What community shares can do for localities

1 Dec 14
Mark Johnson

Community shares offer a way to raise capital from local citizens and could be used to kick start funding for public services and infrastructure

With unprecedented austerity measures in local authority budgets, local communities are seeking innovative ways to protect local services and infrastructure as the state decommissions services or withdraws grant funding. The Localism Act 2011 introduced new rights for communities to bid to run local services and acquire local infrastructure such as buildings, shops or pubs before they are sold off for development. In tandem with this, an exciting programme to build capacity and awareness of community share issues has been undertaken by Locality and Cooperatives UK with funding from the Department for Communities, culminating in the launch in June 2103 of the Community Shares Unit.

Community share issues offer a 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 share issues offer a solution. With bank deposit interest rates running at pathetically 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 issues creates a positive bond 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.

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 non-transferable and carry a right to fixed interest only. There is no right to participate in profits or a slice of the underlying assets – so no scope for capital gain. If the 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.

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. Second, if the rules and aims are drafted correctly, they may qualify for charitable status, which may bring tax benefits for the enterprise in corporation tax, stamp duty land tax and business rates. Third, the issue of such shares is exempt from the heavy regulation which otherwise applies to promotion of shares to the general public.

Since 2009, over 400 new societies have been registered, and more than 180 community share offers have been successfully completed. More than £20m of share capital has been raised from over 20,000 investors. These new enterprises have focused on renewable energy, local food production, 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.

The process for achieving a community share issue 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 take shares. Finally, experienced professional support is needed to launch the share issue – which may require a budget of 5-10% of the capital raised.

Community share offers could be a useful 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.

Mark Johnson is a partner with specialist public services law firm Geldards LLP. [email protected]

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