The projects we work with are set up as Societies and raise all or part of their capital through community share or bond offers.
The terms of membership are different for each Society, and are set out in a Share Offer Document,so the information given here is a general guide only. Society shares are a long-term investment, often offering steady returns .
Societies are a legal form, registered with the Financial Conduct Authority (just as Companies are registered with Companies House). Community Energy projects carrying out share offers are almost all Societies. You can check the registered status of Societies here. Societies can be Co-operative Societies or Community Benefit Societies and are governed by Rules, which are generally available from the Society’s website.
Societies generally aim for a wide membership, and often prioritise local applicants. The members are not just there to provide capital – when you join you become a member of the Society with full voting rights. You get one vote irrespective of the amount you subscribe for shares, and you can stand for the Society’s Board if you wish.
Societies normally offer withdrawable shares. These are quite different to the kind of shares offered on the stock market. They are not tradable, either on an exchange or in person, and will therefore never go up in value. The only way they can be redeemed is by the Society buying them back (withdrawing them). Societies are able to issue these shares to members of the public through share offers which are unregulated, and therefore less costly to carry out. The money you invest is at risk – if the Society fails, you could lose some or even all of it, and you are not protected by deposit guarantee schemes or the Ombudsman. Therefore it is important that you choose to join Societies which have a well-thought-out business plan and a good team.
Societies are not set up to make investors rich, they are set up to achieve their aims. These normally include carbon reduction and community benefits of other types – local funds, cheap electricity for community buildings, etc. Nevertheless, community energy societies need considerable capital to pay for the equipment they own and run – from small solar installs costing a few thousand pounds to windfarms in the £10m bracket. They raise all or some of the money they need through a community share offer.
The principle is that Societies only pay the amount of interest which is necessary to obtain and retain capital. That rate will vary based on the project. Typically small societies with obvious social benefits and less risky projects can raise the capital they need at lower rates of return – perhaps 4%. Larger, more risky, or less obviously philanthropic projects may need to set higher rates – say 7%.
Exactly what the return figure represents may differ between projects. It is comparatively rare for Societies to have a fixed return that is paid out in every year. Typically project returns improve over time. Societies also build up reserves to pay back members capital over time. Therefore the usual way to express member return is as an Internal Rate of Return (IRR). This is the most widely understood way of providing an annualised figure which is comparable to other investments.
Most Society share offers until December 2015 qualified for EIS and SEIS tax reliefs, which were available to most taxpayers, not just wealthy investors. The Government has regrettably announced that these are withdrawn from the end of November 2015, reneging on a previous commitment to retain the key relief, EIS, and and bring it under the new Social Investment Tax relief in time. We are lobbying Government to reverse this position.
Personal Savings Allowance
This measure, announced at the 2016 Budget, means that a certain amount of income from interest in a year will be tax free. For lower-rate taxpayers that will be £1000. That means that you could, for example, have £15,000 in community energy shares with a 6% return and pay no tax on the interest whatsoever. For some people the benefits could even be as useful as EIS. The amount you can earn without paying tax is lower if you are a higher-rate taxpayer – £500 for a 40% taxpayer, zero for a top-rate taxpayer. See Government’s Personal Savings Allowance page for more details. There is also a (more generous) Personal Dividend Allowance and we believe that given the at-risk nature of Society shares they ought to be included under this scheme instead. Co-operatives Uk are lobbying on this front but we understand the current position to be that PSA applies rather than PDA,
Generally the only you can get your money back out is either to wait for the Society to build up funds to pay you back, or to apply to the Society Board to withdraw your shares. The Board is not obliged to allow you to do this – it will depend on the financial status of the Society. In general, Society shares are designed to be a longterm investment. However Societies make substantial annual provision for withdrawal and in many cases are able to meet members’ requests for withdrawal of shares quite easily. In the case of a member’s death, there are provisions for the value of the shares to be paid to the member’s Personal Representative (Executor) and Society Boards will prioritise this repayment. Some Societies also have provision for shares to be transferred to a named person on death of a member.
Societies have AGMs at which Directors are voted in. Directors typically have to stand for re-election once every 3 years. AGMs are usually the point at which the previous year’s performance is reviewed and the payments ot community fund, member interest, and any member capital repayment are determined. Directors of Societies are in a similar legal position to Directors of Companies -they are protected by Limited liability status but are still answerable in case of mismanagement or fraud. Directors are generally not paid and can claim limited expenses.
Societies generally pay an annual fee for administrative services – either delivered in-house or outsourced. Sharenergy provides an admin service for several renewable energy Societies covering book-keeping, annual accounts, member database management and other backend work. This ensures that Societies can meet their obligations and provide a professional service to their members.
Pioneer Share Offers
Societies often struggle to raise the finance they need at an early stage, before they are ready to go to a full public share offer. The grants and loans available are generally quite small, can be hard to get, and don’t necessarily cover all the types of expenditure needed. In these cases, Societies sometimes carry out ‘pioneer’ share offers. These are typically quite small scale and targeted at people who strongly support the project and understand that they are investing at a riskier stage of development. They may receive higher tax reliefs, other perks, or just the satisfaction of supporting projects at the sharp end!
If you want to understand more about the way Societies work, the best place to start is a Society’s Share Offer Document. There are in-depth guides available from Co-operatives UK (the trade body for Societies) in their Simply series and in the Community Shares Handbook. If you are reading at that level of detail you’re probably ready to set up your own local energy project – we can help you of course!
Some Societies offer bonds as well as or instead of shares. Bondholders do not benefit from the advantages of membership (ie the ability to vote and stand for the Board) unless they are also shareholding members. Bonds are typically fixed-interest, fixed-term and offer the Society the ability to raise funds at lower rates of interest. Bond interest payments and capital repayments are usually prioritised over share payments – they offer more security in exchange for lower returns.