A new way to raise capital from local citizens to kick start funding for public services and infrastructure?
With continuing austerity measures in local authority and NHS budgets, local communities are seeking innovative ways to protect local services and infrastructure as the state decommissions services or withdraws grant funding. Politicians are increasingly having to shift their mindset and seek the holy grail of financially self-sustaining services, income generation and co-production of local services, involving the community more in designing and delivering services, as well as harnessing the power of volunteering. The Localism Act 2011 introduced new rights for communities to bid to run local services and to acquire local infrastructure, such as buildings, shops or pubs before they are sold off for development. These ‘community rights’ recently received a funding boost from Government to kickstart more activity. In tandem with this, an exciting programme to build capacity and awareness of community share offers has been undertaken by Locality and Cooperatives UK. With funding from the Department for Communities, this saw the launch in October 2012 of the Community Shares Unit devoted to developing the market. On 30 June 2015 the new Community Shares Standard Mark was unveiled– a quality assurance scheme designed to give social investors confidence that community share offers have been properly designed.
A virtuous circle of community engagement
Community share offers are a neat way to raise capital from local citizens to support local projects and community enterprises. Fledgling enterprises often struggle to raise the seed capital required to launch the business from traditional sources. Community shares offer a solution. With bank deposit interest rates still running at low levels, retail investors with some spare cash to invest may obtain a rate equal or better to the deposit account, whilst also supporting a worthwhile venture with positive social benefits. Set up correctly, the medium of share offers creates a really positive alignment and increased engagement between the new community enterprise and the wider public. Shareholders become natural ambassadors for the products and services offered by the new enterprise, creating a virtuous circle where it is in their interests as members and investors also to be active as customers, supporters and volunteers.
Community Benefit Societies
The term ‘community shares’ refers to ‘withdrawable shares’ in community benefit societies set up under the new Cooperative and Community Benefit Societies Act 2014. This Act overhauled old legislation around industrial and provident societies. The community benefit society is a limited liability entity with a constitution based on a set of rules and a two-tier governance structure comprising the board and general membership. Unlike shares in a limited company, these shares are usually non-transferable and carry a right to capped or fixed interest only. There is no right to participate in profits or a slice of the underlying assets – so no scope for capital gain, so the enterprise is preserved for the common wealth. The decision to pay interest on the shares is usually at the discretion of the board and will only occur if there are sufficient trading surpluses to justify this, without compromising the organisation’s core mission. If a shareholder wishes to cash in, the society simply returns the original cash stake. Controls exist to stop all shareholders cashing in at the same time. Most societies are also subject to an asset lock, which prevents the society being sold and the proceeds of the sale being distributed amongst shareholders.
Tax reliefs and lower costs
There are three other important advantages of this legal format. First, the shares may qualify for Social Investment Tax Relief, which allows the investor to claim 30% of the amount invested as relief against their tax bill in that year or the previous year, either through their tax return or PAYE – thereby adding to the return on investment. Second, if the rules and objects are drafted correctly, they may qualify for charitable status, which may bring tax benefits for the enterprise in corporation tax, stamp duty land tax, relief from business rates and some VAT privileges. Third, the issue of such shares is exempt from the heavy regulation which otherwise applies to promotion of shares to the general public by companies, meaning that a community share offer can be put together much more cost-effectively, often using low-cost crowd-funding platforms.
A growing market
Since 2009, over 400 new societies have been registered, and 286 community share offers have been successfully completed or are underway. According to the CSU’s Inside the Market report (June 2015), more than £80m of share capital has been raised from over 60,000 investors since 2009. Amazingly, this now represents a 10% share of the total social investment market and is the second largest form of crowd-funding in the UK. This seed capital been used to attract matched funding from grants or commercial loans. These new enterprises have so far focused on renewable energy, local food production, community shops pubs and brewing, affordable housing, sports clubs and faith groups. There is no reason why they could not be used to support and kick start activity in a wider range of public services. We are working with groups now running former statutory services who intend to raise funds through this route. An obvious area for further development would be health and social care services, particularly for high growth areas such as services for older people or patients coping with long-term health conditions in the community. The initiative already has the backing of DCLG and DEFRA and it is understood HM Treasury is increasingly taking an interest in the potential for further development.
Launching a successful share offer
The process for achieving a community share offer requires careful forward planning. There needs to be a competent development team in place to develop the idea and get the organisation investment ready; then a business plan demonstrating the viability of the enterprise and its ability to generate a profit to pay a (modest) return to shareholders. The target community needs to be fully engaged in the development process to persuade them to invest in shares. Marketing and promotion plays a key role here. Finally, experienced professional support is needed to launch the share offer.
Community share offers can be a great tool to support local services and infrastructure. The availability of new tax reliefs and lower regulatory burden make this an attractive route for enterprises and investors alike. This year sees several new initiatives and programmes focusing on kick-starting more community enterprises, such as Big Potential, The Power to Change and DCLG’s latest Community Rights programmes: community share offers will dovetail nicely with these.