Longstanding UK social enterprise exponent, Jonathan Bland who toured Australia recently recommended in his article “Social Enterprise in Australia: Realising the Potential” published in Pro Bono News following his visit (see:http://www.probonoaustralia.com.au/news/2015/07/social-enterprise-australia-realising-potential# ) the following:
“ Getting the legal and regulatory framework right – this could mean creating new legal models for social enterprises like the highly successful Community Interest Company in the UK or introducing tax relief like the new Social Investment Tax relief in the UK which incentivizes private investment into social enterprise.”
In relation to this topic, the Social Enterprise Legal Models Working Group (LMWG) has been assisting Federal Government Policy Groups with considering the issues involved in investing in social enterprise, and developing a discussion paper on “new legal structures for social enterprise” in Australia.
From the LMWG’s perspective, there are two major issues to be addressed:
- The downside of not having a CIC is that assets may be stripped from a successful social enterprise operating as a Pty Ltd company through sale, merger or winding up. There is no legal provision for locking the assets into permanent use for the social objective in such companies operating a social enterprise.
- The cost and complexity of achieving “asset lock” at the moment via the setting up of a Trust or similar provision (like a “Golden Share”) – which most advisors need to be done, with costs between $10,000 and $20,0000, plus ongoing administration and governance costs – is a barrier. These costs could be avoided if a CIC or related structure were available.
In assisting with these policy deliberations, the LMWG’s objectives have been:
- To initiate a legal structure specifically for social enterprise that will provide not only for a social enterprise “identity”, but more importantly, a level of “comfort” for social investors, philanthropists and other donors/funders who are providing ‘subsidised’ finance or donations towards the setting up of the social business, that the ‘entity’ cannot be sold, traded or wound up for personal gain, or operated for the sole benefit of its investors/shareholders.
- The model will be easy to facilitate in both policy terms and through legislative implementation, and will operate within an existing regulatory structure, eg: ASIC.
- That the focus is not solely on the needs of ‘impact investors’ as the reason for the new legal structure being required, but that all ‘stakeholders’ in a social enterprise who would be looking for assurance that the enterprise will remain committed/legally obligated to achieving its social objectives, are being considered. This means all those dealing with the social enterprise business in some way will have an interest, eg: purchasers committed to social procurement, ordinary customers and suppliers, governments including local government, the community in which the enterprise operates, beneficiaries, employees and those who act as managers and directors.
On the “need” for CICs, it is interesting to look at the original source document on the topic, specifically “Box A: Evidence of difficulties encountered in choosing a legal form” at page 13 (see “Organisational Forms for Social Enterprise”, UK Cabinet Office, 2002).
It details a range of issues beyond that of the “asset lock” as the need for CICs – all of which are potentially relevant to the case that we are developing. These issues are (pages 13 to 16):
- Lack of a robust lock on assets against conversion into a for-profit enterprise.
- Weakness of the brand.
- Difficulty in choosing an appropriate legal form.
- Problems in establishing some governance models within existing legal forms.
- Difficulties in obtaining finance.
- Limitations on access to equity finance.
- Obstacles for smaller community organisations.
- Costs of registration
There are now over 14,000 ‘community interest companies’ registered in the UK, and growing steadily – see the Community Interest Companies web-site for more information.
The Attractiveness and Power of the CIC Model
These are some of the points that have been made in favour of the CIC model in discussions in Australia
1. The visibility and ease of the model will attract new people towards establishing social enterprises, so boosting entrepreneurship and economic growth within the social economy.
2. There are clear attractions in having the CIC “asset lock” which are not available in the alternatives such as the company limited by guarantee.
3. The annual report and social impact statement required by a ‘CIC Commissioner’ under CIC legislation is more attractive to those wanting to deliver social good than what can be done reporting as a company limited by guarantee.
4. To many, operating as a CIC based ‘social enterprise’ is in itself an attraction – the ‘brand’ has separate, positive recognition.
5. The ability to offer equity funding through a CIC is a very attractive proposition for those wanting to generate increasing revenue, or to establish new income streams.
6. It is also more efficient from the ‘red tape’ perspective – it would be much better to operate under a CIC regulator than the ACNC.
7. For the more entrepreneurial in the NFP sector, it avoids the ‘dead-hand’ of risk averse Boards and enables much greater freedom of action.
Survey: Background information and questions asked of a small group of social enterprises
Background
- Social enterprises are a way of doing good outside of the constraints of charitable status.
- Social investors invest in social enterprises for the social purpose that can be achieved through generating revenue from ‘market trading’.
- To do this, it will be important that a social enterprise can demonstrate that it can “lock in” its social mission through an “asset lock” (the assets that would be derived from operating with finance provided by social investors).
- NFP structures such as the company limited by guarantee and the incorporated association are incorporated with an “asset lock”, but cannot provide for “patient capital” equity holdings on the part of social investors. Their form is primarily for “charitable purpose”.
- For-profit structures such as a pty ltd company or public company limited by shares can access equity capital from social investors for social purpose, but find that they cannot install a secure and irreversible “asset lock” under this form of incorporation.
- Securing an ‘asset lock’ in for profit structures requires a “Trust” to be set up to protect the assets. This can involve considerable cost (through the legal advisors required), as well as complex governance, administration and reporting arrangements.
- The cost and complexity involved in setting up such trusts can act as a barrier towards setting up and operating as a formal social enterprise.
We would like to document the answers to the following questions therefore into “case studies” for a report being written for the Federal Government on “Legal Models For Social Enterprise” (anonymity can be provided in the report if required).
- How do you see your social enterprise operating with an “asset lock”?
- Have you been advised to set up a trust to protect your assets?
- Has the ‘cost and complexity’ of doing this been an inhibitor in terms of access to capital and your progress as a social enterprise?
- If a cheaper and simpler social enterprise legal form similar to the “community interest company” in the UK (with a built-in and regulated ‘asset lock’) were available, would this have been beneficial to your progress?
- What other solutions do you think might be available to secure your assets in perpetuity for your social mission.
For an excellent summary of the CICs (community interest company) social enterprise model, check out the excellent report Alternative Ownership Enterprises – An introduction for mission-oriented investors (November, 2023) by the US-based organisation ‘Transform Finance’. There is a long description of CICs from pages 104 to 111 (along with several other social enterprise legal structures throughout the report).
LATEST NEWS, December, 2019 – an article on the proposed ARLC Review of social enterprise legal models has been published in Pro Bono News, see – Social enterprise structure under review
Report by University of NSW Law School on the CICs Seminar, May, 2017
Article in Pro Bono News entitled “Community Interest Companies’ Could Change the Face of Social Enterprise in Australia”
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