Big Society Capital has been given the green light by the European Commission.
The wholesale investor had been waiting for clearance from the commission for its structure under state aid rules, which prevent countries providing unfair financial advantages to businesses.
Big Society Capital, which expects to have about £400m of funds from dormant bank accounts and £200m from four high-street banks over the next five years, will invest in social finance intermediaries such as Charity Bank and Big Issue Invest and initiatives such as the social impact bond.
The Big Lottery Fund has been holding funds on an interim basis while state aid approval was sought. An interim committee announced its first investment - £1m in the Private Equity Foundation - in July.
A statement from the European Commission on Tuesday said it found the Big Society Capital plans to be "in line with EU state aid rules, in particular because its business model contains a number of safeguards to ensure that its investments do not distort competition at the level of the social investment finance intermediaries".
"Moreover, SIFIs are required to reinvest the capital by lending to frontline social sector organisations under strict conditions, to avoid crowding out private investors and distorting competition," it said. It approved the plans for the next five years.
Joaquín Almunia, vice-president of the commission, said: "The commitments and safeguards put in place by the UK ensure that state aid linked to this innovative project in the social sector remains well-targeted and does not result in undue distortions of competition."
Nick O’Donohoe, chief executive of Big Society Capital, said the approval had come through quicker than expected. "We believe this reflects the general engagement in Brussels around the social investment agenda," he said. "We anticipate clearing our final regulatory hurdles in the new year and being open for business by the end of the first quarter of 2012."
Nick Hurd, the Minister for Civil Society, said in a statement: "I am delighted that the European Commission has approved our state aid case and cleared the way for the government to capitalise Big Society Capital with up to £400m of dormant accounts money."