The bureaucrats in Brussels do not care for the constructive way Britain has fostered vital, young entrepreneurial businesses and their financing. Their latest move is to specify how small companies can use the financial support they receive. In a free and fair market, you might imagine that SMEs should be able to use their funding in any way the funders agree. UK Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) legislation broadly does this.
Nanny Brussels knows better and has decided that these funds may not be used for “replacement capital”, e.g. one generation of SME owners selling out to the next, and company acquisitions. Continental countries, notably Germany, do not use the financial market so much as state handouts which you might think more reprehensible, but oh no. If you did not know for whose benefit the EU operates, wake up now. If there was any doubt, the Association of Investment Companies reports that the Commission has warned HM Treasury that they will be watching the UK implementation quite specifically.
Fresh financing often involves an element of replacement capital, whether the entrepreneur wishes to sell the business, or reduce his personal financial risk, or simply grow the business. Using the financial services market to grow the wider economy is precisely what the EU should want. Releasing some equity may be the only way that an entrepreneur can develop the business.
As a company grows and develops, its financial profile changes and so does that of the management team. Replacement capital is crucial for facilitating such development.
Business growth must not be limited to the organic. Sales and acquisitions are vital for a healthy market. The weak are reinvigorated by the strong. This is where value comes from, notably for consumers who will be short-changed by the Brussels meddling.
To differentiate between growth capital and acquisition finance is, in many instances, completely artificial. VCT and EIS finance are major sources of capital in an investee company. Outlawing such activity, often their main source of funds, will certainly reduce growth at a time when most commentators think that growth is what the EU most needs. A company, like any organism, is constantly evolving; many grow, some shrink, but as they change, so do their finance needs develop and alter.
In the UK version of the legislation in the Draft Finance Bill 2015-2016, HM Treasury has sought to water down the prohibition through negotiation with Brussels. Needless to say, that compromise was ineffective and does not solve the problem. We should not have to play this off the back foot anyway: the EU’s position is simply anti-competitive.