The Future Fund is a matched funding scheme which was announced by the UK Chancellor on 20 April. Final terms and scheme documentation were announced on 18 May and the scheme opened to applicants on 20 May. The scheme is open for applications until the end of September 2020. To date, the UK Government has made £250 million available for the Future Fund, which will be kept under review.

The purpose of the Future Fund is to support innovative companies that rely on equity investment and are facing financing difficulties due to the coronavirus pandemic. These companies may be unable to access other UK government support schemes introduced in the wake of the coronavirus outbreak as they are pre-revenue or pre-profit. Though not specifically targeted at emerging life sciences and healthcare companies, pre-revenue companies in those industries are among the more common applicants as they are often, by their nature, innovative and reliant on equity investment in the pre-revenue phase of their growth.

Support from the Future Fund is delivered by way of convertible loans made by the British Business Bank. Applicants can apply for loans between £125,000 and £5 million and the investment must be at least matched by new funding provided by qualifying investors as part of the same convertible loan agreement.

The Future Fund has been a welcome source of funding for life sciences and healthcare companies over the last few months, especially in cases where the outbreak of coronavirus interrupted fundraising processes and left companies in unexpectedly difficult cash positions. We have advised both investee companies and private lenders who are providing matched funding in relation to successful applications to the Future Fund.

However, several changes in the eligibility criteria for applicants have been made since the Future Fund opened to applications that have not been well implemented or transparently communicated via the Future Fund website, to the corresponding detriment of the fair administration of the scheme.

The first of these changes was to introduce a new “Private Investor” test, which requires the private lender providing the matched funding to the British Business Bank’s own convertible loan to not be a “connected person” of the investee company, for the purposes of sections 1122 and 1123 of the Corporation Taxes Act 2010 (the ‘Connected Person Test’). This Connected Person Test imports a four-limbed control test from section 450 (3) of the same legislation, which includes two limbs that, broadly, speak to a person’s right to a majority of income and capital (respectively) on a distribution by the company in question (the ‘economic control tests’).

We, like others in the market, considered the application of these economic control tests as part of the Connected Person Test to be inappropriate in determining eligibility of the private investors to participate in the scheme, as many such investors are venture capitalists who will often hold preferred equity in the applicant company to which they intend to lend, which preferred entity entitles the investor to a majority of income and/or capital on a distribution, while not entitling that investor to control at board level or by way of shareholder votes. Also problematic was the timing of the introduction of this additional eligibility test, which came in approximately two weeks after the Future Fund opened for applications. For an interim period, it appears that the Future Fund was accepting applications from private investors who were connected persons of the investee companies by reference to the economic control tests via the acceptance of an alternative application certificate, but this was not publicised. Finally, the Future Fund published an update on their website, noting that it would accept applications from private investors who would otherwise fail to be eligible to participate in the Future Fund by reason of the economic control tests.

Clearly, the British Business Bank’s initial choice of an inappropriate test for investor eligibility, and the subsequent period during which applicants were proceeding on the basis of misleading information of the Future Fund’s website, will have been to the detriment of the fair and smooth running of the scheme.

There remains an issue with the Future Fund’s application of the Connected Person Test, in that the Future Fund’s website inaccurately summaries the limb of that test that relates to the ownership of a majority the relevant company’s issued share capital, by stating that this test refers to the holding of a majority of issued shares in a company, rather than (as it should) the holding of a majority of the company’s issued share capital.

We are liaising with several industry bodies to request that the Future Fund’s website (and in particular the glossary and FAQs) are updated to correct this point, so that applicants are not misled by it.