These legal structures are registered by the Financial Conduct Authority (FCA), not Companies House, using model template constitutions sponsored by various organisations, including some national governing bodies (NGBs).
Societies registered before 2014 will have been called a variety of names, such as Industrial and Provident Society (IPS), Bencom or Bona Fide Co-op. These are now termed Registered Societies by the FCA but are still able to issue community shares.
Knitting together clubs and investors
As a form of equity, Community Shares give rights to investors, but unlike standard company equity it cannot be sold to anyone else. As a result, there is no risk of the equity raise leading to a transfer of power over time.
Like debt, interest can be paid to investors and investors can get their money back (called withdrawal) but unlike standard debt, these returns can only be paid if the Board are satisfied it would be prudent to do so. Returns are available, but only if the enterprise is generating funds to justify them.
The FCA restrict returns on investment to "no more than that required to attract the investment" meaning that clubs can ensure that they fulfill their 'mission' ahead of servicing investors returns. As investors are therefore likelier to only see a return in the event of a surplus, this knits them into working with the club to help grow its revenues as users and supporters, rather than more distant and differently motivated external investors interested solely in getting a financial return. This creates a pool of ‘patient capital’ provided on friendly terms by the club’s users and wider community.
Societies are exempt from the regulations governing financial promotions, so clubs structured in this way can issue equity (or debt) to the public without any concerns regarding failing FCA regulations, and so are a relatively easy and cheap way to raise patient capital.
HMRC consider investment in community shares as ‘risk capital’ and so it is eligible for a series of tax reliefs. Community Benefit Societies can seek registration with HMRC as charities and are then able to also claim Gift Aid on donations made to them.
Community Shares have been used by clubs to generate significant investment in new facilities and to provide working capital from members and the wider community. Research by Nesta shows that whilst fundraising donations average at around £50 per person, community shares investment can secure £400 per investor, even though the same people are often the core base providing the funding.
Things to think about
- Cooperative Societies must operate on a one-member, one-vote structure and can pay dividends to members. That makes them unable to achieve charitable status, and can also render them ineligible for many grant-funding programmes. They can take on investment by non-users of the services provided, but that non-user investment cannot control more than 25% of the voting strength on resolutions to liquidate the society or convert it to a company.
- Community Benefit Societies (CBS) can also operate on a one-member, one-vote basis, but can also have restricted memberships (such as club participants only) or fully-open memberships from the general public. Once a CBS has sold shares, those shareholders become members with whatever voting rights the constitution gives them, though they can exercise those via membership classes weighted differently to other member categories, such as users, or other clubs in a multi-sport club.
There’s more on community shares, including a detailed guide on how to prepare a share offer as part of a community asset transfer on the Club Matters website.
You can also find more information about Community Shares here.