Those familiar with Seedrs will know that we have always offered ‘convertible equity’ campaigns on Seedrs as pioneers of convertibles in the equity crowdfunding space.
We now see an evolution of that product to fit with the requirements of the Government backed Future Fund. For campaigns marked as Future Fund campaigns, we have tweaked our convertible product to match the Government defined terms.
So what do investors need to know about Future Fund Convertible Loan Campaigns?
1. Convertible Loan versus Advanced Subscriptions
Most convertible campaigns you would have seen on Seedrs use an instrument called an “Advanced Subscription Agreement”. These agreements allow a company to receive investment now, but the shares are not issued until some further event – generally on a subsequent funding round or an agreed longstop date. Raising funds via convertible loan also allows a company to defer setting a valuation - if the company raises further capital within the required timeframe, that funding round “prices” the shares. The convertible investor is issued shares at a discount to the price agreed by the new investor, as a reward for investing earlier.
Advanced subscription agreements have been developed to be compatible with the requirements of the EIS scheme. Critically, that means they cannot have debt-like elements. Advanced subscription agreements have no interest rate and no right to repayment of the investment – the investment must result in shares being issued at some point.
A convertible loan is similar in that the shares of the company are not valued at the time of entering into the convertible loan agreement. Like an advanced subscription agreement, on certain trigger events (such as a future funding round), the loan will ‘convert’ and shares will be issued to investors at a discount to the share price set by the new funding round.
However, distinguishing features of convertible loans generally include:
- Interest – the loan will attract interest which may be paid out on certain events, at certain intervals, or just accrue and then convert to equity alongside the principal investment amount.
- Repayment Events – there are certain events where the loan does not convert to equity and instead is repaid by the company, often with a redemption premium of some sort.
These convertible loans are not EIS eligible.
The specific terms of the convertible loan will be set out in the Campaign and further detail attached in a term sheet to the Campaign. You can also review the full agreement prescribed by the Future Fund here: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/future-fund/scheme-documentation/. This template has been predefined and cannot be negotiated.
2. Government matched funding
We have indicated on all campaigns - in the highlights section - if the company is intending to apply for matched funding from the Future Fund. For these campaigns, we will ensure an application is made to the Future Fund. The Future Fund will provide matched funding to eligible companies for any private investment raised, with a minimum investment of £125,000 and a maximum investment of £5m. The Future Fund is to be allocated on a ‘first come, first served basis’, so there is no guarantee that a company will receive the Future Fund matched funding.
In order to fairly represent this to investors and allow sufficient flexibility for fundraising companies, we are allowing fundraising companies to specify whether the funding round is conditional upon receiving matched funding from the Future Fund, or is unconditional upon receiving matched funding from the Future Fund. This will be stated in the relevant campaign:
If the funding round is conditional upon receiving matched funding from the Future Fund, then Seedrs will not complete the investment and transfer the funds raised until we have confirmation that the Future Fund matched funding application has been approved and that the Future Fund is ready to make the investment. If the application is denied, the campaign will be cancelled and funds will be returned to investors.
If the funding round is not conditional upon receiving matched funding from the Future Fund, then we will complete the investment and transfer the funds raised even if the application for Future Fund investment is rejected. We will ensure an application is made to the Future Fund for matched funding and will not complete until we know the outcome of the application. But if the application is rejected, the company will still be permitted to complete the investment round.
If the funding round is conditional upon receiving matched funding, or we have already received confirmation that the application is accepted, we will reflect the intended matched funding amount in the progress bar on the campaign. The matched funding portion will show in the progress bar in yellow to distinguish it from other investment through the Seedrs platform. This is to ensure that investors have an indication of the potential total size of the funding round (and potential dilution) once the Future Fund funding is secured. We also wanted to make it clear that this is a different type of investor and not a regular discretionary investor via the Seedrs platform.
Seedrs does not charge any fees in relation to the Future Fund matched funding or application process.
3. Conversion to equity
The convertible loan agreement prescribed by the Future Fund is equity focused and favours conversion of the loan to equity as the default position.
Redemption is only available in certain scenarios and is often subject to the vote of majority of the investors. Where a vote of investors is required, Seedrs will vote on behalf of any investors it represents as nominee.
There is a possibility that the convertible loan will convert in some scenarios without the consent of Seedrs (if we do not make up a majority of investors). It is also Seedrs’ position that this is primarily an instrument for investing in the equity of the fundraising business and our default position would be to vote in favour of converting the loans to shares in the company, unless there is a clear or compelling reason not to.
As always, investors should be aware of the risks involved in investing in early stage and growth focused businesses: https://www.seedrs.com/pages/risk-warnings
In addition to the usual risk warnings included above, investors should be aware with respect to convertible loans:
The convertible loan agreement is intended as bridge funding to a future funding round, but there is no guarantee that a company will be able to secure further funding.
The Future Fund is to be allocated on a ‘first come, first served basis’ and there is no guarantee that a company will be successful in its application to receive the Future Fund matched funding.
There is a risk that the Company may not have sufficient funds to repay the loan on the maturity date, pay interest when it becomes due or pay the redemption premium included in the terms.
Convertible loans are unsecured obligations and in the event of a winding up or liquidation event will rank behind secured creditors of the Company.
5. Secondary market
Investors will not be able to sell their interest in the convertible loans on the Seedrs Secondary Market unless and until they have converted to shares in the company (and then only subject to eligibility and the terms and conditions of the Seedrs Secondary Market.
6. EIS Relief - past, current and future
As noted above, the convertible loan instrument is not compatible with EIS requirements, so no EIS applications will be made with respect to investments in the convertible loan.
The government has confirmed that investing in the convertible loan will not impact EIS relief previously claimed on investments in the fundraising company:
“The government has confirmed that such previous investments will not be affected where the convertible loan converts into shares. Where the convertible loan note redeems, we have been alerted that the government intends to make changes to the rules to clarify that this is compatible with such previous investments.”
However, investing in a convertible loan could impact your ability to claim EIS relief on future investments into the same company. The government has not clarified the position on this and has said it is a matter for HM Treasury and HMRC.
Seedrs is unable to provide tax advice. Tax treatment depends on individual circumstances and is subject to change.