CIC Association

Serving Community Enterprise

Have your say - The Regulator's technical panel meeting Friday 25th March 2011

Hi Everyone

I'll be attending The Regulators technical panel on the 25th March, please add any comments on the agenda below or email me direct at john@cicassociation.org.uk

 

We will be asking the Regulator to consider allowing the dividend cap to be set against the transaction price of the CIC share if it gets sold to a second party.

 

Thanks

 

Agenda

 

1.Review changes to the dividend cap and performance related interest cap

 

2.Information capture/outcomes and impact/reporting

 

3.Are we getting the CIC message across?

 

4.Public Service Delivery

 

5.Do other government departments understand what a CIC Social Enterprise is?

 

6.Do you consider that one of the barriers we are coming across that is stopping people set up as CIC is the ability for the CIC structure to recognise 'sweat equity'?

 

 

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Comment by Jeff Mowatt on March 21, 2011 at 18:59

Amazingly what I was saying just a few days ago about community re-investment has re-appeared described as 'revolving funds'

http://www.forumforthefuture.org/blog/funding-revolution

Comment by Jeff Mowatt on March 19, 2011 at 9:08

On the subject of sweat equity, Chris Cook offers some interesting ideas on the concept of a Community Land Partnership based on the LLP structure.  In this the occupier and perhaps other partners may be rewarded in nths of productive output for their sweat equity. It could reasonably be applied to scenarios other than housing.  

What Chris has written more recently on the role of knowledge as one of the three factors of production may be even more interesting    

The CIC appears to be the first formal interpretation of a business serving a social purpose but it also seems to have been conceived behind closed doors with little thought given to how it would co-exist in the free market as part of the supply chain.  Other areas which might be improved on are the social ,environmental and ethical principles which could go a lot further than simply protecting assets for community aims.


Comment by Jeff Mowatt on March 19, 2011 at 8:45

John/Geof,

One of the ways our approach differs from the CIC is to propose in our founding paper,  the creation of an irrevocable trust to seed creation of like business, i.e.

"If a corporation wants to donate to its local community, it can do so, be it one percent, five percent, fifty or even seventy percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object.  But, if an a priori arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no objection can emerge. Indeed, the corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of corporate employees and community leaders."

It was this community investment approach that was used informally to leverage investment for microfinance in Russia for example:

In the business plan we developed in 2004, the trust fund community investment approach was represented by local CDFIs which would have had the benefit of tax relief on investment.  This plan set out a franchise model with a projected annual yield of £100 for investment in social enterprise.

Why this raised no interest at the time has frequently puzzled me.  Wasn't anyone else thinking about capitalising the social enterprise sector? It seems to have taken a credit crisis to hastily conceive a BIg Society Bank.

Yesterday, it became clearer from reading a blog from the Charity bank which said something about challenging the supremacy of the  limited liability approach to capitalism.  That was the starting point 15 years ago.  Likewise on the US side, they're only just beginning to think about how to apply social investment to replace philanthropy.            

Comment by Geof Cox on March 18, 2011 at 18:21

John - the sweat equity issue is a crucial one for Social Firms, which as you know work with some of the most disadvantaged and financially excluded people in the country.

 

I raised this issue on behalf of Social Firms UK in the last CIC consultation.

 

One solution I suggested would be to allow the specification in the Articles of an HMRC approved employee share trust (or a specifically defined all-emplyee benefit trust) as an asset locked body to which uncapped dividends could be paid.

 

This would enable such a trust to purchase new shares in a Social Firm CIC on behalf of employees, and if indeed significant profits are made and therefore significant share values develop, to act as an internal market, purchasing shares when older staff leave and realising the real value of their 'sweat equity' – tax free if they have worked for the Social Firm fo 5 years or more.

 

If this were possible, it would be an easy matter to develop a model Social Firm Share CIC+ Employee Trust model that would cost no more than a normal CIC design and registration – and the costs of administering the trust would be tax-deductable.

 

While such a model might be a bit less attractive to some grant funders, the Guarantee CIC could be used if necessary in those cases. In fact, I believe this would be a small problem, because most likely funders see developing financial inclusion as indeed a key strength of Social Firms.

 

It might also be objected that non-disabled/disadvantaged CIC employees might benefit from such a provision. Indeed they might – but is this really a problem as long as the trust is indeed an ALL employee share scheme, not just an executive tax avoidance mechanism.

 

There is also an interesting governance advantage here: the CIC board would have their clear responsibility, regulated by the community interest test/reports, to act in the community interest, while the trustees as probably a major shareholder would have a clear responsibility to safeguard the interests of the staff.

 

Note also that Liberation Foods have an interesting financing model - instead of raising grants directly for the CIC start-up they encouraged international aid charities to grant-fund share investment in the CIC for the producer co-ops of small farmers in developing countries - thus not only capitalising a normal fair-trade model but beginning to address the supply-chain ownership issue that is really behind unfair international trade.  Are there grant-giving disability charities out there that instead of grant-funding Social Firm start-up directly would see the long-term sense of grant aiding an employee benefit trust - helping disabled people ultimately gain a financial stake in their own CIC?

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