Introduction

Boosting prosperity and competitiveness are again among the EU's top political priorities for the 2024-2029 legislature. These priorities were inspired by the Draghi report, which calls for an additional investment of €800 billion per year in addition to policy measures that would leverage the EU's single market to scale and commercialise breakthrough innovation.

The Competitiveness Compass for the EU, presented by the European Commission in January 2025, proposes a programme of such policy measures, including a '28th legal regime', which in theory 'would simplify applicable rules and reduce the cost of failure, including any relevant aspects of corporate law, insolvency, labour and tax law'. The proposal recalls earlier attempts to codify European commercial law (see Box 1).

This briefing, produced at the request of the European Parliament's Committee on Legal Affairs (JURI), seeks to support its work in preparing a legislative-initiative report (INL), entitled 'The 28th Regime: a new legal framework for innovative companies', to influence the development of the '28th regime' proposal.

Following a 'state of play' of the innovation ecosystem in the EU, the briefing highlights the key challenges faced by innovative start-ups over the lifecycle. It delves deeper into four sectors that are central to the EU's innovation capacity and competitiveness trajectory and whose findings could apply more broadly to other sectors: (1) Artificial intelligence; (2) Biotech; (3) Clean tech; and (4) Defence tech. In doing so, the analysis recognises that an innovative start-up may fall under more than one sector and innovative technologies may have 'dual use' purposes.

Building on the problem and sectoral analysis, the briefing then points to possible design elements of the 28th regime that could promote its European added value while supporting the EU's achievement of its social, environmental and economic objectives, including its competitiveness and strategic autonomy.

The research, carried out between February and May 2025, draws on research literature, industry reports and interviews. It is also informed by analysis of data from the World Bank's Doing Business survey (Box 6),¹ the Regional Innovation Scoreboard, and Dealroom.co.²

State of play

There are a wide range of definitions of start-ups and scale-ups in use in the EU (Box 2). Definitions typically address aspects such as growth (potential and actual), capital invested, age and business model.

Nonetheless, there is data and research that demonstrates that the EU's strategic innovation agenda is lagging behind that of other regions, in particular the United States (US) and China. The level of public and private investment in comparatively low in the EU compared with the US and China (see Figure 1a and 1b). As noted by the FUTURINNOV project, a collaboration between the European Innovation Council (EIC) and the Joint Research Centre of the European Commission (JRC), private investment is important not only for meeting financial needs, but also securing business and market expertise. The gap in venture capital investment between the EU and the US increases with the maturity of a company.

A similar pattern is evident at sectoral level:

Artificial intelligence (AI) technologies: The US and China have the strongest AI ecosystem as measured by the level of investment, research and patents.

Biotech: Biotech represents about two-thirds of all health industry firms in the US. In the EU, by contrast, biotech makes up only about a third of all health industry firms.

Clean tech: The EU's competitive advantage in clean tech is eroding due to the challenges to scale up manufacturing and to maintain cost competitiveness with China.

Defence tech: While private investment in the EU's industry increased five-fold between 2021 and 2024, its development is considered to lag behind that of the United States by about five years.

Source: Compiled by the author on the basis of the latest available data, structured as follows: Overall indicators use data from the World Intellectual Property Organization (WIPO, 2024), Doing Business (Doing Business, 2020) and the European Commission (EUROSTAT, 2025); Sector 1, Publications Office of the European Union (OP, 2024) and the Global Vibrancy Ranking (Stanford, 2024); Sector 2, Publications Office of The European Union (OP, 2024) and the JRC (European Commission, 2024); Sector 3, Bruegel (Bruegel, 2025) and the US Department of Energy (DoE, 2025); Sector 4, the European Defence Agency (EDA, 2025) and provided by the Stockholm International Peace Research Institute upon request (SIPRI, 2025). Graphic by: Samy Chahri and Giulio Sabbati.

Note: VC = venture capital. Source: EPRS based on data provided by Dealroom.co upon request. Graphic by: Samy Chahri and Giulio Sabbati.

Based on an analysis of research publication citations, the Australian Strategic Policy Institute has found that the EU is lagging behind China and the US in a number of critical technologies in each of the four sectors (see Figure 2).

Source: EPRS based on ASPI Critical Technology Tracker: Top 5 Countries Snapshot with the EU, 2025. Graphic by: Samy Chahri and Giulio Sabbati.

Problem analysis

Figure 3 presents the innovative company lifecycle and its challenges. In the pre-seed stage, an entrepreneur based in a local innovation ecosystem develops an idea with the financial support of friends and family. This idea transforms into a 'proof of concept' that can attract more funding from incubators, angel investors and venture capital. In the early stage, the company (now a start-up) starts to commercialise a product. It continues to build its supply chain and set up subsidiaries in other regions with the support of financing from venture capital, banks, and financial institutions. Finally, the company can exit through a merger or acquisition, initial public offering (IPO) on a stock exchange.

The transitions from stage to stage can also be understood in terms of funding. The initial round is typically referred to as seed funding, while subsequent rounds are referred to as series (e.g. series A funding). Securing equity can support the maturity of innovative European companies and boost their probability of innovation by 13 percentage points.

As innovative European companies grow, it becomes more challenging to attract EU-sourced financing due to the fragmented EU capital market. An estimated 82 % of scale-up deals in the EU involve a foreign lead investor . With each new funding round, innovative European companies are likely to encounter incentives to relocate abroad and 12 % actually do , most notably to the US. Firms undergoing an IPO are likely to open headquarters in the country where they are listed: in 55 % of cases the stock exchange and their new headquarters are in the same country .

Source: EPRS based on Allied for Start-ups, Mastering the Startup Journey: A new approach to closing the innovation gap, March 2025. Mack S., Europe ventures forward: Getting the scaleup of cleantech right innovation gap, Hertie School - Jacques Delors Centre Policy Brief, October 2024. Graphic by: Samy Chahri and Giulio Sabbati.

Data provided by Dealroom.co show that the transition probabilities for EU-27 companies are lower in the EU-27 compared with the US for the first three rounds of financing. An estimated 23 % of companies that received seed funding in the EU-27 transitioned to series A compared with 32 % in the US. For the transition from series A to B the estimated figures are 44 % and 54 % respectively.

The problem analysis identified four key issues that are relevant for the 28th regime:

The European financing ecosystem has a low appetite for risk and cross-border investment. The private investment landscape is dominated by banks with heavy capital and reporting requirements. As a result, they have limited incentives to seek growth and profit over a 10-year plus time horizon.

EU pension funds and insurance are mainly oriented towards safe assets and have limited exposure to venture capital, as required by law. In the US, in contrast, the enactment of the Employee Retirement Income Security Act (ERISA) in 1974 led to greater pension fund investments in venture capital that supported the development of Silicon Valley, an innovation hub that has generated thousands of US innovative companies.

'Home bias' in investing in innovative companies is evident across Europe and it is a failure of the internal market to ensure a level playing field (Box 3). As noted by FranceDigitale, investors are more knowledgeable about 'the status, share capital, cash contributions and the decision powers' inside companies in their own country. These elements may vary significantly in other EU countries.

Member States and innovative European companies struggle to attract skilled, entrepreneurial workers. At least 16 Member States offer a special admission scheme (residence permit and/or visa) for start-ups and entrepreneurs.³ In addition to different conditions, burdens, and waiting times, these schemes cannot permit the free movement of entrepreneurs in the EU. The EU's Blue Card scheme was designed for skilled workers in traditional companies and excludes entrepreneurs. Both public and private investors also have a need for sector-specific, technical expertise to help guide their portfolio decisions.

The high cost of failure and restructuring for innovative European companies. Venture capital fund managers note that the exit environment is more challenging than raising funds. Researchers from Bocconi University note that restructuring is 'key to scale up all companies for success at the technology frontier'. US companies can restructure within months while in Europe it can take years. As the authors note, 'in tech, being two to three years late on a nascent market often means death'.

High geographical variation in legal frameworks and innovation across the EU. There are significant differences in shareholder rights, legal rights to get credit and insolvency rights in the EU, as well as the time needed to start a business (see Figure 4 and Box 4). Some improvements are likely to have been undertaken since then. For example, Austria has set up a new legal form tailored to start-up companies that has been available since January 2024. Slovenia is currently working on a simplified company form as well. Experts in a horizon scanning workshop have noted that differing regulatory frameworks across regions in terms of data privacy and synthetic data inhibit the development and adoption of emerging technologies.

Source: World Bank, Doing Business Indicators, 2019. Indicator definitions are provided in Box 6. Graphic by: Samy Chahri and Giulio Sabbati.

Artificial intelligence technologies

There are around 6 300 AI start-ups in the EU, 10.5 % of which are generative AI start-ups. Most generative AI start-ups develop downstream applications, tools and infrastructure for GenAi models and some 31 % also develop foundation models. Financing is by far the biggest obstacle for EU AI start-ups to scale, followed by regulation, computational power and access to talent.

Weak capital and investment markets, especially venture capital, is very pertinent for AI start-ups. EU AI start-ups face challenges to raise sufficient capital in the EU and many relocate in order to scale up (Box 4). EPRS research indicates that the EU would need to step up its investment in digital infrastructure by €157 billion to €227 billion a year to gain competitiveness. Out of this amount, 25 % is expected to be filled by public investment, leaving 75 % for private funds.

Secondly, limited computational power, high cost of graphics processing units (GPUs) and lack of local cloud service providers are bottlenecks. Unless replaced by smaller language models, the demand for computational power will continue to increase with larger models, which might further limit the ability of AI start-ups to train and run their models.

Thirdly, the scarcity and cost of talent remains an obstacle. Access to highly qualified talent such as senior machine learning engineers, or accessing third-country nationals, remains complex and bureaucratic.

EU public procurement , accounting for 14 % of EU GDP and currently under review, could be another opportunity to boost growth for AI start-ups and innovative companies by simplifying and modernising rules.

Biotech

The development of innovative medicines and treatments to meet the health needs of the EU's population requires significant financial and time investment.⁴ A large share of private investment (44 %), however, is directed to the testing of safety and efficacy of new medicines rather than developing new ones. Other research has found that only about a third of newly approved medicines have high therapeutic value.

Since the early 1990s private investment to develop new medical treatments has shifted from Europe to the United States. The number of biotech researchers in the EU grew from 42 000 in 2012 to 81 000 in 2021, while in the US the number of biotech researchers grew from 35 000 to 250 000 over the same period.

Biotech companies typically scale up through mergers and acquisitions (M&A) and IPOs. To ensure their competitive advantage, pharmaceutical companies tend to license or acquire products that are in advanced stage clinical trials from biotech companies rather than carrying out their own basic research. Such acquisitions may also be done to eliminate competition and are known as 'killer acquisitions'. A 2024 study conducted by the European Commission found that the scale of the phenomenon appears to be quite large. From an analysis of 240 transactions involving a merger, asset purchase, licensing agreement and R&D agreement, about 37 % warranted further scrutiny. Another risk specific to the biotech sector is the dilution of the founder's capital to almost no stake when securing venture capital.

While the mechanics of an IPO are effectively the same in the EU and the US (Frankfurt and Euronext stock exchanges compared with the NASDAQ Stock Market), the initial valuations and prospects for growth are vastly different. The average size of a US biotech IPO is four to five times larger than that of a European biotech IPO. Institutional investors hold a smaller share of the top 10 regional biotech companies in Europe compared with the US (60 % versus 85 %).

Source: EPRS based on data from European Investment Bank, Investment Report, 2024/25. Graphic by: Samy Chahri and Giulio Sabbati.

Clean tech

The clean tech sector in the EU is driven to a large extent by the European Green Deal, which aims to support the energy transition and achieve climate neutrality by 2050. At present, the EU is relatively competitive in the development and scale-up of clean technologies and is at the centre of global patenting networks (see Figure 5). Yet, urgent and decisive action is needed to ensure the EU's continued leadership, to strengthen its strategic autonomy in access to certain key clean technologies (such as batteries), and to meet the climate neutrality target.

According to the International Energy Agency, 35 % of technologies needed to reach this goal are not yet available for consumers and businesses. The EU's position in the sector is under pressure from global competitors, particularly China, as well as the cost of energy and raw materials.

An EPRS study estimates that fulfilling the EU's 2030 climate objectives and achieving carbon neutrality by 2050 would require an additional investment of €1 155 billion per year, of which €351 billion to €364 billion would have to be mobilised from private investors.

European clean tech companies face challenges to access equity in the start-up and early stage of the life cycle, which focuses on R&D, as well as challenges to access debt and equity financing for the later stage of the life cycle, which focuses on infrastructure and manufacturing. As noted by the Jacques Delors Institute, clean tech is less attractive for venture capital investment due to its high capital intensity and lower short-term commercialisation prospects. To secure bank guarantees, clean tech manufacturers are often required to provide cash collateral, which could alternatively have been invested in the company. Moreover, environmental, social and governmental (ESG) conditions and sustainability reporting are not sufficiently strong and taken into account by investors. Nonetheless, the research evidence shows that, with the right institutional and regulatory framework in place, it can be possible to pursue sustainable development goals without compromising economic gains.

Defence tech

The scale-up of the EU's defence tech sector, which has been growing since the Russian invasion of Ukraine in February 2022, is crucial for the EU's future military capabilities and strategic credibility. Still, the level of defence research and technology has not reached the EU permanent structured cooperation (PESCO) benchmark of 2 % of total defence expenditure. Moreover, the fragmentation and low level of collaboration between Member States on defence research and technologies carries the risk of duplication and a lower likelihood of significant breakthroughs.

Advances in 'dual use' technology and software including AI play an important role in generating new innovative defence tech start-ups. Public and private investment is also critical for supporting the maturation of the sector. However, both public and private investors often restrict or prohibit investing in military technologies. Some funding opportunities offered by the EU are considered to have a high administrative burden. According to data provided by Dealroom.co for this briefing, an estimated €753 million in venture capital was invested in EU-27 defence tech and defence application companies in 2024, which represents about 2.5 % of total venture capital invested in EU-27 companies that year.

The lifecycle of a European defence tech start-up typically begins with seed funding from angel investors or venture capital followed by co-funding and support from the national ministry of defence. The start-up may receive further investment to develop a pilot project and carry out demonstrations. There are two main paths to scale-up in the defence tech sector:

Path 1: Equity buy-outs and mergers with larger defence companies. Several illustrative examples are provided in Box 5. The corporate culture divide between traditional defence companies and defence tech may prove to be a hurdle, particularly since start-ups are treated as sub-contractors rather than innovation partners.

Path 2: Public procurement. A large public procurement contract from a ministry of defence can ensure the viability of a defence tech company. However, the cycles of public procurement can be quite long, running up to 20 years. Defence public procurement processes are typically designed for products that may need to be replaced or updated, not entirely new products.

Defence tech start-ups that are unable to transition through either of these two paths risk falling into 'prototype purgatory', in which the company can continue to exist by selling products and demonstrations on a small-scale, but cannot secure a large contract and scale-up.

How could the 28th regime address the identified problems?

Horizon scanning exercises have found that standardisation and legislation are important enablers for breakthrough innovation in deep tech. These two elements can contribute to 'stable, robust, long-term and predictable' framework conditions to promote innovation and scale-up. The European Investment Bank has reported that EU companies with multiple advanced digital technologies in development are more likely to encounter regulatory fragmentation.

The Competitiveness Compass noted four possible areas of law that could be covered by the 28th regime. Each is discussed below in relation to the identified problems of scaling up innovation in the EU. The discussion takes into account the proposal for an EU Inc and the proposal for a Societas Europaea Simplificata by the Henri Capitant Association, in addition to a selection of indicators from the World Bank's Doing Business project (see Box 6). A holistic perspective is taken, as EPRS research has found that EU actions that take into account all types of gains (economic, social, fundamental rights, environmental protection and others such as strategic autonomy) can be more sustainable.

Company law: This body of law concerns the registration of a company or subsidiary, opening a bank account, official correspondence with external parties, registering for value added tax, and the notarising of official documents. The problem analysis highlighted the importance of speed and digitalisation of procedures for innovative companies.

A large part of existing EU company law is codified in Directive 2017/1132, which was subsequently amended by Directive 2019/1151 to promote the digitalisation of company law and updated by Directive (EU) 2025/25. This Directive supports 'digital by default' solutions, such as online company formation and registration, while eliminating the need to resubmit documents when setting up a subsidiary in another Member State. Article 16 calls for the instituting of a 'digital EU power of attorney'. Another EU law, Directive (EU) 2019/2121, promotes the use of digital tools for cross-border movement and company restructuring.

There are, nonetheless, gaps in EU company law that could be addressed by the 28th regime. As noted by the Henri Capitant Association, the provisions in EU company law on company formation only apply to some types of companies and 'there remain aspects that have not been harmonised, such as the form of the instrument of incorporation (a notarial instrument in Germany)'. The proposal for an EU Inc mentions 'standardized documents such as articles of incorporation, share transfer agreements, resolutions' for the online, digital-only registry, called the 'EU Registry'.

A 28th regime, which can apply to any European innovative company and which uses standardised forms, could promote more efficiency in the founding and scaling up of innovative European companies. The efficiency of company law in a country can be reflected in the Doing Business indicator 'time (days) to start a business'.

Insolvency law: This body of law concerns the legal processes that companies must follow when the business fails and debts cannot be paid. Research has found that insolvency reforms support debt restructuring, limit the escalation of non-performing loans, and ultimately reduce failure and liquidation of successful companies. Thus, an efficient insolvency law can help to reduce the cost of failure and help to regenerate the innovative company lifecycle.

A Commission proposal to harmonise certain aspects of national insolvency laws is currently being debated in the European Parliament and the Council. The proposal seeks to maximise the share of debt that can be recovered in a quick and efficient manner, while distributing the value fairly among creditors. The proposal for an EU Inc would require companies to file a liquidation resolution within the EU Registry and to pay debts within 12 months, and would be more efficient than Delaware General Corporation Law. A more efficient insolvency law could reduce the cost of failure and protect the rights of creditors. The efficiency of insolvency law can be reflected in the indicators 'strength of legal rights' and 'insolvency rights'.

Tax law: Tax breaks and tax incentives could increase the attractiveness of the EU for entrepreneurs and skilled workers and some inspiration could be taken from existing schemes in the Member States. A 2019 report noted that about half of Member States offered tax incentives for founders of start-ups or entrepreneurs from third countries, such as reduced corporate taxes due to reinvested profits, reductions in social security contributions and tax exemptions on dividends for new staff members. Employee equity and stock option policies could be an important tool to attract entrepreneurial workers, but there is wide variation in their design and tax treatment across Member States. Germany and France have reformed their stock option policies so that they are at least as competitive as the US.

One of the elements of the proposal for an EU Inc is a standardised EU employee share option scheme (EU-ESOP), which could serve to attract high-skilled workers and overcome the differences evident across national schemes. While the proposal defers to the competence of Member States to set taxation rates, it does suggest harmonising the point of taxation for when there is a sale. Such a scheme could be extended to supervisory board members as well.

Employment law: This body of law concerns the treatment of workers in innovative companies in terms of hiring, compensation, protection and dismissal. A World Bank report recommends policies that ease the burden on firms while ensuring universal, generous unemployment benefits for workers, following examples such as Denmark's 'flexicurity' model and Sweden's Rehn-Meidner welfare model. This recommendation is aligned with the European Pillar of Social Rights, which calls for secure and adaptable employment, information about employment conditions and protection in case of dismissals. A Bocconi University policy brief suggests that exemptions from employment protection could be made for deep-tech workers in the highest decile of earnings.

What could be the European added value of the proposal and its drivers?

The European added value of the 28th regime could be reflected in the following:

The success of the proposal is largely predicated on the improved competitiveness of the EU's financial markets (e.g. via the Savings and Investments Union) as well as the scale of public investment in a strategic innovation agenda. EPRS research has found that additional public investment in the order of €278 billion each year could boost EU GDP by up to 2.6 % by 2035.⁵

The European added value of the proposal could be heightened with complementary EU policy actions such as a mobility scheme for entrepreneurs, completing the EU's digital infrastructure and reducing gaps in value chains (such as AI chips or dependency on cloud services by third countries) and public procurement reform to include non-price criteria.

The following design elements could promote the European added value of the proposal:

Uniform conditions for all Member States: Directive (EU) 2025/25 details how Member States should boost digital tools and processes for companies. Yet, it does not specify one portal or one approach. A single, uniform European approach could leverage the EU's scale and promote certainty for investors within and beyond the EU. The needs of the European innovation ecosystem suggest that the legal instrument should take the form of a regulation to ensure maximum uniformity. It could leverage existing elements such as the EU VAT Number.

Distinct features to attract innovative European companies and protect founders: The 28th regime must offer distinct advantages to attract innovative companies in the EU and beyond. The possible elimination of minimum capital requirements is not sufficient, as most Member States now offer the possibility to set up a company with trivial or no minimum capital requirements.

An EU-ESOP appears to be a promising design feature. According to European venture capital firm Index Ventures, each Member State has its own legal framework and tax code regarding stock options. The EU-ESOP could be offered to all employees including supervisory board members, as is done in Estonia, Latvia and Lithuania. The share option scheme could be complemented by measures to protect company founders such as anti-dilution rules and asset locks.

Source: EPRS based on European Digital Hubs Network Catalogue, downloaded 23 May 2025. Graphic by: Samy Chahri and Giulio Sabbati.

Embedded links to the broader European innovation ecosystem: The 28th regime could be linked to other elements of the European innovation ecosystem such as incubators, the unitary patent ⁶, and European innovation hubs (see Figure 6). There are over 210 innovation hubs in the EU, with at least one in every Member State. The scope of innovative European companies could be aligned with the EU's Strategic Technologies for Europe Platform (STEP), which was established to support European industry and investment in critical technologies.⁷ The 28th regime could also help to streamline the public sector's purchasing power and 'European' preference through public procurement. Doing so could help align the strategic scale-up of innovative European companies in relation to society's needs.

Estimating the scale of potential European added value

According to the European Commission's Single Market Strategy, it should be possible to establish a company under the 28th regime within 48 hours, in line with a recommendation in Enrico Letta's single market report. Some Member States have achieved higher efficiency. For example, in Estonia an entrepreneur (a native with an Estonian ID card or a foreigner with an e-Residency card) can start a business in 15 minutes. Promoting efficiency in fund-raising (e.g. completing a round in six months or less) could also support 'the right to conduct a business' as called for in Article 16 of the Charter of Fundamental Rights. Our quantitative analysis provides two insights:

A one-day decrease in the time to start a business was associated with a 0.29 percentage point increase in venture capital as a share of GDP. ⁸ Assuming that it presently takes 10 days on average to start a business in the EU, then reducing it to two days could lead to an increase in venture capital invested in European companies by about €445 billion, or 15 times more than the current level and exceeding the total level of venture capital invested in US companies by more than three times. The strength of insolvency rights, legal rights and minority shareholder rights were found to be positively correlated with job creation and sales. An enhanced role for the European Labour Authority (ELA) could envisage monitoring of the quality of jobs in companies under the 28th regime, particularly in the case of strategic acquisitions and reorganisations.

Reducing the gap in transition rates between start-ups in the EU-27 and the US along the lifecycle could boost the number of European innovative scale-ups by up to 45 %. Data provided by Dealroom.co show that the transition rates for US companies are higher than EU companies at each financing stage of the company lifecycle from seed to Series D. Increasing the transition rates could also have the indirect effect of boosting the number of European innovative company start-ups, thus further boosting the number of scale-ups.