Virtual stock exchange Investbx - the first regional exchange of its kind in the UK - is set for a summer launch after being given the go-ahead by the European Commission to start operating in the West Midlands.

The EC has endorsed aid of £3 million to Investbx, which plans to assist expanding SMEs raise equity finance up to £2 million by connecting them with investors.

It had been investigating the legality of the exchange after small business stock market Ofex labelled the scheme uncommercial and "a deplorable waste of public funds".

But Neelie Kroes, the EC's Competition Commissioner, said: "This aid will help growing SMEs get access to capital. Investbx is a very innovative project, which may be a valuable precedent for other member states."

Investbx has also been given the seal of approval by the board of Advantage West Midlands. The regional development agency is providing the funding to pump-prime the Investbx project.

The new market is supported by local businessmen including former senior partner of Wragge & Co John Crabtree, who chairs the Investbx board.

Others businessmen on the board include Paul Bassi, chairman of investors and auctioneers Bond Wolfe; David Thompson, chairman of Marston Breweries and John Handley, former director at Lloyds Development Capital.

Mick Laverty, deputy chief executive at AWM, said: "The agency has a key priority to develop a diverse and dynamic business base and appropriate access to finance is key to an enterprising region.

"Investbx is an exciting and innovative solution to rectify an acknowledged equity gap in the market and I am delighted that after two years of hard work preparing for the project, the European Commission has given us the go-ahead.

"Thanks to the commitment of the region's professional services community, Investbx is set to make its mark, which speaks volumes for the aspirations of all the partners involved who are determined to make the West Midlands a world-class region in which to invest, work, learn, visit and live."

A spokesman from PLUS Markets groups, which was formerly Ofex, said the organisation was unconcerned at the EC ruling.

He said: "Plus has expanded dramatically in the last two years and is now an established exchange offering services for a wide range of companies listed on Plus and other exchanges and we do not feel that we are competing directly with Investbx's stated objectives."

But the spokesman added that a publicly funded exchange was highly unusual and that it would face a number of regulatory barriers before it could launch.

He said: "I think all we can say is that no other exchange in Europe or the US has received state funding, why should they?

"Also, there is now a lot more to exchanges than just buying and selling stock.

MiFID - the markets in financial instruments directive - sets out greater regulation for markets and will come into force in November.

"Every stock exchange, including PLUS, has had to dedicate both time and expertise to ensure we are MiFID compliant."

But Mr Laverty said all PLUS's concerns had been addressed by the EC review.

He said: "I must stress that we wouldn't get involved or use public sector resource for such a project if there wasn't a market failure.

"We have had to rigorously prove this market failure to both the DTI and the EC and, if we had not convinced them, they would not have given us approval to go ahead.

"With regards to regulatory compliance, we will be working in partnership with the Share Centre who will be providing our trading platform and ensuring that we meet the requirements."

Mr Laverty denied claims that the exchange was a waste of public money.

He said: "Investbx has come up with a rigorous business model to suggest the exchange will be self-sustaining within three to five years.

"AWM has capped its funding to Investbx at £3 million. If it cannot sustain itself after that has been used we will have to reassess the situation, but there is no plan for a second round of funding."