Community shares are often used to save local pubs and shops or finance renewable energy schemes, transform community facilities, restore historic buildings, and most importantly to build stronger, more vibrant and independent communities.
A community benefit society is run primarily for the benefit of the community at large, rather than just for members of the society. This means that it must have an overarching community purpose that reaches beyond its membership. An applicant enterprise must also have a special reason for being a community benefit society rather than a company, such as wanting to have democratic decision-making built into its structure.
Although a community benefit society has the power to pay interest on members’ share capital, it cannot distribute surpluses to members in the form of dividends. A community benefit society can opt to have a statutory asset lock, which has the same strength as the asset lock for a charity and for a community interest company. This type of asset lock is not currently available for co-operatives.
The main reason for buying community shares is to support the social aims of the venture concerned. Unlike shares in private companies, where personal financial gain is the main motive, community shares are subject to laws that limit financial gain and emphasise social benefit. The following are all possible reasons for purchasing community shares:
- You want to do something good for the community in which you live or work
- You want to be part of a democratic organisation
- You want to have more control over where your money goes and how it is used
- You are looking for alternative options for how you use your money.
Community shares refers to a distinct type of share capital called Withdrawable Shares which behave differently to conventional share capital, also known as ordinary or transferable shares. Transferable shares can be bought and sold by anyone and they can increase or decrease in value and be cashed in at any time.
Community shares cannot be sold and have a fixed value which will not increase although some societies have the power to reduce the value if the society is experiencing financial difficulties. The society allows shareholders to withdraw their share capital, subject to terms and conditions that protect the society’s financial security.
Shareholders have only one vote, regardless of the size of their shareholding, so the society is democratic. There is a limit on personal shareholdings, currently up to £100,000 and there is also a limit on the interest paid on share capital, based on the principle that interest should be no more than is sufficient to attract and retain the investment. Community benefit societies can adopt a statutory asset lock, which prevents the society being sold and the proceeds of the sale being distributed amongst shareholders. This removes the possibility of capital appreciation and the scope for investor speculation.
The sale of community shares is not regulated by the Financial Conduct Authority, because investors are deemed to be investing for social returns, not financial gain. This is good news for community ventures, which would otherwise face prohibitively expensive regulations when marketing community shares. But it comes at a cost to community investors, who have no right of complaint to the Financial Ombudsman Service and cannot apply to the Financial Services Compensation Scheme.
Community shares are far more risky than keeping your money in a savings account with a bank or building society, where currently the first £75,000 is fully protected. You can lose everything you invest in a community shares offer. This is why it is important to look carefully at a community share offer before deciding to invest.