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The Community Shares Handbook
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4.4 Time-bound offers

Purpose

Time-bound offers are offers that seek to raise a target amount of capital for a specific investment-ready project within a specified timescale. If the offer fails to achieve its minimum targets, or any of its contingencies, then the money is returned to investors and the investment project does not proceed. Time-bound offers are open to anyone who qualifies for membership, and because these documents promote an investment opportunity to the general public, it is crucial that they meet high standards of probity. Section 5 of the Handbook provides guidance on how offers should be promoted.

The commitment to refund applicants if the offer fails to meet its minimum targets means that measures should be taken to protect the monies received from applicants until the offer has been successful. There are several ways this can be achieved, for instance through the use of escrow or suspense accounts held by trusted third parties, or by payment procedures that are held in suspense until the closing date of the offer. At the very least, a society should hold applicants’ funds in a separate account established for this purpose.

Because a time-bound offer is connected to a specific investment proposition, it is normal to suspend the withdrawability of share capital until the investment has been made and the society is trading profitably. Typically, this period of suspension may last up to three years.

Time-bound offers are most effective when the purpose of the investment is clear. The community purpose of the investment should be attractive to potential investors, enabling them to engage with this purpose through the simple act of investment. Potential investors will have three immediate concerns: Are they at risk of losing some or all of the money they invest? What are the community benefits of the investment project?  How can they exit from their investment?

If the society is intending to raise some of the capital it requires from institutional investors, it needs to explain how this institutional funding will affect the interests of community shareholders. Section 1.5 of the Handbook examines institutional investment in more detail, and provides guidance on how it should relate to community shares.

Investors will also want to know how the money raised will be used. Will be it be spent on tangible assets that could be sold if the society underperforms and gets into financial difficulties? Or will it be used to provide working capital, covering initial losses, with the inherent danger that continued losses will erode the capital of the society?

There will also be longer-term concerns about the financial returns on the investment. However strong the social motivation may be, financial incentives will always assist the overall motivation to invest. But any offer of financial returns has to be plausible, and supported by evidence presented in the business plan.  

Business plans

All time-bound offer documents should be supported by a business plan that makes the case for the investment project. The business plan should normally be freely available to the public via a website and contain sufficient information and evidence for an independent professional assessment of the business case for investing in the society. Business plans should address some or all of the following matters, in proportion to the scale of the investment project:

  • Purpose and objectives: the purpose and objectives of the society; summary of its origins, history and track record to date
  • The investment project: capital required and how this capital will be used; valuations, assessments, terms and conditions affecting any major assets to be acquired; planned sources and costs of capital
  • Proposed trading activities: description of trading activities; manager competencies; staffing plans; market analysis and marketing plans; member engagement in trading activities
  • Financial forecasts: cashflow forecasts; projected balance sheets and profit and loss accounts covering at least the first three years of the investment project
  • Funding mix: sources of capital available to the society, including community shares and institutional investment in the form of grants, debt and equity. How the funding mix relates to the fundraising targets and contingencies for the share offer
  • Share offer: fundraising targets, timetable, contingencies, terms and conditions, and share liquidity provisions; tax relief (if relevant)
  • Risk analysis: identification of the key risks facing the investment project, and plans for mitigating these risks
  • Governance: access to the rules of the society; explanatory notes for these rules;  details of the management committee composition and competencies
  • Community engagement: profile of the community targeted by the offer document; community engagement activities to date; evidence of community support; plans for promoting the offer.

The public availability of a supporting business plan means that the time-bound offer document can concentrate on communicating with unsophisticated investors, who can, if they choose, seek independent financial advice.

Share capital liquidity

Societies should have a long term plan for providing share capital liquidity, and honouring the terms of withdrawable share capital set out in their rules. Section 2.3 describes five main methods for providing liquidity:

  • Raising new share capital through an open offer
  • Reinvestment of share interest (and dividends) by existing members
  • Redemption of shares from reserves
  • Reduction in capital requirements
  • Replacement with loan capital.

The business plan should make it clear which of these methods will be used by the society. Some societies have reducing capital requirements, and plan to cease trading when the fixed assets of the society come to the end of their working life; if this is the case then it should be clearly stated in the offer document.

Capital requirements and fundraising targets

The total amount of capital required from all sources should be clearly stated in the offer document along with an explanation of how this capital will be used, specifying how much will be spent on fixed assets and how much will be used as working capital.

The offer document should explain how the total capital required by the investment project will be raised, distinguishing between difference sources and types of capital. Details should be provided of any proposed institutional investment, be it in the form of grants, equity, loans or other forms of debt that the society has already secured or negotiated, focusing on any terms that may have a material effect on community shareholders.

The total share capital required should be expressed as three fundraising targets:

  • the minimum amount of share capital to be raised, below which the offer will be deemed to have failed, and the investment project will not proceed;
  • the optimum amount of share capital sought, which will normally be the total amount of capital required by the society for it to proceed with the investment project in full;
  • the maximum amount of share capital to be accepted, above which some applications will be refused or scaled back, following the terms set out in the offer document.

The offer document should state how any funding gap between the minimum amount and the optimum amount will be filled. For instance, the gap might be filled by scaling back the investment project, or by drawing on institutional investment, normally in the form of debt, or possibly shares. The cost of these other sources of capital should be clearly stated, together with an explanation of how this will affect shareholders. If the society has entered into an agreement with an institutional investor, which will subordinate the share capital of members, this should be fully explained in the offer document.   

If the minimum amount is not raised within the time period of the offer, including any extensions, the offer will be deemed to have failed, and applicants who have transferred funds should be refunded. The offer document should state the terms of the refund, detailing any administrative charge that may be made.

In certain circumstances the minimum fundraising target can be zero. This is restricted to societies that are already trading and have investment plans that can accommodate very little capital being raised. Such circumstances may exist where the capital being raised is to replace debt finance, and there is an agreement in place to allow the society to repay a flexible amount of this debt. Alternatively, the society may have decided to use share capital to increase its working capital, and is in a position to adjust its trading activities to suit the amount raised, however small. 

In most cases the optimum amount and the maximum amount will be the same. However, a society may include contingencies in its business plan explaining how additional capital in excess of the optimum amount will be used. Such contingencies may include provisions to replace debt with equity, to bring forward future investment projects, or to improve provisions for capital liquidity. The CSU guidance is that the maximum target should not normally be more than 25% above than the optimum target, otherwise it undermines the credibility of the business plan and the optimum target.

The offer document should explain what will happen if applications exceed the maximum fundraising target. There are several different ways of addressing this matter:

  • Share capital can be allocated on a first-come-first-served basis, and the offer closed when the maximum amount has been raised.
  • The offer remains open until the closing date and applications can then be accepted or rejected on the basis of geographic proximity to the society.
  • The offer remains open until the closing date and then the amount of share capital allocated to individual applicants can be capped or reduced.

Given the uncertainties of any administrative process, it is normal to ignore small differences in the actual amount raised, compared with the minimum and maximum targets. In this context, contingencies should only be invoked if the actual amount raised varies by 1% or more from the target. 

The offer period and timetable

All time-bound offers should have an opening date, when the offer is launched, and a closing date after which no further investments can be accepted. There are a number of factors to consider when determining the timing of an offer period.

Primary consideration should be given to the requirements of the investment project itself. When will the capital be used for the stated purpose? How certain is it that the investment project will be able to proceed according to plan? If the society is planning to purchase an existing business, property or asset, there may be external deadlines to be met. Alternatively, the society may be planning a development that requires permissions, approvals or contractual agreements, and it cannot proceed until these are in place. The offer document should include details of the investment project timetable, highlighting any uncertainties that may affect it. If the investment project is unlikely to proceed within twelve months of the share offer being completed, then members should be given the option of withdrawing some or all of their capital.    

The timing and length of the offer period should also take into account the impact on potential investors. The length of the offer period has to be sufficiently long for the publicity and marketing campaign to be successful, but not so long that early applicants have their money held in suspense for extended periods. Offer periods vary in length from six weeks to six months, with a norm of three months. People often wait until near the end of the offer period before investing, partly to ensure that their money is not held in suspense for too long, and partly to see how successful the offer is before committing their money. So there is a danger with long offer periods that potential investors do not respond to the initial publicity, delay their decision to invest, and then forget to make a decision before the deadline.

It is important to get the timing right by, for example, avoiding major holiday periods, when people may not be thinking about investment, or may have other calls on their money. During the months preceding and following the HMRC financial year-end in April, many people make decisions about the most tax-efficient use of their savings and investments. 

Offer periods can be preceded by promotions, including invitations to register an interest in the offer, make a non-binding investment pledge, or even to pay a deposit towards the investment. Any deposits should be held in an escrow account and be fully-refundable on demand during the offer period.

Most time-bound offers experience a surge of investment at the beginning of the offer period, followed by a lull, and then a final surge in the last few weeks or days of the offer. At the end of the offer period the society should stop actively promoting the offer, although it can continue to accept late applications if the stated maximum amount has not been exceeded. Active promotion would include making the offer document and application form available to enquirers, or continuing to allow online applications.

An extension to the closing date can only be made if the terms of this contingency are outlined in the offer document. Alternatively, an extension can be made if the society contacts all applicants informing them of the extension, and allowing them the option of withdrawing their application.

Offer periods, including extensions, should not exceed twelve months.

Minimum and maximum shareholdings

Currently, the maximum amount an individual can invest in the withdrawable share capital of a society is £100,000. A society is free to determine its own maximum amount below this legal limit, as long as this is stated in the offer document, and is consistent with its rules. A society that is seeking to raise less than £1 million should consider restricting the maximum individual investment to 10% of its total capital requirements. This will reduce the risk of the society being dependent on larger investors, which in turn could create liquidity problems if a larger investor wants to withdraw share capital (see Section 3.1.7). Exceptions can be made for institutional investors, as long as safeguards are in place to protect the interests of other members. This is addressed in greater detail in Section 1.6. 

Caution should be exercised if there is a large spread between the minimum and maximum individual shareholdings, to ensure that an applicant does not inadvertently end up with 30% or more of the total share capital. This could result in the applicant becoming a “connected person” and ineligible for tax relief (see Section 8.4). The same problem could arise if there is a large spread between the minimum and maximum fundraising targets (see Section 4.54). The problem can be avoided by ensuring that the maximum permitted individual shareholding is less than 30% of the minimum fundraising target.

It is up to the society to determine what the minimum investment should be. The minimum investment required by time-bound offers in recent years has ranged from £50 to £1,000. A low minimum investment makes investment more affordable to people on low incomes, and will encourage more people to invest because the stakes are lower. This will also increase the level of community engagement, by increasing the proportion of the target community that can afford to invest.  Alternatively, setting a high minimum investment threshold may result in more capital being invested by fewer people, thus reducing the administrative cost of servicing the membership.

Higher minimum investment thresholds can be made more affordable by offering people the opportunity to invest by instalments. Investment by instalments could be incentivised by financial intermediaries offering bridging loans to allow the investment activity to proceed as soon as sufficient investors are identified.

Contents

Offer documents are aimed at unsophisticated investors so they should be written in an accessible and engaging style. It is important to get the balance right between writing a marketing document that clearly communicates the investment proposition, and a non-technical document which nevertheless provides accurate financial and legal information.

The length of a time-bound offer document should reflect the size of the offer. Small offers, of less than £100,000, may typically be shorter than 2,000 words, whereas medium-sized offers of between £100,000 and £500,000 may warrant a document of up to 4,000 words. Offers seeking to raise larger amounts should be commensurate in length, but not so long as to deter applicants from reading them. The use of small print, technical language, unnecessary details, or other devices that discourage applicants from fully reading the document, should be avoided.

There are nine main elements to all time-bound offer documents:

The purpose of the investment:  This describes the purpose of the enterprise and how it will benefit members and/or the broader community. It should explain how such benefits will be delivered, distinguishing between internal and external delivery mechanisms (see Section 6.1).   

Business plan: The document should provide a summary of the projected income, expenditure and profitability of the society for at least three years after investment. A copy of the full business plan with evidence supporting these projections should normally be available to all applicants.

Capital requirements: The total capital required for the investment project should be clearly stated, along with a statement of how this capital will be used, distinguishing between expenditure on fixed assets and working capital.  

Fundraising targets:  The total amount of capital required should be stated, along with the minimum amount, target amount and maximum amount of share capital sought. If the targets include capital from other sources, these should be stated, along with details of the cost of this capital. Details should also be given of what will happen if the offer is under- or over-subscribed. Any administrative charges for investments and/or refunds should also be clearly stated.

The offer period: The opening and close dates of the offer should be stated, along with any contingency arrangements for extensions to the offer period. The timetable for implementing the investment project should also be outlined, together with an estimate of when the society will start trading.

Minimum and maximum investments: The minimum and maximum amount that can be invested by an individual applicant should be stated, along with any provisions for buying shares in instalments.

Financial returns: There should be a statement of the society’s policies regarding interest on share capital, dividends on transactions (if relevant), together with any forecasts for future interest and dividend rates, if relevant.

Tax relief: If the society has obtained advance assurance from HMRC that the offer is eligible for tax relief through the Enterprise Investment Scheme, Seed Enterprise Investment Scheme or Social Investment Tax Relief this should be mentioned. If advance assurance has been applied for, but not obtained prior to the launch of the offer, any reference to tax relief should be qualified, noting that the society may not be eligible. Applicants should also be advised to check their own eligibility for tax relief, as individual circumstances can and do vary. Sections 8.4 to 8.6 provide more information about these tax relief schemes.

Track record: The offer document should summarise the track record of the society, its management committee and senior managers (if any). It should also identify any personal interests the directors may have in the offer, and explain what actions have been taken to address potential conflicts of interest. If the offer is made by an established society, it should include a summary of the previous three years of trading and its current financial position, along with access to its full annual reports for the same years, including any social performance data (see Section 4.5.9). 

Basic information: This should include any information listed in Section 4.2 which has not been provided elsewhere in the document, and may include statements on, or access to documents covering:

  • Capital-at-risk warning
  • Type of share capital being offered
  • Democratic rights of members
  • Eligibility for membership
  • Governing document
  • Money laundering
  • Conflicts of interest.

Re-opening time-bound offers

A society can re-open a time-bound offer, with a new timetable, if the original offer succeeded in raising at least its stated minimum amount, and if the additional capital to be raised will not result in the total share capital exceeding the stated maximum amount. A society may re-open an offer in order to replace debt capital with share capital, or to launch a new phase of development highlighted in the supporting business plan. In such circumstances the same offer document and business plan can be reused, with revisions to the fundraising targets and timetable.

Offers made by existing societies

When an existing society seeks to raise additional share capital through a time-bound offer, it should first seek the approval of its existing member-shareholders, especially if the offer will be made to non-members and/or the amount to be raised will mean that the total share capital will exceed the maximum amount targeted by any previous time-bound offer (see Section 4.5.3). 

In addition to a business plan, an existing society should ensure that its annual accounts and reports for the previous three years or more are available to the public. Where a society is raising share capital that will be invested in a wholly owned trading subsidiary, the society should publish group or consolidated accounts, showing how capital flows between the different entities. The offer document should contain a link to a summary of the society’s financial performance, the financial returns on share capital, and its history of share capital liquidity. The Community Shares Unit has designed a finance summary template that societies can use to communicate this information, as part of the Community Shares Standard Mark.

There are several other matters that all existing societies making a time-bound offer need to address. If the society has previously made a time-bound offer, sufficient time should have elapsed for that investment to have become operational and the trading performance known, before the new offer is made. Under normal circumstances at least one year should elapse between offers. If a new offer is being made to raise additional capital for the same investment project as the previous offer then the reasons for this must be given. This includes reasons such as cost overruns, delays or unforeseen expenses. The offer document should explain how the additional capital will affect the financial prospects of existing members and investors.  

If the proposed terms and conditions of the new offer are different from those that apply to existing members, then either a new class of membership needs to be created if the differences are permanent, or administrative arrangements need to be put in place to manage any temporary differences.  Temporary differences may include the suspension of share withdrawal rights and/or the receipt of interest on share capital.

A time-bound offer should not be made by an insolvent society, unless the stated purpose of the offer is to address this insolvency, and the risks associated with the offer are made very clear. In such circumstances a society should seek to raise additional share capital from existing members before inviting applications from new members. 

During the offer period measures should be taken to protect the funds of applicants from the current liabilities of the society. This can usually be done by holding the applicants’ funds in a third-party escrow account until the offer closes and the fundraising targets are met.