Investing in Civil Society

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Investing in Civil Society

The report:

A critique by Malcolm Lynch

This well intentioned document, published by NESTA, suffers from an incomplete presentation of the legal obstacles to growing social investment and a bias towards the community interest company and against the industrial and provident society which appears misguided and insufficiently evidence based. It completely fails to address the long-standing obstacles to an effective use of the industrial and provident society as a tool for democratic investment in social enterprise whilst ignoring the obvious deficiencies of the promotion of a potentially debt laden social enterprise in the form of a community interest company limited by guarantee. It consequently reaches conclusions which create an inappropriate ordering of priorities for Government in assisting investment in social enterprise.

It is clear that the community interest company has been successful. It was efficiently established by the Department of Business, with modern law and a modern registry and a Registrar to not only register but promote the legal form (everything which the industrial and provident society does not have). It has Government Departments recommending it over other legal forms and briefing against other legal forms which may be appropriate.

It is disheartening, that three out of four community interest companies are established as companies limited by guarantee – a legal form which restricts full risk capital options to grants and retained profits. The Government is largely to blame because it has not briefed Departments that if they wish to encourage sustainable social enterprise that they must permit them to obtain outside share capital. More could also be done to ensure that the Big Lottery Fund and the Charity Commission give clear guidance on how charities can support asset locked bodies which are not charities.

Whilst the thrust of the paper seems to be that industrial and provident societies have Financial Services and Markets Act exemptions which community interest companies do not, which is correct, it ignores exemptions which charitable companies have which charitable societies do not. Importantly, it does not explore the obstacle set by the Companies Act 2006 that private companies limited by shares are not permitted to offer shares to the public. The effect of that prohibition is that private community interest companies limited by shares can only raise private funds through social enterprise business angel networks such as Ethex, Resonance and ClearlySo until such stage as they become public limited community interest companies.

Community interest companies limited by guarantee may offer bonds to the public but this provides only debt and therefore can limit other borrowings such as bank debt, and does not provide effective risk capital for the social enterprise.

There is a debate to be had, particularly when the libertarian model of shareholder capitalism has demonstrated such spectacular failure, whether replicating that in the social enterprise sector is really appropriate and whether support for more democratic forms of social enterprise ownership might reinforce more prudent models of capitalism which are so clearly needed. If so the priorities suggested in this paper should be re-examined and some of the other underlying problems explored more deeply.

Malcolm Lynch

Source: Social Economy newsletter no. 105