By Tom Ward, Corporate Partner at Fieldfisher
Following the publication of further eligibility criteria and detail on the applications process, Fieldfisher corporate partner Tom Ward outlines the key points for qualifying businesses. The UK government and British Business Bank have published detailed eligibility criteria and documentation for the Future Fund, the scheme to support to UK-based growth companies affected by COVID-19, in the form of convertible loans ranging from £125,000 to £5 million.
Companies should note that the Future Fund is an investor-led scheme, meaning that, while companies are able to register their interest, a lead investor will need to apply on behalf of itself, the company and any other investors. The scheme is initially open for applications from Wednesday 20 May until the end of September 2020. Commenting on this latest scheme to support UK businesses impacted by the COVID-19 lockdown, Tom Ward, corporate partner at Fieldfisher, said:
“The UK’s high-growth VC-backed businesses have been eagerly anticipating this news for the last four weeks.
“Those who stand to benefit from the Future Fund are primarily small private companies in the technology and life sciences sectors, which to date have not been eligible for government support under the CBILs and CLBILs schemes.
“The publication of detailed eligibility criteria on Monday provide useful guidance on which businesses qualify for this support and it is clear that through this investor-led scheme, the UK government intends to support promising home-grown companies that have previously secured backing from other investment sources.
“The government has also been strict about how Future Fund may be used, stating that loans advanced cannot be used to repay shareholder or related party loans, other than under any bank or venture debt facilities, pay dividends, bonuses or discretionary payments that are non-contracted or not in the ordinary course of business for 12 months. In addition, they may not be used to pay advisory, placement or similar corporate finance type fees in relation to the convertible loan agreement.”
Eligibility Criteria for the Future Fund
There has been some initial uncertainty around eligibility criteria when the scheme was first announced on 20 April.
Questions about the scheme included:
- Would UK businesses that had accessed accelerators in the US and put a US holding company at the top of their corporate structure be eligible?
- What was meant by the company having a “substantive economic presence” in the UK?
- Could the “matched funding” come in the form of private investors contributing direct Enterprise Investment Scheme (EIS) investments, or would private investors also have to invest through a similar convertible loan (precluding EIS treatment)?
- Would existing convertible loans, Advanced Subscription Agreements (ASAs) or Simple Agreements for Future Equity (SAFEs) qualify as matched funding?
To be eligible for the scheme, each of the matched investor(s) and the company must meet specific criteria. Investors must fall within the usual categories of persons to whom investment offers can be marketed under the Financial Services and Markets Act 2000 (FSMA), notably, “investment professionals,” “high net worth individuals,” “certified sophisticated investors” or “self-certified sophisticated investors,” “high net worth companies” and others.
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Companies must also meet the following criteria:
- The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020, inclusive);
- The company must be a UK incorporated limited company;
- If the company is a member of a corporate group, it must be the ultimate parent company;
- The company must have been incorporated on or before 31 December 2019;
- The company does not have any of its shares or other securities listed on a regulated market, a multilateral trading facility, a recognised investment exchange and/or any other similar market, stock exchange or listing venue;
- At least one of the following must be true for the company:
- Half or more employees are UK based
- Half or more revenues are from UK sales
UK businesses with foreign-registered parent companies will not be eligible, nor will businesses where the majority of employees and majority of revenues are outside of the UK. It is also clear from the scheme documents that the “matched funding” must come in on the same form as the Future Fund’s convertible loan, with other matched investors being party to the same Convertible Loan Agreement (as lenders), alongside the Future Fund.
The matched lending will need to have been deposited in the company’s solicitors’ account prior to the Future Fund loan being drawn down, with the company’s solicitors giving formal written confirmation to the Future Fund that they are in funds from other lenders in readiness for completion.
Companies will have 90 days to close further funding from other lenders on the same terms (this will not count towards the 50% matched funding requirement). It will therefore not be possible for companies to seek to raise the 50% matched funding requirement via other forms of direct equity investment, notably from specialist EIS funds or other investors (including high net worth individuals) seeking EIS relief.
Guidance on the British Business Bank’s Future Fund FAQs page further makes clear that existing ASAs do not qualify as matched funding for the purposes of the Future Fund, nor do they qualify towards the minimum threshold of £250,000 of equity raised until shares have been issued to the ASA investors.
On the basis that the convertible loan funding is unlikely to trigger an issue of shares under ASAs or SAFEs, pre-seed and seed round companies who have raised funds under SAFEs or ASAs are unlikely to qualify, unless an early issue of shares to advanced investors can be achieved.
Terms of the Convertible Loans
The main terms of the convertible loan are:
- The rate of interest applicable will be no less than 8% (non-compounding), but may be higher if a higher rate is agreed with the matched investors;
- The loans will mature 36 months after the execution date of the CLA;
- The loans can convert into shares in the investee company in a variety of circumstances, including fundraisings, exit events and upon the maturity of the loans;
- The conversion discount will be 20%, unless a higher rate has been agreed with matched investors;
- The investee company cannot choose to repay its loan
Restrictions on Use of Proceeds
Loans advanced cannot be used to repay shareholder or related party loans (other than under any bank or venture debt facilities), pay dividends, bonuses or discretionary payments that are non-contracted or not in the ordinary course of business for 12 months, or pay advisory, placement or similar corporate finance type fees in relation to that CLA.
Further Guidance on The Future Fund
The British Business Bank has published a list of Future Fund FAQs for companies.
A copy of the full loan agreement (which is non-negotiable) is available here.
The full Future Fund terms and conditions can be found here.