Offers of shares to the public can only be done without a full prospectus approved by an authorised investment advisor by a Co-operative or Community Benefit Society. Only Societies have the legal exemptions from the Financial Services and Markets Act 2000 and Public Offers of Securities regulations. What this means is that communities can raise capital through a share issue without the cost implications and regulation for public companies in producing a prospectus which would often make many community share offers unviable.
Where does that leave you if your organisation is not a Society but you want to issue community shares to raise capital? There are two possible ways forward:-
a) To convert the entire organisation to a Society
b) To set up a linked Society to undertake the share issues
Converting to a Society
This means changing from your current legal form into a Society. Your current legal form would no longer apply and you would carry on as a Society.
Although this process is possible from most legal forms (see below) and can be cumbersome, as the organisation continues in a different legal form there is no need to transfer undertakings – so all bank accounts, contracts, leases, ownership of property just continue from one form of organisation to the other.
Case Study – Glenwyvis Distillery is a community owned distillery and visitor centre in the Highland Town of Dingwall. The project was the brainchild of John MacKenzie who originally formed an ordinary Company Limited by Shares. But the idea developed to raise finance through a community share issue. The Company had already signed agreements and contracts so forming a new Society and transferring the business would have been complicated. The Company Limited by Shares therefore converted to a Community Benefit Society in April 2016.
Setting Up A Linked Society
It may be that your organisation needs to raise capital for a specific project. Or the project for which you need to raise capital cannot be accommodated within your current legal form because of regulatory issues or scale.
In which case a separate society can be set up. The Society would be a standalone organisation owned and controlled by its members on the basis of one member one vote. However, constitutional rights for the originating organisation can be built in such as reserved seats on the board and assets to go to the originating organisation if the Society is ever wound up. However, Societies must be democratically controlled on the basis of one member one vote – and it would be counter-productive to suggest to potential buyers of community shares that you wanted their money but didn’t really trust them to support the objects of the Society
Case Study – Partneriaeth Ogwen is a local community company limited by guarantee in Bethesda on the A5. They developed the idea of installing a water turbine on the River Ogwen, but the project dwarfed the other community activities they carried out. It was therefore decided to form a new Society in which Partneriaeth Ogwen had constitutional rights, such as being able to appoint one quarter of the board, to carry out their community share issue.
How to Convert to a Society
It should be noted that certain legal forms cannot be converted into a Society, for example a Charitable Incorporated Organisation or a Limited Liability Partnership or if your organisation is not currently incorporated. However, many legal forms can be converted. There is more details guidance in Section 2.6 of the Community Shares Handbook http://communityshares.org.uk/resources/handbook:-
Company Limited by Guarantee (or by Shares) – The process is fairly straightforward, if cumbersome. There is a specific form and guidance notes on the Mutual Societies Forms section of the Financial Conduct Authority’s website. The company must pass a special resolution at a General Meeting of members to convert and appoint at least three people to complete the Mutual Societies Application Form and sign the new Society’s Rules. Copies must be sent to both Companies House and the FCA. At an agreed date 6-8 weeks after receiving the documents, Companies House will cancel the company registration and the FCA will commence the Society registration.
Community Interest Company (CIC) – A Community Interest Company can only be converted into a Community Benefit Society with an asset lock and can’t be converted to a Co-operative Society. Otherwise the process is similar to for a Company but there must be a special statement for the Regulator of Community Interest Companies and documents must be submitted to Companies House, the Regulator of Community Interest Companies and the FCA. As there are three regulators involved, the conversion process takes slightly longer.
Charitable Company Limited by Guarantee – A charitable Company Limited by Guarantee can only be converted to a charitable Community Benefit Society. There is not currently an approved process for this. The Charity Commission has approved such conversions but does so on a case by case basis. The process involves both moving the organisation’s incorporation from Companies House to the FCA and its charity registration from the Charity Commission to HMRC. Specialist advice should be sought and the timetable for conversion will vary in each case.
Conversion from the ‘Wrong’ type of Society – if your organisation is currently (for example) a Co-operative Society and wishes to become a Community Benefit Society, it is not possible to convert between the two types of Society. However, there is a process of Transfer of Engagements between Societies which effectively means that one Society is absorbed into to the other. This is cheaper and simpler than transferring undertakings from one company to another. The process would be to set up a new Community Benefit Society, then transfer the Co-operative Society’s engagements to the new Society using the forms provided on the Mutual Societies Forms section of the FCA’s website