One of the main reasons why social enterprises can find it difficult to compete with private enterprises is their lack of risk capital. A root cause of this under-capitalisation is the belief that social enterprises cannot, or should not, have shareholders. Equity investment is often considered as being incompatabile with social purpose, because shares give legal title, meaning that the enterprise is owned, controlled and run in the interest of investors.
Community shares provides a mechanism to bridge the gap between under-capitalisation and ownership of social enterprise. This term refers to non-transferable withdrawable share capital; a form of share capital unique to co-operative and community benefit society legislation. This type of share capital can only be issued by co-operative societies and community benefit societies, including charitable community benefit societies and has some unique characteristics:
- This type of share capital cannot be transferred between people. Instead, the society allows shareholders to withdraw their share capital, subject to terms and conditions that protect the society’s financial security.
- The value of shares is fixed and not subject to speculation, although some societies have the power to reduce share values if the society is experiencing financial difficulties.
- Shareholders have only one vote, regardless of the size of their shareholding, so the society is democratic. There is also a limit on personal shareholdings, currently up to £100,000 (£20,000 in Northern Ireland).
- There is also a limit on the interest paid on share capital, based on the principle that interest should be no more than is sufficient to attract investment.
- Finally, the majority of societies are subject to an asset lock, which prevents the society being sold and the proceeds of the sale being distributed amongst shareholders. This removes the possibility of capital appreciation and the scope for investor speculation.
The consequence of these provisions is that societies are not subject to 'financial takeovers', in that they do not offer the prospect of capital gains, and therefore need to attract investors whose interests are aligned with the underlying purpose of the society. For societies it provides a source of long-term patient risk capital which helps attract other forms of finance (grant, donations and debt) giving the enterprise a good chance of viability and sustainability.
Based on all these qualities, community shares are an ideal way for communities to invest in enterprises serving a community purpose and have been used to finance shops, pubs, community buildings, renewable energy initiatives, local food schemes, along with a host of other community based ventures.