The UK government has announced a new investment support program for those start-up and fast growth businesses who are in difficulties, in the form of convertible loans (also known as loan notes) amid the COVID 19 pandemic. (Future Fund). This program forms part the government’s wider £1.25 billion corona virus package to protect and promote innovative businesses in the UK.
The Future Fund will make available convertible loans to UK based Companies ranging from £125,000 to £5 million. The Future Fund’s initial target is to provide £250 million loans in total, matched by at least another £250 million of debt bridge financing from private investors. Therefore, a Company looking to raise between £250,000 and £10 million will be eligible for support. These funds can only be used as working capital and therefore cannot be used for other purposes such as repaying previous borrowings, pay dividends or bonus payments to its stakeholders, pay advisory fees or bonuses to external advisers.
The government will deliver the Future Fund in partnership with British Business Bank and the Future Fund is expected to accept its first applications in May 2020 and will initially be running until the end of September 2020.
The Government has published its Headline Terms and more details are expected in the coming weeks.
As the full requirements have not yet been published it is not clear whether any financial institution will be excluded but it is obvious that the scheme’s aim is to boost innovation.
Based on the current guidance, companies that meet the following requirements may immediately apply to the Future Fund:
a) They have raised more than £250k in third party equity funding in the last 5 years.
b) There are existing investors in a position to proceed quickly with match funding.
c) They are unlisted UK registered companies with enhanced financial presence in the country.
d) The matched funding will be received by investors who are ineligible under the EIS relief.
If a company is a member of a group, only a UK ultimate parent is eligible to receive the loan notes.
Key Terms and provision of the Headline Terms:
The Future Fund investment will be by way of structured convertible notes which will carry an interest rate of 8% which will become repayable on maturity of the convertible loan note after a maximum of 36 months. The loan note will then convert into equity:
a) On the Company’s next qualifying funding round at a minimum conversion discount of 20%; or
b) At the loan maturity date if it has not been repaid.
However, on sale or IPO of the company, the loan notes will either (a) convert into equity at a minimum discount of 20% to the most recent funding round; or (b) be repaid with a 100% redemption premium (i.e. 2 x the amount, plus interest).
Finally the government will have limited governance rights such as being entitled to transfer the loan or following conversion any of its shares to an institutional investor acquiring a portfolio of the government’s interest in at least 10 companies owned in respect of the Future Fund. It will also have the right to transfer any shares within government or to entities wholly owned by central government departments.
The purpose of Future Fund:
The main purpose of the scheme is to provide access to companies who would otherwise be ineligible to benefit from government support programs such as the £750 million targeted support to research and development focused SME’s or CBILS which is based on pre-revenue or pre-profit and typically rely on equity investment.
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