7,500 CICs and Still No Working Share Structure

There are now over 7,500 Community Interest Companies in the UK. January 2013 alone produced 172 new incorporations. By any measure, the CIC experiment is succeeding at scale.

But scratch beneath the surface and you’ll find a persistent, nagging problem that the growth figures don’t capture. Of those 7,500 CICs, at least 1,695 are limited by shares. That’s 23% — a substantial minority who chose the share structure because they wanted to attract investment, involve employees, or create a mechanism for community ownership. And the share structure is letting them down.

I’ve been saying this for a while now, but the evidence from our “A Fair Share” survey makes it impossible to ignore. When we asked share CICs what was happening on the ground, the picture was stark. Most have fewer than ten shareholders — 75% fall into that category, and 27% have a single shareholder. Most have never issued more shares than the original allotment. Most have never paid a dividend. Most — and this is the killer — have never even looked at how to calculate what they’re allowed to pay.

This is not a functioning capital market. It’s a structure that exists on paper but doesn’t do its job in practice.

The problem is that the CIC share was designed with good intentions but without a clear understanding of how real businesses use equity. The cap on dividends, pegged to the initial paid-up value, was meant to ensure that profits stay in the community. What it actually does is make the share unattractive to investors, unworkable for founders, and incomprehensible to everyone else.

Here’s what a functioning share structure would look like. It would allow founders to be rewarded for the value they create — not told that their £1 subscription means they can only ever earn a penny in dividend. It would allow employees to participate in the success of the business they’re building. It would allow communities to invest in the enterprises that serve them, and to see a return that reflects the real performance of the business.

None of this requires abandoning the community purpose. The asset lock still applies. The aggregate cap of 35% of distributable profits still limits total distributions. The community interest test still ensures that the CIC is serving its stated purpose. What changes is that the mechanism for calculating returns becomes rational rather than arbitrary.

The Regulator has a choice to make. She can accept the status quo — a share structure that exists in form but not in function, a tick-box compliance exercise that nobody uses. Or she can implement the reforms that our evidence clearly supports: remove the peg to initial paid-up value, increase the performance loan cap, and give CICs a share that actually works.

The CIC movement has come too far and grown too big to be held back by a regulatory detail that should have been fixed years ago. We have 7,500 organisations proving that the model works. It’s time the regulatory framework caught up with them.