Senior associate Sally Johnston provides insights into the Future Fund, a UK Government-backed scheme launched in 2020 to aid start-ups during the pandemic, as businesses approach the three-year maturity date.
Setting the scene: the Future Fund since 2020
The Future Fund was launched by the Chancellor in May 2020 as a £1.4 billion scheme designed to support UK start-ups to secure investment during the Covid-19 pandemic.
The key mechanism of the Government-backed scheme was that the Future Fund would offer UK-based companies convertible loans ranging from £125,000 to £5 million, if those companies could match investments from other lenders. This scheme is currently delivered by the British Business Bank.
Many businesses that benefited from this investment are now rapidly approaching the three-year maturity date.
For businesses who have not converted the loans into shares before the maturity date, the British Business Bank have indicated that they will be electing for repayment of not only the principal, but also a redemption premium matching the principal amount (along with accrued interest).
The risk of a potentially crippling redemption premium means that the clock is ticking to make a decision for borrowers on how to trigger conversion of their Future Fund loan if repayment of such an onerous loan is not an option.
If your business has borrowed under the Future Fund scheme and the loan has not yet been converted into equity or repaid, you can evaluate the following options:
1. Repayment
The first and the likely least attractive option is to allow the loan to reach its maturity date. As outlined above, the current default is that the Future Fund will demand repayment of the principal, redemption premium and accrued interest (as of the Future Fund’s latest update on 23 June 2023).
The Future Fund and matched lenders can, however, decide separately whether to elect for redemption, or instead to accept conversion of the loan into shares. If the other lenders (by way of a 50% majority election, no later than 30 business days prior to maturity) elect to redeem their loans, then all the other loans will be redeemed.
Depending on the liquidity of your business, this will be the most straightforward option – and may be the only option for businesses that are unable or are unsuccessful in exercising the alternatives outlined below. If your business is unable to repay the loan, you may need to instruct an insolvency expert.
2. Extend the loan
Borrowers can request an extension to the maturity date of their Future Fund loan. Evidence suggests that some borrowers have been able to negotiate extensions of up to two years – although this is entirely at the discretion of the Future Fund.
This option is available where businesses respond to an initial notification from the Future Fund confirming eligibility for a Maturity Extension Request within 20 business days.
Guidance from the Future Fund indicates that they will consider ‘the commercial objectives of the business, the adequacy of the results of Know your Business/Client checks, anti-money laundering and fraud and financial crime checks, and wider public policy aims and proper safeguarding of taxpayers resources’ when evaluating submissions for an extension.
This could buy your business invaluable time to then seek one of the options below, where the redemption premium will not be payable.
3. Issues new shares: qualifying and non-qualifying financing
Your business could initiate a funding round with the aim of raising enough equity through issuing shares to new investors to match an equal or greater amount than the Future Fund loan. This will trigger a conversion through a condition in the loan, called a ‘qualifying financing’.
If you issue shares to new investors, but the value is lower than the amount of the Future Fund loan, then you can still trigger conversion of the loan if a majority of the lenders (excluding the Future Fund) elect for the loans to be converted (this election will need to be received no later than ten business days prior to the financing). This can also occur if the financing is less than 25% of the Future Fund Loan, and the Future Fund consents to the conversion. These are non-qualifying financing triggers.
In either case, the loan will be converted into the most senior class of shares then in issue in the relevant company, with identical rights and preferences issued to the investor(s) in the financing at the conversion price.
The Future Fund requires 20 business days’ notice of a qualifying or non-qualifying financing round – and on this basis, it will be important to factor in further time.
4. Exit
Depending on the terms of the transaction, an exit event, such as a share or asset sale of the company will likely trigger automatic conversion of the Future Fund loans into shares. An automatic conversion is triggered if the lender will receive a greater amount as cash for the sale of the shares than it would otherwise receive had it been repaid its loan with a redemption premium, or if the lenders would receive any non-cash consideration to receive repayment of the loan and the redemption premium (the latter in accordance with specified conditions within the Future Fund loan agreement).
If you are able to find a prospective buyer, seeking advice on how to structure the deal and the corresponding tax implications will be crucial. It will also be important to factor in ample time to facilitate the exit, depending on the size and complexity of your business.
When should I seek legal advice?
The maturity date of a Future Fund loan is a critical milestone for a business that requires careful planning and consideration. Understanding which of the above options best serves your business will be paramount.
You may find that you will need to speak with a corporate solicitor for guidance on how to navigate the right course for your business, if you are exploring or are currently undertaking one of the above options. We would recommend seeking advice sooner rather than later to ensure sufficient time for all of the options to remain feasible.
The corporate and commercial team at Russell-Cooke is here to provide you with expert guidance if you are uncertain on these next steps. If you are considering restructuring the business, the team works closely with the firm’s restructuring and insolvency team.
Sally Johnston is a senior associate in the startups teams. She regularly advises startups and growing companies on a range of matters. Whilst Sally’s expertise is advising on fundraising and growth, her knowledge extends to share schemes and incentives, brand protection, key commercial contracts and M&A.
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If you would like to speak with a member of the team you can contact our corporate and commercial solicitors by email, by telephone on +44 (0)20 3826 7511 or complete our enquiry form below.
