The Future Fund
Government loan scheme for innovative firms
The UK Government has announced a new scheme to issue convertible loans to innovative companies which are facing financing difficulties due to the Coronavirus outbreak (the “Future Fund”).
The Future Fund will provide convertible loans to privately funded UK-based companies ranging from £125,000 to £5 million. The government initially aims to provide £250 million loans in total under the Future Fund (matched by at least another £250m of debt bridge financing from private investors). This scheme forms part of a wider £1.25 billion coronavirus package to protect firms driving innovation in UK, which also includes a scheme under which SMEs focusing on research and development will benefit from £750 million of grants and loans.
Similar to the other loan schemes, the Future Fund will be delivered in partnership with the British Business Bank (“BBB”). The Future Fund will launch for applications in May 2020 and will initially be open until the end of September 2020.
Headline terms, summarised below, have been published on gov.uk with more details to follow in the coming weeks.
The full eligibility criteria have not been published yet and it is unclear whether there will be any exclusions for banks or other financial sector entities similar to the CBILS/CLBILS. At this stage, there are no such exclusions and it appears that the apparent purpose of this scheme is to boost innovation.
Based on the information presently available, companies must meet the following requirements to access the Future Fund:
- be an unlisted UK registered company with a substantive economic presence in the UK;
- have previously raised at least £250,000 in equity investment from private third party investors in the last 5 years; and
- be able to attract at least matching funding from private third party investors and/or institutions.
If a firm is a member of a corporate group, only the ultimate parent company (if UK-registered) is eligible to receive the loan.
Key headline terms
Under the Future Fund, convertible loans will be provided by the government through the BBB to eligible UK-based companies which will be matched by funding from private third-party investors. Whilst the amount of the loan provided by the Government will be between £125,000 and £5 million, there is no cap on the amount that the matched investor(s) may loan the company, and therefore no cap on the aggregate bridge funding being provided.
While full and final details of the scheme will be published in due course, the headline terms set out the following requirements for loans under the Future Fund.
- Use of proceeds: The bridge funding shall be used solely for working capital purposes and shall not be used by the company to repay any borrowings, make any dividends or bonus payments to staff, management, shareholders or consultants or, in respect of the Government loan, pay any advisory or placement fees or bonuses to external advisers.
- Interest rate: The interest rate will be at minimum 8% per annum, or higher if agreed between the company and the matched investor(s).
- Maturity: The loan shall mature after a maximum of 36 months.
- Governance and other rights: The Government will have limited corporate governance rights during the term of the loan and as a shareholder following conversion of the loan, and will benefit from a right to transfer a portfolio of it loans/shares to institutional investors and certain other investor protections.
What are the terms for the conversion?
Under the Future Fund:
- the loan will automatically convert into equity in the next fundraising round of the company in which the company raises an amount at least equal to the aggregate bridge funding (a “qualifying funding round”);
- the loan will convert into the most senior class of equity issued by the company, with the principal converting at a 20% discount (or higher if agreed by the company and the matched investors) to the price set by that funding round, and any unpaid interest converting at the actual price in the round (i.e. no discount)(the “Discount Rate”);
- there will be no valuation cap applicable to the conversion unless the matched investors have agreed a cap (in which event the same terms will apply to the conversion of the Government’s loan);
- on a non-qualifying funding round (i.e. where the private funding raised is less than the bridge funding), at the election of the holders of a majority of the principal amount held by the matched investors, the bridge funding shall convert into equity at the Discount Rate;
- on a sale or IPO, the loan (i) shall convert into equity at the Discount Rate to the price set at the most recent non-qualifying funding round (unless it precedes the date of the loan in which event no discount shall apply) or (ii) shall be repaid with a redemption premium (being a premium equal to 100% of the principal of the bridge funding), whichever will provide the higher amount for the lenders; and
- on maturity of the loan, the loan shall, at the option of the holders of a majority of the principal amount held by the matched investors (i) be repaid by the company with a redemption premium (being a premium equal to 100% of the principal of the bridge funding); or (ii) convert into equity at the Discount Rate to the price set by the most recent funding round provided that the Government’s loan shall convert unless it requests repayment in respect of its loan.
Purpose of the scheme
The Government’s announcement mentions that the purpose of the Future Fund is to support businesses that have been unable to access other government business support programmes, such as CBILS, because they are either pre-revenue or pre-profit and typically rely on equity investment.
Therefore, subject to any relevant exclusions, the Future Fund will be relevant to many angel/VC funded start-ups, including FinTechs, which would not be eligible borrowers under the other loan schemes.
When will it launch?
The Future Fund will launch for applications in May 2020 and will initially be open until the end of September 2020.