The government has announced a new scheme directed towards innovative UK companies that are facing financing difficulties due to the Coronavirus pandemic: the Future Fund.
Many such businesses have been unable to access other government business support programmes, such as the Coronavirus Business Interruption Loan Scheme, Coronavirus Large Business Interruption Loan Scheme or Coronavirus Corporate Finance Facility, because they are either pre-revenue or pre-profit and typically rely on equity investment.
Through the Future Fund, the government will issue convertible loans of between £125,000 and £5 million to companies, subject to various eligibility criteria including a requirement for matched funding from private investors. These loans will automatically convert into equity on the company’s next qualifying funding round or, if not repaid, at the end of the loan term.
The government will initially make up to £250 million available in total for the scheme, although this will be kept under review.
The scheme will be delivered in partnership with the British Business Bank and is expected to launch in May 2020, being open initially until the end of September 2020.
The headline terms for these convertible loans are expected to be as set out below. However, full and final details of the scheme are yet to be published.
To be eligible for the scheme, a business must:
- be an unlisted UK registered company;
- have a substantive economic presence in the UK;
- have raised at least £250,000 in aggregate from private third-party investors in previous funding rounds over the last five years; and
- be able to attract the equivalent match funding from third party private investors and institutions – the government will make unsecured bridge funding available alongside other private third party matched investor(s); the loan shall constitute no more than 50% of the bridge funding being provided to the company, with the remaining amount provided by matched investor(s).
If the company is a member of a corporate group, only the ultimate parent company, if a UK registered company, is eligible to receive the loan.
The quantum of the government loan must be between £125,000 and £5 million. However, there will be no cap on the amount that the matched investor(s) may loan to the company and therefore no cap on the aggregate bridge funding being provided.
The loan will mature after a maximum of 36 months.
The government will receive a minimum of 8% per annum non-compounding interest to be paid on maturity of the loan. The interest rate will be higher if a higher rate is agreed between the company and the matched investors.
Restriction over use of proceeds
The bridge funding obtained under the scheme must be used solely for working capital purposes. It specifically cannot be used to:
- repay existing borrowings;
- pay dividends;
- pay bonuses to staff, management, shareholders or consultants; or
- pay any advisory or placement fees or bonuses to external advisers in respect of the Government loan.
Conversion to equity – maturity and other conversion events
A minimum conversion discount of 20% (the “Discount Rate”) will apply on conversion of the loan. However, the Discount Rate may be higher if a higher rate is agreed between the company and the matched investors.
On maturity, the loan will, at the option of the holders of a majority of the principal amount held by the matched investors, either:
- be repaid by the company with a redemption premium (being a premium equal to 100% of the principal of the bridge funding); or
- 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.
The bridge funding will automatically convert into equity on the company’s next “qualifying funding round” applying the Discount Rate to the price set by that funding round, with a company repayment right in respect of the accrued interest. A “qualifying funding round” is deemed to take place where the company raises an amount in equity capital (excluding any shares issued on conversion of the bridge funding or to employees/consultants on exercise of any options) equal to at least the aggregate amount of the bridge funding.
On a “non-qualifying funding round”, at the election of the holders of a majority of the principal amount held by the matched investors, the bridge funding will convert into equity at the Discount Rate to the price set by that funding round. A “non-qualifying funding round” is deemed to take place where the company raises less in equity capital than the amount required for a “qualifying funding round”.
On a sale or IPO, the loan will, depending upon which will provide the higher amount for the lenders, either:
- convert into equity at the Discount Rate to the price set by the most recent non-qualifying funding round; or
- be repaid with a redemption premium (being a premium equal to 100% of the principal of the bridge funding).
On a sale or an IPO or maturity of the loan, the Discount Rate will not apply to the most recent non-qualifying funding round where such round took place prior to the issuance of the bridge funding. In such circumstances, the conversion price will not include a Discount Rate.
On a conversion event:
- only the principal under the bridge funding (and not any accrued interest) will convert at the Discount Rate and any accrued interest not repaid by a company will convert at the relevant price without the Discount Rate; and
- the loan will convert into the most senior class of shares in the company – if a further funding round is completed within six months of the relevant conversion event, the lenders will be entitled to convert their shares into the senior class of shares of the company in issue post that round.
Please get in touch if you would like further details or assistance with your finance requirements.