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COVID-19 and the Future Fund

Originally announced by the Chancellor on 20 April, the Future Fund, issuing convertible loans to companies, will now be open to applications from May…

Originally announced by the Chancellor on 20 April, the Future Fund, issuing convertible loans to companies, will now be open to applications from 20 May 2020 up to the end of September 2020.

The Government has made £250 million available for the Future Fund.

We have set out the key terms of the scheme below. One of the key criteria is that for the company to be eligible it must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020 inclusive) and must be able to match fund any monies received from the Future Fund, with investor match funding.

We can support both investors and businesses through the process to completion, including advising on:

  • The application process and eligibility criteria (relevant to both investors and companies)
  • Providing detailed analysis and advice on the terms of the Loan Note Instrument – which is binding on all investors
  • Enabling completion and drawdown of monies (the evidencing of ability to meet the strict practicalities of completion is a requirement of the British Business Bank - the distribution of funds for successful applications must be handled through a nominated company solicitor).

Key terms

The application process is investor-led. This means an investor, or lead investor of a group of investors, applies in connection with an eligible company.

Application and amount

The Future Fund will match up to 100% of the amount provided by investor(s), up to a maximum of £5 million. The Future Fund loan amount provided to the company ranges from £125,000 to £5 million.

Amounts of Future Fund loans must be at least matched by co-investment from investors.

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.

Restrictions on the use of funds

Funding must not be used to (a) repay any borrowings;(b) pay any dividends; (c) pay any bonuses; (d) pay any advisory fees.

Interest

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.

Documentation and conversion

The loans will convert into shares in the company in certain circumstances, including an exit or a new funding round.

Investors and the Future Fund both invest using a convertible loan agreement, which is predefined and cannot be negotiated. We can provide a summary of the convertible loan agreement.

Most crucially there are eligibility criteria for both the company and the investor(s) that must be met as set out below

“FCA Rules” means the FCA’s handbook of rules and guidance

“FPO” means the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005:

The investor must fall within any of the following categories:

  • An “investment professional” within the meaning given to that term in article 19 of the FPO
  • A high net worth company, unincorporated associated or high value trust falling within article 49(2) of the FPO
  • A “certified sophisticated investor” or a “self-certified sophisticated investor” within the meaning given in articles 50 and 50A respectively of the FPO
  • A “certified high net worth individual” within the meaning of article 48 of the FPO
  • An equivalent professional, high-net worth, institutional or sophisticated investor in accordance with applicable law and regulation in such investor’s home jurisdiction
  • An association of high net worth or sophisticated investors within the meaning of article 51 of the FPO
  • Capable of being classified as a “professional client” within the meaning given in the glossary to the FCA Rules.

Note that all other investors must fall within one of the above categories in order for them to be eligible to invest in the convertible loan agreement. It is the responsibility of other investors to ensure they are eligible.

To be eligible for the scheme, the company must meet the following criteria:

  • The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020, inclusive)
  • If the company is a member of a corporate group, it must be the ultimate parent company
  • The company does not have any of its shares or other securities listed on a regulated market, a multilateral trading facility, a recognised investment exchange and/or any other similar market, stock exchange or listing venue
  • The company must be a UK incorporated limited company
  • 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

Practical steps – how it works in practice:

  • The investor, or lead investor of a group of investors, certifies they meet the scheme eligibility criteria and provides key investment details.
  • The company confirms the accuracy of the investment application details provided, before submitting the full application.

The contract is completed:

  • In the case of approved applications, all parties will execute an agreement (in the template form) and satisfy certain conditions set out in the agreement before the funds are released.

If you would like to discuss this update further, please contact Patricia Grinyer, Partner at patricia.grinyer@weightmans.com or your usual Weightmans contact.

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