From using a pub’s takeaway service to donating to an under-threat arts venue, one of the many side-effects of the coronavirus pandemic has been a renewed sense of community in supporting local businesses and projects. And, in a growing number of cases, those companies are now asking the public to buy shares in order to help them survive and grow.
For a minimum investment of what can be a few pounds, there is frequently a promise of healthy returns. And at a time when the rates on savings are in the doldrums, that will be attractive to many. Several schemes offer as much as 5% a year, far above the 0.01% that some high street savings accounts pay.
But at this time of low rates, is the solution local?
What are these schemes?
The companies and projects that run the investment schemes are many and varied. Amongst them are:
• Co Cars, based in the south-west, is a not-for-profit co-operative social enterprise that started up in 2005 and runs a hybrid and electric car club that stretches from Salisbury to Falmouth. It also operates an electric bike hire scheme centred on Exeter. It is looking to raise up to £600,000 via its share offer that is open until 31 July, and the “target interest rate” is 5% a year. That is paid “at the discretion of the board,” depending on financial performance. The minimum investment is £250. The company’s aim is that by the end of 2021 it will have increased its Exeter car fleet from 30 to at least 55, and expanded its bike network to a minimum of 150 bikes. It is also looking to extend its membership from 1,600 to 5,000, taking an additional 150 private cars off the roads of Exeter.
• The Low Carbon Hub is a social enterprise that offers people a way to “put your savings to work tackling climate change”. It is building a portfolio of community-owned renewable projects in Oxfordshire, and aims to raise £1.5m to fund solar and other energy schemes that directly reduce CO2 emissions and generate a profit that supports further action on the climate crisis. It is offering a target interest rate capped at 4% for the first four years, rising to 5% after that. The organisation has delivered more than £8m worth of green energy projects since 2011 – for example, it is now partnered with 29 schools around Oxfordshire which have had rooftop solar panels installed – and has more than 1,000 investor members. The minimum investment is £250, and the offer is due to close on 10 June.
• Brighton & Hove Community Land Trust (BHCLT) is looking to raise up to £1.585m, which it would use to buy properties to lease to community-led housing groups, and freehold land that it could develop itself. It says the Brighton area has some of the highest house prices and rents in the country in relation to income, with homelessness and council waiting lists also both on the increase. The trust is a relatively young organisation – the idea for it was born in 2014, and it became a community benefit society in 2017 – though it has secured grants of more than £650,000 to fund its work, and it supported the setting up of the city’s first student housing co-op SEASALT Housing Co-operative. The trust aims to pay 3% interest after three years – so the first payment would not be made until the end of August 2023. The closing date for the share offer is 31 August 2020, and the minimum investment £250 for individuals.
How is it done?
While the returns will seem very attractive, this is a lot riskier than putting your money into a savings account, and, ultimately, there is the chance you could lose everything. All of the examples mentioned here involve putting your money into so-called “withdrawable shares”.
The sale of these is not regulated by the Financial Conduct Authority because investors are deemed to be investing for “social returns”, not financial gain, and you cannot access the Financial Services Compensation Scheme or use the Financial Ombudsman Service.
Also, sometimes you have to wait several years before you can withdraw the money you have invested.
Some people will take the view that a safer bet would be an ethical fund investing in many different companies.
The Ethex investment platform has helped raise more than £75m for social businesses, charities and community organisations. Its website lists several schemes. Other websites featuring share offers include triodoscrowdfunding.co.uk and Crowdfunder.
Are the returns realistic?
Rachel Mountain of Ethex says the shares are about giving community-based organisations long-term capital. Investors, meanwhile, can make a high social and environmental impact and there’s the potential for gain. This type of investment capital will be necessary to “build back better” the UK but the returns vary.
She adds: “Some co-ops and community benefit societies have an established track record of paying out returns of between 4–5% (or potentially higher). These typically tend to be in the community energy sector, which have, in the past, benefited from attractive feed-in tariff subsidies and some sustainable transport organisations.
“Outside of the energy sector, investors should expect to see lower potential returns of between 1-3%, and this is likely to include sectors such as sustainable and affordable housing, sustainable food production and the transferring of assets into community ownership, such as community centres.”
Andrew Johnson, from the Money and Pensions Service, says the schemes should be seen as a social, and not a financial, investment. “ You may earn some interest on your shares during the time you are invested if the business is profitable, but the total amount will be capped. If you decide to leave the scheme, you cannot sell your shares for a profit – the maximum amount you can receive if you withdraw your shares is the amount you originally invested,” he explains.
Be fully aware
Good offer documents should include detailed financial models, and then an assessment can be made as to how realistic forecasts are, says Mountain. As capital is at risk and returns not guaranteed, investors should not put in more than 10% of their investable assets. Amid the risks, however, she says 92% of co-ops and community benefit societies – the organisations able to issue “withdrawable shares” – have survived without going under, a success rate which is much higher than for typical businesses.
Johnson says these organisations don’t deduct tax before paying out interest, so if there are payments, the income must be declared and tax paid. Schemes can have tax reliefs attached such as EIS (Enterprise Investment Scheme), SITR (Social Investment Tax Relief) and SEIS (Seed Enterprise Investment Scheme), which then makes the overall targeted financial return more attractive, adds Mountain.