Can a Community Interest Company Issue Community Shares?
With growing appetite for socially motivated investment and community share offers, is it time to level the playing field for CICs?
Community and social enterprises are booming. According to government data, there are now 70,000 social enterprises in the UK contributing £18.5bn to the UK economy and employing nearly a million people (BIS/BMG 2013). Social and community enterprises are businesses that aim to generate their income by selling goods and services, rather than through grants and donations; they are set up to specifically make a difference and they reinvest most of the profits they make in their social mission. At a time of dwindling trust in large corporations, they have really found their niche.
To date they have focused on renewable energy, local food production, community shops, pubs and brewing, affordable housing, sports and leisure. Increasingly, they are also running a wider range of public services, including health services, social care and childcare. They have also been very successful in raising capital from their communities and supporters. Since 2009, 286 community share offers have been successfully completed or are underway. According to the Community Shares Unit’s Inside the Market report (June 2015), more than £80m of share capital has been raised from over 60,000 investors since 2009. There is growing appetite from philanthropists, foundations, charities, and crucially members of the public, to invest in these enterprises. The new Social Investment Tax Relief allows individual investors to offset 30% of the cost of the investment against their tax bill, if relevant criteria are satisfied. The involvement of these community based members and investors creates strong engagement between the new enterprise and those it serves. They can enhance the governance of the organisation by holding the board the board to account.
To date, community share offers have mainly used the industrial and provident societies (now called cooperatives or community benefit societies), as their legal format of choice. This legal format has a long and proud history dating back to the self-help movement of the nineteenth century and was recently reinvigorated with the passing of the Cooperatives and Community Benefit Societies Act 2014. There are three main reasons for the use of this format. Firstly, cooperatives and community benefit societies can issue ‘withdrawable shares’ – a type of share capital unique to this legal format, which allows the enterprise to pay a fixed or capped rate of interest (usually at the discretion of the board, as finances allow), but at the same time allows the investor to withdraw their capital, but normally not to sell or transfer their shares. Secondly, share offers made by a community benefit society or cooperative are an exempt category of security for the purposes of the Financial Promotion Order 2005, (by virtue of Schedule 1, paragraph 14(3)(c)), which means there is no obligation to involve an expensive FCA authorised adviser in structuring or marketing the investment. Thirdly, a community benefit society (but not a cooperative) can qualify as a charity (if it has exclusively charitable objectives), with all the attendant tax reliefs and status and still issue shares to the public.
Community interest companies on the rise?
The community interest company (CIC) is the newer kid on the block. This format has just celebrated its tenth anniversary. There are more than 10,600 in existence. This legal form was heralded as the new way to kickstart social investment and philanthropic ventures when it was introduced in 2005. The community interest company has a number of attractive features which should promote investor confidence: an automatic ‘asset lock’ is designed to ensure that the company’s cash and assets are only used for the stated community purpose. A ‘dividend cap’ ensures that a CIC limited by shares can only distribute 35% of distributable profits to shareholders and the other 65% must be reinvested in the community mission. And the CIC is overseen by a community interest regulator who will only register it if it has a genuine community purpose and who expects to see annual reports detailing how its mission has been fulfilled in practice. (Arguably, these present a much more demanding regime than the FCA’s current supervision of cooperatives and community benefit societies). But in raising community investment, this format is lagging behind. Why is this?
We first need to understand the restrictions which apply to the community interest company. A lot of these stem from the fact that legislation creating CICs was grafted onto the back of existing company law for commercial enterprises. There are two main issues.
Firstly, a CIC is caught by the prohibition in section 755 of the Companies Act. Section 755 (1) states:
“A private company limited by shares… must not (a) offer the public any securities of the company, or (b) allot or agree to allot any securities of the company with a view to their being offered to the public”.
If companies wish to offer shares to the public, they are supposed to become public limited companies (PLCs), which are more heavily regulated. This provision also catches a CIC limited by shares by virtue of section 1 of the Companies Act 2006. The phrase ‘offer to the public’ is defined in section 756. An offer is not to be regarded as an ‘offer to the public’ if it can properly be regarded in all the circumstances as-
(a) not being calculated to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer, or
(b) Otherwise being a private concern of the person receiving it and the person making it.
A successful community share offer does depend on heavy promotion and marketing amongst supporters of the project. To rely on the first alternative (a), the promoters would have to take extreme care that the investment was not publicised generally, but only to prequalified supporters.
756 (4) goes on to say that an offer is to be regarded (unless the contrary is proved) as being a private concern if (a) it is made to a person already connected with the company..
756(5) defines ‘a person already connected with the company’ as (a) an existing member or employee of the company or (b) a member of the family of a person who is or was a member or employee of the company