Future Fund – The First Week

The Future Fund was officially launched this week with more details, and scheme documentation, provided on 18 May and the application process opening on 20 May 2020. Applications for investment have been welcomed in respect of all eligible companies and demand has been extremely high, with applications for in excess of double the initial funding commitment of £250m being received on the first day alone.

When the Future Fund was announced on 20 April it was largely welcomed but as we reported at the time the guidance posed a number of significant questions around eligibility for the scheme and the form the funding would take. We now have answers to most (but not all) of these questions either through the official guidance or our separate discussions with the British Business Bank since the scheme launched.

Summary

The Future Fund is intended to support high-growth innovative British companies through the provision of convertible loans of between £125,000 and £5m. This investment must be at least matched by new funding provided by qualifying investors as part of the same convertible loan agreement.

Eligibility

Criteria for Companies:

• the company must have raised at least £250,000 in equity from third party investors in the last 5 years (1 April 2015 to 19 April 2020). We understand that as the requirement is to have raised equity, funds raised through other convertible instruments which have not yet converted will not count towards this threshold;
• if the company is a member of a corporate group, it must be the ultimate parent;
• the company cannot have any of its shares listed on a regulated market, a multilateral trading facility, a recognised investment exchange and/or any other similar market, stock exchange or listing venue;
• the company must be a UK incorporated limited company. This has excluded a number of early stage companies which have domiciled overseas for a variety of reasons (including to enable participation in Y Combinator);
• the company must have been incorporated on or before 31 December 2019;
• at least one of the following must be true for the company:
  • half or more employees are UK based; or
  • half or more revenues are from UK sales, which we understand to mean sales to UK customers and not sales generated in the UK from overseas customers.

Investors must fall within one 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 association 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; or
• capable of being classified as a "professional client" within the meaning given in the glossary to the FCA Rules

We understand that Future Fund investment will not match funding provided by an executive director or employee.

Despite some contradictory guidance provided in relation to the scheme the fact that the scheme is structured as a convertible loan agreement means it does not meet the current eligibility criteria for the SEIS and EIS reliefs, although the compatibility of previous SEIS and EIS investments should not be affected where the convertible loan converts into shares. Similarly, the terms of the convertible loan note agreement are such that VCTs will be unable to make a qualifying investment under it and therefore VCTs will need to invest separately, meaning their funding will not be matched. On the positive side because the government have got the scheme within the Temporary Framework and therefore not had to get specific EU approval. This means it’s not notifiable State Aid and therefore doesn’t fall within the risk finance state aid guidelines and count towards the annual or lifetime limits of a company.

Terms of the convertible loan note

The terms of the funding have now been published and take the form of a convertible loan agreement which largely reflects the term sheet published in April. As anticipated the terms are largely non-negotiable and the agreement is a fixed standard form to reduce the administrative burden for the scheme.

The only terms that are negotiable are:

• interest rate (although a minimum of 8% applies);
• conversion discount rate (although a minimum of at least 20% applies);
• headroom can be included for investments on the same terms which may be made within 90 days of the Future Fund’s investment (such amounts will not be matched by the Future Fund); and
• a valuation cap whereby there is a ceiling valuation at which the loan notes will convert irrespective of the valuation on the next round / exit (no cap will apply if not populated).

Proceeds of the convertible loan note

Any proceeds cannot be used to:

• repay borrowings from a shareholder or related party;
• pay a dividend or distribution;
• make a bonus or discretionary payment to an employee or officer of the company for a period of 12 months from the date of the convertible loan agreement;
• pay advisory or placement fees or bonuses to a corporate finance entity, investment bank or similar provider.

Documents and process

A lead investor (who meets the eligibility criteria set out above) is required to lead the process which is as follows:

• the lead investor makes the initial application online for matched funding. This application should include details of all other investors who are seeking to make a matched investment and the lead investor will need to have their details (and the detail of their proposed investment) to hand when submitting the application;
• the company will then be contacted for further details. and a director of the company will be required to confirm:
  • the details provided by the lead investor;
  • the details of any beneficial owners of the company;
  • that the company satisfies the eligibility criteria for the scheme;
  • that a nominated solicitor has been appointed who is able to hold completed funds;
• applications are then considered on a ‘first come, first served’ basis with a minimum period of 21 days anticipated for this stage in the process;
• once confirmation has been received that the application has been successful we understand that the company will be invited to complete the details of the template scheme documentation which will enable execution ready versions of the following to be produced:
  • the convertible loan agreement
  • a director’s certificate to be given by a director of the company
  • a solicitor’s confirmation letter to be given by the company’s nominated solicitor;
• prior to issuing the director’s certificate the company will need to have obtained any consents and pre-emption waivers required in the usual way (board minutes, shareholder resolutions and investor consents (if applicable));
• prior to issuing the solicitor’s confirmation letter the company’s nominated solicitors will need to have been put in funds for the full amount of the matched funding. This will require the solicitors to conduct AML checks on the relevant parties and therefore they should be notified as soon as possible to be able to do this and prevent delays.

Recommendations

The British Business Bank strongly recommends that investee companies take appropriate tax and legal advice before completing any investment under the scheme and we would echo this. While the terms are largely non-negotiable they do still take the form of complex legal documents which should be fully and clearly understood. This is particularly true for founders/existing investors who need to consider the dilutive impact of the convertible loan notes.

We have already advised a number of clients in relation to eligibility for the scheme, the application process, the required consents and approvals and the terms of the scheme and are therefore well placed to support you and your business in relation to any investment to be made under the Future Fund. We are operating a fixed fee arrangement to assist companies with the process so please do get in touch with any queries.