Community Shares Funding Social Enterprise

The rise of community investment initiatives will change the face of impact investing in Australia and provide a new avenue for community based growth capital for social enterprise, writes Alan Greig from Employee Ownership Australia Ltd.

In my last post I reported on developments in crowd sourced equity funding for private companies and the Federal review currently underway to legally enable this in Australia – with the obvious benefit of providing “patient capital” needed to grow social enterprise in Australia

This week I want to report on the other form of crowd sourced equity funding – that of “community shares” which is specific to the cooperative form of enterprise and can be undertaken legally (and cheaply) in a certain way under existing State based Cooperative Acts.

Given the resurgence of interest in cooperative start-ups, it is important to understand how the key resourcing issue – the supply of capital in their early stages –  can be facilitated through crowdsourced community share issues.

The key “how to” on this topic is “Community Investment” manual published by Cooperatives UK. This manual showcases many successful cooperative start-ups in the UK and highlights how community investment is the most effective way of generating start-up capital for community owned, cooperative enterprises. (Community investment is termed “community capital” in the US and is part the “COCAP” revolution of ‘people powered’ projects now sweeping many parts of the world).

For comparative purposes, the most comprehensive data on “community shares” is that from the UK economy – and here, we can refer to the excellent Nesta research report “Understanding Alternative Finance” which has analysed/surveyed all the nine new forms of ‘alternative finance’ that are developing, including community shares.

This study shows that there has been a 95 per cent growth in the value of community share issues over the years 2012, 2013 and 2014, from £9 million in 2012 to £34 million in 2014 (£15 million in 2013), with £174,000 being the average total investment per project. Most importantly, given the people powered nature of these projects, there was an average of 474 ‘investors’ per project.

The total value of the community share issues over the three years is equivalent to A$120 million – a substantial sum compared to what ‘impact investing’ is doing, both here and in the UK ! Community share offers are showing success in ventures ranging from farming and food security, to football clubs and pubs, community retail stores, renewable energy projects, health services, social care cooperatives and urban regeneration.

What these statistics show also is that community investment is very successful in generating “engaged equity”, with community members participating not only in the social and economic mission of a social enterprise, but in its financing as well.

Intriguingly, there are many successful ventures of this nature in Australia but these seem to lack the same attention that researchers, social enterprise developers, policy makers, funders and impact investors are giving to the ‘charity model’ of social enterprise. Some of the better known ‘community share’ successes are “Hepburn Community Windfarm Cooperative” and “West Belconnen Health” (now the National Health Cooperative). The power of community investment in these cases has not stopped with the amount of capital raised – the community investors are themselves the customers of the ventures, with their loyalty contributing to their financial sustainability.

In the last decade, governments have been keen to promote social enterprise and its close cousin, social investment, with the objective of building relationships between social enterprise and commercial/private investors.

Community investment – of which community shares is the major component – is quite different. Instead of turning to the private sector for support, community investment is about encouraging communities to invest in themselves. It is the practice of harnessing the collective power of whole communities, with relatively large amounts of capital being able to be raised in relatively small sums from many community members. Individual community members investing this equity (or in some cases debt finance) into cooperative business ventures thus highlights a new role for the ‘retail investor’ to play in social investment in Australia.

This new role for the ‘retail investor’ will be a challenge for social investment policy development in Australia. This is because policies in this area revolve mostly around the “institutional investor” as represented by governments, social finance funds, wealth based philanthropy and corporate impact investing. As a result, community investment is unrecognized and under-valued by policy-makers – and largely “crowded out” of the impact investing ‘market’.

This is a shame, especially given that community investment provides a business model for communities to help themselves where the private sector has failed them. For instance, in a growing number of regional and rural communities, people have come together to rescue vital facilities and services from closure – stores, service stations, pubs, and picture theatres etc – transforming them from a failing private business into vibrant community owned enterprises. The latest example of this is the community buyout of a butchery in the Victorian country town of Birchip with a view to creating jobs and training opportunities for young people.

To power up community investment from here will require a different skill-set. Buying shares in community businesses involves a leap of imagination for many traditional community activists, more used to organising fund-raising and advocacy events than launching a community share offer. People’s savings are not generally earmarked for good causes, and donations represent only a fraction of this untapped investment pool in the community. So mechanisms created to enable people to invest in good causes in their own communities – as viable social enterprises – can enable far greater sums of money to be raised than through charitable giving. On this, the statistics above are indicative.

On the other hand, cooperatives as a legal form are not common in delivering community services in Australia, and perhaps because of their unconventionality they are seen as being a bit ‘risky’. Community participation in the ownership and operation of community services is not always welcome by the powers that be. However, while they may be an under-used model in social practice, they should not – and should never be given their democratic structure – become instruments of ‘top down’ public policy.

Community investment can add a new dimension to social policy therefore, by making the community not only the investors in, but also the owners of, new social enterprises. By ensuring that ownership is in the hands of the broader community, there is a greater likelihood that these ventures will continue to serve the interests of that community. They also provide for long term social inclusion in that – unlike many ‘social programs’ – they are delivered “with and by” people rather than “for and to” them.

Shifting the “top down” culture of Australian social policy will require both education and a change in public attitude towards economic participation and community investing. Owning “community shares” and pursuing a social purpose simply don’t go together in the public mind in this country – people are far more comfortable with the idea of donating to a good cause than investing in one.

On the plus side though is that the democratic nature of cooperatives encourages and reinforces the inclusion ethic by treating every member as an equal, regardless of how much they have invested in the cooperative or how “disadvantaged’ they may be. Members are encouraged to focus on their mutual and community interests, rather than narrow self-interest and return on investment. The ability of some members to invest more than others confers no special privileges under cooperative principles, but this does not appear to discourage wealthier community members from investing more and becoming involved.

One of the best ways of learning how to harness community investment is to examine the many practical experiences of those who have already done it. For local examples, you can see the website of the Business Council of Cooperatives and Mutuals in Australia. The BCCM is in the process of developing an online resource and advisory exchange for community share issues and community investment.

I would also recommend the following for recent experience in the UK:

1. The “Community Shares” web-site for the range of projects showcased (see: http://communityshares.org.uk/ ),

2. One of the platforms for community share offers called “Microgenius” (which you can see at: http://www.microgenius.org.uk/ ).

As community investment and ‘people powered’ initiatives come to the fore, it will change the face of impact investing in Australia and provide a new avenue for community based growth capital for social enterprise.

About the author: Alan Greig is a Board member Employee Ownership Australia Ltd, a Director of The Mercury Centre Cooperative Ltd and Co-ordinator of the Social Enterprise Legal Models Working Group. He is not a lawyer, so the above represents opinion only.