This article forms part of our coronavirus resource hub and, in particular, develops on a series of articles on the financial measures introduced by the Government to assist businesses across the UK during these turbulent times.
At the end of April, the Chancellor announced a new bailout programme aimed at venture capital-backed businesses that were struggling to survive the pandemic, but were not otherwise eligible for the existing coronavirus schemes. The package included a £250 million convertible loan scheme for high-growth companies, called “Future Fund”. For a summary of the core features of the scheme, please refer to our previous article here.
The Future Fund is now open for applications – from Wednesday 20 May 2020 – on a first come, first served basis so companies will need to act quickly.
On 18 May, the Government published some additional details and the British Business Bank, which will deliver the scheme, has published detailed guidance, including FAQs for companies, investors and solicitors and scheme documents.
The portal for applications together with the guidance and documentation can be found here.
An application to the Future Fund is made by a lead investor (or a sole investor). The role given to the lead investor is an unusual feature of the scheme and drives much of the process.
The investee company and investors should therefore agree on a lead investor who is willing, and able, to take on this role, as soon as possible. The lead investor must invest at least £12,500 but need not invest a majority of the funding or even make the largest investment.
Importantly, all matched funding must be agreed when submitting the application – the lead investor must be able to identify the investors, and investment amounts, in the application.
So this must all be lined up in advance although it will be possible to agree headroom in the loan agreement so that the company can raise further funds on the same terms (but without any matching from the Future Fund) for a period of up to 90 days after closing of the Future Fund loan.
The lead investor must gather information about the company (including compliance with the core eligibility criteria), the investment and its solicitors before submitting the application through the portal. All companies must instruct a regulated solicitor, able to hold client funds, to advise them on the process and deal with completion and transfer of funds.
When the application is submitted a statutory director or the company secretary will have to approve this information.
Assuming the matching investment is in place, it should be relatively simple for the lead investor to submit the initial application. There will then be various checks carried out on the application which may involve further engagement between the investors, the company and the British Business Bank.
The guidance suggests that it will take at least 21 days from submission before hearing if the application is successful although responses to initial applications have suggested a timescale of approximately two weeks for approval.
Once notified that an application is successful, documents, including the loan agreement, will be circulated for signature via the portal. A director of the investee company will need to submit a director’s certificate confirming that all necessary consents have been obtained and the company’s solicitors will need to gather in the investment monies from the co-investors and give undertakings to the Future Fund and co-investors.
The lead investor will also need to ensure that all investors in the loan fall within an exhaustive, but fairly wide list, of eligible investors. This is aimed to ensure that investors fall within exemptions from the FSMA financial promotion regime. Eligible investors include investment professionals, high net worth companies, certified sophisticated investors and certified high net worth individuals and equivalents in overseas jurisdictions.
Founders, employees, workers or consultants or their connected parties aren’t eligible to provide the matched funding – but this exclusion does not affect investor directors or those appointing them.
The maximum number of other investors (ie an investor that is neither the lead investor nor the Future Fund) is set at 147. This is intended to ensure that the total number falls under the prospectus threshold but may make it difficult for companies looking to match funding through a crowdfunding platform.
The new guidance clarifies certain aspects of investee company eligibility:
Most of these criteria will be straightforward to meet. Two to note are:
The matched investment from private investors will be under the same convertible loan agreement as the Future Fund investment and the template has now been published.
The form of the loan agreement itself is not negotiable but certain terms - the interest rate, the conversion discount, the headroom amount and the valuation cap can be varied, within limits, and will then apply to both Future Fund and private investors.
Interest will apply at a non-compounding rate of 8% per annum (unless a higher rate is agreed by the company and private investors). It is payable on repayment or conversion of the loan but on conversion, the company can elect to either convert (in which case the discount will not apply to the interest element converted) or repay the interest.
The loans will convert:
The conversion price on a financing is the price paid by investors in the financing less the agreed conversion discount (which is 20% unless a larger discount is agreed by the company and private investors).
On an exit or maturity, the conversion price will be set at the price paid in the most recent financing. This may be either: a non-qualified financing after 20 April 2020 which raises more than 25% of the amount of the convertible loans (in which case the agreed conversion discount will apply; or the last financing prior to 20 April 2020 (in which case no conversion discount will apply).
If a valuation cap is agreed by the company and the private lenders, and results in a lower conversion price than the other mechanisms, that lower price will apply.
Loans will convert into the most senior class of share at the relevant time – but if more senior shares are issued within a subsequent six month period lenders will be able to convert their shares into that new, more senior class.
If not previously converted, the loans are repayable, together with a 100% redemption premium:
The company cannot repay early without the agreement of all investors.
Other key terms
Use of funds – the loans cannot be used to repay related party borrowings but it has been clarified that they can be used to repay bona fide third party bank or venture debt; they also cannot be used to pay dividends or to pay corporate finance fees relating to the Future Fund process. There are also restrictions for a period of 12 months on using loan monies to pay bonuses or discretionary payments to employees, consultants and directors.
Assignment and transfer – the Future Fund has certain rights to transfer the loans or any shares arising to government entities or to an institutional investor acquiring the whole or part of the Future Fund portfolio; all lenders can transfer their loans to parties they would be able to transfer shares to under the company’s articles.
Covenants and undertakings – the loan agreement contains a number of ongoing undertakings including: provision of management information to the Future Fund; restrictions on secured borrowings (with exceptions for bona fide non-shareholder senior debt or venture debt); most favoured nation ie if any other convertible loans or advance subscriptions are entered into on more favourable terms, those must be extended to the lenders under this instrument; and anti-embarrassment if an exit takes place within six months of a conversion on a non-qualified financing.
It had been hoped that features of the Future Fund would be tweaked to accommodate EIS or SEIS investors but the decision has been taken not to do so.
An existing EIS or SEIS investor could participate in the convertible loan without comprising their existing relief. However, these investors would not able to claim EIS or SEIS relief for the convertible loan or for any future equity investment in the company after the shares have converted.
It may be possible for the investee company to complete in parallel a separate equity round with EIS or SEIS investors provided the relevant qualifying conditions are met and care is taken to ensure there is no conflict with the terms of the Future Fund loans.
Given the current circumstances and the first-come, first-served nature of the fund, companies and their advisers will need to be able to act quickly to benefit from this funding opportunity.
Our team has extensive experience in convertible debt and equity funding rounds so we are well placed to advise an investor or an investee company on the scheme and its conditions.
This article has been co-written with trainee solicitor Olivier Jacquelin.