EU Commission opens inquiry into UK financing for SME’s

An inquiry 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 the inquiry gives interested third parties the option to comment on the measure under assessment.

The Commission’s objective in launching this inquiry is to gather information on each investment carried out by the funds. It will then assess whether the investments comply with the risk capital guidelines. In 2005, the Commission approved the UK Enterprise Capital Funds scheme 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 that circumscribed the conditions under which publicly-backed funds could be invested in SMEs. 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.

Under the EU rules on state aid for risk capital, publicly-backed funds are allowed to invest in early stage SMEs (seed or start-up), or small companies in expansion stage irrespective of their location, or in medium sized companies in expansion phase provided they are located in areas qualifying for regional aid.