When it comes to co-ops and community benefit societies, there has been a revival of interest in recent years in raising capital from shares.
It can be a great way to meet a society’s funding needs, increase member involvement, and build that strength to resist more difficult times. However, there are some key issues to be aware of in using share capital in registered societies:
- Generally shares in a Society are “withdrawable”, meaning that members get their money back by taking the money out of the Society, rather than selling their shares to somebody else as you might do with a company.
- This means that Society capital is variable, not fixed.
- Society shares do not form the basis for the distribution of surplus but instead interest payments are regarded as a cost of capital, where any interest rate is set in advance of when payment of interest is due. This is very different to surplus distribution permitted in a co-op, which is usually on the basis of trade with the society; a community benefit society is usually prohibited from giving out surplus at all.
- Society shares do not normally give the holder a share in the underlying value of the business. Anthony Collins Solicitors have argued elsewhere that this should be recognised through the introduction of a statutory “indivisible reserve”, which is owned by the society and cannot be distributed to members. Following the outcome of a member consultation in 2018, Co-operatives UK is actively lobbying for statutory common capital for co-operative societies, including options for non-distributable assets and an indivisible reserve, though their view is that the rationale and design of the latter probably needs more work before legislative change is pursued in earnest.
- Society shares remain at par value (the value of the shares does not increase with the value of the society), although if the value of the society decreases, then the value of the shares can be “written down”, i.e. reduced in line with the overall reduction in value of the society.
- Generally, society shares do not carry votes in proportion to the number of shares held because a registered society is democratically controlled – one member, one vote.
- Societies will usually have in their rules the right to suspend withdrawal of share capital (to avoid any “run” on the society’s funds, or to assist the society in having a stable capital base in the early years). In terms of reputational risk, societies should use this right sparingly, but the right is very important, as it allows withdrawable share capital to be classed as equity rather than debt.
- In structuring share capital, a number of societies have separated out “membership” shares – a share with a nominal value of £1 which all members have to hold – and then “investment” or “funding” shares, which can be held in addition to the membership share (but don’t have to be). The distinction needs to be clear in the rules of the society, and also needs be clear in relation to any decision to suspend the right to repayment of shares.
- It is important in drafting rules for a society to think about the long term. You may not want to raise money through shares in the short term, but you might in the future; you should consider putting the right rules in place now. You might start with nominal “membership” shares, then move to inviting capital through “funding” shares now. There are lots of variations available and it is important to ensure that your rules are fit for purpose.
None of these issues mean that a society should not use withdrawable share capital to raise funds, but they are all things to be aware of. In particular you should make sure that anyone thinking about putting money into your society understands the differences.
There are lots of resources available if you are thinking of raising funds this way. In 2017, Co-operatives UK worked with Anthony Collins Solicitors on the “members’ money” project, which promoted the use of withdrawable share capital in large co-ops. You can find a wealth of material on the topic on the Co-operatives UK website.
Co-operatives UK’s Community Shares Unit has developed a range of tools and resources for co-operatives and community benefit societies looking to raise funds for their projects which can be found on the Community Shares website.
A further advantage of using a co-op or CBS to raise funds in this way is the exemptions that apply to societies from some of the regulations that normally apply to arranging investments. Generally, this enables organisations to garner financial investment from their supporters as an alternative (or to support) traditional borrowing. Nonetheless, you should make sure that you understand the legal position before you approach people, and get all your documents checked out by someone with the right skills.
To help, the Community Shares Unit has developed the Community Shares Standard mark which provides a quality mark that helps societies demonstrate to potential investors that their share offer has met national standards of good practice. Find out more about the Community Shares Standard Mark.
If you do it right, raising funds through shares can be a real springboard to growth. You just need to make sure you get it right!
We have worked with our lawyers Anthony Collins Solicitors to produce this blog to keep our members up to date with the latest legal developments to affect co-operatives.
If you have any questions or need support, please contact the Co-operatives UK Advice Team.
Pictured: Friends of Stretford Public Hall