As part of its State Aid Modernization plan (see European Competition Newsletter of August 2013 for more information), the European Commission (EC) has adopted new guidelines aimed at promoting risk finance investments. The guidelines set out the conditions under which EU countries can grant support measures to facilitate access to finance for SMEs and midcap companies.
Where risk finance measures do not fall under an automatic exemption from the general ban on State aid in the EU (in which case they would need to be notified to the EC for approval), they will be assessed under the guidelines. The rationale behind the guidelines is that there is a funding gap (a market failure) regarding SMEs and certain small and innovative midcaps, which often have difficulties accessing necessary finance (especially in their start-up stage) due to their lack of a credit track record and sufficient collateral.
The guidelines allow aid to be granted through a wide range of financial instruments, such as equity, quasi-equity, loans and guarantees. They reduce the current requirements for private investment and abolish the current “pari passu” requirement (50-50 public/private investment). Support to alternative trading platforms can also be granted to incentivize investors to buy shares of SMEs listed on such platforms. Likewise, corporate investors may be incentivized through tax incentives under the guidelines. Capital replacement measures (the purchase of shares of existing shareholders, if they are combined with capital injections) will also be possible to facilitate the exit of investors and, at the same time, incentivize investments in the start-up stages.
The guidelines, which will go into effect in July 2014, provide a “simple, flexible and generous” framework which is aimed at enhancing private investment in SMEs and innovative midcaps. Investors, private equity funds, and fund managers will be able to more easily obtain support and guarantees for their future investments from public bodies in the EU.