2.2.2 Transferable shares

Transferable shares are shares that can be traded between buyers and sellers at a mutually agreed price. Any type of society is free to issue transferable shares, as long as provision has been made for this in its rules. Transferable shares cannot be withdrawn from a society, unless the rules state otherwise.  As such, transferable share capital is part of the permanent capital of the society, freeing it from any responsibility to make provision for liquidity. Instead, it is the responsibility of the shareholder to find a buyer if they want to realise the value of their shares. Since 2012 there has been no upper limit on the amount of transferable share capital an individual can hold in a society.

The FCA’s registration guidance requires any society that intends to issue transferable shares to have rules that provide for this type of share capital, including its form of transfer, the registration of such shares, and the requirement that the board must give its consent to any proposed transfer of share capital. The FCA also says that it considers any market arrangement that allowed transferable shareholders to make capital gains would normally be inconsistent with registration.

The main problem with transferable shares is the lack of any secondary market or social motive for buying such shares after they have been issued by a society. Buying shares when they are first issued, in a society that needs the capital to get started, provides the investor with a clear social motive. But buying those same shares from an existing shareholder only helps that shareholder get their money back; it does nothing for the society; there is no social motive. Of course, it might be possible for a society to create a financial motive by offering high interest rates on transferable shares, but this might be contrary to the purpose of the society, which is primarily social not financial.

Another problem with transferable shares is that they are not exempt from financial promotions regulations if issued by a co-operative society, which means that this type of society must have their communications vetted by an FCA authorised adviser if they do decide to issue transferable shares. It may also need to comply with the prospectus regulations if the amount of share capital on offer is above the minimum level. The only exception to this is a community benefit society, which is exempt from the prospectus regulations when issuing transferable share capital as long as the money raised is used for its business purposes. However, a community benefit society offering transferable share capital may be making a direct offer financial promotion, which is subject to Financial Promotion Order 2005 and the FCA’s Conduct of Business Sourcebook rules 4.7. Such a society must have its communications supervised by an FCA authorised person (see Section 7.3.3). For these reasons, transferable share capital is outside the remit of the Community Shares Unit.

It is theoretically possible to issue shares that are transferable and withdrawable, but it is assumed that such capital would be subject to the £100,000 individual shareholding limit, and at the same time would not be exempt from financial promotions regulations. That is why this type of share capital is also outside of the remit of the Community Shares Unit.