The Future Fund – Update

Last night, the UK Government published the full form convertible note agreement setting out the terms and conditions upon which the UK Government, via the Future Fund announced on 20 April, will subscribe for convertible loan notes in certain eligible UK businesses.

Following on from our article published on 24 April, this update summarises the additional information provided yesterday.

Eligibility

Yesterday’s update provides clarity in relation to the eligibility criteria.

It is now clear that only equity investment provided by third-party investors will be counted towards the £250,000 historic funding requirement. This is potentially bad news for founders of companies who have contributed their own money to the capital requirements of their business as such amounts will not count towards the £250,000 minimum threshold.

The additional information also provides that for a business to be considered to be “UK based” at least one of the following must be true:

• either half or more of its employees are UK-based; or
• half or more revenues are from UK sales.

An additional criteria, namely that the applicant company must have been incorporated prior to 31 December 2019, was also introduced. In most cases those companies who meet the previously stated criteria will meet this additional criteria, but this will rule out  newly established businesses irrespective of the amount of seed funding they may have already raised (should they have wanted to raise further funding so soon after having raised £250,000 of seed funding).

(S)EIS

Calls for the Government to take action to ensure that matched investors would be able to enjoy the benefits of (S)EIS in relation to this investment do not appear to have been successful with the British Business Bank stating that the (S)EIS rules (and the Scheme’s terms’ compatibility with them) are a matter for HMRC.

This will likely rule out the scheme for a number of companies who are unable to convince their investors to trade in their (S)EIS benefits for the potential of a higher return on an exit or a  redemption of the loan.

Separately, the Government have clarified that previous (S)EIS investments will not be affected where the convertible loan is converted into shares. Where the convertible loan is redeemed the Government has stated that it intends to make changes to the rules to clarify that this is compatible with such previous investments however, at the time of writing, no such changes have been actioned.

No statement has been made in relation to future investments except to say that this is a matter for the Treasury and HMRC and so investors should seek tax advice in relation to any such future investments.

Terms

The detailed terms provided in the form of agreement closely follow the terms set out in the term sheet published at the end of April and there are no huge surprises.

What has been provided though is an insight into the type of shareholder the Government would likely be if the loan were converted. In the event that its loan is converted into equity, the Government has asked only that in such circumstances, it is given the opportunity to negotiate in good faith with the company in relation to its shareholder rights, acknowledging that the company will not be under any legal obligation to provide any additional rights. This is perhaps unsurprising when one considers the work involved in monitoring compliance and processing any associated requests for consent from various investee companies but will be good news for many founders not relishing the prospect of complying with onerous obligations and dealing with an overbearing shareholder.

Application Process

• Precise details of the process for application will become clear when the scheme opens for applications tomorrow (Wednesday, 20 May) however information available on the British Business Bank states that the application will be led by the matched investor(s) (where there are multiple investors, a nominated lead investor may apply on behalf of all) who will be asked to certify that they meet the scheme eligibility criteria and provides key investment details. The company which is the subject of the application will then be asked to confirm the accuracy of the investment application details provided, before submitting the full application.

Where an application is approved, all parties will execute the convertible loan agreement before the funds are released to the Company. The Scheme states that no negotiation of the terms of the Convertible loan agreement are allowed.

Choosing successful applicants

The Government has confirmed that  funding will be provided on a first-come-first-served basis and so Companies should look to submit their applications as soon as possible but only once they have all information required to do so (in particular, details of all matched investors and the amounts they propose to invest).

It is also notable that the Government website no longer references the £250m maximum pool available for this fund as well as the period for which it will remain open for applications; the Chancellor has also signalled a willingness to extend the scheme if it proves successful.

Given the lack of information available in relation to the selection process at present, it would be prudent, for applicant to ensure that:

• evidence of eligibility (for both the Company and the prospective matched investors) is at hand and available to upload as part of any application process;
• details of and proof of identity for any individual matched investor is at hand (this will be required by the Company’s solicitors in order to receive funds into its client account);
• all documentation that will be required for the application is completed and signed so far as is possible at this stage (see https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/future-fund/scheme-documentation/);
• all information relating to the Company that a typical investor would likely request is available should it be requested (e.g. cashflow, budgets, forecasts, operational information, evidence of compliance with applicable regulations etc.);
• you have instructed your solicitors to act. We will be able to advise you on the terms of the convertible loan agreement but also will be required at completion to manage receipt of funds and provide the solicitor confirmation letter prior to completion,

so that applications can be submitted as soon as possible and additional information is at hand should it be requested.

Useful links for further information:

https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/future-fund/company-informaton/

https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/future-fund/investor-information/

https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/future-fund/scheme-documentation/

https://www.gov.uk/guidance/future-fund