The government ‘Future Fund’
From 1 May 2020, the UK government will be implementing the ‘Future Fund’ of £250 million for certain eligible companies that have been adversely affected by the effects of COVID-19. Current guidance has indicated that the scheme will be available until the end of September and the £250 million pot will be continually reviewed. It is clear from the details released to date that the terms of this scheme will be heavily in favour of the government.
The below sets out some key terms to be aware of:
- Conditions of eligibility:
- an unlisted UK registered company;
- that has a substantive economic presence in the UK;
- in the last five years, the company has raised at least £250,000 in equity investment from private third party investors; and
- a private third party investor is in a position to match the funding being granted from the government.
- The loan has a maximum term of three years and will be unsecured (loan).
- Minimum interest rate of 8% per annum (if the company and the private third party investor have agreed a higher rate, then the higher rate applies).
- The loan can only be used for the purpose of working capital. Dividends, employee bonuses and debts cannot be paid.
- The company will need to provide some limited warranties and covenants to the government, including equal treatment of all lenders and holders of convertible securities, as well as the same level of information rights. The government will also have certain (but limited) governance rights over the company for the duration of the loan.
- Conversion of the loan:
- if the company can raise equity capital matching the aggregate of both the investor and government’s loans during the next funding round (excluding any employee share option exercises and government share conversions), both the investor’s loan and the loan will automatically convert into shares at a rate of 20% to the price paid by the investors in that particular funding round. The company can choose to repay the accrued interest in cash; and
- in the event that the company cannot raise the same amount at the next funding round, the loan will convert into shares at 20% to the price set by that funding round. The investor can choose to convert its loan into shares or leave its loan as is.
- If the company decides to issue equity securities on better terms than the loan at any time in the six months after receiving the loan, the loan shall automatically receive the same treatment.
- Maturity of the loan (should no funding round take place in the next three years):
- the government has the option of being repaid with a redemption premium (equal to 100% of the original loan amount) plus the 8% interest; or
- the government may decide to convert the shares at a conversion discount rate of 20%.
Similar terms will apply on a sale of the company or an IPO.
- The company cannot take on additional loans that rank higher in priority to the loan; and
- The government may choose to transfer the loan (or its shares, where applicable) without any restrictions. Such an investor must ensure that it has secured an interest in 10 other companies that have obtained funding under this Future Fund.
We anticipate there being further guidance and details to be released in the next few days. Once these have been confirmed, time will be of the essence given the funds being made available. Should you have any specific queries, we would recommend that you contact us as soon as practicable.