In the UK the community shares programme began in 2009.
Since its launch, more than 90% of community share offers have been made by new co-operative societies. Most of these societies have been formed by communities in response to one or more of the following:
- a community is about to lose a significant local service, for instance, a pub, shop or post office, or any other community service that is encountering market failure.
- a community is being poorly served by an existing enterprise, for instance, supporters of a football club may feel that the current owners do not serve their interests, or a local service is too expensive or fails to address local needs.
- a community need or interest is not being met, for instance, there may be no local sports facilities, poor broadband connections, or a lack of flexible workspaces for new businesses.
- a community is inspired by new ideas or opportunities to act collectively, for instance, by the scope to establish community renewable energy schemes, local food initiatives, or develop community land trusts for affordable housing.
These stimuli result in new co-operatives being formed as pre-start initiatives, or to act as the vehicle for acquisitions and buy-outs of existing enterprises that are failing in these communities.
Community share offers, however, are not confined or restricted to new start-ups. Co-operatives in both the UK and in Australia have the legal capacity to issue shares as part of their membership. The procedures required for the issue of shares by a co-operative – either a new co-operative or an existing one- are the same.
There are four main challenges facing all community enterprise pre-start initiatives:
Acquisitions and buy-outs
Acquisitions and buy-outs mainly arise when a community is driven to rescuing a local business threatened with closure or, in exceptional circumstances, where the community feels poorly served by the business. Communities engaged in acquisitions and buy-outs face all the same challenges as pre-start initiatives, but with the extra burden of:
- having to act quickly, especially if there is competition to buy the business or its principal assets.
- having to commit to development costs with no certainty that it will be successful in acquiring the business, with the risk of substantial losses.
- the difficulty of agreeing a fair valuation for the business, especially when the principle assets may be worth more as non-business assets, such as a building with a heritage or community value.
The first of these challenges can be difficult to overcome without access to immediate capital or the patience and benevolence of the existing owner. The third of these challenges requires extreme caution and preparedness to engage independent advice4.
Even when a new enterprise has got through the pre-start stage and is able to prove that the project or enterprise is investment-ready, there is still a lot to do before it can launch a community share offer. The enterprise first needs to be incorporated. Incorporation of a co-operative with share capital under Australian Law – the CNL – requires two main documents5.
- Constitution: sometimes referred to as a governing document that sets out the rules of the society. The constitution defines the co-operative’s purpose, activities, management structure and the minimum obligations of members to acquire share capital and engage with the co-operative.
- Disclosure statement: is the document that sets out the details of an offer of membership, including shares aimed at the target community.
Once the co-operative is registered then it is able to offer membership shares to the public within its ‘home’ state or territory6.
Of course, just being able to offer shares does not mean that the community will apply for membership and acquire shares. It is important that the co-operative has a third document:
- A community engagement plan: for recruiting members to the co-operative, involving them in the business model, and securing their investment7.
Community share offers are markedly different to share offers made by companies.
Companies usually only make public offers at a relatively late stage in their development, either as part of an exit strategy for private equity or to fund expansion. Public offers by a company are usually aimed at raising a specific amount within a short period of time and the offer documents make provision for under or over subscription by the market. The offers are for large amounts and they will be managed by underwriters and brokers. In contrast, community share offers tend to be made by new enterprises with no proven record of success, sometimes referred to as a ‘blue sky’ proposal. Whilst the offer will aim for a stated minimum amount there is no limit on the number of members who may join and subscribe for shares.
New company enterprises usually raise share capital from family, friends, ‘angel investors’ and other types of sophisticated investor, whereas community share offers are aimed at people who are unlikely to have had any prior experience, knowledge or competencies in investing in enterprise.
Start-up company enterprises tend to raise share capital through private placements, which might lead to a handful of investors purchasing stakes in lots of $50,000 or more. In contrast, the average investment of share capital under a co-operative share offer is significantly smaller.