I am thinking of setting up a CIC, as I believe it would best suit my plans, but before I do so, I would like to enquire on a certain topic I am concerned about.
I am already in talks with an investor who is interested in my idea, however they are not very pleased with return on investment. As far as I understand, their issue is maximum dividend per share which can never exceed 20% of paid up value per annum, basically irrespective of profit. For instance - the investor will own 10,000 paid up shares worth £100,000, i.e. £10 per share. The maximum dividend per share will be £2 per annum. Whether the company makes £100k profit, £1M or £10M, only £20,000 can be returned to the investor per annum, which means it will take at least 5 years to break even.
Is this thought correct? Is there any chance to make the investment more attractive for investors and increase the total dividend above 20% of paid up capital? Or any other recommendation?
I will appreciate any help on this matter.
Thank you very much.
Yes, thats correct, but you also have to factor in the maximum aggregate cap, which is 35% of profit. Ie making 100k profit, would allow a maximum of 35k to be distributed, if you made 50k profit the maximum would be 17.5k which would fall below the individual share cap in the example you give (20k).
EIS and CITR are two tax reliefs that can be available, click thru here for links to HMRC guidance notes http://cicassoc.ning.com/forum/categories/useful-links/listForCategory
There is an ongoing discussion about CIC shares, ensuring we balance the primacy of community interest with the ability to attract investment is an evolving story. CIC Shares group has a lot of good discussion http://cicassoc.ning.com/group/cicshareissues , the Regulator is conducting a full review next year and is always happy to receive an opinion directly.
(I believe) There is plenty to do to get CIC shares exactly where we want them, liquidity is as big or bigger an issue than the current caps, but evidence of successful equity investment into CICs are starting to emerge so at least we know its not impossible. We dont know the full story on what is happening out there, again part of the reason we got the Association going to trap and share good examples of success.
Off the top of my head there have been 3 CICs recently who have secured over £700k,including the first (again I believe as we dont fully know) preference share investment into a CIC.
Also potential to structure something as a loan which your investor may prefer, what are their expectations?
Last Saturday, I met a new healthcare CIC, Gloucestershire Care Services. I was with a group including Unison protesting about privatisation of the NHS, which later went in to talk to them.
They've set up a CIC based on a share model and when I suggested to them that this would allow up to 35% of profit to be returned to shareholders, they didn't agree.
Why they should chose a share based model wasn't clear. To me, in spite of being a CIC, there's the underlying structure of a company limited by shares which on aquisition of more than 50% of shares could be influenced by a controlling interest which might decide not to be a CIC any more.
The CIC will have a ready made market with a turnover of £100 million, I'm told.
I don't think you can cease to be a CIC Jeff. http://www.bis.gov.uk/cicregulator/guidance/chapter-10
You can only sell everything at market value, or transfer to another asset-locked body.
If the cap is an issue consider either setting up a new company which is not legally a CIC but which has all of their restrictions in the Mem&Arts (with the obvious exception of the Dividend cap).
Or, consider a hybrid - you own a CIC which owns X% of a subsidiary company, the other Y% of the subsidiary owned by your investor. This subsidiary would not be a CIC and not subject to the limits. The CIC itself is probably still subject to the general "everything I do must be at Market Value" restrictions but I would then simply argue that the market (the investor) had shown what it was prepared to accept and so no dividend cap was the market value position.
There maybe other restrictions on this approach however, not the least of which being that you won't have a trading CIC but a CIC owning a trading company.
Unless you got into complicated sub-contracting where the CIC wins the contract and subcontracts delivery of the service to its subsidiary. You'd need a lawyer who knew what they were doing to set this up.