Civil Society – Social Investment
This theme is now closed for comment. An announcement on Red Tape Challenge plans will be made in due course. You can read comments made during the theme spotlight (17 May 2012 – 13 September 2012) below.
Social ventures – such as charities, social enterprises and community organisations – all share a passion for finding innovative solutions to social problems. They rely on donations and grants as a source of revenue and income. Social investment allows charitable trusts, foundations, and institutional and private investors to support social ventures. Like any normal investment it provides investors with an opportunity to grow their money, but on top of that, they can feel good about knowing they are making a real contribution to a better, stronger, society.
However, uncertainty about the legality and tax treatment of investing in social ventures can be a significant barrier to these types of investment. Almost all the relevant law and regulation predates the emergence of the social investment market, leaving those looking to invest, and those seeking investment, unclear about where they stand.
Greater clarity is needed to drive forward social investment and we’re interested in your thoughts about how this could be achieved:
- Have you tried to invest in a social venture, if so what were the legal and regulatory barriers that you came across, and how do you think that they should be dealt with?
- Have you tried to access social investment, if so, what were the legal and regulatory issues that you faced, and how do you think they should be dealt with?
- Should current regulations be amended to give express permission in law that allows trusts, foundations and institutional investors to invest in social ventures?
‘Ten Reforms to Grow the Social Investment Market’
Our sector champions for social investment, BWB, have published a paper called ‘Ten Reforms to Grow the Social Investment Market’ that calls on government to make 10 key changes to the regulatory environment in order to make social investment easier. Click here to see the ten recommendations and make comment. You can also download the full document from that page.
If you want to share your experience privately, then you can comment through our private inbox here. Visit the Civil Society landing page here.
Charitable trusts and foundations do a great job supporting charities, social enterprises and other organisations. Through their endowment and other investments they can play a critical role in promoting social investment while enhancing their mission. A small number of larger trusts and foundations are already making social investments but many more are not.
To unlock this investment there is a need to give trustees greater legal reassurance on how they make decisions about investing their funds. For example, what is the most appropriate tax treatment for social investment? In my opinion we can’t just leave it to the market – there is a need for a further clarification around the legal underpinning for social investment or targets and incentives to encourage a higher proportion of trust or foundation funding to be released as social investment.Comment Tags: social investment trusts foundations
Remove the prohibitions against industrial and provident societies which do not apply to companies engaged in social investment
Industrial and provident societies have demonstrated over many years their suitability for democratic social investment notwithstanding the failure of HM Treasury to modernise the law in any meaningful respect. Whereas companies legislation has been modernised several times since 1948 industrial and provident societies are essentially operating from a 1948 environment with restrictions which do not apply to companies. HM Treasury has been supportive with credit unions but continues to demonstrate it has not the resources or skill base to examine IPS legislation in the thorough manner that BIS examines and keeps under examination company law.
While much of the mainstream banking sector, based around the form of the limited company in the United Kingdom, has demonstrated its inability to behave responsibly not once but several times over the last 10 years co-operative banking and social investment deposit taking by industrial and provident societies is prohibited by law. Democratic building societies have generally demonstrated that they have acted with greater propriety and soundness than their banking company counterparts. In contrast the 1,197 banks (2008 data) of the German co-operative banking sector have demonstrated propriety and resilience and are currently the largest lender to SME’s in Germany.
Section 7 of the Industrial and Provident Societies Act 1965 prohibits an industrial and provident society with withdrawable share capital being registered for the business of banking. With the removal of the limit on non-withdrawable share capital of societies in January 2012 and the proposed classification of core tier equity in CRD IV there is no need for the IPS Act 1965 to prohibit co-operative banking and the democratisation of money and enhancement of social investment in this way.
Similarly, Section 7(3) prevents the taking of more than £400 in deposits. There are not these restrictions in companies legislation on companies. Instead the Financial Services and Markets Act 2000 and secondary legislation prohibits the taking of deposits except by charities from other charities (with interest) or from other persons (without interest) FSMA (Exemption) Order 2001 Schedule 22.. The Christian charity Stewardship has built up its several million pound charitable business on these exemptions but it would be a prohibited activity for a charitable IPS.
If these two de-regulatory measures were taken the Financial Services and Markets Act 2000 would continue to apply the same law to companies as to IPS’s and the potential for authorised co-operative banking activities and charity deposits with IPS’s would be enhanced.Comment Tags: Encouraging co-operative banking and social investment
Malcolm, By coincidence it was with a proposal for investing in CDFIs that we approached coop funders in 2004 with a Bencom based model. It wasn’t our intention to become CDFIs but to provide them with capital to seed social enterprise in impoverished communities. We warned then of the risk of uprisings due to failure of capitalism. As I read it the new coop capitalism demand collaboration . This could be working with other forms of social purpose organisation, for example
Social ventures have the means to tackle stubborn and expensive problems such as fractured communities, homelessness and high rates of re-offending. They already have an important role to play in helping to design and deliver open and responsive public services, reaching people and communities that the public sector struggles to reach.
When starting a social venture there is a need to cover upfront costs and have access to finance to get through the first few years. Too often budding entrepreneurs are unable to meet the lending criteria for mainstream bank loans. This can be a significant barrier to the start up and growth of social enterprises. Grants will continue to help but there is a need to increase the amount of funding available to social enterprises and give them a choice about where to go.
The Government’s social investment strategy, Growing the Social Investment Market: A vision and strategy published in February 2011, outlines a vision to: create a new pillar of finance for social ventures; allow social ventures to grow more dynamically; allowing individual citizens to contribute to social goals through their personal finance choices; and offering new opportunities to investors, financial institutions and wider government.
However, if social investment is about to expand there is a need to tap into the finance available via institutional and other investors. Interested in any views about how uncertainty as to the legality and tax treatment of social investment continues to be a significant barrier to the growth of this market.Comment Tags: Potential impact of growing the market
So, John, to clarify your point. Withdrawable share capital is not available to CICs but IPSs are able to issue and use it essentially without supervision. As a result, CICs receive less a benevolent tax treatment than IPSs though it is arguably a more “social” form than cooperatives, as CICs must pass a community interest test and have an asset lock, whereas cooperatives are established for the benefit of their members. Any thoughts on the risks associated with this, particularly concerns expressed about difficulties for potential investors in obtaining information on share issues and IPSs (or CICs potentially) making the right decision about rights/options for raising finance.Comment Tags: Share issues
Extract from letter to Mr Cable, I would hope this could garner some support from the red tape challenge community
We feel this particular point needs to be addressed as it unfairly discriminates against the intrinsic value of a CIC share (quite separate to the intended controls of the regulation) I’ll keep this brief but I am at your disposal if you require further information
To allow the dividend cap to be set against any subsequent transfer/sale price of the CIC Share, currently it is pegged permanently to the initial paid up value of the Share.
This is a recommendation that I believe can attract almost complete agreement, as it improves the potential of CIC Shares considerably without calling into question the current balance of community primacy. The difficulties generally around small company shares being hard to trade, coupled with the dividend caps themselves will still make for a difficult environment, but at least we would have shares where the second hand value is the same as the first hand value.
- It improves liquidity and allows for development and innovation. It will open up investment into CICs from a wider group of investors.
- It is an unintended consequence. It fails the basic notion of what a share is on a technical level.
- It unnecessarily prejudices against an investor who may want to invest in CIC Shares. Eg. An investor can get a maximum potential 20% return on the issue of a new share in a CIC, why not on the transfer of an old one?
- It widens exit strategies for community investors
- It overcomes the current issue of allowing the entrepreneur to build some sweat equity.
In the legislation it specifically states that a CIC is restricted to purchasing shares at PAR value when buying shares back, this clearly suggests that it was intended that other types of share transfer didnt have to be at PAR value. It is a simple point in itself and I hope you can support it as a recommendation, coupled with wider changes you are implementing this would really help set the landscape for a boon in retail social investment.Comment Tags: CIC Shares, Weapon of Mass Re-Construction or policy plaything?
Lord Hodgson has it right when he says ‘The missing piece in the jigsaw at present is the ability to approach individuals about social impact investments without the need for a full Companies Act prospectus, the cost of which renders almost any scheme uneconomic”
Only £3.5 million of equity investment took place in the social economy 2010/11, which for us is astonishingly low. (BBC Consulting/Young Foundation ‘Growing the market for social enterprise)
Extend the current exemption under the Financial Promotions Order (FPO) to include CIC and Benn Comms (as has already been done in other parts of the Finance Bill) or up to a fixed amount for all org/company types which might also hit the spot in enabling all small business to prosper.Comment Tags: Enable a boon in retail social investment