On 20 April 2020, the UK Government announced its new Future Fund scheme, aimed at supporting innovative companies which are facing financing difficulties due to the coronavirus outbreak through the issue of convertible loan notes. The scheme was launched after concerns were raised that many early-stage and venture capital backed companies would not qualify for the Government’s Coronavirus Business Interruption Scheme (“CBILS”). Ashfords’ guide to CBILS can be found here.
The Future Fund scheme will be delivered in partnership with the British Business Bank and is intended to launch in May 2020 and will remain open until the end of September 2020 (although this will be reviewed). The Government will initially make up to £250,000,000 available in total for the scheme (again this will be reviewed). In addition, Innovate UK, the national innovation agency, is extending up to £750 million of loans and grant funding to innovation driven businesses focussed on research and development. Full details of the Future Fund scheme will become available over the coming weeks.
We have set out a brief summary of the terms and key questions based on the current information.
The Future Fund scheme will be available to businesses that:
- are unlisted UK registered companies;
- have a substantive economic presence in the UK (so group companies with a UK parent with a majority of their operations overseas will not qualify);
- have raised at least £250,000 in equity investment from third party investors in the past five years; and
- can attract the equivalent match funding from third party private investors and institutions.
If a company is a member of a corporate group, only the ultimate parent company (provided it is a UK registered), is eligible to receive the loan.
There is currently little further detail published on the eligibility criteria but we are expecting further details to be made available shortly.
Convertible Loan Note Terms
Investments made by the Government pursuant to the Future Fund scheme are to be made by way of an unsecured convertible loan. Headline features of the loans are as follows:
- the loans must at least be matched by bridge funding made by private third party investors;
- the Government will invest between £125,000 and £5,000,000 (there is no cap on the amount that can be invested by matched investors in the relevant financing);
- the loans will have a term of 36 months;
- interest will accrue at 8% per annum (unless a higher rate is agreed with matched investors), repayable on maturity;
- the loan notes convert:
- automatically into equity on the company’s next qualify funding round (being an investment at least equal to the value of the Government’s funding and matched funding)
- at a 20% discount to the funding round price, unless a higher discount rate is agreed with matched investors. There will be no valuation cap (unless one has been agreed with the matched funders);
- at the discretion of the holders of a majority of the principal amount held by the matched funders (the “Lender Majority”) on any non-qualifying fundraising (again at a minimum 20% discount);
- accrued interest will not convert at a discount;
- on maturity, the loans are either repaid at two times the existing principal plus interest or converted into equity (at a minimum 20% discount to the most recent funding).
Ashfords has advised several prominent venture capital funds in their discussions with HMT with respect to the structuring of the Future Fund and are pleased to see steps being taken to support a key UK business sector.
Although the scheme is a much-needed step forward, the initial details appear to exclude crucial investment from VCTs and EIS-focused investors and there is also a concern that Enterprise Capital Funds may not be considered to be ‘private investors’ in the context of match funding. That would greatly impact take-up, with the scheme being more readily available to the more promising portfolio companies of the larger, more established private funds.
Whilst we await further detail, the matched investment element of the scheme appears to be limited to convertible loans, which means that most angel investment and many institutional funds will be excluded from providing matching finance, as the convertible loans would be disqualified for EIS purposes. This also means that advance subscriptions are unlikely to qualify.
Looking forward, the automatic conversion on a fundraising will also mean that the Government will end up holding minority stakes in promising companies but also some with no real return (if any) for several years. The Government can transfer the loan notes to other institutional investors or other government entities, so we may well see a series of secondary transactions or a Government backed fund coming out of the pandemic.
Please contact the Venture Capital Team at Ashfords if you have any questions. We will provide further updates and commentary as more information is released.