Will a venture capitalist judge us negatively

Zuleger, Volker

Venture Capital and State Aid

EWS 2005, 481 (Issue 11)

I. Introduction The communication "State aid and risk capital" 1ABl. C 235, 21. 8. 2001, p. 3. (hereinafter: "Risk Capital Communication") was adopted by the Commission on 23.5.2001 for a period of five years. In the period since its publication on August 21, 2001, the communication has developed into an important basis for decision-making not only for risk capital measures, but also for other aid regimes. The following article provides a definition of the term (II.) And a brief overview of how it came about of the communication (III.) the essential rules of this legal act based on the decision-making practice of the Commission (IV.) and presents possible reform approaches (V.). Finally, a look into the future of the communication should be ventured (VI.). II. Risk capital and its role in the Lisbon strategy 1. What is Risk Capital The Risk Capital Communication does not contain its own definition of Risk Capital. In its footnote 1, it rather refers to the Commission document "Risk capital: the key to job creation in the European Union" 2SEK (1998) 552 final of March 31, 1998. The term "risk capital" is defined there as financial resources that in the form of investments, companies are provided to finance their start-up and development phases. In contrast, the term “venture capital” essentially refers to venture capital that is provided by investment funds (venture capital funds) set up specifically for this purpose. Such funds often offer a combination of different forms of financing (equity capital, »mezzanine capital« and subordinated debt capital). The term "venture capital financing" refers to all of these forms of financing. Significance for the Lisbon strategy The allocation of venture capital is of great importance in the context of the Lisbon strategy - the goal adopted at the Lisbon European Council in March 2000 to make the EU the most competitive and dynamic knowledge-based economic area in the world by 2010 do. A high-level expert group chaired by Wim Kok referred in its final report to the Commission in November 2004, the so-called Kok report3Taking up the challenge - The Lisbon strategy for growth and jobs, report of the high-level expert group chaired by Wim Kok, November 2004, http://europa.eu.int/growthandjobs/pdf/kok_report_de.pdf., In Chapter 3 under the heading »Making more risk capital available«, points out that the financing of companies in Europe is currently too heavily dependent on loans and too relies little on venture capital. She called for the framework conditions for venture capital investments to be further improved in order to remove the limited availability of financial resources as an obstacle to the creation and development of companies in Europe. The Commission communication "Working together for growth and jobs - a new beginning for the Lisbon strategy" 4KOM (2005) 24 final for the spring 2005 European Council also assigns an important role to the control of state aid within the framework of the Lisbon strategy, which the " State aid action plan - Less and better targeted state aid - Roadmap for the reform of state aid law 2005 to 2009 «5KOM (2005) 107 final. History of the risk capital notification 1. Difficulties in applying existing state aid legislation ... The lack of a separate assessment basis for risk capital measures by the Member States posed increasing problems for the Commission when assessing such measures in the 1990s. In a decision of the Commission6State Aid No. C 16/1997 - Germany (OJ L 212, 30. 7. 1998, p. 50)., Confirmed by the ECJ7EuGH, 19. 9. 2000 - Case C-156/98, Germany / Commission [Tax benefits based on Section 53 (8) EStG], Coll. 2000, I-6857., Regarding tax benefits based on Section 53 (8) of the German Income Tax Act, such measures were regarded as operating aid incompatible with the common market, as they does not adhere to the existing state aid decision-making bases such as the Community framework for state aid for research and development8ABl. C 45, 17. 2. 1996, p. 5. or the then applicable Community framework for aid to small and medium-sized enterprises9ABl. C 213, 23. 7. 1996, p. 4. (KMU). The latter could, however, with the measure "Equity capital for small technology companies" 10State aid No. N 551/2000 - Germany (OJ C 117, April 21, 2001, p. 17). be ensured. In individual cases, approval was also possible with direct reference to Art. 87 Para. 3 c EC, for example with the »UK High Technology Fund« 11State aid No. N 705/1999 - United Kingdom (OJ C 315, 4.11. 2000, p. 22)., At the Viridian Growth Fund 12 State aid No. C 46/2000 - United Kingdom (OJ L 144, 30. 5. 2001, p. 23). and at the "Innovationsfonds der Innovations- und Beteiligungsgesellschaft mbH Sachsen-Anhalt" 13State aid no. N 707/2000 - Germany (OJ C 149, May 19, 2001, p. 8). In all of these cases, the problem was the im In individual cases it is difficult to determine an aid equivalent and the often missing link with eligible costs, both legal figures that are typical in state aid law. 2 .... and an increased importance of risk capital as an aid instrument ... In practice, risk capital has been used more and more frequently as an aid instrument, which the Commission has supported, for example, in the context of structural funds. For example, Regulation (EC) No. 1685/2000 in its annex in Rule No. 8 contains provisions on the co-financing of national risk capital measures with funds from the European Regional Development Fund14ABl. L 193, 29. 7. 2000, pp. 39..3 .... led to the adoption of the risk capital communication. The problems described in the application of the existing aid texts were exemplified by the British risk capital measure "Regional Venture Capital Funds" 15State aid No. C 56/2000 - United Kingdom .. On October 19, 2000, the Commission opened the formal investigation procedures in accordance with Art. 88 (2) EC with regard to this measure16ABl. C 27, 27. 1. 2001, p. 20 .. In the course of the formal investigation procedure, a separate legal basis for state aid in the form of risk capital was drafted May 23, 2001. was adopted by the Commission and could already serve as a basis for assessing the approval of the above-mentioned UK risk capital measure on June 8, 200118 L 263, 3. 10. 2001, p. 28, before the notice was published in the Official Journal of the European Communities on August 21, 2001. IV. Regulatory content of the communication and decision-making practice of the Commission 1. The Risk Capital Communication as the Sphinx of EC State Aid Law The Risk Capital Communication was adopted in the form of a Commission Communication. Notifications normally identify legal acts in the area where the Commission does not have any discretion in applying the State aid rules of the Treaty, but it may be useful to further define the Commission's interpretation of the rules and administrative practice for reasons of transparency19Mederer, in: Schröter / Jakob / Mederer, Commentary on European Competition Law, 1st edition 2003, Art. 87 Para. 3 EC, No. 152 ff. They therefore usually serve as an aid to the interpretation of Art. 87 (1) EC20See for example the communication from the Commission on the application of Art. 87 and 88 of the EC Treaty to state aid in the form of exemptions from liability and guarantees (OJ C 71, 11.3.2000, p. 14) as well as the communication from the Commission on elements of state aid in sales of buildings or land by the public sector (OJ C 209, 10.7.1997, p. 3). In the area in which the Commission has discretion, d. H. the area of ​​the exception provision according to Art. 87 (3) EC, on the other hand, one usually speaks of guidelines and community frameworks, the latter also including appropriate measures21Mederer (footnote 19). See, for example, the Community guidelines on state aid for rescuing and restructuring firms in difficulty (OJ C 244, 1. 10. 2004); Community framework for state aid for research and development (OJ C 45, 17.2.1996, p. 5); Community framework for state aid for environmental protection (OJ C 37, 3. 2. 2001, p. 15). Section IV of the Risk Capital Communication also shows when a risk capital measure constitutes state aid under Article 87 (1) EC. In addition, it also sets up its own approval criteria for risk capital measures in Section VIII, i.e. regulates an area in which the Commission has a discretion according to Art. 87 (3) EC to call a sphinx of EC state aid law, as a legal text in an enigmatic guise. This dual nature will be explained in more detail below. Risk capital measures as state aidThe concept of state aid is defined in Article 87 (1) EC. For a measure to fall under Art. 87 (1) EC, four criteria must be met at the same time: the use of state funds must be provided, the measure must distort competition by giving the beneficiary an advantage, it must be selective, i. H. limited to certain companies and must affect trade between member states and distort or threaten to distort competition. a) Examination levels for the existence of state aid In its decision-making practice, the Commission examines the existence of state aid within the meaning of Art. 87 (1) EC in risk capital measures at three different levels: - Aid for the fund, - Aid for investors, - Aid for target companies b) Commission decision-making practice on the concept of aid The Commission's decision-making practice shows that the question of whether and at what level there is aid, depends on the design of the respective risk capital measure: aa) State aid-free risk capital measuresNo aid has already been accepted by the Commission in several decisions, such as the "Burgenland Beteiligungsfonds" 22State aid no. N 677/2002 - Austria (OJ C 148, 25. 6. 2003, p. 8)., The »A ction program Venture Capital of the Styrian Provincial Government «23State Aid No. N 403/2002 - Austria (OJ. C 138, June 13, 2003, p. 4). or the Irish Seed and Venture Capital Fund Scheme, which was already approved before the notice came into force. 24 State aid No. N 172/2000 - Ireland (OJ C 37, 3 February 2001, p. 48). This is in particular This is the case when state funds are made available at all levels under the same conditions, as would be the case with private investors (pari passu principle). bb) Aid exclusively at the level of the target companies Only at the level of the target companies, aid was granted to a few Cases detected. The target company receives financing on terms that it would not get on the market. It is characteristic that the fund is merely a passing intermediary and the measure is open to all investors. Examples include an Italian fund for the region of Calabria25 State aid No. N 173/2003 - Italy (OJ C 250, 8. 10. 2005, p. 9). and the Irish "Western Investment Fund" 26 State aid No. N 306/2004 - Ireland (OJ C 136, 3 June 2005, p. 44) .. cc) Aid at target company level and at investor levelAid both at the level of the target company as well as at the level of the investor is probably the most common variant in the Commission's decision-making practice. The aid at the level of the financier is particularly affirmed if there is an improvement in private compared to public financing and a limited fund volume means that not all interested financiers may invest in the fund and benefit from it. Examples of this are the decisions on several German ERDF venture capital funds27State aid No. N 212/2004 - Germany (Berlin) (OJ C 95, May 20, 2005, p. 8); State aid No. N 266/2004 - Germany (Thuringia) (OJ C 95, May 20, 2005, p. 9); State aid No. N 310/2004 - Germany (Brandenburg) (not yet published); State Aid No. N 213/2004 - Germany (Schleswig-Holstein (not yet published), amended by State Aid No. N 345/2005 (Schleswig-Holstein) (not yet published); State Aid No. N 364/2004 - Germany (Saxony) (not yet published) as well as the British cases "Wales Early Stage Fund" 28 State aid No. N 572/2003 - United Kingdom (OJ C 133, May 31, 2005, p. 2). And " Greater London High Technology Seed and Creative Industries Funds «29 State aid No. N 5/2004 - United Kingdom (OJ C 133, May 31, 2005, p. 2). Referred to dd) Aid at fund level At fund level Aid was only found in a few exceptional cases. In general, the Commission tends to take the view that a fund serves to pass on aid to capital providers or companies to be financed and is not as such a beneficiary30 Paragraph IV. 5. (2) of the communication - Venture capital funds to apply. Aid at this level, however, is affirmed if it is an existing fund or the intermediary organism has the character of an independent company for other reasons, as is the case with the »Innovation Fund of the IBG Saxony-Anhalt« 31State aid no. N 707/2000 - Germany (OJ C 149, 19. 5. 2001, p. 8) as well as the extension of the duration of State Aid No. N 280/2003 - Germany (OJ C 67, 17. 3. 2004, p. 9)., At »Consolidation and Growth Fund of the SBG - Sächsische Beteiligungsgesellschaft« 32State aid no. N 349/2001 - Germany (OJ C 62, March 9, 2002, p. 41). and in the case of Community Investment Tax Credit 33 State aid No. N 711/2001 - United Kingdom (OJ C 18, January 25, 2003, p. 38). the case war.ee) Aid exclusively at the level of the capital provider Aid only at the level of the capital provider would contradict the stated aim of the Risk Capital Communication to eliminate the market failure at the level of the target company. Approval of such measures is therefore difficult to imagine. 3. Approval criteria and decision-making practice of the Commission The Commission points out in Section V of the Risk Capital Communication that risk capital measures can still be approved on the basis of the existing legal texts. However, since the Risk Capital Communication came into force, this has only been the case in exceptional cases because of the difficulties described in calculating an aid equivalent and the link with the costs eligible for aid.34 See State Aid No. N 565/2002 - Germany (»Equity capital for small technology companies (BTU ) «) (OJ C 76, 28. 3. 2003, p. 28) .. Since the Risk Capital Communication came into force, the following compatibility criteria set out in Sections VI, VII and VIII have been the basis for the approval of risk capital measures: a) Market failure the approval is, according to the risk capital notification, the presence of market failure. According to section VI. 5 of the Communication requires the Commission to demonstrate evidence of market failure before risk capital measures are approved. The importance of market failure in EC state aid control is highlighted in more recent state aid texts such as the State Aid Action Plan - Less and better targeted state aid - Roadmap for the reform of state aid law 2005 to 200935 COM (2005) 436 final; http://europa.eu.int/comm/competition/state_aid/others/action_plan/saap_de.pdf. and the Commission's consultation paper on State aid for innovation 36 COM (2005) 107; http://europa.eu.int/comm/competition/state_aid/others/action_plan/cdsai_de.pdf. aa) Main drivers of market failure37 Section VI. 3 of the Communication. In the area of ​​risk capital measures, there are two main factors behind the market failures that prevent SMEs and companies from accessing capital at an early stage in their development and justify public intervention: - incomplete or asymmetrical information from financiers and SMEs, - transaction costs : Small projects are less attractive for investments because of the high costs involved in the valuation of the investment and other transaction costs.bb) Assumed market failure - the "safe harbor" threshold values38, Paragraph VI. 4 and VI. 5 of the communication. The Commission assumes a market failure, without a Member State having to submit studies, if the individual financing tranches for a company from risk capital measures financed in whole or in part by state aid do not exceed EUR 500,000 orEUR 750,000 in aid areas under Art. 87 Para. 3 c EC or EUR 1 million in aid areas under Art. 87 Para. 3 a EC. In the case of such relatively small-volume transactions, it is more plausible that there is market failure due to high transaction costs. Since a market failure is assumed if these thresholds are not reached and a member state no longer has to prove this separately, they are also referred to as "safe harbor" thresholds. However, there is no general failure of the venture capital market in the Community assumed, but assumed market deficiencies or equity gaps in some forms of participations and for certain development phases of the company. c) Evidence of major market failure Insofar as a member state wishes to apply higher financing tranches, the Commission usually opens the formal investigation procedure under Art. 88 (2) EC to To examine the existence of market failures more closely and to give interested third parties the opportunity to comment. If a Member State can demonstrate market failure for higher financing tranches, the Commission will approve the risk capital measure in the requested amount. On 22/10/2004, for example, the Commission approved in the "Invest Northern Ireland Venture 2003" aid case 39State Aid No. C 72/2003 - United Kingdom (OJ L 236, 13. 9. 2005, p. 14). Financing tranches between GBP 250,000 (EUR 357,000) and GBP 1.5 million (EUR 2.2 million) and on May 3, 2005 in the Enterprise Capital Funds case 40 State aid no. C 17/2004 - United Kingdom ( not published yet). Financing tranches between £ 250,000 (€ 357,000) and £ 2 million (€ 2.9 million). In both cases, the United Kingdom has been able to demonstrate, based on expert opinions and studies, a market failure in the amounts mentioned. B) Form of the aid measure aa) Application of the risk capital notification to the establishment of investment funds with state participation, grants to venture capital funds, guarantees and bonds, tax incentives, .. The Risk Capital Communication applies in particular to aid measures in the form of the establishment of investment funds ("venture capital funds") in which the state has a stake, in the form of grants to venture capital funds to partially cover administrative and management costs, in the form of guarantees the venture capital investors or venture capital funds are partially protected against losses from their investments, as well as in the form of tax incentives for investors who undertake venture capital investments41See Section VII.1. of the communication .. Guarantees and sureties are the exception, which is why at this point only a program of the State of Lower Saxony for guarantees to equity investment companies to secure investments for the restructuring of SMEs in difficulty42State aid No. N 353/2002 - Germany (OJ. C 34, February 13, 2003, p. 4). should be pointed out, even if the measure did not fall within the scope of the communication because of the promotion of companies in difficulty. bb) ... but not to loans / silent partnerships The communication is in any case not applicable to loan financing in favor of the target companies43 See Section VII.2. of the communication .. It should be noted that the financing through silent partnerships, which is quite common for German risk capital measures, is treated like loans by the Commission in terms of state aid because of its - in contrast to open participations - fixed annual and profit-independent participation fee. In practice, this means that Germany regularly promises to pay an annual participation fee of 400 basis points above the EU reference interest rate, so that financing through silent participations in accordance with the Commission's communication on the method for setting the reference and discount rates44ABl. C 273, 9. 9. 1997, p. 3. can be classified as free of aid. Here, too, reference is made to the German ERDF risk capital cases already mentioned as an example45See note 27 .. In extreme cases, this type of financing was granted with the award of open participations as de minimis aid in the amount of a maximum of 100,000 euros within three years in accordance with the ordinance (EG) No. 69/200146ABl. L 10, 13. 1. 2001, p. 30. combined, so that the entire risk capital measure could be classified as aid-free by the Commission, as far as no aid could be ascertained at the level of the financiers and the fund. This was, for example, with the German measures "High-Tech Gründerfonds" 47 State aid No. N 34/2005 - Germany (OJ C 138, June 7, 2005, p. 2). and "Region MIT Regionalfonds Mittelhessen" 48State Aid No. N 104/2005 - Germany (not yet published). The notification was declared applicable in a case in which the Free and Hanseatic City of Hamburg granted an interest-free loan to BTG Beteiligungsgesellschaft Hamburg mbH49State aid no. N 698/2002 - Germany (OJ C 78, 27. 3. 2004, p. 31) .. Lending was exclusively for the benefit of this fund, while at the level of the target company, financial resources were made available in the form of equity, so that the principles set out in Section VIII. 2 of the communication were not applied. c) Compatibility criteria for risk capital measures In general, in accordance with the criteria set out in Section VIII of the Risk Capital Communication, the Commission is prepared to positively assess regulations in which the state is involved in risk capital measures as a shareholder, investor or in some other way. Section VII.1. of the communication .. In Section VIII. 3 of the Risk Capital Communication, seven compatibility criteria are specified. In contrast to other legal texts of EC state aid law, not all compatibility criteria need to be present cumulatively. Rather, the criteria take the form of "positive and negative factors." Not all factors have the same weight, the most important factors are mentioned first. In addition, a single factor is not yet decisive in itself, so that none of them is to be regarded as sufficient to ensure the compatibility by itself 51 Paragraph VIII. 1. of the communication ... The fact that not all compatibility criteria have to be cumulative is what the risk capital communication makes unique in the context of state aid legislation and leaves the Commission considerable leeway in assessing national risk capital measures. In practice, however, the Commission tries to ensure the presence of as many of these factors as possible, so if market failure has been proven and the aid is subject to the form of notification, the Commission, when assessing a risk capital measure under state aid law, examines the existence of the following seven factors: aa) Target companies and scope of transactions52 Section VIII. 3., first subpara. It is considered a positive factor if all or most of the investments relate to small or even very small companies as well as to medium-sized companies in accordance with the Commission's definition of SMEs. L 124, 20. 5. 2003, p. 36. in their start-up or other early development phases or in development areas. The financing of medium-sized companies after completion of their start-up or early development phase in development areas should not exceed a certain maximum limit per company. A restriction to a smaller size of the individual financing tranches, i. H. the level of the "safe harbor" thresholds, or the proven market failure is also viewed as a positive factor. The size factor is complied with in all commission decisions, but with a wide variety of detailed regulations regarding the size of the companies to be funded. There is no commission decision in which venture capital for large companies was approved on the basis of the risk capital notification, at most restrictions on small or even micro-enterprises. With regard to the concept of a transaction, it should be noted that separate capital injections every six months are considered to belong to the same tranche. Different capital injections, even over a longer period of time, are considered to belong to the same tranche to the extent that an obligation is assumed for them in the same transaction54See footnote 27 of the Communication. On the basis of this definition, the Commission considered the Belgian venture capital measure "ARKimedes" 55State aid N 632/2003 - Belgium (OJ C 223, 10. 9. 2005, p. 2). Financing tranches of up to EUR 1 million outside an assisted area as compatible with the common market, as Belgium had undertaken not to undertake any further transactions within a 12-month period. Bb) Targeting cases in which there is a failure of the venture capital markets56 Item VIII 3., second sub-para. The Communication considers it a positive factor if a measure provides companies primarily with equity or quasi-equity for financing. Since forms of aid such as silent partnerships fall outside the scope of the Risk Capital Communication, it is currently unclear what is to be regarded as quasi-equity. The communication does not contain any definition of this. The risk capital communication regards as a negative factor if a measure provides significant financial resources in another form, whereby the financial resources in another form are primarily to be understood as debt capital. if a risk capital measure obviously has no incentive effect, but only leads to deadweight effects.cc) Profit-oriented investment decisions57Section VIII. 3., third sub-para. the message. ... In principle, the requirement of profit-oriented investment decisions conceals two sub-points: (1) ... by avoiding predatory financial competition ... On the one hand, the aim is to prevent private investors from being crowded out by public investors «To prevent and encourage the use of large private capital reserves in the EU. For this purpose, two alternatives are shown: Measures are seen as positive in which the entire capital for the investments in the target companies is provided by market-economy investors and these also make the investment decisions. Such constellations can be found in particular in the case of tax subsidies that favor risk capital investments. The Irish Business Expansion and Seed Capital Scheme 58 State aid No. N 311/2004 - Ireland (OJ C 133, May 31, 2005, p. 2). may be an example of this. The aid only serves as an incentive to invest in target companies. If this is not or cannot be the case, it is alternatively regarded as a positive factor if market-economy investors are involved to a significant extent. The provision of at least 50% of private funds or, in the case of measures in assisted areas, 30% of private funds is considered to be a “significant participation” of private investors in funds. The risk of cutthroat financial competition from private investors by public investors is likely to decrease the further the risk capital measure is from the market (earliest financing phases; restriction to micro-enterprises, etc.), so that in these cases exceptions to the 30% / 50% rule should be possible At this point, reference should be made to the Commission decisions of October 20, 2005 on the Flemish innovation fund "VINNOF" 59 State aid No. N 281/2005 - Belgium (not yet published). and to the British innovation fund "NESTA" 60State aid No. NN 81/2005 - United Kingdom (not yet published). pointed out. In the case of »VINNOF«, a private participation of only 20% was considered acceptable, as it was restricted to newly founded, innovative micro-enterprises. In the NESTA case, the lack of private participation could even be considered compatible, as the start-up investments of only up to £ 150,000 (approx. 217,000 euros) in favor of newly founded, innovative small and micro-enterprises61 See the Commission's press release IP / 05/1317 of October 20, 2005 .. In both cases, the capital was made available in the early phases of setting up a company (so-called “seed stage” and “pre-seed stage”), ie in stages in which private Investors still exercise reluctance to invest, since a business idea has to be further developed, mature and converted into usable results. (2) ... and investment decisions from a commercial point of view On the other hand, within the scope of this compatibility criterion, further positive factors apply, which suggest that the investment decisions are made according to commercial criteria. The factors listed are profit-oriented remuneration for professional fund managers, the representation of market-economy investors in decision-making and the application of best practices, as well as the supervision of fund management. Dd) Minimal distortion of competition between investors and investment funds. The fourth criterion is the first and only time that provisions are made for the compatibility of aid at the level of the investor and the investment fund. It is crucial that the distortions in competition between investors and investment funds are kept as low as possible. This can be done with the help of a tender to determine any preferential conditions for investors. The call for tenders is usually made in the Official Journal of the European Union, which is practical, but not mandatory. Alternatively, this criterion can be taken into account by a regulation that is open to investors for a longer period of time (such as a guarantee regulation). In practice, however, the tendering process by far predominates. If, on the other hand, it is not ensured that individual financiers do not receive excessive remuneration or the risk of loss is borne entirely by the state and the benefits flow exclusively to private financiers, this is rated negatively.ee) Sectoral Orientation63Section VIII. 3., fifth sub-para. The Commission assesses negatively if sensitive sectors working with overcapacity, such as shipbuilding or the steel sector, are eligible under a risk capital measure, which is therefore always excluded in practice. A sectoral orientation of risk capital measures is possible, however, as with the approval of an Italian risk capital fund in the field of agriculture64State aid No. N 384/2003 - Italy (OJ C 56, 4. 3. 2004, p. 6). ff) Participations on the basis of corporate plans65Section VIII. 3., sixth sub-para. The participation on the basis of business plans and the provision of exit mechanisms from a participation ("exit") are viewed as positive factors. This is practically guaranteed for all risk capital measures. Gg) No accumulation of aid measures for individual companies66Cipher VIII. 3., seventh subpara. The Commission may ask Member States to undertake to review and limit other forms of State aid, including approved schemes to venture capital firms. However, the obligation to comply with such cumulation rules is not easy because the cumulation of aid requires the same eligible costs67See for example the cumulation rules in point 4.18. ff. of the regional guidelines (OJ C 74, 10.3.1998, p. 9). One of the reasons for the introduction of the Risk Capital Communication, however, was precisely the difficulty recognized in decision-making practice in determining eligible costs for risk capital measures. Because of these practical problems In the first cases of application of the Risk Capital Communication, such as the "Regional Venture Capital Funds" and the "Consolidation and Growth Fund of the SBG - Sächsische Beteiligungsgesellschaft" - and occasionally in later commission decisions, either no cumulation rules were required or an exclusion of any further investment funding was agreed, such as this in the French "Fonds de capital investment" 68 State aid No. N 448/2000 - France (OJ C 38, 13. 11. 2001, p. 5). or in a Spanish fund for technology-oriented companies 69 State aid no. N 630/2001 - Spain (OJ C 32, 5. 2. 2002, p. 18). A solution between these two extremes could be found within the framework of the notification of the British risk capital measures "Coalfields Enterprise Fund" 70State aid No. N 722/2000 - United Kingdom (OJ C 133, June 5, 2002, p. 11) . and Community Development Venture Fund 71 State aid No. N 606/2001 - United Kingdom (OJ C 133, 5. 6. 2002, p. 10). being found. The UK authorities undertook to reduce the granting of regional and SME aid to companies benefiting from the two risk capital measures by 50%. Since then, the commission has regularly required the assurance of a reduction rate between 20% and 50% in notification procedures, depending on whether the target companies of the risk capital measure are outside or within an assisted area according to Art. 87 para.3 a or c EC and depending on the size of the individual financing tranches. In practice, the latter in the canon of the seven compatibility criteria has thus developed into a "hard" factor that is checked in practically every notification. Extension of the scope of the risk capital communication in the decision-making practice of the Commission The communication is the only aid text, in addition to section 2.4 of the Community framework for research and development aid. C 45, 17.2.1996, p. 5. Rules on partnership between private actors and the public sector. It therefore made sense to apply it analogously to other projects in so-called public-private partnerships. One of the statements contained in Section V. 6 c) of the Risk Capital Communication on measures with several measures is particularly significant Actors too. According to this, a measure cannot be regarded as incompatible simply because, in the case of private investor holdings, it constitutes State aid to those investors as well as to the companies in which investments are made. If a state transfer is compatible with state aid rules, a measure that gives other economic actors a minimum incentive to undertake the same transfer must also be generally approved, even if technically the actors concerned receive aid The Commission approved in the case of "Grants for Owner Occupation - Scotland" 73 State aid No. N 497/2001 - United Kingdom (OJ C 32, 5. 2. 2002, p. 18). and, in several similar cases, the promotion of residential property, but also, for example, aid from the state of Saxony-Anhalt to technology centers, which ultimately benefits the SMEs located there.74 State aid No. N 318/2003 - Germany (OJ C 67, 17.3 . 2004, p. 9) .. V. Problems with the application of the law and the revised Risk Capital Communication At the beginning of 2005 the Commission published a questionnaire on the revision of the Risk Capital Communication for the public hearing75See http://europa.eu.int/comm/competition/state_aid/others/sarc_questionnaire_pubcons_de.pdf .. The questionnaire and the Consultation communication on state aid for innovation, adopted in September 2005, COM (2005) 436 final, provide examples of the following topics for a revision of the risk capital communication: 1. Existence of aid at different levels The criteria set out in the risk capital communication for the existence of aid at the three levels mentioned (investor, fund, target company) have largely proven themselves in practice. Only the existence of an aid at fund level may require further explanation. It is also questionable whether an obligation to tender for fund management needs to be clarified in accordance with public procurement law. Financing tranches and market failures The listed British cases of "Invest Northern Ireland Venture 2003" 77See footnote 39 and "Enterprise Capital Funds" 78See footnote 40 suggest that the capital market gap for corporate investments has widened and that there is market failure on a larger scale, than previously assumed in the Risk Capital Communication. Should this suspicion be confirmed, the "safe harbor" thresholds would have to be raised accordingly. In order to minimize the risk of financial “crowding out”, however, a certain flexibility in the application of these criteria would be desirable, in particular in order to be able to react accordingly in the event of possible opposing developments on the capital market. Treatment of silent participations and other quasi-equity financing The Risk Capital Communication in its current version shows the paradox that quasi-equity is viewed as positive but is practically excluded from its scope, as is the case in the Commission's decision-making practice, for example in German cases when using silent participations. A revised Risk Capital Communication should therefore include rules for quasi-equity or mezzanine financing. 4. Amount of the required private participation Member States have repeatedly argued that a private participation of 30% or 50% can often not be achieved due to a lack of private investors. A certain degree of flexibility already seems possible today, especially if the measures are limited to early financing phases and micro-enterprises. Further flexibility in this area is certainly worth discussing, but must ensure that cutthroat financial competition is prevented. The current version of the Risk Capital Communication is practically limited to investments in the early financing phases. Exceptions are only possible in assisted areas. However, enabling participation in later financing phases could significantly facilitate the growth of innovative SMEs. This is therefore also an issue raised by the Commission in its consultation paper on State aid for innovation and which could be reflected in a revised Risk Capital Communication. 6. Cumulation The formula found in decision-making practice of a percentage reduction in further aid is certainly practical. In assisted areas, however, the reduction in regional investment grants and grants appears to lead to competition with venture capital, with companies often preferring the former, as they can keep the funds they have received and do not have to give them a say. A solution to the conflict of interest must be sought as part of the revision of the risk capital notification. One solution could be, for example, to cut back on the regional differentiation of the financing tranches in order to introduce a cohesive element in the cumulation. A block exemption for certain risk capital measures within the framework of the exemption for aid to SMEs, which is occasionally requested, does not seem appropriate in view of the difficulties described in determining the aid at the various levels. However, greater flexibility in the compatibility criteria should also contribute to shorter processing times. Assessment and outlook 1. Timetable Already in the communication on a proactive competition policy79 COM (2004) 293 final of April 2004, the Commission announced that the Risk Capital Communication 2005 would be revised as part of a comprehensive review of the aid documents relevant to the Lisbon Strategy. This request for revision was confirmed in the consultation paper State aid action plan - Less and better targeted state aid - Roadmap for the reform of state aid law 2005 to 2009. Furthermore, the need for change arises from the experience of the Commission with the application of the communication and the responses of the Member States to the consultation paper on state aid for innovation by the end of November 2005. For the latter reason, the adoption of a revised Risk Capital Communication before the end of 2005 seems rather unlikely and an adoption in spring / summer 2006 seems realistic. Conclusion The Risk Capital Communication has largely proven itself, but needs some revision and occasional clarification. Compared to other regulations, the communication leaves a comparatively large amount of leeway in approval practice for the Commission and thus for the Member States when designing their risk capital measures. The communication could therefore also serve as a model for future competition rules in the field of state aid.

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