The Scottish Government has announced today a £38 million support package for high growth companies based in Scotland. The new funding, which will be managed by Scottish Enterprise, will consist of:
- £3m worth of grants up to £50k, plus advisor support, for start-ups identified as having significant growth potential
- a further £10m for the existing Scottish Investment Bank co-investment funds, managed by Scottish Enterprise
- a £25m Early Stage Growth Challenge Fund, which will allow companies to apply on a competitive basis for a mixture of investment and grant funding; and we have provided more details on the fund below
What is the Early Stage Growth Challenge Fund?
It is a new Scottish Government Fund announced today (10th July 2020). Its purpose is to assist early-stage, innovative companies who have been badly affected by Covid-19; and to provide them with a cash injection before their next funding round.
Applications for the Fund are competitive, and are not awarded on a first-come-first served basis (unlike the Future Fund). We understand that the businesses which are most likely to be successful with their applications are those which can contribute most to Scotland's economic recovery from Covid-19.
The fund is set to open on 20 July 2020; and will close at 5pm on 31 July 2020. We understand that applicants will find out whether they are successful in the week beginning 7 September 2020.
Which businesses are eligible for funding?
Companies which apply for the Early Stage Growth Challenge Fund must:
- be based in Scotland or have the majority of its operations in Scotland
- be a private company limited by shares
- have been incorporated on or before 31 December 2019, but less than 10 years ago
- have raised external equity funding in the last 2 years, or anticipate receiving funding in the next 12 months (this funding can be from founders, family and friends or crowdfunding; but it is not clear whether there is a minimum amount)
- be a high- growth innovative company, and if it has not raised external equity funding, the company must have either (i) registered at least one technology right (eg. patent or design right) in the last 2 years; or (ii) received an R&D or innovation grant of at least £50,000 from a body in the EU; or (iii) received (or working through the application process for) approval from a regulatory body such as Medicines and Healthcare Products Regulatory Agency (MHRA), U.S. Food and Drug Administration (FDA) or CE certification mark, or equivalent;
- be able to produce a plan for the funds in line with what they can be used for (see below); and
- be committed to the Scottish Government's Fair Work First Policy.
There is no guarantee that all businesses which meet the above eligibility criteria will receive funding, given the competitive application process.
What funding is available?
The Fund will provide up to £25 million of funding into early-stage companies meeting the above eligibility criteria. The maximum amount that a business can receive from the Fund will be £300,000. This will either be by way of a convertible loan, or a combination of convertible loan and grant funding. The maximum amount that a business can receive by way of grant is 20% of the total funding. So, if a business receives £300,000 from the Fund, the maximum they could receive by way of grant is £60,000.
The grant element of the funding will not need to be repaid. But the convertible loan funding (plus interest) will either need to be repaid or it shall convert into shares. It will be at the discretion of the Fund as to whether they seek repayment or if they choose for the loan to be converted.
The fund will be administered by Scottish Enterprise.
What can the funding be used for?
The funding must be used for the purpose of funding growth activities. A full list of eligible and ineligible funding has been provided here.
Is the funding repayable?
Any repayment of the loan to the Fund shall be at the discretion of Scottish Enterprise. There shall be an interest free period for the first 12 months of the loan. Interest shall then accrue on the loan at a rate of 8% per annum payable on maturity of the loan. But Scottish Enterprise may convert the loan into shares prior to any repayment date, which will be a maximum of 36 months from the date of drawdown. Default interest of 5% may be payable if the loan is not repaid in accordance with its terms.
Scottish Enterprise shall have the right (but will not be obliged) to convert the loan and all accrued interest to shares on:
- a qualifying funding round (being any subscription for shares by a bona fide third party)
- a share sale
- a listing on an investment exchange,
and such conversions will be at a 15% discount to the price set by any funding round.
Scottish Enterprise will also have the option to convert the loan on an asset sale by the company. Again, the price of such conversion would be at a 15% discount to the price set by a funding round, failing which, an agreed "fair value".
What investor rights will Scottish Enterprise require?
As an investor, we understand that Scottish Enterprise will require:
- the loan to convert into the most senior class of shares in the company (i.e. they will rank first in any capital distribution)
- the right to appoint an observer to the board of the company
- warranties to be given by the company at closing of the loan, these will include warranties in respect of title and capacity, intellectual property, insolvency and borrowings
- rights to financial information of the company, including monthly or quarterly management accounts and annual accounts
- undertakings by the company to, among others, maintain insurances, provide additional information, comply with legislation and liaise with Scottish Enterprise on any publications in which they are referenced
Can Scottish Enterprise transfer its interests?
Scottish Enterprise will have the right to transfer the loan or, following any conversion of the loan, any of its shares to any member of the Scottish Enterprise Group (including the Scottish National Investment Bank, once operational).
How can Brodies help?
Our corporate colleagues regularly advise on deals of this type and would be happy to assist if you are considering making an application for assistance from the Early Stage Growth Challenge Fund.
If you have any questions about this or any other matter relating to the impact of COVID-19 on your business, please get in touch with any member of the corporate team or your usual Brodies contact.