Key points regarding the UK's COVID-19 Future Fund for growth companies

The Treasury has announced a £250 million fund to support venture capital-backed growth companies affected by the coronavirus lockdown, but several aspects of how the scheme will apply in practice remain unclear.

  As part of its response to the COVID-19 pandemic and associated lockdown, the UK government has announced the launch of the new Future Fund to support the UK's high-growth VC-backed businesses, primarily in the technology and life sciences sectors, which to date have not been eligible for government support under the CBILs and CLBILs schemes.
 
The new co-investment fund, which will be delivered in partnership with the British Business Bank, will see the Future Fund provide unsecured convertible loans ranging from £125,000 to £5 million to UK-based businesses, provided the business is able to raise an equal amount of funds from private sector investors.
 
The Future Fund, which will be available from 1 May, will provide up to an initial £250 million (subject to ongoing review).
 
The scheme will be open to applications until the end of September, but this may be extended.


Eligibility
 
While full eligibility criteria is yet to be published, the main conditions will include:

• The business must be an unlisted private company registered in the UK;
• The business is able to attract the equivalent match funding from third party private investors and institutions;
• The business has raised at least £250,000 in aggregate from private third party investors in previous funding rounds in the last five years;
• The business has a substantive economic presence in the UK.

If the company is a member of a corporate group, only the ultimate parent company (if it is an unlisted UK registered company) is eligible to receive the loan.
 
Early stage companies who have not yet raised at least £250,000 will therefore not be eligible for the scheme. 
 
However, it is not expressly clear, from the guidance published so far, what is meant by the company having raised at least £250,000 in "previous funding rounds".
 
For example, will this require the company to have raised £250,000 of equity finance, and issued shares to investors? Or, can it also include previous convertible loans which have not yet converted (or even unconvertible loan facilities), or previous advanced subscription funds or simple agreements for future equity (SAFEs) which have yet to have been converted? 
 
Further details, yet to be published, will hopefully clarify this position.
 
 
Matched funding
 
The government loans will only be made alongside other private third party matched investors who are able to fund at least an equal amount (or more) to that applied for under the scheme.  
 
The guidance published to date is not expressly clear on whether or not the matched funding must be on exactly the same terms and structure as the unsecured convertible loans, or could include other forms of instruments such as SAFEs and Advanced Subscription Agreements (ASAs), particularly those which are Enterprise Investment Scheme (EIS)-qualifying. 
 
Some of the guidance suggests that matched investors would hold the same form of convertible loans as held by the government. 

However, were this so, this would seem to preclude a vast amount of available funding to UK growth companies under the tax-advantageous EIS from high net worth individuals and specialist EIS funds (as EIS investors cannot be eligible for EIS relief if they invest via a convertible loan).

Further clarity is needed when full details of the scheme are published, particularly as to whether funds secured by a company via ASAs or SAFEs on similar terms as to the discount rate, but which are not loans, can count towards the matched funding requirement.
 
 
Use of proceeds
 
The bridge funding may be used solely for working capital purposes and not to repay any borrowings, pay dividends or bonus payments to staff, management, shareholders or consultants or, in respect of the government loan, pay any advisory or placement fees or bonuses to external advisers. 
 
 
Other material terms
 
Interest: The government loans will be unsecured and will carry a minimum interest rate of 8% per annum (the rate may be higher if agreed between the company and the matched investors).
 
Repayment: If not converted earlier (see below), the loans will mature after a maximum term of three years. Interest will be payable at maturity and, subject to the conversion mechanism (see below) the company will have the option to repay accrued interest in cash.
 
The company will only have the right to repay the principal in cash at maturity at the option of the majority matched investors.
 
Conversion: The principal amount of the loans will automatically convert into the most senior class of equity on the company's next qualifying funding round at a minimum conversion discount of 20% (the 'discount rate') to the price paid by new investors in that round.
 
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.  The company may choose to repay the accrued interest in cash.
 
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 "qualifying funding round" will 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 share options.
 
Given that it is currently not clear whether EIS advanced subscriptions count towards matched funding, there is no clarity on whether different investors in the bridge round can opt for a different class of equity.
 
For example, while the government may elect for the "most senior class of share in issue", if that class of share is not EIS-eligible, then investors wishing to seek EIS relief would typically choose the most senior class of equity that is EIS-qualifying.
 
The convertible loans will also be convertible upon a sale of an IPO, if not converted or repaid beforehand.
 
Most favoured nation: In the event that the company issues further convertible loan instruments to investors (including any new or existing investors, which are not matched investors) with more favourable terms, those terms shall apply to the bridge funding provided under the scheme.
 
Negative pledge: The company will not be permitted to incur any debt that is senior to the loan, other than any bona fide senior indebtedness from a person that is not an existing shareholder or matched investor. 
 
Consequently bank or other senior (secured or unsecured) debt shall be permitted, provided the creditor is not an equity holder.
 
Transfer rights: The government will be entitled to transfer the loan and, following conversion of the loan, any of its shares without restriction to an institutional investor acquiring a portfolio of the government’s interest in at least 10 companies owned in respect of the Future Fund. 
 
In addition, the government shall be entitled to transfer any of its shares without restriction within Government and to entities wholly owned by central government departments.
 
We will update our analysis of the Future Fund once further guidance has been published.
 
If you have any queries, please get in touch with your usual client partner or a member of Fieldfisher's venture capital team for advice on how your business can take advantage of this scheme.