The European Commission intends to ease the rules of the state aid for start ups

On 19 March 2020, the European Commission adopted the State Aid Temporary Framework (the “Temporary Framework”) designed to support the economies of the member states in the context of Covid-19 pandemic (the “Pandemic”).  Since that date, the Temporary Framework has been amended twice but neither change took into account the micro, small and newly founded companies (which include the start ups).

To this extent, on 29 June 2020 the European Commission adopted a third amendment (the “Amendment”) to the Temporary Framework, with the purpose to include support to micro and small companies, including start ups.  If the Amendment is agreed upon by the Member States, then the Temporary Framework would be extended as follows:

  • the Member States will be able to provide state support to all micro, small and newly founded companies (including start ups), even if they faced financial difficulty on 31 December 2019;
  • Provide incentives for private investors to participate in coronavirus-related recapitalisation measures (where the private investors participate in the share capital increase of the respective company, together with the Member State).

Why have the start ups been excluded so far from the benefit of a state aid?

A start up is a new company founded with the purpose to develop an original product and/or service and to put it on the market.  It is thus initially financed by the owner(s) and its family and friends.

In an early stage, start ups have little or no revenue but have the idea of the product or service that they wish to develop.  They have no profit, are short of liquidities and are thus seen in financial difficulty.  Such circumstance excludes the start up from getting a state aid which leads to bankruptcy.

Why is there is a need to grant state aid to start ups?

Even if the start up funding mechanisms have greatly evolved over the last years, including crowdfunding, investment syndicates and Venture Capital firms, the Pandemic has revealed the fragility of these small businesses.

Start ups are essential in order for economies to recover and to thrive in the coming months and years.  The investments are also going to be difficult to raise, but the problems which require solutions and products developed by start ups are increasing.

Which are the conditions to benefit from state aid, once the Amendment to the Framework is approved by the Member States?

Further to the provisions of the Amendment, the state aid provided under the Temporary Framework is available for start ups which were already in financial difficulty on 31 December 2019, under the following conditions:

  • The company is not in insolvency proceeding or;
  • Has not received aid which has not been repaid or;
  • It is not subject to a restructuring plan under the State aid rules.

The Temporary Framework has been very well received by the advocacy groups and by the players in the field and shows that the small and micro enterprises are important for the EU economy.