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Last updated: 28th September 2020
The Future Fund scheme has been extended to take applications until 30th November 2020.
Applications are now open for the Future Fund; a further scheme unveiled this week as part of the Government’s coronavirus business aid package. Around £250 million of funding has been made available to innovative UK companies which were showing potential prior to the pandemic, although this figure could be increased.
The fund is aimed at companies who would typically rely on equity investment.
Under the scheme, businesses will be able to access loans starting from £125,000 from investors which will then be matched by the Government £1 for £1 up to a cap of £5 million. Unlike typical bank loans the loans will be convertible in equity. The conversion comes with a 20% share value discount in favour of the Treasury and whist full details are not published there are other strings attached:
- converted shares stay as part of the most senior share class of the business
- the Treasury can sell on shares to institutional investors as part of a packaged Future Fund portfolio
- if the company enters another convertible loan agreement on more favourable terms than the Future Fund loan, these terms also apply to the Future Fund
If a funding round does not raise enough capital to cover the Future Fund loan, if the matched investors agree, the switch from debt to equity can still go ahead at the discount rate.
The Treasury has also hinted the discount rate rule will apply to an IPO or when the loan term ends.
During the loan term or period the government owns shares in the business, the Treasury will have some governance rights, but the full details have yet to be released.
In return, the company must treat the government fairly as lenders and/or shareholders and offer the same information rights to them as other investors and to comply any legal obligations to shareholders.
Successful applicants and their investors will be required to enter into a non-negotiable Convertible Loan Agreement (CLA with the Future Fund).
The process is investor led, applicants will already need to have an investor lined up and the fund will not ‘matchmake’ companies to investors. Companies will then need to pre-agree terms with the investor .
Who is eligible?
To be eligible to apply under the Future Fund scheme, businesses must:
- be a UK incorporated private company, if the company is part of a corporate group, only the parent company is eligible to apply for Future Fund
- be incorporated on or before the 31st December 2019
- have raised at least £250,000 in private investment in the last five years (from 1st April 2015 to 19th April 2020 inclusive)
- 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
- be in a position to secure enough private funding to match the government’s investment; and
- have at least one of the following true for the company
- half or more of their employees based in the UK; or
- half or more of their revenues being from UK sales
The Future Fund cannot be used to:
- pay any dividends or other distributions
- repay any borrowings
- for a period of 12 months from the date of the CLA, make any bonus payments to staff, management, shareholders, director or consultants other than as contracted prior to the date of the agreement and as paid by the company in the ordinary course of business; or
- in relation to monies advanced by Future Fund, pay any advisory or placement fees or bonuses to any corporate finance entity or investment bank or similar service provider
Loans received under the Future Fund will be subject to a minimum interest rate of 8% per annum (non-compounding) although this can be higher if the parties agree. Under the Future Fund, the interest rate will not be payable on a monthly basis, but instead accrue when the loan converts.
The loan will mature after 36 months and cannot be repaid early except by agreement from the investor.
It is possible for the loan to convert in certain circumstances such as on a further fundraise or an exit scenario. More information on such circumstances will be contained in the CLA.
What should companies do now?
Applications for the Future Fund opened on Wednesday 20th May 2020 and eligible companies will be able to apply until the end of November 2020. Applications will be processed on a first come, first served basis and funds will be received within a time frame of around 21 days.
Successful applicants will need to nominate a solicitor to deal with the movement of funds and the Business Bank strongly recommends that applicant companies seek appropriate accounting, taxation and legal advice before entering into the CLA. Guidance from HM Treasury and HMRC is awaited in respect of whether shares under the CLA will qualify for SEIS and EIS but from the information provided so far, it is expected that they will not be eligible.
How can Napthens help?
If you require any advice in relation to the Future Fund scheme and your eligibility to apply under the scheme, we can help. In addition, we can advise on the documentation required to enter into the scheme.
If your application is successful you will be required to identify a nominated UK regulated solicitor to manage the movement of funds received under the scheme. If you would like to instruct us as your nominated solicitor, we would be happy to discuss how we can help and provide a quotation. We are also able to assist with supporting you through the application process and can help you to understand your obligations under the CLA.
Should you require any further information in relation to the Future Fund scheme, please do not hesitate to contact a member of the Napthens’ Corporate team.