Undoubtedly, most of the businesses are dealing with great difficulties due to the COVID19 pandemic. Therefore, to help the companies to cope with this period of financial disruption, on 20 April, the Chancellor announced the Future Fund Scheme. Via this scheme convertible loans ranging from £125,000 to £5 million will be issued to innovative companies that mainly rely on equity investment.

The Future Fund scheme is open now and you can apply for this until the end of September 2020. At present the government has made available £250 million for the Future Fund; however, they will keep this amount under review.

We have elaborated the key terms and conditions of the scheme below.

 

To qualify for the scheme you must meet the following criteria –

1- The company is a limited company incorporated in the UK on or before 31 December 2019

2- The company has raised at least £250,000 in equity investment from third-party investors in the last 5 years (from 1 April 2015 to 19 April 2020, inclusive)

3- If the company is a part of a corporate group, then only the parent company is eligible

4- None of the company shares are traded on a regulated market, multilateral trading facility or other listing venue

5- At least one of the following is true for the company –

       a) half or more employees are UK-based

       b) half or more revenues are from UK sales

It is clear that parent companies registered outside the UK are not eligible and the businesses with majority of overseas employees and revenues outside of the UK do not qualify for this scheme.

 

Key aspects of the Future Fund Scheme

• - This is an Investor-led application process, which means although companies can register their interest, the application will have to be made by an investor, or lead investor of a group of investors, on behalf of the company.

 

• - The Future Fund will match 100% of the amount provided by investor(s), up to a maximum of £5 million. The loan amount provided to the company ranges from £125,000 to £5 million. Further, amounts of Future Fund loans must be at least matched by co-investment from investors.

 

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

 

• - The loan will mature after 36 months. The company cannot repay the loan early unless all of the investors are in agreement.

 

• - The loans will have a minimum 8% non-compound interest charge. This may increase if both the company and the investors are in agreement. It has to be noted that 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.

 

• - 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.

 

Who are the eligible investors?

The British Business Bank specifies that eligible investors must fall within one of the following categories

 

• - An “investment professional” within the meaning given to that term in article 19 of the FPO (Financial Services and Markets Act 2000 (Financial Promotion) Order 2005)

 

• - 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 (Financial Conduct Authority) 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.

 

How it works? In brief –

      1- Investors those who want to apply for match-funding under the Scheme will create an account on a dedicated website.

 

      2- The investor, or lead investor of a group of investors, will certify that they meet the scheme eligibility criteria and provide key investment details.

 

      3- The company will confirm that all the details submitted are accurate.

Once it is determined that the investment meets all the eligibility criteria, the match funding will be provided under a Convertible Loan Agreement.

The investors and the company must agree on details such as the discount rate (at least 20%), the interest rate (at least 8%), and – optionally – a valuation cap and headroom amount based on the Agreement template, available on the Government’s website. It must be noted that other than these details, there is no room for negotiations in the Agreement.

Keeping in view the terms and conditions of the Future Fund and its application process, it is obvious that you will have certain questions regarding the process and the benefit of availing fund via this scheme. Therefore, it is advisable that you must seek professional advice from a firm with good experience of handling business accounting and business tax works as this will enable you to understand the potential benefit of the Future Fund scheme for you, considering the actual financial health of your business.