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Commission opens in-depth inquiry into UK financing for small and medium enterprises

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The Commission became aware that several funds set up under the UK scheme operated beyond the scope of the guidelines, that is why it is launching an in-deep investigation to gather detailed information on each investment carried out by the funds.

The European Commission has opened an in-depth investigation to examine whether a UK scheme allowing publicly-backed funds to invest in Small and Medium Enterprises (SMEs) is being implemented in line with EU state aid rules. The opening of an in-depth investigation gives interested third parties the possibility to comment on the measure under assessment. It does not prejudge the outcome of the investigation.

In May 2005, the Commission approved the UK Enterprise Capital Funds scheme (case SA.15373), aimed at improving access to expansion capital for SMEs throughout the UK. Funds, created through a joint participation of public and private resources, were to be commercially run and were allowed to invest in SMEs up to a maximum ceiling. Subsequent investments were allowed under specific conditions.

In 2006, the Commission adopted new guidelines on state aid to promote risk capital (see IP/06/1015), that circumscribed the conditions under which such publicly-backed funds could invest in SMEs, in particular who would be eligible as investee and which types of operations the funds were allowed to undertake. The UK undertook to amend its existing schemes to bring them in line with the amended EU rules on state aid to risk capital.

During a recent monitoring exercise, the Commission became aware that several funds set up under the UK scheme operated beyond the scope of the guidelines. For example, one fund invested in two medium-sized companies in the expansion stage that were located in areas which are not eligible for state aid aimed at regional development. Another fund invested in a company through a capital replacement transaction. The Commission has doubts that these two types of operations are in line with the guidelines.

The Commission's objective in launching this investigation is to gather detailed information on each investment carried out by the funds. The Commission will then assess whether the investments comply with the risk capital guidelines.

Background

Under the EU rules on state aid for risk capital (the risk capital guidelines), publicly-backed funds are allowed to invest in early stage SMEs (seed or start-up), or small companies in expansion stage irrespective their location, i.e. areas entitled or not to regional aid, or in medium companies in expansion phase provided they are located in areas qualifying for regional aid. As for the type of operations the funds are allowed to undertake, capital replacement transactions are not permitted under the current rules.

The non-confidential version of the decision will be made available under the case number SA.15373 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

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