With the launch of the £250m Future Fund which has opened to applications today (Wednesday 20th May), the government have committed to providing matched funding for investment into eligible businesses using a Convertible Loan Note (CLN), and we set out the key details on this initiative and how your business can apply below.
Key Features of the scheme
- An Investor led process – the investor or lead investor of a group of investors must apply for the funding alongside the eligible company,
- Matched funding – the Future Fund will match up to 100% of the amount provided by investors from £125,000 up to a maximum of £5m,
- Use of funding – funds received from the Future Fund cannot be used to repay any other borrowings, pay dividends, bonuses or any advisory fees.
The Convertible Loan Note
- Interest rate – the CLN will carry a minimum interest rate of 8% (although can be higher if the investor(s) agree, and will accrue until the loan converts rather than be payable monthly. The interest can be paid at maturity or convert into equity if not,
- Term – the loan will mature after a period of 36 months where it will convert into shares or be repaid at a premium,
- Conversion – the loan will convert to shares in the company in certain circumstances, including an exit or further funding round. It will convert into the most senior class of shares if more than one and with a discount on the conversion events share price of 20%,
- Standardised Terms – both Investors and the Fund invest using the CLN which is predefined and cannot be negotiated.
The Investor must fall within one of the following categories as specified by FCA and Financial Services and Markets Act 2000 guidelines:
- An Investment Professional,
- A high net worth company, unincorporated associated or high value trust,
- A certified sophisticated investor or self certified sophisticated investor,
- A certified high net worth individual,
- 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 capable of being classified as a “professional client” within the meaning given in the glossary to the FCA Rules.
The Company must meet the following criteria:
- The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (1 April 2015 – 19 April 2020, inclusive),
- The company musts be the ultimate parent company if a member of a corporate group,
- No shares or securities of the company can be listed on a regulated market, multilateral trading facility or a recognised exchange, stock market or listing venue,
- The company must be UK incorporated,
- It must have been incorporated before 31 December 2019
- At least one of the following must be true:
- Half or more employees are UK based
- Half or more revenues are from UK sales.
Key points to consider
EIS/SEIS interaction – While it was expected from the limited initial information provided, the CLN used will be non-qualifying for EIS/SEIS purposes, and therefore any investment made alongside the future fund as part of the matched funding will therefore not qualify for these reliefs.
It may be possible to for those investors wanting to benefit from these reliefs, to invest separately outside of the Future Fund/matched funding round and at the same time.
Accessing the Future Fund will not impact existing EIS/SEIS investment made into the relevant company.
State aid – The current understanding of the position is that accessing funds through the Future Fund CLN’s will not constitute state aid, as it is an undertaking advanced on commercial terms.
The main benefits of this are two-fold:
- It won’t impact other state aid schemes such as R&D tax credits (SME) and EIS/SEIS investments.
- The undertaking in difficulty rules (such as those used in CBILS and CLBILS) won’t apply, meaning companies should be able to access these funds more easily.
Dilution of shareholding – While it may not be a priority if cash is required, given the conversion into senior shares of any CLN this may have a large impact on diluting the existing shareholding of the company, and therefore investors and management need to consider this. In particular the impact it may have on those employee shareholders that currently may qualify for Entrepreneurs’ Relief, but could be pushed out of qualifying for this by dilution on conversion.
Cost/Time to obtain funding – in going through the process of obtaining funding through the future fund, you will likely need to engage both solicitors and accountants to review documentation. You will also need to liaise with and obtain the buy-in of your investors which may take time.
With the initial funding capped at £250m, it is expected to be over subscribed although the latest guidance released has hinted that it could be increased if deemed appropriate.
At this time any support and funding offered by the Government is helpful, although as a business you need to consider whether it is best for you, and if not whether there are better alternatives that you will qualify for, such as the CBILS or CLBILS loan or support from Innovate UK.
As next steps we would recommend that you contact your solicitors and existing investors if you have not already done so, and if you need any further guidance on this please do not hesitate to contact PEM.