Last updated on May 28th, 2020 at 12:21 pm
Introduction to the Future Fund scheme
The Government’s Future Fund scheme opened to applications from 20 May 2020 onwards. This blog post gives you general information relating to the scheme, provides useful links to various associated sources and explores the implications of the scheme on the SEIS / EIS regimes.
On 20 April 2020, the UK’s Chancellor of the Exchequer, Rishi Sunak, announced that UK businesses driving innovation and development will be helped through the Covid-19 outbreak with a £1.25 billion Government support package. The aforementioned financial assistance includes a £500 million loan scheme, called the Future Fund, for high-growth companies impacted by the crisis, made up of funding from both the Government and the private sector. This scheme will issue convertible loans to innovative companies facing financing difficulties due to the outbreak.
The Future Fund scheme is to be delivered in partnership with the British Business Bank (“BBB”), aimed at providing UK-based companies with between £125,000 and £5 million from the Government (note that the minimum aggregate loan amount is £250,000). Private investors are to at least match / equal the Government commitment.
The Government is committing an initial £250 million in funding towards the scheme (which will initially be open until the end of September 2020) and the scale of the fund is to be kept under review.
In order to be eligible for the scheme, each of the investor(s) and the company must meet specific criteria, which are detailed below under subheadings “Information for investors” and “Information for companies”.
Demand for the scheme has been extremely high, with applications for in excess of double the initial funding commitment of £250m being received on the first day alone.
Key features of the scheme
The scheme generally operates as follows:
- Step one: Investor applies – The investor, or lead investor of a group of investors, certifies they meet the scheme eligibility criteria and provides key investment details.
- Step two: Company confirms – The company confirms the accuracy of the investment application details provided, before submitting the final application.
- Step three: Contract is finalised – In the case of approved applications, all parties will execute an agreement (in the template form provided, which can be accessed here) and satisfy certain conditions set out in the agreement before the funds are released.
The application is investor-led, which means that an investor, or lead investor of a group of investors, applies in connection with an eligible company (although note that companies are still able to register their interest).
The Future Fund will match up to 100% of the amount provided by investor(s), up to a maximum of £5 million.
The Future Fund loan amount provided to the company ranges from £125,000 to £5 million. The amount of Future Fund loans must be at least matched by co-investment from investors.
Use of proceeds
Investors and companies should note that the proceeds of the convertible loan agreement cannot be used for any of the following purposes:
- Repaying 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);
- Paying any dividends or other distributions;
- For a period of twelve months from the date of the relevant convertible loan agreement, making any bonus or other discretionary payment to any employee, consultant or director of the company other than as contracted prior to the date hereof and as paid by the company in the ordinary course of business; or
- Paying any advisory or placement fees or bonuses to any corporate finance entity or investment bank or similar service provider on monies advanced by the Future Fund.
The loans will have a minimum of 8% per annum (non-compounding) interest charge applied. This interest will be higher if the company and the investor(s) agree between themselves. Unlike a typical bank loan, 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 into equity.
The loan will mature after 36 months. The loan cannot be repaid early by the company other than with the agreement of all of the investors.
The loans will convert into shares in the company in certain circumstances, including an exit or a new funding round (please see clause 5 (“Conversion”) in the convertible loan agreement template for further information on the circumstances under which the loan will convert into shares).
Investors and the Future Fund both invest using a convertible loan agreement, which is predefined and the terms of which are mostly non-negotible (a link to this agreement has been provided above). The only terms that are negotiable (between the investors (other than the Future Fund) and the investee company) are:
- Interest rate (although a minimum of 8% applies);
- Conversion discount rate (although a minimum of at least 20% applies);
- Headroom can be included for investments on the same terms which may be made within 90 days of the Future Fund scheme’s investment (such amounts will not be matched by the Future Fund); and
- A valuation cap whereby there is a ceiling valuation at which the loan notes will convert irrespective of the valuation of the next round / exit (no cap will apply if not populated).
The Future Fund retains its right to alter the application process, eligibility criteria and allocation criteria at any time, with details of any such changes posted on its website.
Information for investors
Investors are advised to read the Future Fund FAQs, which are fairly comprehensive and provide useful insights.
How to apply
- Create account – The investor, or lead investor of a group of investors, must first create an account using the Future Fund Portal to be able to sign in and make applications.
- Check eligibility – The investor, or lead investor of a group of investors, then provides information regarding the investment and confirms their eligibility.
- Submit application – The investor, or lead investor of a group of investors, submits their application in connection with an eligible company, and the company (statutory director or the company secretary) then confirms it is happy for the application to be submitted.
The investor(s) must fall within any of the following categories in order to be eligible under the Future Fund scheme:
- an “investment professional” within the meaning given to that term in article 19 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”);
- a high net worth company, unincorporated or associated or high value trust falling within article 49(2) of the FPO;
- a “certified sophisticated investor” or “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; or
- capable of being classified as a “professional client” within the meaning given in the glossary to the FCA’s handbook of rules and guidance.
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.
Information investors will need to apply
Applicant’s personal information – information on the individual completing the application, including an upload of the individual’s photo identification (i.e. passport, driving licence or identity card).
Investor’s details – information on the investor making the match funding application.
Other investors’ details – information on all other investors who will be making up the match funding (only required for investor applying as a group).
Investment information – the full amount of proposed funding.
Company information and contact details – information on the company receiving the loan and contact details of a statutory director or the company secretary.
Any data and documents provided will be used for Know Your Customer (“KYC”) / Anti-money laundering (“AML”) and general fraud checks as part of the full application.
If providing information about other investors, data and documents provided by the lead investor relating to other investors may be used for Politically Exposed Person (PEP) and Sanctions screening.
Before completing an application, you are advised to ensure that all those on whom you will provide personal data as part of the application process (i.e. other investors, company statutory director or company secretary) have consented to you doing so, and that they are aware that it may be used for PEP and Sanctions screening and that they may be contacted by the BBB, using the information that you provide in order to progress the application.
Participating investors are advised to take independent legal advice (ILA) in order to understand the full implications of participating in the Future Fund scheme.
A director of the company will also be asked to provide a signed confirmation concerning certain facts about the company’s issued share capital and that it has the appropriate authorisations, waivers and approvals in place to fulfil its obligations in respect of the convertible loan agreements, including its ability to issue equity on conversion. The director and the company may wish to also take separate legal advice about this confirmation.
Note that there may also be tax implications for investors using the scheme, and so applicants should take appropriate financial advice.
During a recent webinar hosted by law firm Orrick, which has advised the government on the terms of the Future Fund, partner Ylan Steiner highlighted the importance of ensuring the application is well drafted, by saying: “An early application which is clean and eligible will be processed quicker than a late one which is rejected and takes a while to get right”.
Information for companies
To be eligible for the scheme, the company must meet the following criteria:
- 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). It is extremely likely that the government will seek to verify that the investee company has raised at least £250,000 previously. It is unclear how they’ll do this exactly, but one of the easiest ways is by reviewing Companies House filings. All they need to do is multiply the shares on every Form SH01 (‘Return of allotment of shares’) filed for each share by the stated price by share to see how much has been raised. Therefore, it is vital that the investee company ensures its Companies House filings are up to date ahead of submission of the application;
- if the company is a member of a corporate group, it must be the ultimate parent company;
- the company does 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;
- the company must be a UK incorporated limited company;
- the company must have been incorporated on or before 31 December 2019; and
- at least one of the following must be true for the company:
- half or more of its employees are UK based; and / or
- half or more of its revenues are attributable to UK sales.
Again, data and documents may be used for KYC / AML and general fraud checks as part of the full application.
Participating companies are advised to take legal advice in order to understand the full implications of participating in the Future Fund scheme. Participating companies will also be required to nominate a solicitor and confirm that the solicitor is prepared to act and is able to receive and hold client funds.
Companies may be contacted at any point during and / or after the application process for the purposes of evaluation.
As part of the application process, the BBB will collect information about the company, as the intended recipient of the convertible loan. The BBB will use the information it collects to ensure that it is allocating funds fairly through the Future Fund scheme. The BBB reserves the right to share all data for research purposes with other Government departments and agencies acting on its behalf.
Information for solicitors
The distribution of funds for successful applications will be handled through a nominated company solicitor. It is the company’s responsibility to appoint a solicitor with the necessary right to practice and handle client monies.
To be able to act for a client in respect of the Future Fund scheme, the solicitor must meet the following requirements:
- the solicitor must be a practising UK regulated solicitor – registered with the relevant UK regulatory body (i.e. The Solicitors Regulation Authority for England and Wales (SRA), The Law Society of Scotland (LSS) or The Law Society of Northern Ireland (LSNI). Information is also available from The Law Society of England & Wales (LSEW)); and
- if a client requires the solicitor to handle any completion monies, the solicitor must be permitted to hold client money and have a client account in accordance with the rules of the relevant UK regulatory body set out above.
For further information on the role of solicitors in the Future Fund, please click here.
Further useful information
The Future Fund FAQs on the BBB’s website (link provided above) confirms that applications will be considered on a “first come, first served” basis, with applications expected to take a minimum of 21 days from the initial application being submitted to funding being awarded (the length of time this takes in practice remains to be seen). The difference between application timelines will depend on a number of factors including the speed at which applicants are able to provide information and review documentation.
Once confirmation has been received that the application has been successful, it is our understanding that the company will then be invited to complete the details of the template scheme documentation (i.e. the convertible loan agreement, director’s certificate to be given by a director of the investee company and solicitor’s confirmation letter to be given by the investee company’s nominated solicitor).
Prior to issuing the director’s certificate the investee company will need to have obtained any consents and pre-emption waivers required in the usual way (in the form of board minutes, shareholder resolutions and investor consents if applicable).
Prior to issuing the solicitor’s confirmation letter, the investee company’s nominated solicitors will need to have been put in funds for the full amount of the matched funding. This will require the solicitors to conduct KYC / AML checks on the relevant parties and therefore they should be notified as soon as possible to be able to do this and prevent delays.
Once you have sent the Future Fund evidence to show that the solicitor’s bank account is in funds of the investors’ matched funding, provided that the Future Fund is content with the evidence provided, the government will then wire their funds to the solicitor’s bank account, which the solicitor will then release to the investee company.
SEIS / EIS implications and review of the scheme
From reviewing the Future Fund FAQs, it is clear that the scheme’s impact on the SEIS / EIS regimes has been raised as an issue, and therefore the Government will be expected to publish guidance on this point in due course.
Below are some key points regarding how the Future Fund scheme will impact SEIS / EIS, as taken from the Future Fund FAQs:
- Q: Will the Convertible Loan Agreement (CLA) be SEIS or EIS eligible?
- A: HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS. It is our (i.e. BBB’s) understanding that the structure of the CLA does not meet existing rules for SEIS or EIS eligibility. Compatibility with tax schemes is a matter for HM Treasury and HMRC.
- Q: Will entering into the CLA affect the SEIS or EIS compatibility of investments made prior to the CLA?
- A: HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS. Compatibility of previous investments with the SEIS and EIS tax schemes is a matter for HM Treasury and HMRC. The government has confirmed that such previous investments will not be affected where the convertible loan converts into shares. Where the convertible loan note redeems, we (i.e. the BBB) have been alerted that the government intends to make changes to the rules to clarify that this is compatible with such previous investments.
- Q: Will entering into the CLA affect the SEIS or EIS compatibility of future investments?
- A: HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS.
In summary, as the scheme is structured as a convertible loan agreement, this means that it does not meet the current eligibility criteria for the SEIS / EIS reliefs, although (as stated above), the compatibility of previous SEIS and EIS investments should not be affected where the convertible loan converts into shares.
Criticism of the scheme so far has been rife, with the majority of commentators highlighting the way in which the scheme focuses very heavily on the VC portion of the investment sector, and most of all condemning the fact that the scheme is incompatible with SEIS and EIS.
According to data from research platform ProSapient and corporate financial advisor Adelpha, 56% of funding of UK start-ups comes from private individuals (i.e. angel investors, high net worth individuals, family offices and founders). A mere 17% of such funding is attributable to venture capital and private equity funds, and this noticeably smaller pool of investors will be better placed to co-invest under the Future Fund scheme, which has to be a major design flaw.
Research conducted by the BBB and UK Business Angels Association (“UKBAA”) suggests that 86% of angel investors use SEIS and EIS to support their investments. Without the benefit of the significant tax and loss reliefs that these schemes offer, the likelihood of angel investors being motivated to co-invest alongside the government using this scheme is low.
One positive is that the government has ensured that the scheme comes within the Temporary Framework for State Aid measures to support the economy in the Covid-19 outbreak, meaning that it did not need to obtain specific EU approval in order to launch the scheme. This means that the scheme is not notifiable State Aid and so doesn’t fall within the risk finance State Aid guidelines and count towards the annual or lifetime limits of a company.
One of the most significant flaws in the Future Fund scheme is that, if an SEIS / EIS investor chooses to (or is persuaded to) participate and invest via the scheme, once the loan has converted, that investor will not be entitled to make any further SEIS / EIS investments in the underlying investee company, and the investee company will lose that investor for future SEIS / EIS rounds.
As stated above, companies applying to the Future Fund scheme are required to have already raised £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). This benchmark is high and puts those start-ups that have struggled with access to funding at a significant disadvantage.
Finally, during a recent panel discussion hosted by Tech Nation, Francis Evans, head of business finance at the department for business, energy and industrial strategy (BEIS) opined on the scheme’s SEIS / EIS compatibility as follows: “Don’t expect the headline terms of the Future Fund to change”.
Links to Future Fund scheme documentation
You may also wish to access BBB’s Website Terms and Conditions.
Finally, the British Business Bank’s glossary of terms, which sets out defined terms that are used in the Future Fund portal and the FAQ documents, can be found here.
How we can help you
We offer our clients a capped fixed fee of £1,500 plus VAT (£1,800) to provide our support so as to coordinate the parties, conduct all necessary KYC / AML checks, ensure that any relevant shareholder resolutions and board minutes are drafted and any necessary investor consents obtained, and to accept the investment monies from your investor(s) into our client account (as well as the matched funding from the government) which we will then release to the company.
Please note that for new clients and fixed fee matters we require payment upfront. This helps us operate in an efficient manner and thus keep our pricing more competitive, as we benefit from increased cash flow and reduce the risk of time being incurred chasing invoices and / or non-payment.
The aforementioned fixed fee comprises a time cap of up to 10 hour of the team’s aggregated time (10 hours of our time in aggregate should be more than enough to carry out our scope of work in relation to these applications and get the monies released to the investee company). In the event that the work takes us more than 10 hours to complete, then we will need to charge for such further time (in addition to the fixed fee) in accordance with our hourly rates (further details as to our hourly rates can be provided should you decide to formally instruct us).
If you would like our assistance with making an application pursuant to the Future Fund scheme, please send an email to firstname.lastname@example.org in the first instance, following which someone will liaise to fix a mutually convenient time for a no cost, no obligation introductory call between you and one of our fee earners.