The European Commission has opened and in-depth enquiry to examine whether a U.K. scheme allowing publicly-backed funds to invest in Small and Medium Enterprises (SMEs) is being implemented in line with European Union state aid rules.

In May 2005, the European Commission has 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 and private resources, were to be commercially run and were allowed to invest in SMEs up to a maximum ceiling.

In 2006, the European Commission adopted new guidelines on state aid to promote risk capital, that circumscribed the conditions under which such publicly-backed funds could invest in SMEs, especially 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.

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Lately, the European commission became aware that several funds set up under the UK scheme operated beyond the scope of the guidelines.

Under the EU rules on state aid for risk capital, publicly-backed funds are allowed to invest in early stage SMEs (seed or start-ups), or small companies in expansion stage irrespective their location.

As for the type operations the funds are allowed to undertake, capital replacement transactions are not permitted under the current rules.

The European Commission will now asses whether the investments comply with the risk capital guidelines.

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