In January 2022 I started writing content for CrowdInvest. It is a new equity crowdfunding platform, and part of Red Ribbon Asset Management Plc. The platform will enable Indian startups to trade shares in the UK to raise investment funding. India now has the world’s third largest startup ecosystem, though equity crowdfunding as we know it in the UK does not happen in India. This article is about how local campaigners and activists can structure a variety of community projects as a not-for-profit company and issue shares in them through a crowdfunding project.
Crowdfunding is an extremely versatile way of raising money. It can raise donations towards personal aims or charitable and worthy causes, act as a sales channel for new products, and private companies can trade equity. A further use of crowdfunding is to generate funds that are used for a community benefit. Since 2012, community share issues have raised over £155m from more than 100,000 people to support 440+ enterprises.
Why not just pass the hat round and collect donations in a regular way? This article will explain the added benefits delivered by community shares offered through a crowdfunding project, who is eligible to run them, and provide some examples.
What are community shares?
A community project can set itself up as a legal entity and offer equity for money invested in it. The investors seldom take part with an expectation of financial reward, they usually do it to support initiatives that will benefit their local community.
Each investor is allocated one share, regardless of different amounts they may have invested. Also, the shares cannot be bought or sold in a secondary market. These measures protect the integrity of a project from majority control being bought by a third party who could be hostile to its aims. Shares can only be sold back to the issuer, if there are funds available to buy them.
There is little expectation of an eventual return on investment in the standard sense of a company acquisition or an IPO, and dividends are not paid though there could be interest payments at a pre-fixed rate. Like any commercial venture, there is the risk of a project failing and capital could be lost.
Who is eligible to issue community shares?
There are restrictions on who can offer shares in a community project. It can be used by co-operative societies, community benefit societies, and charitable benefit societies. Projects have to be registered with the appropriate authorities and legally incorporated in one of these three formats.
Why use crowdfunding?
It may not always be necessary to use crowdfunding and community shares. A group of community activists may be able to afford the cost of their project without publicising their venture to a wider audience. However, there are several other benefits from using crowdfunding.
Crowdfunding community shares is a low cost way of transferring equity, without needing solicitors and lawyers. The crowdfunding platforms can ensure any relevant financial and legal rules and regulations are followed, they handle the transactions, and issue shares when the fundraising is completed. For this they may charge a fee, which includes handling transactions, of up to around 8% of the amount raised. It varies, and project leaders should check with the platforms they are thinking of using.
Research has shown that investors in community shares put in eight times more than they would have given as a straight donation. That’s a measure of how much it means to people to be formally involved with a local project and have a say in it.
A crowdfunding project can gain media exposure and bring a project/society’s aims to a wider number and range of stakeholders.
Investors can inject more than money. They can also bring added skills and knowledge they are willing to offer to the project.
Once a community project is incorporated as a society eligible to issue community shares, it may also be able to register with HMRC under its EIS or SEIS schemes. Investors who pay UK income tax would then be able to reclaim from 30% to 50% of the money they put in.
Crowdfunding platforms may also be able to offer match funding donated by a third party.
What’s needed for crowdfunding to succeed?
There are basic requirements that include providing a business plan for potential investors to study, and an offer document.
Beyond these essentials, there are three more generally accepted key requirements:
1. A community project/society has to have a crowd of supporters who can be inspired to make an investment.
2. The project should provide a tangible long-term benefit, rather than be a way to shore up running costs or cash flow problems associated with some existing infrastructure, for example.
3. The project/society leaders have to be happy to share ownership with a wider community. Investors who have voting rights will also expect their views to be heard.
Relevant crowdfunding platforms
The most relevant UK platforms are:
· Community Shares Unit at Co-Operatives UK.
What sorts of projects get funded?
Community share projects can often be in out-of-the-way places where trading levels are insufficient to meet turnover or profit targets. This can cover a community buying its local pub when the brewery-owner would otherwise close it down, or taking ownership of a village shop and post office. Shareholders then have a vested financial interest in supporting the community assets.
Preserving a local bookshop in the face of growing online shopping was another example. The project leader said afterwards: “We raised the money we needed quicker and we raised more through community shares than we would’ve done via a loan. It’s great having all these members having a stake. They will be customers as well as members.”
On a far larger scale, the town of Dingwall in Ross-shire, Scotland, had a proud tradition of malt whisky production dating back to 1690. Ninety years after the town’s last whisky distillery closed, a new one opened as the world’s first community owned distillation plant after a £2.5 million community shares fundraise in 2018. Over 2,400 investors from 30 countries bought shares in what became the UK’s largest community share crowdfunding campaign. The distillery created local job opportunities, with business and personal incomes feeding in to the local economy.
In this example, issuing community shares supported sustainability in the built environment. Carl Elefante, former president of the American Institute of Architects, said: “The greenest building is the one that already exists.” When the NHS decided to close the Southwold and District Hospital in Suffolk it was going to be demolished and replaced by luxury homes. A group of local people partnered with a housing association to buy the former community hospital and recycle it. Their community share offer raised almost £400,000 towards redeveloping and repurposing the former hospital as a community hub with a library and co-working space, plus nine affordable flats and houses.
LATCH (Leeds Action To Change Homes) is a community benefit society in the Chapeltown area of Leeds. For over 30 years it has been transforming derelict buildings into new homes for people who need them, helping them get their lives back on track while at the same time providing training and employment opportunities. In August 2021 they raised over £550,000 to refurbish vacant properties as eight new homes.
These few examples demonstrate how community share crowdfunding can empower local communities to take control of their environment and resist corporate decision-making that is not always in their best interest.