1.2.7 Community interest companies
Community interest companies (CICs) can, and do, sell shares to investors and raise capital from the communities they serve. But they must do so in a way that is completely different from societies.
CICs are a regulated form of company. As such they are fully subject to company law, plus the specific provisions of the CIC regulations. CIC legislation, introduced in 2005, provided a new regulatory framework governing the three main forms of company: a private company limited by shares, a company limited by guarantee, and a public limited company (plc).
Section 755 of the Companies Act 2006 prohibits private companies from making public share offers. This means that any company planning to make a public offer of its securities must convert to a plc before making the public offer. This includes CICs, which must become CIC plcs. Plcs are required to have a minimum of £50,000 in paid-up share capital, meet more stringent auditing and public reporting standards, and are generally subject to greater levels of regulation and compliance, making this form of company too costly for most community enterprises with a capitalisation of under £5m.
The Financial Promotion Order 2005 (see Section 7.3.3) requires financial promotions to be overseen by an FCA authorised person, unless the promotion is exempt from these provisions. The Order specifies a range of exemptions, including an exemption for societies, but not for CICs. Other exemptions include high net worth individuals, sophisticated investors, and the ‘common interest group’ of a company. This could include defined groups such as the members of a company, its employees, customers and suppliers, or other groups with a pre-existing interest in the affairs of the company making the promotion.
In addition to complying with the Financial Promotion Order, larger financial promotions must also comply with the Prospectus Regulations 2005. These regulations apply to promotions made to more than 100 people or where the total being sought exceeds the sterling equivalent of €5m. Societies issuing withdrawable share capital are exempt from these Regulations, as are charities and other non-profit-making bodies or associations, which could be interpreted as including CICs.
To sum up, it is possible for a CIC to make a share offer to the public, but it must be a plc and employ an FCA authorised person to oversee its communications with the public. The costs associated with these requirements can be onerous and out of scale with the capital requirements of most community enterprises.
There are also financial and governance reasons why CICs may not be a suitable form for community shares. Unlike societies, companies cannot issue withdrawable shares; their shares must be either transferable or redeemable, which requires a very different approach to capital liquidity. On the other hand, there are no restrictions on the amount of share capital an individual may hold in a CIC. The dividend cap on CICs may allow investors a far higher return on capital than can be offered on shares in societies, as it is based on a proportion of profits (currently 35%) rather than a dividend rate per share.
Although the CIC form may not be suited to community investment, it is still a suitable form for equity investment by social investors. It may be particularly suited to social investors who want to exercise control over their investment, because CICs work to the principle of one-share-one-vote. The private placement of CIC equity with social investors could be facilitated by social investment financial intermediaries who understand the constraints of the Financial Promotion Orders and have access to sophisticated investors and high-net-worth individuals.
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