SMEs.

(177) Concerning the necessity of the measure, the Commission
first takes note that no private market operator was willing
to start the Investbx initiative without the granting of state
aid. This may follow from the fact that setting up a regional
online marketplace for SMEs involves substantial risks at
the initial period until economies of scale are achieved.
Consequently,
in order to target the market failure by
setting up Investbx and by supporting it to break-even
within the initial
five years of operation, state aid is
considered necessary.

(178) In the following, the Commission further assesses the

incentive effect.

(179) According to the estimates based on surveys conducted by
the UK authorities, every year at least 10 SMEs from the
West Midlands with viable business plans seek equity but
do not receive it. Investbx plans to obtain equity for at least
47 such enterprises during the first five years of its activity.
Furthermore, the provision of equity capital in the range of
between GBP 0,5 and 2 million is likely to have positive
effects on adjacent financial markets. Business angels and
other informal investors, who usually provide financing
below GBP 0,5 million will be able to use Investbx as a
new exit option for their investment, whereby more senior
established markets and investors involved in larger deals,
such as the AIM and venture capital funds, may benefit
from the firms that will grow with the help of Investbx and
will require larger financial tranches than GBP 2 million
through listing on a stock exchange. The measure concerns
a pilot project which, if successful, may lead to further such
projects in other regions.

(180) The incentive effect of the aid on Investbx is apparent from
the fact that it would not exist without state aid as claimed
by the United Kingdom and Ofex. Moreover, a clear end
date of the aid is an incentive for Investbx to become
profitable and commercially viable. The measure intends to
change the behaviour of investors as well as SMEs by
improving their information exchange on their potential
matches.

i.e. direct aid to
contrast to other state aid measures,
investing in SMEs, the incentives for investors remain
undistorted.

(182) According to the UK authorities' estimates, at least 47
companies are expected to receive equity financing under
the conditions offered by Investbx during the initial five
years. The majority of them may otherwise be discouraged
by the conditions currently present on the market,
in
particular by lack of information, complicated procedures
and the prevailing prices. Thanks to the establishment of
the new channel for raising equity finance, the bundling of
all related services and a possibility to trade their shares
subsequently, SMEs are expected to raise more equity
financing for their expansion. This is the incentive effect of
the measure.

(183) The Commission considers that in line with 5.2.3 of the
Risk Capital Guidelines, the measure is necessary and
provides an incentive effect.

6.3.4. Proportionality of the aid

(184) According to point 5.2.4 of the Risk Capital Guidelines the
the aid. The
Commission assesses proportionality of
the aid does not go
Commission examines whether
beyond what
is needed to induce more risk capital
provision, and in particular whether investors are not
overcompensated and the risk of
losses are not borne
entirely by the public sector while the benefits flow to the
the Commission may
other
consider that an open tender or public invitation to
investors will positively influence the assessment.

investors. Furthermore,

(185) There will be a public invitation to investors to use
Investbx, and the information about
Investbx will be
publicly available to all investors on the Investbx website.
The measure will not be closed, but remains open to any
investors.

(186) Compared to risk capital schemes that are commonly used
by the Member States to reduce the market failure, the
amount of public funding used is very limited. Regional
risk capital schemes covering regions similar in size to the
West Midlands normally involve far higher amounts of aid
than foreseen for this measure (40). Furthermore, Investbx
does not by itself provide capital to SMEs. The measure
only introduces a new type of marketplace for investments
in SMEs, which facilitates transactions between private
parties at market conditions. In this sense Investbx appears
particularly efficient in addressing the market failure.

(181) The Investbx measure does not provide aid at the level of
their incentive
investors;
therefore it does not distort
mechanism to choose the most profitable investments. In

(40) Take as example State aid case No C 17/2004 — United Kingdom
(‘Enterprise Capital Funds’), OJ L 91, 29.3.2006, p. 16, and State aid
case No C 72/2003 — United Kingdom (‘Invest Northern Ireland
Venture 2003’), OJ L 236, 13.9.2005, p. 14.

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(187) The size of the aid is calculated in a way to enable Investbx
to achieve economies of scale and get a sufficient size to be
able to break-even after five years. There is a maximum
limit of the aid of GBP 3 million. This will cover only the
difference between the prospected revenues from the
Investbx activity and the costs incurred by Investbx in the
first five years. The actual aid will be limited to what is
necessary to cover potential losses. If Investbx performs so
well that it covers its administrative costs before the entire
amount of aid is spent, it will return the remaining part of
grant to AWM.

(192) In the following the likely effects of the aid on competitors
shall be discussed. The competitors that provide or
facilitate the provision of equity financing in the range of
GBP 0,5 to 2 million could include business angels,
venture capitalists, brokers, Alternative Trading Systems as
well as the mainstream stock exchanges the AIM and the
LSE.

(188) The Commission notes positively that

this period,

the measure is
limited to five years. After
the regional
authority, AWM, will either close down Investbx or sell its
shares through an open and non-discriminatory tender
available to any market participant, including Ofex. AWM
would then receive back at least a part of its entire grant
and potentially even more in the form of the sale price of
Investbx.

(189) The Commission considers that the aid is limited to the
minimum necessary and is therefore proportional.

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

(190) According to point 5.3 of the Risk Capital Guidelines, the
Commission will assess the negative effects of the measure
in order to balance them with the positive effects. In the
following the possible crowding-out effect on potential
competitors and other negative effects will be discussed.

6.3.5.1. Potential competitors and the extent to which
they may be affected by crowding out

(191) The principle service provided by Investbx is to obtain
equity capital in the range of GBP 0,5 to 2 million for
SMEs. Associated services provided by Investbx are
auxiliary and with the primary purpose of channelling
equity to SMEs. Although there are some advantages to
invest into SMEs locally, the geographic market for these
equity tranches is at least the entire United Kingdom, as
those SMEs that already received such financing received it
from sources based in other parts of the United Kingdom,
such as London. Although an example of
receiving
financing abroad has been reported (41), the equity capital
market
for tranches between GBP 0,5 and 2 million
generally tends to be national.

(41) The Warwick University submission reported of a case study,

in
which a West Midlands SME received equity financing from
Australia.

(193) In comparison with business angels financing, Investbx, on
the one hand, facilitates the provision of larger amounts of
equity, and on the other hand, requires greater level of
disclosure and independent studies than business angels.
Although some business angel networks or syndications
may provide the same amounts of equity capital, their
competition with Investbx in this case may be rather
limited because such business angels would offer equity at
lower costs than Investbx, as they do not require the same
level of research and disclosure. Moreover, business angels
could even benefit from the measure by investing through
Investbx. The Commission only received positive com-
ments from the business-angel community.

(194) Private venture capital

capital

funds or

investors at more

funds, as demonstrated above,
concentrate mainly on larger deals. Investbx will facilitate
the growth of SMEs that could be further taken over by
venture
senior
established markets. A degree of competition with those
funds that provide a small amount of equity cannot be
excluded. From the representatives of the venture capital
industry, namely the Catapult Venture Managers Ltd. and
the Advantage Growth Fund,
the Commission only
received positive comments. Since the main characteristic
of Investbx is to raise capital for SMEs from investors and
to act as a trading platform,
it does not itself provide
funding to the companies traded. Therefore, it is only to a
very limited extent in competition with venture capital
funds.

(195) From the brokers' community, the Commission received
critical comments from JP Jenkins, claiming that Investbx
will become a direct competitor benefiting from a
competitive advantage by the state aid provided, which
would lead to a distortion of competition prejudicing JP
Jenkins' position. In this respect, the Commission notes the
statement of the UK authorities that JP Jenkins operates a
different business model to that of Investbx. JP Jenkins is
an execution-only stockbroker and market maker, match-
ing trades in unlisted and unquoted securities off-exchange.
Furthermore, there is no regulatory obligation for this
market. Consequently, the United Kingdom states that JP
Jenkins does not perform the function of raising funds for
SMEs, which is the primary objective of Investbx. The same
arguments are valid for the activity of other execution-only

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brokers. As for the allegations of JP Jenkins, in any event,
in June 2006, before removing the possibility to search by
regions on its website, JP Jenkins traded 157 companies
out of which only four companies were from the West
Midlands. Therefore, the Commission considers a potential
effect of Investbx on JP Jenkins at least to be very limited.

(196) Investbx is intended to enter

the market of

trading
platforms for equity financing of companies which cannot
get quoted on the main stock exchange in the United
Kingdom. The LSE is not considered to be a potential
competitor of Investbx, since the companies traded at the
two markets would be different in terms of their size and
other features required by the LSE. In particular, in order to
get listed on the LSE, companies have to fulfil certain
criteria, such as 25 % of shares being held in public hands,
3 years' trading experience, and working capital for at least
the next 12 months, or a minimum market capitalisation.
Moreover, the AIM is less suitable for raising amounts
under GBP 2 million, as the direct cost of raising such an
amount can represent on average 20 — 26 % of the equity
raised. It does not provide the same services to SMEs as
Investbx. Consequently, SMEs raising GBP 2 million are
discouraged from using the AIM.

(197) Present Alternative Trading Systems, such as Ofex and The
Share Centre may also provide primary or secondary
trading to SMEs. Concerning the competitive situation on
the market as a whole, the effects of Investbx will be
limited to only one region of United Kingdom. Moreover,
in this region the provision and intermediation of equity is
less developed than in the United Kingdom as a whole.
Concerning possible competition with Ofex in particular,
the Commission recalls
that presently only 5 % of
companies traded on Ofex are based in the West Midlands.
From the region, between 2000 and 2005 altogether 10
companies were admitted to Ofex. From the presently
listed companies only 2 were admitted since 2003. Ofex is
acting nation-wide and aims at international trade and it
cannot be excluded that it will use its upgraded platform to
trade more significant volumes as well as large companies'
shares that may be quoted elsewhere. Moreover, as stated
by the UK authorities, during the six years 2000 to 2005,
Ofex has raised only GBP 3,5 million of primary funding
for 5 companies based in the West Midlands. At the same
time, Ofex raised overall GBP 43,3 million of primary
funding within the GBP 0,5 million to 2 million range for
39 companies in the United Kingdom. Consequently, the
distortion of competition in terms of volume of primary
funding and of the number of SMEs potentially switching
from Ofex to Investbx in the West Midlands is very limited.

(198) The Commission considers

that

there would be no
distortion of competition at all if Investbx were not at all
successful and did not raise any capital and/or would not
trade any SMEs. In such a case the measure would be
merely ineffective, but not distortive.

(199) At the level of SMEs invested in through Investbx, the
distortion of competition is also limited. Their advantage is
limited to the West Midlands region and to improved
access to financial services in the way of bundling of
services otherwise provided at market conditions and
raising funds from locally interested investors, for which in
any case they have to pay 6 % of
the funds raised.
Moreover, the access to Investbx is open to SMEs from the
West Midlands that fulfil the prescribed disclosure rules
and provide an independent research study. It is the private
investors who will at the end decide which SME has the
most suitable business plan to invest into.

6.3.5.2. Other distortions of competition

(200) Concerning other distortions of competition as set out in
point 5.3.2 of the Risk Capital Guidelines, the Commission
examines whether the measure will lead to the creation of
significant market power of the target SMEs, whether it
will have the effect of keeping inefficient firms or sectors
afloat, the effect of over-supply of risk capital funding and
whether the aid may build up an inefficient allocation of
production factors between regions.

(201) As stated in the assessment of the existence of aid at the
level of SMEs, the target SMEs will receive risk capital from
private investors without any aid element. The only
advantage they will get consists in receiving services that
are otherwise not available on the market. It comes from
the nature of the advantage that it cannot alone lead to
development of market power. Similarly, the private nature
of investment decisions will ensure that the measure will
not have the effect of keeping inefficient firms or sectors
afloat or to modify the allocation of production factors
between regions.

6.3.5.3. Other factors limiting the distortive effect on
competition

(202) The Commission considers that the GBP 3 million of aid to
Investbx may distort competition, however
there are
several aspects that limit the detriment that may be caused
to competitors. The measure is limited in the aid amount
provided, geographically and in time.

(203) Firstly, the aid to Investbx will be strictly limited to the
maximum of GBP 3 million. This aid amount will not be
increased and is limited to what is necessary to cover
potential losses in the start-up phase of Investbx.

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(204) Secondly, it offers its services to SMEs located only in the
West Midlands region, while other marketplaces, such as
Ofex, offer their services to the whole UK as well as
abroad. Therefore, any potential distortive effects would be
limited to a small part of established operators markets.

(205) Thirdly, the aid is also limited in time, to five years. After
this period, AWM will either sell its shares of Investbx
through a non-discriminatory and open tender procedure
to private investors, or close Investbx down and thus the
possible distortion will be eliminated. In case of a sale, any
outstanding funds from the original grant will be paid back
to AWM. Although Investbx does not only cover an initial
investment, but also start-up costs for five years,
the
Commission considers this amount necessary. Since the
yearly expected number of new SMEs entering the Investbx
marketplace is limited, it is reasonable to assume that the
economies of scale will only be effective and Investbx will
only be able to break-even when the number of SMEs
traded achieves a certain level after several years.

(206) In its additional comments, Ofex raised its concern that
after the five-year period there is a risk that no purchaser
could be found for Investbx, thus companies admitted to
its platform would lose their trading facility and their
shareholders would lose the ability to sell their shares and
be ‘locked-in’. The UK authorities confirmed that in case of
a potential closure of Investbx, The Share Centre is obliged
to maintain its platform, which Investbx uses, and SMEs
will have the possibility to continue to use it at the same
conditions as they have at Investbx. Shareholders, contrary
to the allegations of Ofex, would have the possibility to
continue trading their shares and would not be locked-in.

(207) Fourthly,

the measure concerns exclusively SMEs

in
expansion phase. The aim of the measure is to attract
more SMEs to the equity market that previously did not
participate and thus to create new investment opportu-
nities. Moreover, the UK authorities have undertaken to
limit the transaction size to a maximum of GBP 2 million
per year, while at established market platforms this formal
upper limit does not exist.

(208) Finally,

the distortion of competition was limited by
choosing in a non-discriminatory procedure the main
provider of services. Only three bids were submitted,
among them also one from Ofex. The choice for the
Investbx service provider was done on the basis of criteria
equal for all bidders. The offer of The Share Centre was
superior according to the qualitative criteria as well as to
the price.

the AIM. The restriction of the transaction size to GBP
2 million will reinforce this escalator function.

(210) The project has already attracted broad interest as it may be
used in the future to resolve potential local market failures
in other
the European Communities, as
witnessed by the comments of CEBRE and Regione
Emilia-Romagna. It may become an interesting and cost
effective option for stimulating the risk capital market and
supporting SMEs.

regions of

(211) At

the level of

investors into the target SMEs,

the
Commission considers that private investment
is not
crowded out as a result of the aid measure, on the contrary,
Investbx will give more opportunities for private investors
by improving their access to information on SMEs.
Furthermore, it aims at targeting the general public rather
than institutional investors.

(212) Nevertheless,

least a part of

it cannot be excluded that Investbx will
attract at
the companies that would
otherwise seek investment through other marketplaces.
However, this effect would be confined to a limited time
period of maximum five years, and to the region of the
failure
West Midlands, where an unresolved market
demonstrates that the present potential of the region is
insufficiently served by other marketplaces.

(213) The Commission considers that overall the negative effects
of the aid according to point 5.3 of the Risk Capital
Guidelines are limited.

6.3.6. Commission reaction to the critical comments of third

parties

(214) In the following the Commission resumes its arguments
that counter the critical comments made by third parties.

(215) Concerning fragmentation of liquidity, Investbx limits its
services to SMEs from the West Midlands that seek raising
equity between GBP 0,5 and 2 million. In this particular
segment it may attract only a very small part of investees
that use other market places. As for investors, it will attract
only those who are interested in investing in the West
Midlands. Consequently, a possible danger of fragmenta-
tion of
liquidity that is present at the existing market
places is very limited. On the other hand, Investbx will
contribute to pooling liquidity through the concentration
at the organised auctions of the several securities and
transactions, the majority of them would otherwise only
be traded separately over the counter.

(209) The ‘escalator function’ of Investbx for investees that will
grow to qualify for more senior established markets at a
later stage of their development will be advantageous for

(216) Investbx will comply with the regulatory and disclosure
requirements appropriate for an Alternative Trading
System. It will be monitored by The Share Centre, an
FSA regulated firm as explained in the description.

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It

the LSE.

the AIM or

(217) Concerning the alleged distortion of competition causing
disadvantage to JP Jenkins, the Commission notes that JP
Jenkins has a different business model. JP Jenkins trades
unlisted companies or those that have been de-listed from
Ofex,
is an execution-only
stockbroker and market maker. According to the United
Kingdom, whilst a two-way price may be shown against
each company it features, JP Jenkins may not necessarily
have shares available to buy or sell, but endeavours to
match buyers and sellers. In any event, according to its
traded in June 2006 only 4
web-pages,
companies from the West Midlands out of
its 157
companies traded. Therefore, the Commission considers
a potential effect of Investbx on JP Jenkins to be very
limited.

JP Jenkins

(218) As regards the claim of Ofex that the Commission bases its
preliminary assessment on information that is incomplete,
outdated and inconsistent with the reality of the United
Kingdom equity market, the Commission notes that it
bases its assessment on the latest available data and studies,
in particular the BVCA Reports on Investment Activity 2003,
2004 and 2005, the BVCA Private Equity and Venture Capital
Performance Measurement Surveys of 2003, 2004 and 2005,
the HM Treasury reports and other sources referred to
throughout the Decision. Neither Ofex nor other interested
parties provided any contradictory or more recent studies
or data.

(219) Ofex claims

that

there is no evidence on lack of
information for SMEs on how to access equity funding,
on failure of West Midlands companies with viable
business plans to raise equity and on investors lacking
information on investees. Firstly,
the Deloitte report
‘Improving Access to Finance for Small and Medium Sized
Enterprises’ (42), based on stakeholder interviews states that
the general knowledge and awareness of finance options
by SMEs is poor. The interviews revealed that poor
investment readiness was the main barrier to accessing
finance across the West Midlands region.
Investment
readiness encompasses business attitude to finance, the
quality of business documents and the general investability
of a project. Secondly, the UK authorities conducted a
survey that indicates that at least 10 West Midlands SMEs
could be brought yearly to Investbx. Moreover,
they
provided statements of a venture capitalist that many SMEs
with viable business plans are rejected by venture capital
funds that could be suitable for Investbx. Thirdly, the
provided studies cite lack of reliable information for
investors as one of the reasons for the existence of market
failure. (43)

(42) Deloitte & Touche: ‘Improving Access to Finance for Small and Medium

Sized Enterprises’ (2002).

(43) Deloitte & Touche: Access to Finance: Opportunities and Constraints for
Business Development and Growth in the West Midlands; (2002), p. 36
and 39; ECOTEC: Advantage Enterprise & Innovation Fund: Analysis of
Market Demand (2004), p. 16-18.

(220) As to the doubts on the commercial need for Investbx, the
Commission notes that the United Kingdom presented the
results of a survey they carried out in 2003 among 21
firms of professional advisers asking them how many
companies per year they would expect to introduce on
Investbx. As a result, 13 of 20 firms indicated that they
would expect to introduce between one and six companies
per year. Taking into account that not all professionals
active in the West Midlands were contacted, the Commis-
sion agrees that an estimation of between five and twelve
companies joining Investbx per year can be considered to
be conservative. Moreover, in another survey, conducted in
2003 among representatives from the regional business
community, 88 % out of 41 respondents
that
established capital markets did not meet the funding needs
of SMEs. In the same survey 68 % felt that Ofex was little
used as a source of capital for SMEs. Although Ofex claims
that since 2003 it has restructured and introduced a
regional manager, in 2004 and 2005 only one company
from the West Midlands was newly listed on Ofex. The
discrepancy between the potential demand and the extent
to which it is satisfied by Ofex or any other established
market places indicates that there is a need for Investbx.

felt

(221) Ofex claims that Investbx is prevented by regulation from
providing more information on the business prospects of
the investees than what is available at Ofex and the AIM.
Nevertheless, according to the UK authorities, Investbx is
allowed and will make available to all investors indepen-
dent research on the SMEs, which is presently not a
prerequisite for
joining established market places. As
regards investor protection, the UK authorities stated that
as an appointed representative of an FSA regulated firm,
The Share Centre,
to the
requirements of the Financial Services and Markets Act
2000, and The Share Centre will ensure that Investbx
operates the appropriate best practices as set out in the
FSA's Code of Business Practice.

Investbx will be subject

(222) Regarding transaction costs, the UK authorities claim that
Investbx will ensure the provision of
research and
showcasing services, on average at a significantly lower
cost level, while in addition it will eliminate the market-
maker margin between the bid and offer price.

(223) If after five years Investbx is not viable economically, and it
cannot be sold, it will be closed. However, the companies
listed at that time at Investbx may choose to be taken over
by The Share Centre, which will guarantee to the investors
and investees a secure continuity of trading at the platform
subject to the same fees and other conditions as were
offered in the selection procedure for providing services to

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Investbx. This arrangement was introduced in order to
prevent fear of being locked in the investment towards the
end of the five-year period of support.

(224) Concerning the argument that an auction-based system is
less suitable for trading SMEs' shares, the Commission
notes that both systems offer different advantages. While
the market-maker system offers the possibility to trade at
any time, the auction-based system eliminates the price
spread. Moreover, the UK authorities declared that Investbx
will aim at attracting investors with long term perspectives
who would attribute less importance to the capacity to
trade their shares on a daily basis. In any case it is not for
the Commission to establish which system is more
suitable. The Commission merely notes that Investbx can
contribute to the mitigation of the market failure.

(225) According to Ofex, the escalator function is fully covered
by Ofex, the AIM and the Official List. The Commission
notes that Investbx aims at contributing to bridging the
first step on this scale towards the AIM for West Midlands
based SMEs. From the list provided by Ofex of companies
that went from Ofex to the AIM during past three years,
only one company was from the West Midlands. Taking
into account that the AIM is a fast growing market, the
Commission assumes that there would, in any event, be
space for Investbx to complement the efforts of Ofex to
bring new companies to the AIM.

(226) Nevertheless, the Commission recognises that indeed there
is a risk that the objectives of Investbx, be it capital raising
for SMEs or serving as a step to more senior capital
markets, may not be achieved. Such a risk is inherent in the
nature of a pilot project. It is the reason why private
investors were not willing to invest into this project and
why the incentive of state aid is used.

(227) Ofex is right that the aid is predominantly not directed to
cover enterprise costs of SMEs to be financed, but the start-
up costs of Investbx. Investees will receive equity financing
from private investors at market conditions. The aid is
directed merely at a market place that will help to increase
efficiency in channelling the funds.

(228) Concerning the incentive effect, the aid enables a regional
alternative trading system place with additional services to
be founded, and which also provides for a new channel for
transmitting investment
information between
investors and investee SMEs. Thus the aid provides an
incentive for Investbx to come into existence and to target
market failure.

relevant

(229) […] (*).

(*) Business secret.

(230) As to the concern of Ofex that Investbx would crowd out
private investment to existing or potential trading markets,
the Commission does not exclude this possibility to a
limited extent but recalls that the activity of Investbx is
limited to SMEs in the West Midlands that aim at raising
equity of up to GBP 2 million. In this segment the other
market places known to the Commission are active to a
very limited extent.
In particular Ofex lists only 7
companies from the West Midlands out of its 180 quoted
companies. If Investbx is not successful, it means that its
turnover will be too small to realise profits, and it will be
unlikely to influence in any way the position of
its
competitors. On the other hand, if Investbx is successful,
AWM will sell
it after five years to private investors
through an open tender and thus would attract more
private investment into the market for this type of financial
services. In any case, it will be for the private investors to
assess which type of market place offers better services, is
more innovative and offers higher return possibilities for
their investment. On the one hand, it is true that during
the first five years Investbx will not have to pay any
dividends to the public investor. Investbx will for the first
five years charge prices for its services such that it aims at
breaking even in five years. Nevertheless, in view of its sale,
its ultimate aim is to develop into a profitable enterprise,
which will have to generate profits once it will be sold.
Ofex claims that Investbx may restrain innovation in the
financial market. However, by the way how Investbx will
operate, it represents by itself a major innovation. Indeed,
it is a combination of several innovative elements.

6.4. Balancing and Conclusion

(231) The Commission acknowledges

the creation of
Investbx is a measure aimed at eliminating a market
failure and it will have an incentive effect to raise equity
capital for SMEs.

that

(232) The Commission considers that the GBP 3 million of aid to
Investbx is proportional. There are several aspects that
limit the detriment that may be caused to competitors. The
measure is limited geographically, in time and in terms of
targeted investees.

(233) Based on the above considerations, the Commission has
the aid contributes to
come to the conclusion that
failure and makes possible the
overcoming a market
development of a regional equity trading platform that will
facilitate equity financing of SMEs, while it does not
adversely affect trading conditions to an extent that is
contrary to the common interest. Consequently, the aid to
Investbx is compatible with the common market under the
Risk Capital Guidelines.

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6.5. Cumulation

compatible with the common market within the meaning of
Article 87(3)(c) of the Treaty.

(234) The UK authorities have given the undertaking that the
grant to Investbx will not be cumulated with any other
state aid at the level of Investbx. As regards aid to the target
SMEs, the advantage they may receive from this measure is
the access
to Investbx services, which they would
otherwise either not have, or not at the same terms. They
will receive equity not containing any element of aid from
purely private resources. The aid element is not in the
equity investment, therefore the rules of Section 6 Risk
Capital Guidelines, which prevent the cumulation of aided
risk capital with other aid measures, do not apply to the
SMEs using Investbx.

7. MONITORING

in order

raised for each SME so that

(235) Taking into account the innovative nature, the complexity
and the potential of the measure to be applied in other
to
the European Communities
regions of
contribute to resolving the market failure at regional level,
the Commission wishes to monitor the effects and the
success of the Investbx measure. The UK authorities shall
submit in a yearly report concerning this measure the
number of SMEs for which capital was raised, and the
volume of capital
the
the measure indeed
Commission may assess whether
appropriately tackles
failure below GBP
the market
2 million. In order to be able to evaluate the effects on
the supply side, the UK authorities shall equally submit the
volume of investment capital raised per type of investor. In
order to measure the profitability of the measure and to
monitor the use of the state resources, the UK authorities
shall submit yearly financial accounts of Investbx. At the
end of the fifth year after setting up Investbx the UK shall
inform the Commission whether
sold
successfully to private investors through a public tender
process or whether it was closed down.

Investbx was

Implementation of the aid is accordingly authorised.

Article 2

The United Kingdom shall submit an annual report on the
include the following
implementation of the aid, which will
elements:

— the number of SMEs for which capital was raised,

— the volume of capital raised for each SME,

— the volume of investment capital raised per type of investor,

and

— financial accounts.

At the end of the fifth year after setting up Investbx the United
Kingdom shall inform the Commission whether Investbx was
sold successfully to private investors through a public open and
non-discriminatory tender process or whether it was closed
down.

Article 3

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

HAS ADOPTED THIS DECISION:

Done at Brussels, 20 December 2006.

Article 1

The aid which the United Kingdom is planning to implement in
the form of a grant of GBP 3 million in favour of Investbx is

For the Commission

Neelie KROES

Member of the Commission