Future Fund: finalised terms

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White & Case LLPOn 18 May 2020, the UK Government announced the final terms for the Future Fund, the matched funding scheme aimed at the UK's fast growth companies.

Summary of the final terms

Following engagement with the industry over the previous terms (our summary of which can be found here), further clarity has now been provided on the issues which were previously flagged (the full terms of the Future Fund convertible loan agreement, along with supporting FAQs for investors and companies, can be found here). There are five key changes or clarifications that we want to highlight: (i) applications must be submitted via an online portal; (ii) lead investors only, rather than companies, may make applications; (iii) only certain commercial points may be negotiated; (iv) matched investments will not benefit from EIS/SEIS treatment; and (v) the system will work on a first come first served basis.

These methods highlight a clear desire from the Government for the Future Fund to be deployed quickly, and in some cases, at the expense of some companies who will not be able to attract the necessary investment or who could otherwise obtain better terms. However, we fully expect that the Future Fund will remain an attractive option for fast growth and start up companies seeking to increase runways and survive the COVID storm. We have set out below ten key questions which have now been answered.

1. How and when can I apply and when should I receive my matched funds?

Applications will open on Wednesday 20 May via an online portal, and must be made by the lead investor (who will need to upload corporate information in respect of the company it wishes to invest into, a full list of which is set out in the FAQs), rather than the company. The lead investor will also need to confirm the total amount of funding to be raised plus contact details for all other investors, and so it will not be possible for companies and investors to submit applications and subsequently find investors to provide funds which will then be matched. Investors and companies will also need to provide reasons for applying for, and the intended use of, the funds (however, we do not expect the Government to make any suitability assessments).

The company intending to receive the investment will need to provide further information at the next stage (including recent turnover figures, details on all officers and ultimate beneficial owners owning 25% or more) and verify the information provided by the lead investor. Applications will remain open until 30 September 2020.

The Government is targeting for applications to be processed and decided upon within three weeks of receipt, and therefore funds will be disbursed relatively quickly. This timeline may be extended in the event that there is a higher than expected number of applications once the portal opens on Wednesday. Investors and companies will also need to appoint solicitors as part of their application, as funds will be disbursed directly to solicitors for onward sharing to companies.

2. What are the eligibility criteria regarding funding?

In order to qualify for the scheme, companies will need to have raised at least £250,000 in aggregate between 1 April 2015 – 19 April 2020 from third party investors (e.g. not from founders, employees, or connected persons). The Government has separately clarified that amounts received pursuant to existing advance subscription agreements (which are outstanding and pursuant to which, no shares have yet been issued) will not qualify for the £250,000 prior funding eligibility criteria. Companies will be required to self-certify the prior funding, as well as other items such as corporate authorisations and lack of any debt funding restrictions, by way of a director's certificate.

3. Can I get matched funding for funds raised previously?

No, the Government has confirmed that only funds raised in connection with an application will be eligible for matched funding from the Future Fund. However, we understand that companies which have either: (i) agreed convertible instruments or new funding rounds but not yet received the relevant funds or issued shares; or (ii) already received funding but have an option to repay such funding (e.g. pursuant to a convertible loan), should have the option to renegotiate with their investors to cancel such investment terms or repay such funding and reinvest such amounts in connection with an application for matched funding.

4. Can investors obtain S/EIS relief on their investment which will be matched by the Future Fund?

No, the scheme is not compatible with the existing EIS and SEIS regimes, and will not otherwise benefit from any preferential UK tax regime. The Government has confirmed that the conversion of the loan into shares will not affect any existing EIS investments, and it is understood that the Government intends to revise the EIS rules to ensure that any existing EIS investments will similarly not be affected by any future redemption of the loan; we hope that the Government will move to make the necessary changes to the EIS regime as soon as practicable. Following conversion of the loan, an investor will not be entitled to make any further EIS investments in the underlying company.

5. Are the Future Fund terms negotiable?

Only four items are negotiable: (i) the interest rate (which shall be at least 8%); (ii) the conversion discount rate (which shall be at least 20%); (iii) any headroom for investments on the same terms which may be made within 90 days of the Future Fund documentation being executed (although such amounts will not be matched); and
(iv) any valuation cap on conversion. Otherwise, the terms of the convertible loan agreement to be entered into are standardised.

The Government has taken a policy decision to prioritise the preceding four points as key commercial points which may be amended on a bespoke basis, whereas other more mechanical points have been standardised. This should allow applications to be processed faster.

6. Can I choose to repay money received from the Future Fund before maturity?

No, a repayment option in favour of the company has not been included in the revised terms. Accepting matched funding from the Future Fund is likely therefore to result in the relevant government vehicle becoming a shareholder in the company.

7. What is considered as a substantive economic presence in the UK?

The Government has clarified the eligibility criteria, which require a company to either: (i) have at least half of its employees based in the UK; or (ii) generate at least half of its revenues from sales in the UK.

8. Will the Future Fund be tranched or ring-fenced in anyway?

No, the Government has confirmed that the Future Fund will not be divided up into smaller pots reserved for different levels of investment. Funding will be dispensed on a first come first served basis, although this will become less relevant in the event that the size of the Future Fund is increased at a later date (which is what we would expect to happen should there be over demand).

9. How is the Future Fund promoting diversity?

The Future Fund has signed, and is encouraging companies to sign, the Investing in Women Code (found here) to support the advancement of female entrepreneurship in the UK. The Future Fund will also request the gender mix and ethnicity mix of management teams and the region in which they are based, and will publish these anonymised and aggregated statistics once a meaningful amount of data has been received.

10. What rights will the long form documentation give the Government?

Information rights

The Government shall have the right to receive a quarterly report setting out customary financial and investment information (see Schedule 4 of the Convertible Loan Agreement, which can be found here) and certain other information in the event that a conversion event has occurred and monthly net cash flow is negative.

In addition to the above, certain historical financial information must be provided within 90 days of signing the agreement. Further, the Government may request the same information as is provided to other lead or major investors in the company pursuant to existing investment documentation. However, the board may decide to withhold such information for commercial sensitivity or legal privilege, provided it acts reasonably and unanimously.

Governance rights

A new right has been included allowing the Future Fund to request a meeting with the company prior to a conversion event to discuss in good faith the governance rights that Future Fund may have following the conversion event. However, it is clearly stated that there are no obligations to agree such governance rights. Otherwise, customary controls requiring the company to comply with applicable laws (including anti-bribery and sanctions laws and regulations) and act in good faith towards the Future Fund have been included.

A new right has been included allowing the Future Fund to either demand repayment of the outstanding loan or sell back its shares to the company, in each case for £1 in the event that the Future Fund (in its absolute discretion) determines that it would be prejudicial to the reputation of the Future Fund or the Government for the Future Fund to continue holding its interest.

Anti-embarrassment rights

A new right has been included whereby if an exit occurs within 6 months after a non-qualifying financing in which the lenders elect to convert their loans into shares, the Future Fund and the matched investors will receive the higher of the amount received for their shares in connection with the exit, and the amount they would have received had their loan been repaid with a redemption premium on the non-qualifying financing, rather than converting. Separately, the right to benefit from any enhanced terms received by an investor within 6 months of conversion has also been included in the long form document.

Transfer rights

The Government's position on transferability remains largely unchanged – it is still entitled to transfer the loan or the converted shares to an institutional investor acquiring a portfolio of the Government's interest in at least ten companies owned in respect of the Future Fund. However, the definition of Associated Government Entities whom act as permitted transferees for the Future Fund includes companies wholly or partly owned by UK government departments, which would allow for Future Fund interests in one company to be transferred another company which has taken Future Fund money. We expect that this will be rectified prior to the agreements being entered into.

Helen Pantelides (White & Case, Associate, London) and Cassy Raby (White & Case Trainee Solicitor, London) contributed to the development of this publication.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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