UK ‘Future Fund’ Update

The British Business Bank has opened the application process for the Future Fund, a new fund that provides financing to UK start-ups and scale-ups in the form of a convertible loan which is invested directly by the UK government. The application process will remain open, initially, until the end of September 2020. 

Goodwin led the legal task force advising the government on the structure of the Future Fund. This note contains preliminary guidance on the application and eligibility process as well as some changes to provisions of the scheme announced by the government in its Headline Terms published in April 2020.

We will be running a webinar next week to explore the Future Fund terms announced in more detail and to answer your questions. Look out for your invite and feel free to share with colleagues and others it may be of interest to. Please also get in touch with your usual Goodwin contact or using the contact details provided at the end of this note.

What size is the Future Fund?

The Government has made £250 million available for the Future Fund. The British Business Bank has stated it “will keep this amount under review”. Further, Rishi Sunak, the Chancellor, told MPs on Monday this week that he would be “more than happy” to expand the scheme if demand outstripped the money initially allocated.

How does the application process work?

This is an investor rather than a company-led process.

The investor, or lead investor of a group of investors, creates an account to be able to sign in and make applications.

The lead investor provides information regarding the investment and confirms their eligibility, and then submits its application in connection with an eligible company.

Once the lead investor has submitted an application, the company will receive an email with instructions on how to: (i) proceed with opening an online account; and (ii) progress the application. This will require the company (statutory director or the company secretary) to confirm it is happy for the application to be submitted.

The British Business Bank says that applications are expected to take a minimum of 21 days from initial application to funding being awarded.

In the case of approved applications, all parties will then execute a convertible loan agreement (in the form of the template provided here) and satisfy certain conditions set out in the agreement before the Future Fund monies are released. These conditions include:

• A director’s certificate from the company in the form provided here, which requires companies to have obtained all appropriate resolutions, consents, and waivers required from directors or shareholders and all necessary waivers and consents under any existing debt financing arrangements (if any); and
• Confirmation from the company’s solicitors that they have received into their client account the full amount of the completion monies on behalf of the lead investor and any other investor(s) other than the Future Fund.

The satisfaction of these conditions will be the trigger for the Future Fund to transfer its monies to the company’s solicitors client account.

How is funding allocated?

Applications for the Future Fund will be assessed and allocated funding on a first-come, first-served basis, subject to meeting the eligibility criteria. However, if a lead investor submits multiple applications on the same day and there are a high number of other applications on that day, then only one application made by that lead investor may be processed on that day. So, if there is a group of investors providing matched funding, it may make sense to consider which should take the lead investor role, after taking into account any other Future Fund applications being made by that investor. The lead investor does not have to be the investor committing the largest matched investment. The only requirement is that the lead investor must be investing at least £12,500. 

Are there any changes to the eligibility requirements from those announced in April 2020?

The eligibility requirements for the company remain largely as previously announced in April.

The British Business Bank has confirmed that the company (which, if it is a member of a corporate group, needs to be the ultimate parent company) must be a UK-incorporated limited company.

The reference in April to needing a “substantive economic presence” in the UK has been replaced with a requirement that 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.

There are also now detailed eligibility criteria for investors, which can be found in the glossary here. Generally, we expect most investors active in the UK market to meet the eligibility criteria.

Will the Convertible Loan Agreement (CLA) be SEIS or EIS eligible?

The British Business Bank’s understanding is that the structure of the CLA does not meet existing rules for SEIS or EIS eligibility.

However, the government has confirmed that previous SEIS and EIS investments will not be affected when the convertible loan converts into shares. When the convertible loan is repaid, the British Business Bank has said that the government intends to make changes to the rules to clarify that this is compatible with previous SEIS and EIS investments.

There is no guidance on whether entering into the CLA affects the SEIS or EIS compatibility of future investments.

There is also no guidance on whether the CLA will be compatible with VCT reliefs, however, we expect it will not be.

Are there any substantial changes to the terms of the convertible loan announced by the Government in its Headline Terms published in April 2020?

Not many. Generally, the CLA (which can be found here) follows the structure and terms outlined in April, which we commented on in our Q&A document found here.

The principal differences or clarifications are:

• Certain anti-avoidance clauses including:
  
  
  
  • No side letters or other agreements that adversely affect the economic interests of the Future Fund;
  • Not artificially inflating the price on any equity financing round in a manner which is adverse to the Future Fund;
  • If there is an exit within 6 months of a non-qualified financing in which investors have converted the loans, on such exit the investors will be entitled to receive the greater of the amount they would receive on selling those shares in the sale and the amount they would have received had they been repaid the loan with the 100% redemption premium;
    
    
• The maturity date of 36 months is fixed, rather than a ‘maximum’ according to the Headline Terms;
• A right for the Future Fund to request, upon a conversion of the loan, a meeting with the company to discuss in good faith a suite of shareholder governance rights that may be afforded to the Future Fund (but no obligation to grant those rights); and
• Certain information rights for the Future Fund, including those set out in schedule 4 to the CLA and also, at the Future Fund’s request, the same information as is provided by the company to its other major investors in the company, subject to the ability of the Board to withhold information that is commercially sensitive and/or legally privileged.

It is important to note in the context of the anti-avoidance clauses in particular that failure to comply could trigger an Event of Default potentially requiring repayment of the loan together with interest and a 100% redemption premium.

Can the CLA be amended or negotiated?

No, except that the interest rate, conversion discount, headroom amount (see below) and valuation cap are negotiable between the investors (other than the Future Fund) and the company in advance of the application. However, the interest and discount rates cannot be lower than 8% and 20% respectively. If no headroom amount or valuation cap is agreed, they will default to zero and void, respectively. 

Following completion of the Future Fund’s investment, it is possible for the company to raise further sums within 90 days up to the headroom amount agreed previously in the CLA. Note that such further investment requires additional investors to sign up to the CLA but does not qualify for matched funding from the Future Fund. Therefore, to maximise the amount of Future Fund monies received, a company would want to accelerate any such further investment in order to bring it into the first close.

Where can I find more information?

Information on how the scheme will be implemented can be found on the British Business Bank website, which now includes detailed eligibility criteria for both investors and companies. 

The website also includes informative FAQs for investors and companies. 

If the scheme is of interest to you or if you have any questions, please get in touch.