The Future Fund – Open for applications
This blog was written by Lee Humble, Corporate Finance Associate Partner.
The Future Fund, announced by the Chancellor of the Exchequer on 20 April, opens for applications from Wednesday 20 May.
The Future Fund is a new scheme to issue convertible loans to innovative companies which are facing financing difficulties due to the Coronavirus outbreak.
The Government will initially make up to £250,000,000 available in total for the scheme. The scheme will initially be open until the end of September 2020 and will be delivered in partnership with the British Business Bank.
How it works
- £125k-£5m government support: UK-based companies provided with between £125k and £5m in government support, with third-party investors at least matching the government commitment. This means the minimum loan to a company is £250k with no maximum, since there is no upper limit on the amount that additional investors may co-invest.
- Funding must not be used to (a) repay any borrowings;(b) pay any dividends; (c) pay any bonuses; (d) pay any advisory fees.
- Broad range of third-party investors: A broad range of third-party investors can invest alongside government as part of the scheme.
|Eligibility:||• Companies must be UK-incorporated and if part of a corporate group, only the parent company is eligible.|
• Companies in receipt of the loans will be required to have previously raised at least £250k in equity investment from third party investors in the last five years.
• Only eligible companies that can attract at least 50% of third-party investment will receive funding.
• Companies cannot have any of their shares traded on a regulated market, multilateral trading facility or other listing venue.
• 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
– Half or more revenues are from UK sales
|Convertible loans:||The Future Fund programme uses a recognised financial instrument known as a convertible loan. Unlike equity investment, there isn’t a requirement under the convertible loan to value the company or the price of its shares, at a time when company valuations have been significantly impacted by Covid-19. There is no requirement for a company to make regular repayments. Instead, the convertible loans are designed to convert into equity at the next funding round, when an equity value can be negotiated between companies and investors.|
|Investor-led||The Future Fund programme is investor led. An application on the platform is initiated by a lead investor who will provide information about itself, other investors in the round and the company. If an application is successful, the platform will generate documentation for the company and all investors to sign. As this is not a matching service, each company seeking funding must have already identified investors to contribute the matched funding amount.|
|Self-certification||Companies will be responsible for confirming company information and reviewing the application before submission and as part of the legal documentation at completion of each the Convertible Loan Agreement.|
|Role of the solicitor: ||As part of the scheme, companies appoint a company solicitor to facilitate the payment mechanics at completion of the Convertible Loan Agreement. It is anticipated that solicitors may provide legal advice to clients interested in the scheme. |
|Interest Rate||The loans will have a minimum of 8% per annum (non-compounding) interest charge applied. This interest will be higher if the company and the investor(s) agree between themselves. Unlike a typical bank loan, the interest is not payable on a monthly basis and instead will accrue until the loan converts. At this point, the interest will either be repaid or convert in equity.|
|Term|| The loan will mature after 36 months.|
The loan cannot be repaid early by the company other than with the agreement of all of the investors.
|Conversion||The loans will convert into shares in the company in certain circumstances, including an exit or a new funding round.|
|Standardised Terms||Investors and the Future Fund both invest using a convertible loan agreement, which is predefined and cannot be negotiated.|