All content on this page is correct as of May 20, 2020
What is it?
The Government has made an initial £250 million available for investment to support continued growth and innovation in sectors including technology, life sciences and the creative industries. Although this sounds helpful, the nature and structure of the scheme will be of limited use to smaller early stage start-ups.
Are you eligible?
On a first come first served basis, UK-based companies can now apply for a convertible loan of between £125,000 and £5 million if the company has raised at least £250,000 in equity investment from third party investors in the period from 1 April 2015 to 19 April 2020. Third party investors do not include founders, employees, workers or consultants. Although not all of these terms are defined, this will in effect exclude smaller, newer start-ups.
The company must have lined up at least £125,000 of matched third party convertible loan funding before making the application. The investor must come into one of the listed categories (which include certified sophisticated investors and certified high net worth individuals). Loans can be made by non-executive and investment directors (although this is not defined) but there will be employment related securities issues to consider on conversion. Since the scheme will only apply to match convertible loans made by investors, SEIS/EIS share subscriptions will not qualify to be matched by the Government.
If the company is a part of a corporate group, only the parent company is eligible. Further, either half or more employees must be UK based or half or more of revenues must be from UK sales.
How can you apply?
The scheme is being delivered by the British Business Bank. The lead investor must make the application. The company will be required to confirm its information and review the lead investor’s application. If the application is approved, all parties will execute the template agreement and subject to satisfying certain conditions, the funds will be released.
What are the main terms?
The terms of the convertible loans are broadly non-negotiable. The maximum term is 36 months. There is an interest rate of at least 8% per annum, a conversion rate with a discount of at least 20% to the lowest price on a later fundraising and a redemption premium of 100% of the loan amount.
What can you do with the monies?
There are restrictions on the use of the convertible loan monies (from both the investors and the Government). For example, the monies cannot be used to repay shareholder debt or to pay advisory or placement fees or bonuses to any corporate finance entity or investment bank or similar service provider. Additionally, for a period of 12 months, the monies cannot be used to pay bonuses or other discretionary payments to employees, consultants or directors other than those payments contracted before 20 May 2020.
Are there alternatives?
Yes, SEIS/EIS remains a very powerful tool for attracting investors and de-risking their investment to an extent. SEIS offers a 50% relief and EIS offers a 30% relief – this means that an amount equal to 50%/30% (as applicable) of the amount invested can be set against the investor’s income tax bill. If the investment is not successful and losses are made, the losses (less any relief claimed) can be set against income. These are therefore very generous reliefs and help mitigate risky investments.
For example, if an investor invests £20,000 into an EIS-qualifying investment they could claim upfront income tax relief of £6,000 (i.e. his/her income tax bill would be reduced by £6,000 and the net cost to the investor of that investment would be £14,000).
If the company fails and the investor receives nothing on the winding up he could set the loss of £14,000 (being £20,000 less the initial relief of £6,000) against his/her income generating a tax saving of £6,300 (assuming an income tax rate of 45%).
Therefore the maximum cost to the investor of the £20,000 investment in this example would be £7,700.
If you are considering availing of the Future Fund scheme or you would like to discuss other options, please contact Mark Tasker ([email protected]), Stephen Callender ([email protected]) or anyone in our Corporate Team.
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of May 20, 2020.