We recently reported on the announcement of the government’s new “Future Fund” which, developed in conjunction with the British Business Bank, aims to support the UK’s innovative businesses currently affected by the Covid-19 pandemic.
The launch of the Future Fund is expected imminently (the exact date is yet to be confirmed) and is directed at assisting start-ups and R&D firms. These businesses are often pre-revenue or pre-profit and typically rely on equity investment. Many of them are struggling to survive in the Covid-19 lockdown. The Future Fund provides a mechanism for these businesses to apply for convertible loans from the government to match private third party investment (with certain limitations). The loans, ranging from £125,000 to £5 million, are convertible on certain trigger events. At this time, we understand that only matching convertible debt funding on the same terms will be permitted as part of the Future Fund's eligibility criteria.
Whilst preliminary eligibility criteria and headline terms have been announced (and can be found here), since the announcement of the Future Fund, the government has issued limited practical advice and assistance to businesses in preparing for what is expected to be a race for funding.
Due to the limited size of the Future Fund (currently capped at £250 million based on the latest information from the government), it is likely that demand will significantly exceed supply. The current information is that the government will select their investments on a first-come-first-served basis. Companies on short cash runways must put in place plans for interim financing and it is not expected that any monies from the Future Funds will flow until late May in a best case scenario. While juggling other short term challenges, interested businesses will need to ensure that they are in a position to apply quickly once the Future Fund is up and running. With that in mind, we have set out below some practical steps and considerations so companies can best position themselves:
- Companies should check their existing debt documents. Is it possible for your company to create new convertible debt on such terms without breaching terms of existing debt (e.g. considering issues such as subordination rights and consents to new debt being created since the Future Fund debt cannot be subordinate to other debt)?
- Companies should obtain all other consents and approvals now. This includes all shareholder, investor and board consents. Shareholder consents are likely to be required to alter existing articles of association since the shares issued on conversion of any Future Fund debt must be freely transferable. In addition, consideration will need to be given to the rights of the company relating to directors' authority to create debt convertible into shares, and disapplication of statutory or contractual pre-emption rights. The company's shareholders' agreement will also need to be reviewed for issues such as "veto rights" which may need to be waived.
- Companies should secure a term sheet or other indications of interest agreed with third party funders in line with the Future Fund term sheet (which can be found here).
- Companies should obtain permission to disclose names of matching funders who have indicated intention to invest (as we expect these will need to be disclosed as part of any application of the Future Fund).
- Companies should draft and provisionally agree an initial form of the convertible loan documents with matching funders now so any material issues can be raised and negotiated in advance of the Future Fund launching. This may also include any due diligence enquiries from such investors and disclosures about the company and its business.
- Companies should consider approaching EIS/SEIS equity investors in case the eligibility criteria for the Future Fund are altered to include other categories of investors on different terms. We note that presently there is no indication this will be the case but much lobbying is being undertaken on this issue. For now, third party investors should be aware of the impact of the potential ineligibility of the Future Fund scheme on their own EIS status.
- Companies should ensure that any potential matching investors have undertaken their own internal investment committee consents, if applicable. Be aware that this can take some time. If consents can't be given before deal terms and/or documents are finalised, then it is prudent to get visibility on how long investors will need.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.