An update to this article has been provided here.
The UK Government has announced a further financial scheme to assist business during the unprecedented coronavirus crisis – the Future Fund. It is specifically focussed on helping innovative companies that are facing financial difficulties due to the outbreak that cannot access other government support programmes and who usually rely on equity investment.
The scheme is being developed in conjunction with British Business Bank and is expected to launch in May 2020 and initially run until September 2020. The fund will total £250,000,000.00 and individual loans will range from £125,000 to £5 million.
Further details on the scheme are expected to be published soon, but in the meantime, we have summarised the headline terms (published on gov.uk) below:
- The present eligibility requirements state that an applicant company must:
- be an unlisted UK company;
- have raised at least £250,000 in aggregate from private third party investors in previous funding rounds within the last five years;
- have a substantive economic presence in the UK. There is no definition of what is meant by ‘substantive economic presence’; and
- be able to attract/obtain at least matched funding from private third party investor(s).
If the company is part of a corporate group, only the parent company (provided it is incorporated in the UK) is eligible for the loan.
- Presently there is no criteria related to distress caused by COVID-19 or related specifically to innovation, although further eligibility criteria may be introduced in due course.
- The loans will be provided by the Government to eligible companies provided it is made alongside other private third party investor(s). The loan shall constitute no more than 50% of the bridge funding being provided to the company. Whilst the maximum amount of an individual Government loan will be £5,000,000, there is no cap on the amount that the matched investor can provide and therefore there is no cap on the aggregate bridge funding available.
- The Government is not proposing to provide matched funding in respect of recently closed rounds, therefore companies who are currently trying to raise funds should consider holding off closing any rounds until the Future Fund opens for applications.
- The key headline terms at present are as follows:
- The bridge funding may be used for working capital purposes only;
- The Government shall receive a minimum of 8% per annum interest to be paid on maturity of the loan (it will be higher if a higher rate is agreed between the company and the matched investors);
- The loan shall mature after a maximum of 36 months;
- The Government will have limited corporate governance rights during the term of the loan and as a shareholder following conversion of the loan and shall be entitled to transfer the loan and following conversion, any of its shares, to an institutional investor, within Government and/or to entities wholly owned by central government departments;
- The company will be required to provide limited warranties (including in respect of title and ownership, capacity, its loan eligibility, compliance with law, borrowing facilities of the company, litigation and insolvency events);
- The company will be required to provide limited covenants to the Government; and
- The company will not be permitted to create any indebtedness that is senior to the loan other than any bona fide senior indebtedness from a person that is not an existing shareholder or matched investor.
Conversion of the loan:
- The loan shall be a convertible loan which will automatically convert into equity on the company’s next qualifying funding round (being where a company raises an amount in equity capital equal to at least the aggregate amount of the bridge funding) (Qualifying Funding Round);
- The loan will convert to the most senior class of equity issued by the company at a minimum conversion rate of 20% to the price set at the funding round. The discount rate may be higher if a higher rate is agreed between the company and the private investor(s) (Discount Rate). Any interest not repaid at date of conversion will not attract the Discount Rate;
- On a “non-qualifying funding round” (i.e. where the company has raised less than the aggregate amount of the bridge funding) conversion shall be at the election of the holders of a majority of principal amount held by the matched investors and it shall convert into equity at the Discount Rate;
- On a sale or IPO the loan shall either (i) convert into equity at the Discount Rate to the price set by the most recent non-qualifying funding round (unless the round took place prior to the issuance of the bridge funding, in which case, no discount shall apply) or (ii) be repaid with a redemption premium (being an amount equal to 100% of the principal of the bridge funding) (Redemption Premium), whichever will provide the higher amount for the lenders;
- On maturity of the loan, the loan shall, at the option of the holders of a majority of the principal amount held by the matched investors, (i) be repaid by the company with a Redemption Premium; or (ii) convert into equity at the Discount Rate to the price set by the most recent funding round, provided that the Government’s loan shall convert unless it requests repayment in respect of its loan;
- The Government shall not set a valuation cap on the price at which the loan converts into equity on the company’s next funding round but where this is set by the matched investors, Government will be entitled to the same terms.
This type of government assistance is fairly unusual, but it will be a well-known avenue for venture capitalists and private investors. There is a fine line to balance for the Government, in that it wants to support innovative businesses who cannot benefit from other coronavirus assistance schemes, but the use of taxpayer money has to be justified, and taxpayers will want to be assured that their investment is secure. The Government has introduced terms to protect this position – the need for matched funding from private investors, who inevitably will do thorough due diligence and are unlikely to do a ‘bad deal’, and several investor friendly terms, such as the 100% redemption premium.
Further information is required regarding certain aspects of the scheme and headline terms – for example, presently there is no guidance as to whether early repayment will be available. Similarly, companies will want to see further detail regarding what information rights the Government will want and full details of the covenants and warranties to be provided.
Whilst further exclusions to the scheme may well be published in due course, the Future Fund looks like it will provide some much needed relief to angel and VC funded start-ups, some of the most innovative and promising companies in the UK.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Technology Law team at Cleaver Fulton Rankin for further advice or information.