Community Share Issues
Community share issues are a way of raising inexpensive capital and at the same time mobilising a community behind a building project. A successful share issue gives the organisation credibility and recruits volunteers.
Despite appearances, it isn’t that complicated!
Industrial and Provident Societies (IPS) are the only type of company that can issue shares in an inexpensive manner. If you want to issue shares to more than 100 people as a private company or share limited Community Interest Company, you have to produce a formal prospectus that can cost between £20 and 50k.
A Company Limited by Guarantee (CLG) cannot issue shares (but can issue bonds). It costs less than £1,000 to convert from a CLG to an IPS.
Share issues range from a few thousand pounds to start a community shop, to the £20m raised by Shared Interest (Fair Trade). IPS share issues without a full prospectus cannot be for more than £2m. There have only been about 50 share issues of over £10,000, but this is set to increase.
Questions to be answered before embarking on a share issue
- Is the business plan viable?
No one wants to invest in a loss making concern. What you say in your business prospectus has to be honest, warning people of the dangers of losing their money and not exaggerating possible returns.
If you are going to offer dividend payments on the shares you must justify it.
- Will it provide security to the investors?
Shares will normally be withdrawable i.e. investors will be able to ask for their money back. Particularly in an era of low inflation, this makes investing, rather than donating money, much more attractive. But people will want to be confident that their money will still be there in 3 years time.
There can be conditions on shareholders withdrawing their cash – perhaps having to give 6 months warning or being dependent on the agreement of the Board. The more restrictive these conditions, the less appealing the share purchase.
- Who will purchase the shares?
The maximum individual (or company) investment is £20,000, though another IPS can invest as much as it chooses.
You need to be clear about who your market is. The most successful issues are generally associated with a community of place (a village shop), a community of interest (environment) or an existing customer base (The Phone Co-op).
As an IPS share issue is inexpensive (prospectus design and print, distribution, administration, solicitor’s fee – perhaps less than £3,000 in all), so even if you do not expect to raise a lot of money, the issue may be worth doing to engage people.
- What should be the minimum investment?
A balance between the hassle of administering small amounts, what people can afford and setting appropriate targets. £50 or £100 is often used as a minimum
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Will they expect a return on their investment?
If your business plan anticipates paying a dividend that can increase the attraction of the share issue. Some of the community energy schemes anticipate paying over 5% a year and not surprisingly have been oversubscribed (see Energy for All)
- Have you got a business idea that will inspire people?
Rescuing a village shop from closure is likely to have more appeal than refurbishing an industrial unit. You need to have confidence in the popularity of your idea and campaign for it. Investors can often become volunteers
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How will you market the shares?
Build and borrow databases. Get local politicians, businesses and partnerships involved. Get people involved in the planning, hold meetings, create a web site. Use direct mail and the local media. Possibly get someone to help you and pay them a percentage of the money raised.
Above all – create excitement.
ISSUING THE PROSPECTUS
The Financial Services Authority says the following should be in an IPS prospectus.
- Details of the assets, liabilities, financial position, profits and prospects of the organisation.
- The rights attached to the shares
- Current information
Generally be enthusiastic but real and spell out the risks. See attached prospectus for the two share issues in Headingley – HEART and the Natural Food Store
Don’t forget to register for the Enterprise Investment Scheme. For anyone investing over £500, 20% of their investment is set off against tax (www.eisa.org.uk)
Watch the legal costs. There is now plenty of guidance out there and you should be able to get the prospectus to a point that a solicitor (one who knows the field), only has to check it.
The two key documents – Community Investment (Jim Brown) and Community Share and Bond Issues (Camberwell and Wrigleys) can be downloaded at
www.communityshares.org.uk