Future Fund support now available

What is the Future Fund?

The Future Fund is a new scheme from the Government, in partnership with the British Business Bank, to support innovative companies which are facing financing difficulties due to the coronavirus outbreak. Up to £250 million of convertible loans will be issued by the Government, subject to at least equal match funding from private investors.

British Business Bank has now published the form of the loan agreement that companies are expected to enter into and a subscription deed. The summary in this insight is based on the Future Fund portal, the British Business Bank page and the loan agreement. See also the FAQs that have been published on the scheme.

Applications can be made from 20 May 2020 until the end of September 2020.

How much funding is available and what can a business use it for?

The Future Fund will provide convertible loans ranging from £125,000 to £5 million for each eligible company. The funding must be matched by private, third party investors, meaning that the minimum investment will be £250,000. There is no upper limit on how much the matched investors can put in. (All of these loans being the “Loans”.)

The Loans attract a minimum 8% per annum (non-compounding) interest rate, to be paid on a conversion event (see below) or if there is an event of default. On a conversion event, the company can decide whether to repay the accrued interest in cash or convert it into equity. The Loans are for 3 years.

The loan agreement does not say what the loan has to be used for but it cannot be used to (i) repay some shareholder borrowings; (ii) pay any dividends or other distributions; (iii) for 12 months from the date of the loan agreement, make any bonus or other discretionary payment to any employee, consultant or director unless already agreed before the date of the loan agreement and paid in the ordinary course of business; or (iv) pay any advisors’ fees in connection with the loan scheme.

The Loans will be repayable (together with the redemption premium which is 100% of the principal amount of the loan (“Redemption Premium”)) on maturity (if they have not been repaid or converted earlier) and on demand if certain events of default occur. The Loans cannot be repaid early by the company other than with the agreement of all of the investors.

Which companies can apply?

To be eligible, a company must be an unlisted, UK registered company, and investment in any group of companies or in any part of a group must be made through the parent company.

The company must have raised at least £250,000 in equity investment from third party investors in the last five years.

The company must have been incorporated on or before 31 December 2019 and half or more of its employees must be UK-based and/or half or more of its revenues must be from UK sales.

Which investors can apply?

To be eligible, an investor must fall within any of the following categories:

• an "investment professional" within the meaning given to that term in article 19 of the 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
• 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
• capable of being classified as a "professional client" within the meaning given in the glossary to the FCA Rules.

(“FCA Rules” means the FCA's handbook of rules and guidance and “FPO” means the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.)

All investors must fall within one of these categories and it is the responsibility of the other investors to ensure they are all eligible.

The application process is investor-led. Initially the application will be made by the lead investor, with the company subsequently providing and verifying information during the later stages of the application. See here for more information on the application process.

What is the headroom amount?

In the first 90 days after the date of the loan agreement, the company can enter into additional unsecured convertible loans with other lenders up to a “headroom amount” to be agreed between the parties to the loan agreement. Those loans must be on the same terms as this loan agreement and these additional lenders will have to become parties to the main loan agreement by entering into a subscription deed, which has also been published.

How will conversion work?

The Loans will either convert into equity or be repaid, although if the scheme works as it should, and works to the benefit of both company and lenders, the expectation is that the Loans will convert into equity. The conversion events are set out below.

On a company’s next “Qualified” equity funding round (when the company raises an amount equal to or greater in value than the amount of the Loans), the Loans (and if not repaid, interest) will automatically convert into the most senior class of shares being offered to the investors in the Qualified funding round. The conversion price is the lowest price per share paid by those new investors for those shares, reduced by a discount of at least 20%. (The amount of the discount (the ‘Agreed Discount’) will be agreed when the loan agreement is entered into and may be adjusted by a valuation cap if one is agreed).

On a “Non-Qualified” equity funding round, the Loans may be converted, at the election of a certain majority of the investors, into the most senior class of shares being offered to the investors in the Non-Qualified funding round. The conversion price is the lowest price per share paid by those new investors for those shares, reduced by the Agreed Discount.

On a sale or IPO (an “Exit”), the Loans will:

• be repaid (with the Redemption Premium) unless the Lenders will receive more in cash through conversion in which case, immediately before Exit, the Loans will convert into the most senior class of shares that will be in issue at Exit at a price per share equal to the lowest price per share paid by investor(s) for such class of shares in certain recent equity financings, reduced in certain cases by the Agreed Discount;

• if the Lenders will receive non-cash consideration, convert in the same way as for cash consideration unless the Lenders elect for the Loans to be repaid with the Redemption Premium.

On maturity, the Loans will:

• If elected by the lenders, be repaid with interest and the Redemption Premium; or

• convert into the most senior class of shares in issue at the Maturity Date at a price per share equal to the lowest price per share paid by investor(s) for such class of shares in certain recent equity financings, reduced in certain cases by the Agreed Discount.

If an Exit occurs within six months of a Non-Qualified Financing and the lenders had elected to convert the Loans, each lender will be entitled on that Exit to whichever is the greater of: (i) the amount to be received for the sale of the shares that were issued to it on conversion; and (ii) the amount that it would otherwise have received had its loan been repaid (with a Redemption Premium) on the relevant conversion date.

What rights will the lenders have?

The loan agreement includes warranties from the company, including that it satisfies the eligibility criteria, has the authority to enter into the loan agreement, entering into the loan agreement will not breach anything, that there is no litigation outstanding or threatened, and that there are no insolvency events.

The company gives various covenants to the lenders including that:

• it will provide certain financial reporting and other information quarterly and on request to Future Fund;

• it will not create any indebtedness that is more senior to the Loans without consent;

• Future Fund can require the company to repay its loan or purchase all of its shares in the company, in each case for an aggregate price of £1.00, if Future Fund determines that it would be prejudicial to its reputation or that of the UK Government to continue holding its loan and/or shares.

When Future Fund has been given notice of a proposed conversion event, it can ask to meet with the company to discuss (in good faith) the suite of shareholder governance rights that it might be given as a shareholder in the company. The company is not, however, under any obligation to agree to give any specific shareholder rights.

Future Fund will be free to transfer any of its equity stake in the company to an institutional investor which is acquiring the whole or part (being not fewer than 10 companies, including the company) of Future Fund’s interest in a portfolio of investments which comprise or result from the conversion of unsecured convertible loans substantially on the same terms as this loan agreement.

Future Fund will also be able to transfer any of its loan or shares to certain associated Government entities.

Any lender can transfer its loan as if the loan were subject to the same transfer restrictions and permitted transfer provisions as set out in the company’s articles of association and shareholders' agreement.

What warranties do the lenders have to give?

In the loan agreement, the lenders have to warrant to Future Fund that they fall within one of the eligibility criteria and that they have the capacity and authority to enter into the loan agreement and no other consents or approvals are needed.

What are the next steps?

The scheme launched on 20 May and it will be awarded on a first come first served basis.

You will need to consider:

• pre-emption rights and any existing investor terms to see if they could block the application, and also to assess any impact of the loan on those existing terms;

• existing contracts to see if they prohibit an investment under the Future Fund;

• whether any shareholder and/or other consents or approvals are required in connection with the application; and

• how best to negotiate the application to ensure all key stakeholders are informed and on board.

Matched investors will need to be lined up and ready to invest.

Both investors and companies will need to carefully consider whether the Future Fund best suits them in navigating the economic impact of COVID-19, not just in the short term but also in the medium to long term.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.