Most community share issues are currently done through Society legal structures, and there is a lot of advice available for these - here, for example.
However, although the Society structure is in general better suited to larger community share issues, in other ways it is an awkward legal structure - societies are, for example, more expensive and time-consuming to set up and administer than CICs.
The CIC Association believes that where there is a smaller group of supporters who might invest, the CIC can become the optimal vehicle for raising social investment through share issues. We are therefore developing guidance and model documents which will hopefully make this process easy.
I wonder if I might post up some draft text here over the coming days, to get your feedback on accuracy and clarity?
If you are a Share CIC but not a Public Limited CIC...
Under company law, a Private Share CIC cannot offer shares to the public, unless
- the offer is not likely to result in the shares becoming available to persons other than those receiving the offer (Companies Act section 756.3.a), or
- it is 'a private concern of the person receiving it and the person making it' (Companies Act section 756.3.b), or
- the offer is made as part of the process of becoming a Public Limited Community Interest Company.
This company law regulation is not to be confused with the exemptions from Prospectus requirements under the Financial Services & Markets Act, which exempt small issues (less than 100,000€ – about £80,000), or to fewer than 100 people, or issues to 'qualified investors'.
So although a Private Share CIC does have to abide by the Prospectus requirements, it is first and foremost the regulations under company law that matter, not the exceptions under the Financial Services & Markets Act. This is unfortunate, since the latter are clear (less than 100,000€, less than 100 people, etc), whereas complying with the company law regulations is more of a judgement call.
The intention of company law is however clear: to allow a Private Company the freedom to issue shares to known individuals such as business associates, employees, family and friends, but to protect the general public from unregulated and exploitative issues. In practice, we think this means that:
- a Private Share CIC can only offer shares to a clearly identified group of people already connected with the CIC, such as its employees, established customers or suppliers, or members of a support group or linked organisation, and
- this group is made up of people you know by name, and with whom the CIC has had past dealings, at least by correspondence, and
- it is made clear to them that the offer applies to them only – they cannot pass it on to others, or buy the shares with the intention of re-selling them (it should perhaps also be stated that if an application for shares or a share transfer is received from an unknown person it will be refused), and
- they should not buy the shares with primarily financial motives – the main purpose of the share issue is to support the work of the CIC for community benefit, and that CIC Shares have limited financial returns.
It is also essential to ensure that the offer is to less than 100 people and intended to raise less than the sterling equivalent of 100,000€.
What happens if you breach the regulations?
Under the 2006 Companies Act a Private Share CIC no longer commits an offence if it offers shares to the public. Instead, it will be compelled to re-register as a Public Limited CIC, unless it appears to a court that the CIC does not meet the PLCIC requirements, or that it is impractical or undesirable to require it to convert to PLCIC status - in which case a court could make a remedial order and/or an order for the compulsory winding up of the CIC.
What about misrepresentation?
Where a Share Prospectus is issued there are specific rules and remedies set out in the Financial Services & Markets Act, but it is important to note that these provisions are in fact based on common law principles, which apply to a small private share issue even if there is no formal Prospectus.
Not surprisingly, given its basis in common law, what constitutes 'misrepresentation' is a matter of common sense: was the buyer induced to buy the shares by factual statements which were known to be untrue, or by the omission of crucial facts? If so, the share purchase can be 'rescinded' – ie. the offending CIC has to cancel the shares and repay the purchase money.
Note however that it is generally only factual statements or omissions that are held to constitute 'misrepresentation': opinions or intentions clearly presented as such cannot be used as a basis for rescission.
More to follow...
Hi Geoff, does this apply equally to Ordinary and Preference shares? Are there any circumstances when Ordinary shares with voting rights would be used rather than Preference shares to increase the security of an investment?
Yes it does apply to both ordinary and preference shares.
One of the biggest questions when thinking about a share issue is: who will buy them? Would the supporters be happier with a preferential dividend, rather than voting rights? Logically, a preferential dividend only really adds value if there are also ordinary share investors who want a dividend - so the two types of share actually complement each other. But where the main motive for purchase is to support the CIC rather than get a return - hmmm, I'll have to think about that one!