Reflections on a Revision of the Definition of the EU SME Crehan, Patrick December 2020 This publication is a report by the Joint Research Centre (JRC), the European Commission’s science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication. For information on the methodology and quality underlying the data used in this publication for which the source is neither Eurostat nor other Commission services, users should contact the referenced source. The designations employed and the presentation of material on the maps do not imply the expression of any opinion whatsoever on the part of the European Union concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Contact information Name: James P. Gavigan Address: European Commission, Joint Research Centre, Edificio Expo, Calle Inca Garcilaso, 3, 41092 Seville, Spain Email: [email protected] Tel.: +34 9544 88409 EU Science Hub https://ec.europa.eu/jrc JRC123296 PDF ISBN 978-92-76-28301-0 doi:10.2760/602855 Luxembourg: Publications Office of the European Union, 2020 © European Union, 2020 The reuse policy of the European Commission is implemented by the Commission Decision 2011/833/EU of 12 December 2011 on the reuse of Commission documents (OJ L 330, 14.12.2011, p. 39). 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Contents Foreword ..................................................................................................................................................................................................................................................................... 1 Acknowledgements .......................................................................................................................................................................................................................................... 2 Abstract ....................................................................................................................................................................................................................................................................... 3 1 The Case for Revising the Definition of the SME in Europe ............................................................................................................................. 5 1.1 The EU Definition ......................................................................................................................................................................................................................... 5 1.2 The EVCA Challenge .................................................................................................................................................................................................................. 6 1.3 The Business Europe Challenge ..................................................................................................................................................................................... 7 1.4 A Need for Clarity ........................................................................................................................................................................................................................ 7 2 Other Approaches to Small Business Size Standards ......................................................................................................................................... 10 2.1 The Definition of Medium Sized Business in Italy ..................................................................................................................................... 10 2.2 The 50+ Definitions of Small Business Used Around the World ................................................................................................ 10 2.3 The Many Definitions of Small Business Employed in the USA ................................................................................................... 11 2.3.1 The History of Size Standards in Small Business Set-Aside ......................................................................................... 12 2.3.2 Size Standards for Small Business Set-Aside by Sector and Over Time .......................................................... 12 2.3.3 The 2019 Revision and Methods Used .............................................................................................................................................. 13 2.3.4 Size Standards for the SBIR Program................................................................................................................................................. 14 2.3.5 Access by Small VC-backed Business to the SBIR Program ......................................................................................... 15 2.3.6 Access by Small VC-Backed Business to the PPP Program ........................................................................................... 15 2.3.7 The New SBA Rules of Affiliation and Criteria for Independent Ownership and Control .................. 17 3 Conclusions .................................................................................................................................................................................................................................................. 18 3.1 The Possibility of Multiple SME standards applied in EU Programs ........................................................................................ 18 3.2 The Public Interest Served by SMEs and the VC Industry .................................................................................................................. 18 3.3 The Purpose and Application of Rules relating to Ownership and Control ........................................................................ 19 3.4 Exceptions to the General SME definition in the US and Europe ................................................................................................ 20 3.5 Suggested Ways to Proceed .......................................................................................................................................................................................... 20 List of abbreviations and definitions ........................................................................................................................................................................................... 22 Annexes .................................................................................................................................................................................................................................................................... 24 Annex 1: Ambiguous Language ................................................................................................................................................................................................ 24 Annex 2: Legal Persons, Natural Person and Partnerships ............................................................................................................................ 25 Annex 3: Stress Testing the EU Definition of the SME ....................................................................................................................................... 27 Where the SME is a Parent Company ........................................................................................................................................................................ 27 When the SME is a Subsidiary or Affiliate ............................................................................................................................................................ 28 When the SME is backed by a VC or PE Fund .................................................................................................................................................... 28 Annex 4: The LP-GP Relationship ............................................................................................................................................................................................ 31 LP-GP Agreements ....................................................................................................................................................................................................................... 32 i Tensions in LP-GP relations ...............................................................................................................................................................................................