1.2 Share offers and regulation

Probably the most significant difference between a society and a company is how they are regulated when making public share offers. This matter is covered in far greater detail in Section 7 of this Handbook.

Section 755 of the Companies Act 2006 prohibits private companies from making a public offer of securities, including share capital. A private company must convert to a public limited company before making a public offer, and to do this it must have a minimum of £50,000 in paid-up share capital and meet far more stringent auditing and public reporting standards. In addition to this, the Financial Conduct Authority (FCA) has regulatory powers created through the Financial Services and Markets Act 2000 and expressed in the Financial Promotions Order 2005 that require all financial promotions to be overseen by an FCA authorised person unless the promotion is exempt from these provisions. The same Act also requires organisations promoting the sale of transferable securities to publish a prospectus and comply with the Prospectus Directive, issued by the European Union.

A society issuing withdrawable, non-transferable shares is outside the scope of the Prospectus Directive and the related aspects of the Financial Services and Markets Act 2000. This type of share capital, referred to here as community shares, is either exempt from, or outside the scope of this statutory regulation.

This freedom from statutory regulation means that societies can make public offers without recourse to an FCA approved adviser, or the considerable expense of statutory compliance. But it also means that the public have no statutory rights of redress through the Financial Ombudsman Service or the Financial Services Compensation Scheme to settle disputes between a society and the investor or to recover investment should the society fail.

Co-operatives and community benefit societies have a duty to take all reasonable steps to protect the public when making a share offer, not to mislead the public, or fail to disclose information that may help the public to decide whether they should invest in the society. The reputation and credibility of community shares depends on upon the quality of all community share offers, and the subsequent actions of societies in delivering what they said to the public in their share offer documents.