CIC Association

Serving Community Enterprise

Update June 2013

Good news everyone, Govt have included CIC Caps as part of the consultation on social investment tax relief (page 18 and 19 are the CIC Cap questions)

Well done on helping raise the level of awareness and debate, ill probably arrange an event, for us all to get together.

Would everyone be happy with Manchester?

Update 12th Feb 2013

Hi all, please find attached below our report to The Regulator, based on the findings from our CIC Dividend Cap review.

Thanks you for helping us organise organise the wisdom of the crowd, I would appreciate any feedback positive or critical to ensure the ongoing debate is exactly where you want it to be.

John

Update Nov 21st 2012

Hi All

Dividend Cap review survey can be accessed here: http://www.ezsurvey.org.uk/cic2012/index2.php

Event in London 14th Dec to discuss the review and network with fellow CICs:

http://thecicdividendcapreview2012.eventbrite.com/

Hi All

 

In advance of the review of the caps later this year year, we are actively seeking comments and suggestions to ensure as wide and deep a feedback as possible. A number of activities including a technical panel are ongoing http://cicassoc.ning.com/profiles/blogs/have-your-say-the-regulators ,  with more evidence of investments and a better understanding of the issues emerging daily.

 

There are a multiple of opinions on this subject, please make sure you give yours if you havent already.  Any practical effects of any change will not come to pass until summer 2014 at the earliest, I believe we need to achieve recommendation 1 at the very least, and based on anecdotal evidence only we favour recommendation 3 over 2.

 

No1 recommendation 1 - To allow the dividend cap to be set against any subsequent transfer/sale price of the CIC Share, currently it is pegged permanently to the initial paid up value of the Share.

 

This is a recommendation that I believe can attract almost complete agreement, as it improves the potential of CIC Shares without calling into question the current balance of community primacy. It is not a neutral suggestion, it definitely takes into account CIC members views that dont want the generic balance of community primacy/investor reward changed. 

 

It improves liquidity and allows for development and innovation. It will open up investment into CICs from a wider group of investors.

 

It is an unintended consequence. It fails the basic notion of what a share is on a technical level. It unnecessarily prejudices against an investor who may want to invest in CIC Shares. Eg. An investor can get a maximum potential 20% return on the issue of a new share in the same CIC, so why not on the transfer of an old one? 

 

The difficulties generally around small company shares being hard to trade, coupled with the dividend caps themselves will still make for a difficult environment.

 

No2 Alternate recommendation - To remove the individual caps altogether and just use the aggregate cap of 35% of distributable profit.

 

This could be a far simpler system to monitor and evaluate, to report and to scrutinise on, and it would undoubtedly open up the potential opportunity to attract more inward capital investment.

 

It would open up CIC to almost all types of investor.

 

It does however raise objections from many CICs who feel this is a fundamental change to that relationship between community primacy and investment reward. On balance and based only on anecdotal evidence within the Association we feel 35% distributable would be too much.

 

No3 Alternate Recommendation - To remove the individual caps altogether and just use an aggregate cap of 20% (or 25%) of distributable profit

 

If we take into account the reality of developing CIC Shares, developing the Regulatory procedures that are in place will be important, to cut down on bureaucracy and running costs. This would allow for effective slimline Regulatory control and wouldnt change the primacy of community benefit/ investor reward. 

 

Reducing to 25% instead of 20% would keep more investment options to CIC.

 

The Regulator would then have one simple control (that it could increase or decrease subject to further review), and in the medium term this (we suggest) could be the best strategy to adopt.

 

Both alternate recommendations 1 and 2 would supersede the need for recommendation 1

 

 

 

Views: 1587

Attachments:

Replies to This Discussion

I would also add that there have been a few very interesting share issues arranged this year, including a proposed part-purchase of a football club, a hydro investment and the first preference share issue. We've captured details of over 10 different deals so far, but some of them are micro and only involving investment from personal contacts. 

 

The Govt's wider Financial Services reforms and growth strategy will also have a huge role to play. Im optimistic the generic landscape will be improved as they seem to be looking at the right issues, guess we'll find out soon enough!

Sorry I missed this consultation - and thanks John for pointing it out yesterday.

Option 1 makes perfect sense - as you say it removes an anomaly in the current arrangement.

However, on balance I do prefer Option 3.  This would enable a better realisation of 'sweat equity' - one of my main concerns - because part-paid shares could be issued to founders/staff and dividends still paid.

As I think Gareth points out, in all the Options capital growth would still be constrained by redemption at par in a winding up or purchase of own shares - so the Share CIC would remain a very different proposition from ordinary share companies - but I think Option 3 better combines the advantages of simplicity, clarity and a powerful public image message.

My only doubt is about pushing the Share CIC form away from the Guarantee.  On the one hand this is useful - better to have 2 different tools than two similar ones - but we need to be aware that in making the Share CIC form more attractive to investors we are also probably making it less attractive to grant funders - many of which such as the Esmee Fairbairn Foundation do currently fund Share CICs - and of course we lose the idea of a form that is attractive to both investment and grants.

Finally, would a wider forum be useful to our discussion?  I could suggest it to Gines as a topic for a Guardian Online Q&A, and ourselves as panelists.

Hi all, very interesting discussion. The current situation where you can only draw dividends if you have put money in (regardless of potential 120 hour weeks in getting the CIC setup) must change. I think the best option is to get rid of the cap linked to sale price and increase the aggregate cap to 49% - still in keeping with the philosophy of social enterprises reinvesting majority of profits. I have wrote a blog post about this here.

Hi Richard

That would require a big change in the current balance of the legislation.  What will be the benefit? Many would see (and have already argued) that such a reduction of community benefit would dramatically weaken the social credibility CIC currently enjoys?

Most damning evidence against that argument is the BCC/Young report stating only £3.5 million went into risk investment across all social enterprise 2010/11. 60k+ reported social enterprises, many have the ability to offer 49%  and there doesnt look to be much of it? Funnily enough, half of that figure was  into a small group of CICs, which statistically is very interesting considering there are less than 3k CIC Share companies.

This conversation will really kick off once we know what's happening with the regulatory landscape, we've got the arguments into the right place at the right time and we should know by end of September.

Hi John, please can you link up the BCC/Young report?

For me even a single 35% dividend cap limits the amount of risk investment going into CIC and therefore social enterprise. As Dragon Den is famous for saying, 100% of nothing is nothing. Limiting the payout / upside to 35% of profit essentially means that there is a maximum equity payout of 35% and if a CIC seeks further equity investment the payout of existing investors / shareholders gets diluted. i.e. a CIC offers 40% equity in return for £100k but can only pay out YoY at 35% profit - this disconnect is unattractive. This situation is obviously made far worse with the double dividend cap based on paid up share price.

However for me the potential far bigger problem is the asset lock. I'm in the process creating an incubator / accelerator programme for social ventures in Norwich working with angel investors to provide the seed funding in return for equity. Do you know whether the asset lock also captures intellectual assets such as IP as well as brand equity or is it purely financial purchases? If it does then CIC ltd by shares will be viewed unfavourably in terms of exits by angel investors as their ability to make a return through a sale is significantly diminished.

I think Richard, in the latest post, has described something very important about the lack of exit route for investors. In my discussions with CICs this is a difficult area as any investor needs to understand the asset lock and that an investment into a CIC, even a share based one, is essentially a social investment, i.e. one for social return not financial.

This does, however, limit the attractiveness of CIC and hinders growth of the movement. There's probably a separate argument around CIC social entrepreneurs being able to gain some benefit (without breaching the community interest test) on selling their stake when they want to exit the business they've worked hard to create and grow.

John, has the regulator launched a formal consultation into this issue? I see you mentioned summer/September - is this when the formal consultation will open? Are discussions on this issue going on in other forums?

I also wanted to ask a question about your option one. Could you provide a simple worked out example? My understanding of what you are suggesting is that if I purchase say £10k of £1 shares then want to sell them say at £50k the cap should apply at the sale? What about year-on-year dividends? Without a stock market setting a price it woud be difficult to get a transparent value to apply the cap? Also how does the general asset lock apply to the sale of shares here? Again my understanding is that currently you cannot sell CIC shares for a profit, only at the par value. So an investor can only get their initial stake back? Actually, I need to read up on this, not sure even that's right?

I think there should be a cap on dividends but it should be simple and set at a level that can encourage capital into the sector. The current cap is far too strict. The community interest test and asset lock need to have primacy so unlimited dividends would defeat the point of being a CIC. Although I think it is too high, in theory, you could go up to a 49% cap and still argue that the majority of the profits were going towards the community interest.

For option 1 I have the same concern as Gareth - it would be meaningless if the price at which dividends are to be paid out is the last price someone paid as two people could trade between themselves to get the price up to whatever they want.

You can sell shares at any price someone is willing to pay but that price will be seriously diminished if the asset lock prevents brand equity from being sold.

Hi Gareth

Will answer more fully shortly,but just wanted to dispel the myth that you cant sell your shares for more than the initial paid up value. You can sell your shares for however much someone might pay for them, and it is OUTSIDE the asset lock.

Par value is only for buy back from the CIC itself.

BIS Legal official position:
 
 If a shareholder makes a profit selling the shares, the shareholder may keep this money subject to usual company law rules (e.g. unfair prejudice, etc.). The asset lock rules are not engaged since shares in the CIC cannot also be assets of the CIC, since a CIC cannot hold its own shares for its own account.

Hi Gareth

As discussed above the  technical 'exit strategy' for initial shareholder receiving reward is already in place, but I think you've hit the nail on the head when you describe an investment into a CIC as mainly a social one. We want to improve the chance and opportunity, but without moving the balance of community primacy, that is a pre-requisite in my thinking. Im open to challenge as always on this.

The Regulator will be keen to receive opinions and positions independently of our submission to her, and in that regard our position will be only one of a number she'll take into account. I think the better and deeper the discussion the better decision she'll make. Govt are the key hand in all this, but we know a wide range of stakeholders can and should have influence.

We're not going to push the review until we know what comes out of the Govt work previously discussed. We expect change, and that the conversation around this subject will become electric!

We'll have to wait to see what the landscape will be before figuring out where to pitch the tent so to speak, but a letter will be going out to all CICs when it does officially kick off. We keep kicking the date down the road but the current guesstimate is for early Oct.  The Regulator is and has been very flexible in this process, we'll have enough time to exhaust it dont worry! I honestly think it will be 2014 before we really get moving, whatever the case.

Richard, there are rules against the type of trading of shares that you mention, and if you look into the 'how to' of doing it, you really wouldnt want to bother doing it with CIC Shares! Actually would be easy to control that type of shenanigan with a CIC though, first transaction value of any tax year, per tax year. Sorted! 

To argue your point suggesting a share price might seriously diminish, not necessarily so. You could argue that controlled dividend distribution makes for a more sustainable business, thereby increasing the capital value of the share. CIC Shares will have a different set of values than a normal company share, that indeed is the desired reality!

I also think only considering existing markets of finance, (and indeed giving undue precedence to some of the smaller ones) is perhaps missing the biggest single opportunity there is out there at the moment for improving risk investment into Civil Society,  CIC Shares could offer the GB public a defined, prescribed opportunity to invest in 'moral capitalism'.

When I look at 49%, come to that even 35%, for me it would be like steering an ocean liner down a stream, maybe full of fish but a stream nonetheless.

I ask myself the question, is a group of investors who want 49% of profit and plan to exit my organisation in 3 years who I really want as a funding partner? I suggest no, that more practical target groups of investors would make for a better long term outcomes for CIC as a whole, such as the retail investor.

Have at look at the attached Kay review - particularly the section The sources of short-termism – the erosion of trust and the misalignment of incentives. 

Attachments:

Hi John, my point about raising the dividend threshold to 49% was more for the benefits of founders (to recoup their sweat equity in the most tax efficient way) than investors. Agree with your point on a controlled dividend distribution in terms of sustainability.

Also do you know whether CICs can only pay out dividends based on profits in the current financial year or can they roll over / aggregate years? i.e. if a CIC chose to only pay out 20% of a £100k profit in the previous year but only makes £50k profit in the current year are they stuck to only paying out a max £17.5k for £37.5k total over two years when could have paid out £52.5k if chose to max both years at 35%? If so then could argue that the restrictions could cause CICs to pay out more than would otherwise due to a fear of not being able to give a return in future years!

Richard, yep, understand that and agree it is relevant and does have consequences, but  isnt it really a secondary question in relation to the review?

Generally, the efficiency you seek to achieve is a benefit against income tax, as is for example, the scenario where a CIC Director invoices the CIC individually for services provided, as opposed to being a salaried employee of the CIC.  Some of the Tax practice in normal companies cannot be conducted within a CIC, but that doesnt mean a reasonable outcome cannot be achieved. 

The 120 hours worked a week you mention earlier for example...... is earned income, Directors can easily provide for this in a Directors loan agreement, market competitive hourly/daily rate is agreed at the outset. When the company starts making a profit the director can then re-coup the value of those earned income hours. That doesnt deal with reward for the profit from his/her work, but does provide for the executive value of delivering it.

Profit is then expressed in the rise of the Share value, ever thought what would happen if you paid yourself in Shares?

All the dividend info you need here:

Attachments:

John, No intention to make a challenge but you might like to read an alternative perspective on how a business which distribute no dividend can achieve a financial return.  The article erroneously claims that this is based on a CIC model.     

In the evolution of moral capitalism, our part in it, the reasoning against shareholder primacy is one of human rights, a fundamental predicate that people are not disposable in the name of economic progress.  it is a call for post growth economies which are sharing and people-centred.  

What I'm observing now are those whose ideologies helped create the financial crisis putting on the clothes of social innovation while still pursuing the production and profit maximisation approach.  To counter, I introduce them to what social purpose business can achieve in spite of those who stand in the way.  Imagine what could be achieved with solidarity and 'no more scraps'  

RSS

Groups

From Funding Central

Events

© 2019   Created by John Mulkerrin.   Powered by

Badges  |  Report an Issue  |  Terms of Service