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How to issue community shares when you’re already a Community Interest Company?

How to issue community shares when you’re already a Community Interest Company?

A few years ago, I was a Director of Saltdean Lido CIC, who were at the time investigating whether or not (and how) they might do a Community Share issue as part of the capital raising process to bring the 1930s building back into use.

As it happens, the major impediment was that the Lido CIC was, like a lot of CICs, a Company Limited by Guarantee, so it couldn’t have a share capital, and there’s no way to convert from a company limited by guarantee into one limited by shares. But lets say we weren’t, and we had have been a company limited by shares?

You might have read about on the Community Shares Unit’s handbook – you can’t do a community share issue as a CIC as Community Shares are a specific type of capital only possible with societies, not companies. And, since, as the CSU Handbook points out, raising capital from the public when you’re a CIC is likely to be prohibitively expensive, that left us with a conundrum if the Lido CIC wanted to go ahead with a Community Share issue.

One route Would have been to liquidate the CIC – you basically kill it as a legal entity. The issue here is what your assets and liabilities are. If you’ve just started and there’s not much in the bank account, this might be the easiest and quickest route. But if you have assets (such as land or buildings, or perhaps grants you’ve been awarded), then those assets can’t simple be transferred to your new Community Benefit Society (CBS) – that CBS needs to make sure it’s an eligible body under your CIC’s article of association. If you create a new CBS with an asset lock, you’ll probably be OK, but you need to check first, ideally with the CIC Regulator, and of course any grant funders and other important stakeholders.

The more your CIC has been active though (with grants awarded and paid over and so on), the more liquidating is a tricky and complex thing to undertake. So, a second option is to convert the CIC into a Community Benefit Society, but there’s a big choice to make here.

As the CIC has an asset lock, it needs to convert into something with either have an asset lock of its own or something even stronger. That means that you must either convert into a Community Benefit Society with an asset lock or (stay with me here, as this gets messy!) you first convert the CIC into a Charitable Company Limited By Guarantee  (as charities have an even stronger asset lock than CICs) and then covert the Charitable CLG into a Charitable Community Benefit Society.

This latter option is a bit a like a heart, lung and liver transplant: it’s technically quite routine but it’s gruelling, things can go wrong and, even when they go right, it takes an age.

In addition to the complexity, there’s an added problem that being either a Charitable CBS or an asset-locked CBS is a one-way street. Whilst you can convert an asset-locked CIC into a Charity, you can’t convert an asset-locked CBS into a Charitable CBS, for completely unknown reasons (but one suspects a failure of the imagination by legislators).

In addition, if you did want to take the route involving becoming a charity, then if you were a CIC limited by shares, you’d have a problem as they are problematic when it comes to being registered by the Charity Commission, and under Company Law, you can’t convert a company limited by shares into a company limited by guarantee (or vice-versa)

That means there’s no way out once you’ve chosen either route. The advantages or disadvantages of either route are difficult to determine in advance and will likely only become clear after you’ve been running a few years, by which time it’ll be too late.

That’s why at the Saltdean Lido we decided a third option would make more sense – to create a CBS and make it the parent company of the CIC. Then, shares could be issued in the CBS and the Lido run through the CIC as a subsidiary operating company. It would be a relatively quicker and painless process to begin with, but it does have some risks for the future.

Firstly, it means there are two boards of Directors, not one, and that has the potential to create issues later, as different people on the two boards could end up wrestling for supremacy. It also means that when doing a share issue, the money has to be raised in the CBS and then lent to the CIC, so the CBS has a very strong balance sheet and the CIC has a weak one, because it’s got a massive debt to a CBS. Secondly, as the CBS needs to have the funds to pay any interest or fund withdrawals, you need a loan agreement which demonstrates how money will pass back up from the CIC to investors in the CBS.

All told, it’s something of a minefield and no option is without consequences. The best advice here is to hold off forming a legal entity for your enterprise  if raising capital from your supporters via a public campaign is part of your plans now or in the future, as you’ll be better placed to make the right decisions at the right time.

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