Tag Archives: CIC Association

Mind the cap

Potentially interesting developments loom for Community Interest Companies (CICs) after the CIC Regulator launched a review of the CIC dividend cap last week. CICs were introduced as new legal form by the then Labour government in 2005. There are now over 7000 of them with umbrella group, the CIC Association, reporting over 100 new registrations each month.

As Civil Society explains: “Currently, community interest companies (CIC) dividend pay-outs are capped at 20 per cent of the initial investment. There is also an aggregate cap of 35 per cent on all distributable profit of a CIC. The consultation launched this week asks if the cap on dividend pay-outs should be increased to 49 per cent.

So, what’s the problem? As is so often the case with questions of social enterprise, profits and organisational structures it’s a heady mix of strong principles, deep confusion and hot air.

Like all government initiatives to promote social enterprise, the creation of CIC represented a trade-off between practical and political utility. The new Labour government needed a political structure that enshrined in law the idea that it was possible to do good while also making a profit, they also needed a suitable vehicle for ‘spinning-out’ public service delivery into vehicles that would notionally be owned by the wider community.

Added to that lots of people doing good stuff in civil society needed a company structure (or some company strucures) that would enable them to do what they wanted to do without having to set up a charity with a split governance (between paid staff and volunteer trustees).

The various types of CIC – there’s several versions of ‘not-for-profit’ CIC limited-by-guarantee and ‘for-profit’ CIC limited-by-shares – have succeeded in meeting all of those needs reasonably well. Examples of CIC range from NAViGO, which spun-out of the NHS and provides mental health and other services in North East Lincolshire with a turnover of over £22million, to us at Social Spider CIC turning over closer to £150,000 and other similarly small, innovative social enterprises.

The CIC limited-by-shares models have also worked well for charities looking for an appropriate structure for trading arms. Under CIC legislation, CICs owned entirely by asset-locked bodies (such as charities) can pay as much of their profit to those as want to. Where CICs haven’t done so well is in attracting equity investment.

So, what’s currently being debated is what happens when CICs limited-by-shares and owned by entrepreneurs and investors who aren’t charities (or other asset-locked) bodies want to take profits out of the business to repay their investment. There’s (at least) two separate problems with the current situation:

  1. The current rules place strict limits on how much money can be taken out.
  2. As well as being strict, these way these limits are imposed is unnecessarily complicated and gives a particularly bad deal to entrepreneurs who start CICs.

As explained above, the current caps relate both to the initial investment – either the amount an investor puts into the business or, in the case of entrepreneurs putting in sweat equity (unpaid work), the value of their shares at the time they received them – and the distributable profit that the company makes in any given year.

If you’re really interested and you want to fully understand what’s going on, it might be worth making a cup of tea, printing out the guidance here (or downloading it to a suitable device) and sitting down for good read. To explain it very briefly, for companies formed since 2010, shareholders can receive an annual dividend of either 20% of the value of their shares at time of purchase or 35% of distributable profit, whichever figure is lower. That means that even if everything goes really well, it takes investors ages to get their money back and they can’t make a very big profit.

Suffice to say while the CIC structures have proved to be useful, uncomplicated vehicles for various forms doing social good, they’ve (understandably) been far less successful in attracting cash from (non-charity) investors hoping to their money back through dividends.

Explaining his views in anticipation of the current consultation, Richard Patey at Profit is Good explained that: “For us the solution is to simplify the whole process by removing the cap on the paid up value of share and increasing the aggregate cap to 49%” adding that:  “This is still in keeping with the standard definition of social enterprise of ‘principally reinvests its surpluses into the organisation’ and would be a simple and attractive value proposition to would be social entrepreneurs who would otherwise be hampered by their ability to be rewarded for sweat equity and scaling their enterprise’s social impact.

I personally sympathise with the arguments for simplification but – unless the company has significant assets which are locked – I’m not sure that a 49% distribution cap delivers a business that’s significantly more focused on community/social benefit than your average company. How many companies regularly pay out more than 49% of their profits in dividends?

For me, the right approach is a single cap of 20% cap of distributable profit. That way, in the event that a CIC makes massive profits, entrepreneurs and early investors who’ve taken a big risk to get the CIC up-and-running can make significant amounts of money but the community still gets significantly more – either in cash or more services.

Of course, what happens to CIC and other social enterprise profit remains a relatively minor issue overall. I’d be interested to hear what others think about this. Is it realistic for large numbers of CICs to take on equity investment? Does anyone have an experience of taking an equity investment as a CIC?

 

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Instruments of confusion

I’ve enjoyed attending a number of social enterprise events since the beginning of the year, including the CIC Association’s CIC Start 2010 and SEL’s Social Enterprise Question Time. It’s clearly a big year for social enterprise – with a new chief executive at the SEC and a growing political warmth towards social enterprise as a concept.

One thing that’s beginning to worry me, though, is the apparently growing focus on new financial instruments. It’s difficult to move in the social enterprise world without bumping to someone who’s got an exciting idea for a new bond or quasi-equity model that’s going to solve the problems of social enterprise finance. This is not a bad thing in itself. I’m supportive of these developments and either personally know and like, or know of and respect many of the people involved in developing them.

What I’m worried about is the prospect that people running average-sized social enterprises – the median annual turnover for UK social enterprises according to this is around £175,000 – are going to events and getting the idea that the key issue for their business is finding the right instrument to channel a big chunk of finance into their business.

‘Scaling up’ is (rightly) an issue for ‘the sector’ because ‘the sector’ wants to prove that social enterprises can be bigger business solving big parts of big social problems. But the vast majority of social enterprises  – like the vast majority of conventional small businesses  – either can’t or don’t want to become big businesses, they want (and need) to find a sustainable way of operating on a fairly smallscale while delivering significant social benefits.

One danger is that smaller social enterprises could be annoyed by ‘the sector’s’ focus on lauding and supporting those who want to scale up but a more worrying one is that they’ll think they need to join in the race to raise big finance despite its practical irrelevance to their aims.

The social enterprise world is unusual because it’s made up of a wide range of disparate organisations notionally group together based on perceived social mission rather than based on how big they are, what they do or who they do it for.

A social enterprise that wants to build and run a new clinic clearly needs a lot of cash to get started. And an organisation that delivers really good services to a particular group of people in one area and wants to do the same in five more area also needs some cash to take that step.

At the other end of the spectrum, a small social enterprise operating in the creative industries (of which there are lots) really, really, doesn’t need to spend ages trying to find the right investor to give them a £200,000 quasi-equity loan. They need to stop faffing around and start selling their services to someone.

The majority of the new financial packages currently being developed are primarily of use to social enterprises in specific sectors and/or at specific points in their development. And I’d estimate that 90% plus of currently trading social enterprises are never likely to be in position where these packages would be right for them, even if they could get hold of  them.

That’s not to say they’re not needed and they’re not valuable but it would be a shame if people in the early months and years of running a social enterprise were confused into thinking that finding an exciting specialised source of finance is a major priority for their business – when for most social entrepreneurs our most important aim should continue to be to work harder, get better at doing what we do and get more people to buy our goods and services.

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