Future Fund: help for businesses

The government’s Future Fund programme opened on 20 May 2020 and there has been huge demand for it. Despite strict requirements, which we mention below, future fund loans appear to be really taking off.

It seems that the initial £250 million fund may not be sufficient to meet demand and it has been reported that the government will make additional funding available if needed.  Initial reports show that on the first day of applications more than £453 million was applied for, meaning a total of at least £906 million was being pledged in less than 24 hours.

Coronavirus has caused serious concerns for businesses but these figures show that there is appetite to invest in innovative UK businesses with strong potential.

Future Fund: the basics

The Future Fund was designed to provide support to UK-based start-ups by offering convertible loans to innovative companies with good potential that typically rely on equity investment and are currently affected by Coronavirus. The amount of each convertible loan ranges from £125,000 to £5 million, subject to matched funding from investors. The scheme is currently open until the end of September 2020.

It is an investor-led programme, meaning an investor will need to make the application on behalf of itself, any other investors and the borrower company.

The matched funding from the investors must be in the same form as the Future Fund’s convertible loan, as the matched investors will be party to the same convertible loan agreement. It is an essential requirement that a successful applicant’s funds must be handled by a nominated company solicitor. The matched investor’s lending will need to be deposited with the company’s solicitors before the Future Fund loan is drawn down, and the company’s solicitors must give certain formal written confirmations to the Future Fund before completion of the Future Fund loan. Moore Kingston Smith’s team of solicitors can help borrowers or investors with this process.

Terms of the loans

The main terms of these convertible loans are:

• The rate of interest applicable will be no less than 8% per annum (non-compounding) but may be higher if a higher rate is agreed with the matched investors. Unlike a typical bank loan, the interest is not payable monthly and instead accrues until the loan converts.  At this point, the interest will either be repaid or convert to equity.

• The loans will mature after 36 months and can only be repaid early by agreement with all investors.
• The loans will convert into shares in certain circumstances, including fundraisings, exit events and upon the maturity of the loans.
• The conversion discount will be 20%, unless a higher rate has been agreed with investors.

Restrictions on use

Future Fund loans cannot be used to:

• repay any borrowings from a shareholder or a shareholder-related party (other than the repayment of any borrowings pursuant to any bank or venture debt facilities).
• pay any dividends or other distributions.
• for a period of 12 months, make any bonus or other discretionary payment to any employee, consultant or director of the company (except where there is a previous contractual obligation to do so and as paid in the usual course of business).
• pay any advisory, placement or similar corporate finance type fees.

Eligibility criteria: matched investors

In order to be eligible, matched investors must fall within certain categories of persons to whom exemptions apply under the Financial Services and Markets Act 2000, i.e. “investment professionals”, “certified high net worth individuals”, “certified sophisticated investors” or “self-certified sophisticated investors”, “high net worth companies”, and others.

Eligibility criteria: borrowing company

• The company must be a UK-incorporated limited company, incorporated before 31 December 2019.
• 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 group, the borrower must be the ultimate parent company.
• The company’s shares must not be listed on a regulated market or stock exchange.
• 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.

As a result, UK companies with foreign-registered parent companies, and businesses with a majority of employees and revenues outside of the UK, will not be able to participate.