(1)

Is the aid measure aimed at a well-defined objective of common interest, such as growth, employment, cohesion and environment?

(2)

Is the aid well designed to deliver the objective of common interest, that is to say, does the proposed aid address the market failure or other objective?

(3)

Are the distortions of competition and effect on trade limited, so that the overall balance is positive?

(a)

Transaction and agency costs: potential investors face more difficulties in gathering reliable information on the business prospects of an SME or a new company and subsequently in monitoring and supporting the enterprise's development. This is in particular the case for highly innovative projects or risky projects. Furthermore, small deals are less attractive to investment funds due to relatively high costs for investment appraisal and other transaction costs.

(b)

Risk aversion: investors may become more reluctant to provide risk capital to SMEs, the more the provision of risk capital is subject to imperfect of asymmetric information. In other words, imperfect or asymmetric information tends to exacerbate risk aversion.

(a)

the risk of “crowding out”. The presence of publicly supported measures may discourage other potential investors from providing capital. This could, over the longer term, further discourage private investment in young SMEs and thus end up widening the equity gap, while at the same time creating the need for additional public funding;

(b)

the risk that advantages to the investors and/or investment funds create an undue distortion of competition in the venture capital market relative to their competitors that do not receive the same advantages;

(c)

the risk that an oversupply of public risk capital for target enterprises not invested according to a commercial logic could help inefficient firms stay afloat and could cause an artificial inflation of their valuations, making it all the less attractive for private investors to supply risk capital to these firms.

(a)

in difficulty, within the meaning of the Authority's guidelines on aid for rescuing and restructuring firms in difficulty (7);

(b)

in the shipbuilding (8), coal (9) and steel industry (10).

(a)

“equity” means ownership interest in a company, represented by the shares issued to investors;

(b)

“private equity” means private (as opposed to public) equity investment in companies not listed on a stock-market, including venture capital, replacement capital and buy-outs;

(c)

“quasi-equity investment instruments” means instruments whose return for the holder (investor/lender) is predominantly based on the profits or losses of the underlying target company, are unsecured in the event of default. This definition is based on a substance-over-form approach;

(d)

“debt investment instruments” means loans and other funding instruments which provide the lender/investor with a predominant component of fixed minimum remuneration and are at least partly secured. This definition is based on a substance-over-form approach;

(e)

“seed capital” means financing provided to study, assess and develop an initial concept, preceding the start-up phase;

(f)

“start-up capital” means financing provided to companies, which have not sold their product or service commercially and are not yet generating a profit, for product development and initial marketing;

(g)

“early-stage capital” means seed and start-up capital;

(h)

“expansion capital” means financing provided for the growth and expansion of a company, which may or may not break even or trade profitably, for the purposes of increasing production capacity, market or product development or the provision of additional working capital;

(i)

“venture capital” means investment in unquoted companies by investment funds (venture capital funds) that, acting as principals, manage individual, institutional or in-house money and includes early-stage and expansion financing, but not replacement finance and buy-outs;

(j)

“replacement capital” means the purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders. Replacement capital is also called secondary purchase;

(k)

“risk capital” means equity and quasi-equity financing to companies during their early-growth stages (seed, start-up and expansion phases), including informal investment by business angels, venture capital and alternative stock markets specialised in SMEs including high-growth companies (hereafter referred to as investment vehicles);

(l)

“risk capital measures” means schemes to provide or promote aid in the form of risk capital;

(m)

“Initial Public Offering” (“IPO”) means the process of launching the sale or distribution of a company's shares to the public for the first time;

(n)

“follow-on investment” means an additional investment in a company subsequent to an initial investment;

(o)

“buyout” means the purchase of at least a controlling percentage of a company's equity from the current shareholders to take over its assets and operations through negotiation or a tender offer;

(p)

“exit strategy” means a strategy for the liquidation of holdings by a venture capital or private equity fund according to a plan to achieve maximum return, including trade sale, write-offs, repayment of preference shares/loans, sale to another venture capitalist, sale to a financial institution and sale by public offering (including Initial Public Offerings);

(q)

“small and medium-sized enterprises” (“SMEs”) means small enterprises and medium-sized enterprises within the meaning of Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises (11) or any Regulation replacing that Regulation;

(r)

“target enterprise or company” means an enterprise or company in which an investor or investment fund is considering investing;

(s)

“business angels” means wealthy private individuals who invest directly in young new and growing unquoted business (seed finance) and provide them with advice, usually in return for an equity stake in the business, but may also provide other long-term finance;

(t)

“assisted areas” means regions falling within the scope of the derogations contained in Article 61(3)(a) or (c) of the EEA Agreement;

(a)

constitution of investment funds (venture capital funds) in which the State is a partner, investor or participant, even if on less advantageous terms than other investors;

(b)

guarantees to risk capital investors or to venture capital funds against a proportion of investment losses, or guarantees given in respect of loans to investors/funds for investment in risk capital, provided the public cover for the potential underlying losses does not exceed 50 % of the nominal amount of the investment guaranteed;

(c)

other financial instruments in favour of risk capital investors or venture capital funds to provide extra capital for investment;

(d)

fiscal incentives to investment funds and/or their managers, or to investors to undertake risk capital investment.

(a)

the measures have significant involvement of private investors as described in section 10B.4.3.4, providing investments on a commercial basis (that is, only for profit) directly or indirectly in the equity of the target enterprises; and

(b)

a business plan exists for each investment containing details of product, sales and profitability development and establishing the ex ante viability of the project; and

(c)

a clear and realistic exit strategy exists for each investment.

(a)

there is an agreement between a professional fund manager or a management company and participants in the fund, providing that the manager's remuneration is linked to performance and setting out the objectives of the fund and proposed timing of investments; and

(b)

private market investors are represented in decision-making, such as through an investors’ or advisory committee; and

(c)

best practices and regulatory supervision apply to the management of funds.

(a)

development of the fundraising over the past five years, also in comparison with the correspondent national and/or European averages;

(b)

the current overhang of money;

(c)

the share of government-aided investment programmes in the total venture capital investment over the preceding three to five years;

(d)

the percentage of new start-ups receiving venture capital;

(e)

the distribution of investments by categories of amount of investment;

(f)

a comparison of the number of business plans presented with the number of investments made by segment (amount of investment, sector, round of financing, etc.).

(a)

estimation of the additional size of the equity gap caused by the peripherality and other regional specificities, in particular in terms of total amount of risk capital invested, number of funds or investment vehicles present in the territory or at a short distance, availability of skilled managers, number of deals and average and minimum size of deals if available;

(b)

specific local economic data, social and/or historic reasons for an underprovision of risk capital, in comparison with the relevant average data and/or situation at national and/or EEA level as appropriate;

(c)

any other relevant indicator showing an increased degree of market failure.

(a)

Open tender for managers. A transparent, non-discriminatory open tender for the choice of the managers or management company ensuring the best combination of quality and value for money will be considered positively, as it will limit the cost (and possibly aid) level at the minimum necessary and will also minimise distortion of competition.

(b)

Call for tender or public invitation to investors. A call for tender for the establishment of any “preferential terms” given to investors, or the availability of any such terms to other investors. This availability might take the form of a public invitation to investors at the launch of an investment fund or investment vehicle, or might take the form of a scheme (such as a guarantee scheme) which remained open to new entrants over an extended period.

(a)

the number of venture capital firms/funds/investment vehicles present at national level or in the area in case of a regional fund and the segments in which they are active;

(b)

the targeted enterprises in terms of size of companies, growth stage, and business sector;

(c)

the average deal size and possibly the minimum deal size the funds or investors would scrutinise;

(d)

the total amount of venture capital available for the target enterprises, sector and stage targeted by the relevant measure.

(a)

overall profitability of the firms invested in over time and prospects of future profitability;

(b)

rate of enterprise failure targeted by the measure;

(c)

maximum size of investment tranche envisaged by the measure as compared to the turnover and costs of the target SMEs;

(d)

over-capacity of the sector benefiting from the aid.

(a)

if higher thresholds of investment tranches per target enterprise are foreseen, it may lower the maximum amount proposed per investment tranche or set an overall maximum amount of finance per target enterprise;

(b)

if investments in the expansion stage in medium-sized enterprises in non-assisted areas are foreseen, it may limit investments predominantly to the seed and start-up stage and/or limit the investments to one or two rounds and/or limit the tranches to a maximum threshold per target enterprise;

(c)

if follow-on investment is foreseen, it may set specific limits to the maximum amount to be invested into each target enterprise, to the investment stage eligible for intervention, and/or to the period during which aid may be granted, having also regard to the sector concerned and to the size of the fund;

(d)

if a lower participation of private investors is foreseen, it may require a progressive increase of the participation of private investors over the life of the fund, having particular regard to the business stage, the sector, the respective levels of profit-sharing and subordination, and possibly the localisation in assisted areas of the target enterprises;

(e)

for measures providing seed capital only, it may require EFTA States to ensure that the State receives an adequate return on its investment commensurate with the risks incurred for these investments, in particular where the State finances the investment in the form of quasi-equity or debt instruments, the return on which should, for instance, be linked to potential rights of exploitation (for example, royalties) generated by intellectual property rights created as a result of the investment;

(f)

require a different balancing between respective profit- and loss-sharing arrangements and level of subordination between the State and private investors;

(g)

require more stringent commitments as regards cumulation of risk capital aid with aid granted under other state aid regulations or frameworks, by way of derogation from section 10B.6.

(a)

these guidelines, if the aid was granted after their adoption;

(b)

Chapter 10A of the Authority's State Aid Guidelines in all other cases.