The UK Government, via its in-house bank the British Business Bank, has announced details of the Future Fund and applications open today, 20 May 2020. Provisional details were announced in April 2020. The Scheme is designed to enable privately held UK companies which are pre-revenue or pre-profit (and which have historically had to rely on equity financing) to access the pool of funding the Government is making available to help businesses through the pandemic. The Scheme makes available convertible loan funding of between £125,000 and £5,000,000, on a matched funding basis. The Government has allocated an initial £250 million to the Scheme, which will be allocated to eligible applicants on a first-come, first-served basis.
This note, which builds on our note published when the Scheme was announced in April 2020 (which can be found here), looks to clarify some of the uncertainties which have been resolved by publication of the detailed documents and deals with the application process.
When the Scheme was announced, it was referred to as a scheme to help “innovative companies”. The formal documentation published earlier this week makes no clear reference to this requirement of innovation and the Bank has confirmed to us that, in fact, innovation is no longer a requirement. Provided a company and its investors meet the various stated eligibility requirements, the funding will be made available, on a first-come, first-served basis. The terms of the scheme also make it clear that AIM companies are not eligible, even though for many purposes they are regarded as unlisted.
The Scheme depends on a company having identified “third party investors” who are prepared to lend funds to the company on the terms of the Scheme’s pro forma convertible loan instrument, and also requires that third party investors have subscribed at least £250,000 for equity in the company in the last three years. We now have a definition of “third party investors”. An investor must, broadly, be an institutional investor, or fall within one of various categories of high net worth individual or sophisticated investor. An investor is a third party investor if they are not a founder, employee, worker, or consultant to the company and do not have a controlling interest in the company already.
The Government has clearly resisted pressure from some parts of the venture capital industry to limit the category of investors to institutional investors. In addition, they have clarified that existing arm’s length investors in the company who don’t work for the company in some way, are potentially “third party” investors, as are non-executive directors. New EIS or SEIS investment does not qualify for use as matching funding; indeed, great care is required with investors who have previously taken advantage of EIS or SEIS incentives to invest in the company, who may have their relief withdrawn if Future Fund money is raised. It is also worth noting that international investors can qualify as third party investors if they fall within their national equivalent categories of investors.
The application process is investor-led. A lead investor is designated to handle the initial application on behalf of himself, any other investors, and the company. Extensive information, both as to the investors and the company, is required to be provided at this stage. The information required includes the reason for applying and the projected use of funds, but there is no requirement to submit a business plan of financial projections.
The core document, the form of convertible loan note, has now been published. It is expressed to be non-negotiable once the commercial terms have been agreed with the third party investors. Companies, and investors, will want to be advised on its legal effect and on its implications, particularly for future fundraising rounds, but lack of opportunity for negotiation will certainly speed up the process and minimise professional costs.
Once all parties are agreed, the investors and the company sign the document and the investors lodge their funds with the company’s solicitor (a requirement of the scheme). The solicitor confirms this to the Bank. The Bank then signs the document and releases the Future Fund investment alongside that of the third party investors.
The Bank envisages that it will take a minimum of 21 days from acceptance of the application to completion of the transaction and drawdown of the funds.
As already noted, it is a requirement of the Scheme that the company raising funds engages a solicitor. Druces has been monitoring the development of the Scheme closely and is well placed to assist in the submission of an application for funding, advise on the formal documentation and assist in closing the investment.
For further information about the Scheme, and to explore with us how we may help you take advantage of it, please speak to your usual Druces contact or: