The UK Government and the British Business Bank recently announced the opening of the Future Fund application process, which will remain open (initially) until the end of September 2020.
Taylor Wessing played a lead role in advising the government on the new fund; here, we provide a summary of the detail and tips for applicants.
How will the scheme be implemented?
Details of how the Scheme will be implemented can be found on the British Business Bank website, which now includes granular eligibility criteria for both investors and companies.
The website also includes helpful FAQs for investors and companies, both of which we suggest reading in full, irrespective of your role in the transaction.
How will applications be initiated?
Applications will be initiated by the investor, or lead investor of a group of investors participating in the bridge round, by creating an account on the Future Fund portal and submitting an application form.
Where multiple investors are participating in the bridge round, the lead investor who makes the application does not need to be the largest investor, but must be investing at least £12,500 in the notes.
Once an application has been commenced by an investor/lead investor, the investee company will receive a prompt to create an account on the Future Fund portal and progress the application by submitting and confirming certain details in relation to the application.
Details of the information that will need to be provided by the investor and by the company to initiate an application can be found on the aforementioned FAQ pages.
However, the application form has not been made public yet, and so it is possible that this list may not be exhaustive.
Tips for applicants
It has now been made clear that the company applying for matched funding must be an unlisted UK incorporated limited company and, if it is a member of a corporate group, it must be the ultimate parent company.
To satisfy the previously trailed “substantive economic presence in the UK" test, the applicant company must:
- have half or more of its employees based in the UK, or
- generate half or more of its revenues from UK sales.
The requirement to have previously raised £250,000 from third parties must have been through equity funding (ie an earlier raise through unconverted ASAs or convertible loan notes will not satisfy this requirement).
Applications will be made on a purely "first come, first served basis", subject to the proviso that where a single investor makes applications on behalf of multiple companies on the same day and there is a high volume of applications received on that day, only one application from that investor will be processed. Given the flexibility with which the participating investor initiates the application process, companies should consider who the most suitable "lead investor" for the purposes of the application should be.
Since launch, the British Business Bank has made clear that companies will not be permitted to make more than one application for matched funding
Applications are expected to take a minimum of 21 days from initial application to funding being awarded. For companies that have immediate cash needs, there does not appear to be any prohibition against "bridging into the bridge" by incurring interim debt which is repaid and then re-drawn down on Future Fund terms. Companies should be aware that in order to do this, they will need to have cash available to repay the interim loan.
Guidance has been provided as to the interaction between investor tax reliefs on the loan as follows (noting always that HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS):
- It is the British Business Bank's understanding that the structure of the CLA does not meet existing rules for SEIS or EIS eligibility.
- The government has confirmed that existing EIS investments will not be affected where the convertible loan converts into shares. Where the convertible loan note redeems, the British Business Bank has been alerted that the government intends to make changes to the rules to clarify that this is compatible.
- Whether or not entering into the CLA will affect the SEIS or EIS compatibility of future investments will be a matter for HM Treasury and HMRC.
Notably, VCT reliefs are not expressly discussed in the guidance but we expect the scheme will not be compatible with VCT investments.
Terms
The terms of the loan broadly reflect the provisions of the Heads of Terms published in April 2020. Certain anti-avoidance clauses (for example, side letters or other agreements being entered into that economically prejudice the Future Fund) and Future Fund covenants have been included in the CLA and should be read in detail. Companies should be aware that material breach of these covenants or material failure to comply with the terms of the CLA will trigger an Event of Default potentially requiring repayment of the loan.
The CLA includes (at paragraph 5(b)) a right for the Future Fund to request, upon a conversion of the loan, a meeting to discuss in good faith a suite of shareholder governance rights that may be afforded to the Future Fund.
The CLA and application process deliberately minimises government input. This will be useful in terms of speed and efficiency but may not always suit unique cases (for example, it may be difficult to accommodate a request from an existing debt finance provider to enter into a subordination deed).
Beyond the interest rate attaching to the loans, the discounted conversion price,any valuation cap on conversion, and the inclusion of a "rolling close", the terms of the CLA are not negotiable.
On the terms of the CLA, debt raised in the subsequent "rolling close" will not be eligible for matched funding. As the company's solicitors will need to conduct KYC checks on all matched funders and be holding the matched funding, accelerating this process is essential to maximise matched funding from the Future Fund.
Required documentation
The documentation that will be required to implement the loan arrangement has been made public as follows:
Corporate authorities
Companies will be required to obtain:
- all appropriate resolutions/consents/waivers required from directors or shareholders pursuant to the applicant company's constitutional documents, and
- all necessary waivers and consents as required under any debt financing arrangements (if any) that may be required to enter into the convertible loan agreement and to perform its terms will need to have been obtained.
Timing
The timing for delivery of each of these documents remains unclear at this stage. In particular, it is unclear when the corporate authorities will need to have been obtained and money secured in the solicitors client account, although we assume that these actions will be able to be progressed during the period in which the government is considering the application.
Further information
We will publish further analysis and guidance as additional information becomes available and once we have experience of the application process. In the meantime, please feel free to reach out directly to a member of our dedicated Future Fund Task Force, using the contact details provided on this page.
