The UK government recently issued final guidance on its Coronavirus Future Fund (the Scheme) launched in April to support innovative and fast-growth businesses through the Covid-19 outbreak. Privately owned UK companies that have raised at least £250,000 of equity finance in the last 5 years are entitled to apply for loans of up to £5,000,000 provided the government funds are at least matched by the business’s existing investors. The Scheme is administered by the British Business Bank.
The Scheme is designed to provide bridge financing for companies that will go on to raise additional equity. The Scheme was also a response to help those companies unable to access other government business support programmes because they are either pre-revenue or pre-profit and typically rely on equity investment.
Launched with an initial investment pot of £250m, the Scheme has been significantly extended and at the time of writing has invested in excess of £320m. The Scheme is open until the end of September 2020.
Eligibility
In order to be eligible for the Scheme, each of the investors and the company must meet specific criteria.
Companies
The Scheme is restricted to privately owned unlisted (AIM companies are ineligible) UK registered companies which were incorporated prior to 31st December 2019.
The company must have previously raised at least £250k in equity from investors in the 5 years up to the launch of the Scheme (1 April 2015 - 19 April 2020).
The company must have a substantive economic presence in the UK meaning:
50% or more employees are UK based; or
50% or more of its revenues are generated by UK sales
If it is part of a group of companies the company is the parent company (only the parent company in any group is eligible). However this rule is relaxed for UK companies which have participated in accelerator programmes and were required, as part of that programme, to have parent companies outside the UK. The Scheme is restricted to privately owned unlisted (AIM companies are ineligible) UK registered companies which were incorporated prior to 31st December 2019.
Investor
An investor must fall within any of the following categories to be eligible:
an “investment professional” within the meaning of article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO)
a high-net-worth company, unincorporated associated or high value trust falling within article 49(2) of the FPO
a “certified sophisticated investor” or a “self-certified sophisticated investor” within the meaning given in articles 50 and 50A respectively of the FPO
a “certified high net worth individual” within the meaning of article 48 of the FPO • an equivalent professional, high-net worth, institutional or sophisticated investor in accordance with applicable law and regulation in such investor’s home jurisdiction
an association of high net-worth or sophisticated investors within the meaning of article 51 of the FPO
capable of being classified as a “professional client” within the meaning given in the glossary to the FCA’s handbook of rules and guidance.
None of the investors should be “connected persons” of the company. It should be noted that, depending upon the rights of investors under the company’s constitution, this restriction (which captures not only an investor with more than 50% of votes but also any who has more than 50% of the economic rights) may well adversely impact the ability of companies to access the Scheme (see Application Process).
Funding
The Scheme is structured using convertible loan notes so avoiding the need for the lender to have to value the business which will likely be depressed as a result of the pandemic or possibly be pre-revenue or profit. (Convertible loan notes are typically used by investors in early stage investment where it is difficult carry out an accurate valuation.)
The minimum loan amount provided by the Scheme is £125,000 and the maximum amount is £5m.
There is no “cap” on the amount that the investors may loan to the company.
Conversion
The loan converts into the company’s most senior class of equity shares in a variety of circumstances, including fundraisings, exit events and upon maturity.
The loan converts at a minimum 20% discount to the price set by the relevant funding round. The rate will be higher if the company agrees a higher rate with matched private investors. Only the principal element of the loan attracts the discount rate, not any accrued interest.
The loan will convert automatically into equity on the company’s next qualifying funding round (i.e. where the company raises an amount at least equal to that raised through the scheme). On a non-qualifying round (i.e. where the company raises an amount that is less that the amount raised through the scheme) the holders of a majority of the principal amount held by the matched investors will have the right to elect to convert at the 20% discount.
On a sale or IPO, the loan will convert at the relevant discount or be repaid with a redemption premium of 100% of the principal of the bridge funding – whichever results in the greater return.
Repayment
The government and matched investors can elect for the company to repay the loan on an exit or at its maturity date. The amount repaid will be the full amount of the loan plus a premium of 100% of the principal.
The loan is repayable after 3 years. There is no right for the company to elect to prepay the loan.
Interest
Interest is payable on the loan at 8% per annum (not compounding) payable on maturity of the loan. The rate will be higher if the company agrees a higher rate with matched private investors.
Use of Funds
The scheme funds must be used solely for working capital purposes. They are not to be used for any of the following purposes:
Repay any debt from a shareholder or a shareholder related party (other than the repayment of any borrowings pursuant to any bank or venture debt facilities)
Pay any dividends or other distributions
Make any bonus or other discretionary payment to any employee, consultant or director of the company for a period of twelve months from the date of the relevant convertible loan agreement (unless they are performing a contract that predates the investment by the Scheme or it is paid by the company in the ordinary course of business
Pay any advisory fees or bonuses to any corporate finance entity or investment bank.
Government Rights
Under the terms of the loan documentation the government has limited rights including:
Governance
Warranties
Covenants (including the provision of financial information)
Creation of any indebtedness ranking ahead of the scheme loan
To transfer the loan and any shares arising on conversion to an institutional investor acquiring a portfolio of the government’s interest in at least 10 companies
Most favoured nation - if the company agrees more favourable terms with future investors then those terms will apply automatically to the Scheme funding.
Tax
The investor match funding will not qualify for SEIS/EIS Relief. This may have a significant impact on the investor’s appetite to take advantage of the scheme.
There may be tax implications for investors using the Scheme and applicants should take appropriate financial advice before applying.
Application Process
The Scheme is investor-led, meaning that the existing investor (or a lead investor of a group of investors) applies on behalf of themselves.
A typical process is likely to involve the following steps:
Discussions between the company and its investors concerning eligibility for the Scheme (with particular attention to any liquidation preference rights of shareholders under the company’s articles), the company's ability to repay the debt, any impact on future fund-raising and agreement of the specific commercial arrangements. Consideration will also need to be given to any necessary approvals and consents required (shareholder and board approval will most likely be required).
The lead investor should check the eligibility of the business on the scheme website
If the company is eligible, the lead investor will submit an application using the British Business Bank’s online portal. The company’s director or secretary confirms (through the company’s account on the Scheme’s online portal) that it is happy for the application to be submitted. (It should be noted that the investor will need to provide information when submitting the application for the Scheme concerning the applicant, the other investors making up the matched funding and the company.)
The company must identify a nominated solicitor to support it through the process and also to handle distribution of funds if the application is successful. Once checks have been completed on the nominated solicitor, the company will formally instruct the solicitor to act on its behalf in relation to the scheme.
Following a successful application the following documentation will be issued by the government:
convertible loan agreement
solicitor’s confirmation that the investor(s) completion monies have been received into its client account
a director’s certificate confirming that the company meets the eligibility criteria and is in receipt of all corporate authorities and debt approvals and/or waivers needed to enter into the loan agreement.
(The British Business Bank has provided a set of standard documents on its website required under the Scheme.)Provided it is satisfied that everything is in order, on receipt of the signed scheme documentation the government will complete the transaction by signing and dating the loan agreement and release it to the company and investor(s). The Government will the send its completion monies to the solicitor for release to the company.
