The UK Future Fund is aimed at supporting continued growth and innovation for UK-based companies in a variety of sectors amid the coronavirus (COVID-19) pandemic.
Originally announced on 20 April 2020, the UK government officially launched the Future Fund, in connection with the British Business Bank, on 20 May. The government has made an initial £250 million available, with companies able to obtain convertible loans of between £125,000 and £5 million, provided that they are able to secure a matching amount from private investors.
The terms of the government’s loan, as discussed in our previous LawFlash, are non-negotiable. Some key terms include the following:
- Eligibility: To qualify, companies must (1) be unlisted and UK registered; (2) have received at least £250,000 in third-party investments in the preceding five years; (3) have a substantive economic presence in the United Kingdom, determined by having half its employees, or deriving half of its revenues, in the United Kingdom; (4) have been incorporated prior to 31 December 2019; and (5) if part of a group, be the ultimate parent company.
- Interest: The interest rate shall be a minimum of 8% per annum, but may be higher if agreed between the company and any private investors matching the government’s loan.
- Term: The term of the loan is for a period of 36 months, though the loan may be repaid early with the consent of the private investors.
- Use of proceeds: The funding may not be used for any (1) debt repayments (other than bank or venture debt facilities); (2) distributions or dividends; (3) bonus or discretionary payments to employees, consultants, or directors for a period of 12 months, unless agreed prior to the date of the loan; or (4) advisory or placement fess or any bonuses to external advisors such as investment banks or corporate finance service providers.
- Covenants: Covenants in favour of the UK government are limited and focus on (1) the provision of information to the government on the same terms as to the private investors; (2) a negative pledge prohibiting the creation of senior indebtedness (other than bona fide indebtedness to third parties or one of the matching private investors); and (3) permitting the government to require the company to repay the loan (or repurchase any converted shares) for an aggregate price of £1.00 if the government determines it is prejudicial to its interests to continue to be an investor in the company.
- Conversion: The conversion mechanics are triggered (1) by a funding round that raises as much funding as the round in which the government participated; (2) by a funding round that is less than the round in which the government participated, if a majority of the matching private investors choose to convert; (3) on an arm’s-length sale to a third party or an initial public offering; or (4) on maturity of the loan. The government’s loan includes a discount of at least 20% on the price per share (or a higher discount if agreed with the private investors), which will apply on the conversion of shares other than in the event of a sale or initial public offering.
- Most favoured nation: The government loan will include a most favoured nation clause stipulating that if any additional convertible loans are issued on more favourable terms, those terms shall apply to the government’s loan also.
- Transfer rights: The government will be entitled to transfer the loan, or converted equity, to any institutional investor that is acquiring the government’s interest in at least 10 companies in which the government invested through the Future Fund. The government will also be able to transfer its interest to other governmental departments or entities, or other entities that are wholly owned by the government.
Access a template of the government’s loan agreement >>
The Future Fund is intended to be investor led. As a result, the application for involvement in the Future Fund should be made by the lead investor, on behalf of itself, the investor consortium, and the company.
The government has also announced that it intends to make amendments to the Enterprise Investment Scheme. This scheme allows investors in high-growth companies to benefit from tax relief. The government is planning to amend the scheme to allow private investors to retain this tax relief where they invest alongside the Future Fund.
Applications to the Future Fund will remain open until the end of September 2020.
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Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Nicholas Moore
Jack Shawdon