Author: Rachel McAllister
To assist high growth companies who typically rely on equity investment, the UK Government has made £250 million available for the Future Fund, and will keep this amount under review. The Future Fund is targeted at start-up, scale up and venture backed businesses affected by coronavirus but which do not meet traditional lending criteria and have been unable to access the previously announced coronavirus packages.
The Future Fund opened to applications on Wednesday, 20th May 2020 and the scheme will initially run until the end of September 2020. Applications will be dealt with on a first come, first served basis and so, given that at time of writing a maximum of 2,000 companies (based on the lowest investment amount) will benefit from the scheme, we recommend that applications are made very promptly.
What is the Future Fund Scheme?
The Future Fund scheme is a co-investment fund, delivered in partnership with British Business Bank, which will provide investment ranging from £125,000 to £5 million, subject to at least match funding from private investors, to UK-based companies which are facing financial difficulties.
Investment will be made into successful companies by way of an unsecured convertible loan note, which is a form of relatively short-term debt which may convert into shares in the company at a later date, typically in conjunction with a future funding round, on an exit or upon maturity of the convertible loan note.
What criteria must the company meet to be eligible to apply for the Scheme?
Your company will be eligible to apply to the Future Fund if it satisfies the following criteria:
- the company was incorporated in the UK on or prior to 31 December 2019;
- the company has raised not less that £250,000 in equity investment from third party investors in the last 5 years (from 1 April 2015 to 19 April 2020 inclusive);
- the company is able to attract equivalent match funding from third party investors;
- at least one of the following is true:
-- at least 50% of the company’s employees are based in the UK; or
-- at least 50% of the company’s revenues are as a result of UK sales;
- none of the company’s shares are traded on a regulated market, multilateral trading facility, a recognised investment exchange and/ or similar market, stock exchange or listing venue; and
- if the company is a member of a group, the investment must be made into the ultimate parent company.
What criteria must the third party investors meet to be eligible to apply for the Scheme?
To be eligible for the Scheme, each investor must fall within one of the following categories:
- an “investment professional” within the meaning given to that term in article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”);
- a high net worth company, unincorporated associated or high value trust falling within article 49(2) of the FPO;
- a “certified sophisticated investor” or a “self-certified sophisticated investor” within the meaning given in articles 50 and 50A respectively of the FPO; or
- a “certified high net worth individual” within the meaning of article 48 of the FPO.
- an equivalent professional, high-net worth, institutional or sophisticated investor in accordance with applicable law and regulation in such investor’s home jurisdiction;
- an association of high net-worth or sophisticated investors within the meaning of article 51 of the FPO; or
capable of being classified as a “professional client” within the meaning given in the glossary to the FCA’s handbook of rules and guidance.
Please note that all other investors must fall within one of the above categories in order for them to be eligible to invest.
What are the key investment terms?
- Loan Size – The loan amount provided by the Future Fund will range between £125,000 to £5 million, subject to match funding being in place.
- Term – The loan will mature after 36 months.The loan cannot be repaid early by the company other than with the agreement of all of the investors.
- Interest – The loan will have a minimum of 8% per annum (non-compounding) interest charge applied (higher where agreed between the company and the investors). The interest will accrue until conversion of the loan.At this point the interest will either be repaid or converted into equity.
- Conversion – The loan will convert into shares in the company in certain circumstances, including:
-- Qualifying Funding Round – The loan will automatically convert into the most senior class of shares issued to investors as part of the next qualifying funding round (where the company raises at least an amount equal to the aggregate amount of the bridge funding round) at a 20% discount to the valuation set at that funding round;
-- Non-Qualifying Funding Round – The loan will, at the election of the holders of a majority of the loan notes, convert to equity at a 20% discount to the valuation set at that funding round (whether the threshold for a qualifying funding round has not been met);
-- Sale/ IPO – The loan will either convert into equity immediately prior to the sale/ IPO at a 20% discount or be repaid in full with a redemption premium (equivalent to 100% of the principal of the bridge funding), whichever is the higher;
-- Maturity of the loan – At the end of the 36 month period the loan will, at the election of the holders of a majority of the loan notes, convert to equity at a 20% discount to the valuation set at that funding round or be repaid in full with a redemption premium (equivalent to 100% of the principal of the bridge funding).
- Use of Proceeds - The loans cannot be used by the Company to (i) repay any shareholder related borrowings, (ii) pay any dividends or other distributions, (iii) pay any employee bonuses or other discretionary payments to any employee, consultant or director (for a period of 12 months and other than in the ordinary course pursuant to a contract) or (iv) pay any advisory fees.
- Legal Advice - Alongside providing advice on the scheme documents and process, the scheme rules require each company’s lawyer to facilitate completion by holding the matched funds and co-ordinating receipt of monies from the British Business bank on behalf of the company.
Will the investment qualify for SEIS or EIS relief?
Convertible loan notes do not meet the current requirements to qualify for SEIS or EIS relief. This means that other investors investing alongside the Future Fund, who must invest on identical terms to the Future Fund, will not be entitled to receive the tax relief that would be applicable on an SEIS or EIS qualifying equity investment. However, investors do benefit from the 20% reduction on conversion and enhanced interest rates.
How does it work?
- Investor application - The application process is investor-led. The lead investor must create an account on the website at www.gov.uk/guidance/future-fund. The investor must provide information to apply, including the applicant’s personal information, details of the other investors, information about the investment (including the proposed investment amount) and relevant company information.
- Company confirmation – The company confirms the accuracy of the investment application before submitting the full application.
- Contract finalised –Where an application is approved, the parties must sign a template convertible loan note agreement and satisfy prescribed criteria before funds are released.
Please note that, although the process is investor-led, companies are still able to register their interest in the Future Fund and progress the application.
If you have any queries, or would like to discuss the Future Fund Scheme with us in more detail, please contact a member of our Corporate team.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your particular circumstances.