A question regarding setting up a CIC before you have a CIC registered

[David Alexander]

In short I am involved in buying a village shop as a community, we are going to create a community interest company to do this but there are some challenges about how we operate ahead of the formation of CIC, these are as follows

1. We do not want to set up company until we are sure we will buy the shop so as to avoid asset lock of communities members cash so the solicitor is going to hold the funds. The other reason to avoid forming the CIC until we are certain it will happen is simply that as individuals working together we can do all of this without the need for compliance to FSA regulations the minute we form a company to raise money we are governed by FSA and people either need to certify themselves as sophisticated investors, the trouble is some of our people investing are not
2. Our lawyers have come a cropper with the money laundering regs as they are required to vet their clients, if we do not have a legal vehicle to vet then everyone contributing funds into the client holding account for funds needs to be individually vetted which is not practical given the 50 plus community members involved
3. I as a lead person coordinating this do not want to end up being liable for costs or falling foul of any regulations for showing some community spirit and running the campaign.

I need a simple solution to managing the intervening period before CIC and desire to do it today that will make the lawyers happy and meet legal requirements of money laundering regs. I am not prepared to take money off people personally, the other option proposed is form a company / association / charity temporarily to hold the receive the funds legally as a transition vehicle

Anyone got any thoughts please

[Alastair Irvine]

David,

There is no need to form a CIC right from the off. Simply incorporate a ‘normal’ company with bog-standard Mem&Arts, with no asset lock or anything remotely ‘social’ in them. This would be very easy if it is intended to be Limited by shares, I’m sure a similar thing could be achieved with one Ltd by Guarantee [I’m not sure if there is a statutory minimum number of members a Ltd by Guarantee has to have, but it sounds like you could find enough people to get to this stage). The cash investment at this stage need only be £1 each, although you could request loans from the other member’s as a sign of intention, and remember there’s no asset lock in place yet.

The solicitors can then easily money launder the handful of people currently owning the new dormant company.

The solicitors can then advise you/the company on creating legal agreements which simultaneously (and each is subject to all of the other agreements being entered into on the same day)
a) Accept investment from the other members of the community (or even convert loans they already gave into equity)
b) Purchase / lease the shop
c) Change the Mem & Arts to add in the asset locks (this requires a special resolution so the solicitors will have to advise on the timetable involved of giving notice etc)

Now at this stage, technically, you’re not a CIC (as that is dependent on Regulator approval) but everyone involved has the protection that the Mem&Arts have been legally changed. To change this back (remove the asset lock) would require a special resolution and 75% of shareholders approval, which if someone was trying to rip them off they probably wouldn’t agree to. The company can then fill in the form and request regulator approval.
[BTW I set up my CIC this way – with an online incorporation service and I changed the Mem & Arts myself later.]

You should also closely check the FSA requirements on sophisticated investors. My understanding is that these regulations only apply to companies publically advertising for investors, they do not apply to you talking to your friend about her possible investment in your new company (if you were starting a new business with a mate you wouldn’t even consider the FSA regs on incorporating the company, you’d both just do it). If your project does involve advertising for investment, you should take advice on exactly what you might advertise for instead. There’s a big difference between advertising “shares for sale in a new company” and advertising “a meeting to discuss the future of the local shop”.

As for liability for legal costs – this can be gotten round by the company being the client of the solicitors, and interested parties loaning money to the company to at least cover these initial fees. You should probably consider having a contract of employment between you and the new company, so as to protect yourself in case everything does fall over.

I have to caveat all of the above with “I am not a solicitor, you need to speak to someone who is.” ;-)

[David Alexander]

Thanks Adrian, yes we have connected with these groups, excellent information unfortunately the issues raised do not seem to be addressed by their guidance,

[Adrian Ashton]

hi David,

well, you could do a lot worse than contact both the Plunkett Foundation and Co-operaties UK: both have lots of experince and guidance freely available on supporting communities to take on local services and shops.

In fact, both have been involved in national programmes that have created some really useful toolkits and step by step guides for the process too...

http://www.plunkett.co.uk/
http://www.co-operativesuk.coop