<B>New laws for French investors</B>

Joshua Jampol. Journalist

21 March 2003

New laws under review in France may change the state of direct capital investment in small and medium businesses, and offer investors more fiscal advantages, explains Joshua Jampol.

Benefits for investors in firms that are not publicly traded may increase, if the Dutreil law, now being examined by Parliament, is passed.

Currently, one-fourth of all sums invested in small and medium business are tax deductible, with a ceiling of €12,000 for single investors and €24,000 for couples. If the law, named after Renaud Dutreil, State Secretary for Small and Medium Businesses, gets the green light, these figures will rise to €20,000 and €40,000, respectively.

The measure is seen as a godsend for the individual investor, since it will not only bring purely fiscal advantages, but also create jobs. It will function something like the existing French Soficas, or fiscal accounts, such as the one which subsidizes France’s cinema industry.

Investing in small and medium businesses in France has been called a “difficult profession”.

The nation counts only between 3,000 and 5,000 business angels, whose average investment is a mere €45,000. A modest showing, when compared with the more than 50,000 angels operating in the U.K. who invest twice as much, and with the half million in the U.S., who dole out $100,000 (€93,000) on average.

Difficult profession or dangerous game? A boosters group, France Angels, runs two-day information sessions to try and spread the facts about investing and encourage more people to assume the investor’s mantle. This itinerant school visited five French towns last year and plans on hitting 20 this year. With First Tuesday-type affairs having dissolved like the dotcom bubble, the breed is not easy to promote, nor is enthusiasm simple to foster. The French government may step in. It has said it will offer financial assistance to any firms which help educate the public on the matter.

Business angels only became important to enterprise creation in France at the height of the dotcom frenzy. According to one study, they were present alongside professional investment groups in 15 percent of startups at that time, but only responsible for three percent of the cash. By 2002, they had grown considerably more circumspect. Over 20 startups of technology companies had business-angel backing in 2000. This dropped to less than 10 in 2001, to four last year and none so far this year. In France as elsewhere, investor confidence is still shaky. Some say this is certain to continue.

[*D Unified Euroland *]

Across Europe, investment in risky affairs enjoyed its heyday between 1995 and 2000. The start of the stock-exchange downturn in 2000 saw a divided investor’s Europe. This gave way to a Euroland that was more unified and safety-conscious, as a whole, in 2001, a trend that sharpened in 2002. Today, with the FTSE down 50 percent from its all-time high eight years ago, this feeling is more widespread.

Yet even in the financially conservative land of Gaul, it is beginning to dawn on the powers that be that fiscal laws should facilitate, not intimidate investment. Perhaps the new Dutreil statute will bring a change in attitude, breathe new life into old forms of investing, and perhaps even spark some new ones.

Indeed, some say change is already at hand. Many French investors have been turning to “love money”, investing in family projects or in those of close friends or relatives - though recent stock-exchange seesaws the world over have made this option chancier. Return on investment, even in love-money schemes, is more uncertain today. When queried, only 27 percent of the nation’s capital-investment professionals felt their stakes would appreciate in the short term.

Other new areas are drawing investors’ aid. Single backers are putting money in a Common Fund for Innovation, where it aids research. Such funds benefit from attractive incentives. Still others have been placing cash with local development projects, such as those specializing in herbal medicine or biological agriculture, which give investors a feeling their checks are going toward some useful endeavor.

A second law on innovation, proposed by the French Ministry for Research, in conjunction with the Ministry for Industry, should reach Parliament in April. This law would allow creation of single-person capital-risk firms. Currently, any capital-risk enterprise formed in France must have at least three shareholders, neither of whom can own more than 30 percent.

Observers believe this law will meet a real need – particularly for people who have sold their businesses, created a holding company in order to invest, and put employees on salary. These people do not currently benefit from any breaks in the tax law.

Experts predict that at least a €40,000 capital outlay will be necessary, which suggests the new bill will not open capital-risk firm creation to all comers. The law should however bring a special status for companies involved with innovation, and include tax exemptions for them.


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