Following its announcement on 20 April 2020 by the Chancellor, the Future Fund targeted at supporting high growth companies has today (20 May 2020) opened for applications, which can be made through to the end of September 2020.
The Future Fund is designed to provide £500m to high growth companies, by providing convertible loans of between £125,000 and £5 million. The scheme requires private investors to invest in the Company seeking funding, with the fund matching the investment up to the limit of £5 million. Since the initial announcement and our first article on the fund, further guidance and eligibility criteria have been released.
To be applicable to apply for a loan under the scheme, a business must:
- be an unlisted, UK registered company;
- if it is part of a group, be the ultimate parent company;
- have previously raised at least £250,000 in equity investment from third party investors in the past 5 years (being the period of 20 April 2015 to 19 April 2020);
- have been incorporated on or prior to 31 December 2019; and
- have either:
- half or more of its employees in the UK; or
- half or more of its revenues from the UK.
How do you actually apply for a loan under the Future Fund?
The scheme is designed to be “Investor led”. The process occurs in three stages:
- The investor, (or the lead investor if there is a group) must certify that they meet the investor eligibility criteria first, and provide details on their investment in the company;
- These details are then confirmed by the company, who submits a full application for funding; and
- The investors, the company and the Future Fund then enter into a prescribed, non-negotiable loan agreement to govern the convertible loan to be made under the scheme.
Investor Eligibility Criteria
The eligibility criteria for private investors providing funding in each application is a new part of the process which was not provided for when the scheme was initially announced. The criteria for being an eligible investor can be found here:
The investor (or all investors in the case of a group), must meet at least one of the eligibility criteria. If they do, the lead investor can submit an application in connection with an eligible company. The company can then confirm it wishes to make an application for the investment to be matched by the Future Fund.
There are some key points to note:
- As mentioned, the scheme is to be a joint effort between the Government and private investors. The Government is only committing £250m presently, with the other £250m to be provided by private equity investors. The government will provide no more than 50% of the bridge funding for each company, so private investors will need to at least match the government loan in each case;
- The loans will be made by convertible loan notes, meaning that on the next investment round in the applicant company (with caveats) or upon an exit, the government’s loan will convert into equity, at a 20% discount to the price paid per share by private investors. For example, if shares were issued at £1.00 a share in the qualifying round, the government would receive its shares at 80p a share;
- The conversion into equity is into the most ‘senior’ class of shares available at the time of fundraising;
- On a sale or listing, the loan either converts into equity at the discount rate of 20% to the most recent non-qualifying round, or is to be repaid with a 100% redemption premium (whichever is higher); and
- Loans mature after 36 months, and the interest rate of at least 8% a year is then repayable.
What can you use the funds for?
The government has sought to lay out what a recipient company cannot do with the funds, rather than saying what they can do. Any funds advanced as part of the Future Fund scheme cannot be used:
- to repay any borrowings from a shareholder or a shareholder related party (except repayments for borrowings pursuant to any bank or venture debt facilities);
- to pay any dividends or distributions;
- for 12 months from the date of the convertible loan agreement, to make any bonus or discretionary payments to employees, directors or consultants of the company; or
- to pay any advisory or placement fees or bonuses to corporate finance entities or investment banks.
Anyone considering an application is advised to read the details provided on the links below.
Leathes Prior are ready and available to assist companies with the Convertible Loan Agreement which is now a requirement of the application process. If you would like any advice on the Loan Agreement, or require assistance as your business adjusts and looks to get back to business in the coming weeks, please do contact a member of our Corporate Team via email or call us on 01603 610911.