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.
Update Nov 21st 2012
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:
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 https://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
On the whole we would go for option 3 however, we're not clear as to the meaning of the unintended consequense part of option 1:
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?
Why should it only apply to a new share?
Very difficult to administer. Will the CIC always know what the individual paid for the share? How could they trust the individual has told them the truth?
Isn't an Aggregate Cap of 20% a worse situation than we currently have? With both you can pay 20% in year 1 but in Year 2 the new model can pay nothing, whereas the current model can pay 15%?
Are CICs allowed to buy back their own shares?
Why haven't you mentioned restricting the dividends to a % of the profit made, why this link to what was invested? Limiting dividends payable to 20% of the current profit would mean more can be paid out when succesful but most of it stays in the CIC.
And Devil's Advocate time
Would a CIC really want an investor who was only in it for the returns?
Good point as Devil's Advocate.
What's happening here, in my view, is that a social approach to business is trying to contort itself to be acceptable to a culture of profit maximisation without regard for humanity.
So the 4th option might be no dividend distribution, but a social impact.
A little while ago, US based research indicated an estimated $120 billion in private bank accounts of those who'd indicated willingness to invest in social objectives. If there was a tax incentive to do this, as there is in some cases, it would something which would become doubly attractive.
As the example of the Merism pitch promoted by SEL indicates, venture capital is desperate to be seen to be social, while bending over backwards to deny the existing forms as too restrictive,
I'm not sure about 20% of gross, which for the business which isn't focussed on profit maximisation might in many cases exceed 100% of profit.
Hi Alastair, very glad to have your input and hope you are well.
No1 - All dividend payments have to have been approved by an ordinary or special resolution of the members, so from an internal perspective the reporting and approving of dividend payments is still the same, and the procedure/s for transferring the share is the same. Ive compared it to the complication of issuing new shares, id be keen to have your thoughts as to whether you think the liquidity improvement for 'sweat equity' entrepreneurs would make this worthwhile?
I doubt there would be much short term trading of CIC shares, but do take your point on potential administration issues, especially if (and lets hope so eh?) investment via CIC Shares takes off. It could be made simple by having it set at the first of the year for example, and the dividend is set for that year , tie it in with existing reporting? For me its a compromise solution, but would at least make the second hand value of the share the same as the first hand value, that just doesnt makes sense to me and is especially unfair on those starting with not much more than passion and purpose.
This one detail should be put right if we do nothing else.
Yes, in some ways it is but on balance it could make sense. Both 2 and 3 create a change in the basic situation, but 3 has had support from CICs, whereas 2 has only been supported by intermediaries and professionals. Either would sweep away a layer of regulation, and makes the message on CICs quite simple, x amount is maximum amount distributable. The uplift in simplification alone makes for a strong argument.
I doubt 35% could/would ever happen, it would reduce as to impotent the basic premise and there is too much going on for that to happen now.
A CIC can buy back its own shares, but only at PAR value. There are no restrictions on sale/transfer to third parties.
Changing the link to the performance as opposed to the purchase price? Yes please, as I said it is a 'very least you should do proposal', if we were to move to 20% of profit that would allow the entrepreneur to consider not having to sell them to achieve a sweat equity return. I could definitely endorse that as a final recommendation. This would be an outcome of No3
Devils Advocate time
Would a CIC really want an investor who was only in it for the returns?
Not really, but thats the basis of the existing system! Outside of grants and donations of course :-)
I hadn't really thought through 2 and 3 - these ar eboth good. And once you hit the aggregate limit, as you make more profit you can distribute more. I odn't think the exact % matters much, but the mechanism is far better than anything linked to share value.
Dividends can only be paid from post tax profits, just like any limited company. As CIC's are in essence SOCIAL limited companies (limited by shares or guarantee), I would suggest option 3 is easiest. After all, if a social investor wants a return on investment as an income play, then surely the easiest measure is dividends based on post tax profits. 20% of such profits may not be a great return on investment, but as an income play, 20% dividend policy represents perhaps to social investors, a reasonable income return. Any class of share can benefit from this, whenever the share capital sums are invested and shares issued.
I agree with Keith Bendell's comment on ease of administration. After all, Companies House has the accounts records on site and the CIC Regulator's office can monitor this at low cost.
Hope this helps.
Option 1 is really all about creating liquidity (without making any material changes to the main system, and something that should happen if nothing else does). Evidence is very difficult to gather, I would suggest we wont be able to get much evidence of early trading because there will not be any until Option 1 at the very least is implemented. The second hand share value is negatively affected by the dividend cap being set on the initial paid up value, we have a situation where a new share is intrinsically worth more than a second hand share.
I totally agree that equity could (and really should) be an engine for growth, but im not sure 35% will be tolerable to most. It would obviously make it easier, but perhaps too easy for the majority ?
Ive had strong comments coming in confirming this, many pointing out that the only companies that are paying 30% plus dividends are the Utulities, public opinion suggests this level of profit distribution isnt acceptable for normal companies, let alone CICs.
Sometimes the evidence is looking for what isnt there, good question to ask is where are the CIC PLCs? Not a single one in six years.
Would appreciate more on your opinion Gareth, i want to make sure that when the Regulator comes to reviewing the situation in the summer she has all the evidence/opinion available to help make a decision (which could be to leave things the way they are)
Even if we do get a change, it would then take approx two years to go through the system, I think it would be negligent of us all to not make this issue a priority discussion, especially as you rightly point out things have changed, we need to find potential new sources to fund activity as traditional routes to funding decrease.
Thanks for this. Hmmm - interesting point re: utilities type companies. If private companies aren't putting 30% of profit toward dividends I can see how this is an issue for CICs as we need to carve clear water. However, there is still the asset lock to prevent exit strategy/sale, etc. Also, by far the majority of the profit is retained for community interest.
I think my main point is that a single component to the cap would be much clearer. I accept that 35% could seem high. 20-25% could be a reasonable compromise. I'm still a bit puzzled by your option 1. Not sure this makes things any clearer. As a director of a CIC it would be much easier to say to potential investors - the aggregate dividends are limited to say 25% of profit, but you are investing for mainly a social return.
Hope this helps. Sara Burgess spoke at an event I was at on Friday - possibly some PLCs in the pipeline - which will be very interesting.
I think you should go for 35%. This can always be reduced by the individual CIC if they so wish, but we're talking about the entire sector here.
And you may well be correct that only the utilities are the ones paying such dividends out of publically listed companies, but there are many private companies which will pay dividends far in excess of 35% (as part of their tax and remuneration strategy).
Indeed we are Alastair! as well as the potential ramifications for levels of investment and liquidity these options do raise points of interest against some existing small company practices.
( I feel it pertinent to point out to any potential readers that this is discussion based on theory for development purposes only, and that no advice or formal opinion is being offered. If you really are practically taking these sort of considerations into account you should seek formal, professional advice)
Ive had numerous conversations around what I loosely coin 'The IR35 debate'. Wider tax strategy will no doubt impact on this but I would suggest it is inherently obvious that if it was set at Option 3 far more conversions would occur than with Option 2. This would in all likelihood increase the level of business skills within the community, and the collective size of the CIC community as a whole. Option 2 would still allow for tax and remuneration strategies to be implemented, just for the lesser figures. There is the argument that more real community growth is achieved by having a lower amount of numbers in Option2 directing a larger amount into Asset Locks (as it were), and that this tighter profit distribution level is an increase in CIC distinction which will itself be in the best interests of the medium term collective development of CICs.
Pros and Cons to be weighed up, these particular issues should be looked at in more detail as even doing nothing is a decision. Perhaps a sponsored research piece around these particular issues would hit the spot. Would you help me frame the context of a focussed piece of research? Ive managed to get some related small research projects funded and I think one of the big firms would help.
Im happy that these points are being discussed, at the very least we have a framework to ensure the level of debate is raised. Its one of those 'The quick way versus the (perhaps) slower but steadier way' discussions. I think we'd need a lot of powerful evidence to convince the Regulator to approve Option 3, it would probably need politicians to want that to happen and I would suggest that wont happen before the review next year.
Had an email from one CIC saying it would trigger a dot com style boom and bust cycle for social innovation, but he wont tell me whether he thinks this is a good or a bad thing!