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The European Commission has approved under EU state aid rules a scheme that promotes the establishment of venture capital funds for small to medium sized businesses throughout the UK. This approval is a major contribution towards helping small and medium sized enterprises get access to equity capital and so to boosting economic growth and job creation. Commissioner Neelie Kroes said: ¿Small and medium sized businesses have an important role to play in strengthening the European economy and creating jobs, and this scheme will help them to flourish in the UK. This scheme is a good example of how state aid can play a very positive role, notably in boosting competitiveness in areas where the market often fails to provide adequate finance.¿ The objective of the United Kingdom scheme is to increase the amount of equity funding for small and medium-sized enterprises (SMEs). Licensed Enterprise Capital Funds (ECFs) will combine private and public money and use these funds to supply equity finance to SMEs. Public money will be used solely to leverage private money and will have to be repaid by the ECFs with interest plus a share of the profits for the public. The investment tranches proposed by the UK range between £250,000 (¿357,000) and £2 million (¿2.9 million). They therefore exceed the maximum investment tranche foreseen by the Commission¿s Risk Capital Communication. In such cases, the Communication states that the Member State needs to provide evidence of market failure. In May 2004, the Commission opened a formal investigation under Article 88(2) of the EC Treaty in order to give interested third parties the opportunity to comment on the actual size of the equity gap. The Commission received comments from 20 interested parties, showing that there is a great interest in the issue. All comments received were positive and supportive of the measure proposed by the UK. The uniform opinion was that there is an equity gap reaching up to at least ¿3 million. Due to relatively high transaction costs, private venture capital firms are not interested in providing ¿small¿ amounts of equity and consequently move to larger deal sizes. The result is a finance gap in the small to medium range deal size that slows down company growth and job creation. This trend was not only certified by private venture capital funds active in the same market, but also by academic studies and by other Member States. The widening of the equity gap can thus be regarded as a pan-European phenomenon. As all other conditions of the Risk Capital Communication are fulfilled, the Commission has therefore closed the formal investigation procedure with a final positive decision and has concluded that the Enterprise Capital Funds are compatible with the common market pursuant to EC Treaty state aid rules.
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