Warning investors about exemption from regulation

The motivation to buy shares in a society is wholly different from the motivation to buy shares in a company. This is reflected in the differences between company law and society law, and in how these corporate forms are regulated when they seek to raise capital from the public.

The commonly accepted purpose of private enterprise is to maximise the wealth of owners and shareholders. Shareholders are motivated by the revenues they receive in the form of dividends, and by the capital gains they may achieve through any increase in the value of the enterprise. Company law caters for this by allowing companies to use their profits to pay unrestricted dividends, by giving shareholders full rights over the assets of the enterprise, and by allowing shareholders to sell or transfer their shares to a third party at a mutually acceptable price.

The primary motivation for purchasing shares in a society is to support the social purpose and objects of the enterprise. Financial motivation is at best secondary, and any return on capital is better understood as compensation rather than a reward for risk taking.

Because of these differences in investor motivation, societies are normally exempt from financial promotions regulations when promoting the sale of share capital to the public. Accordingly, all community share offer documents should make it absolutely clear that anyone buying community shares could lose some or all of the money they invest, without the protection of the government’s Financial Services Compensation Scheme, and without recourse to the Financial Ombudsman Service. This warning should be prominently positioned in all offer documents and expressed in plain English.

For further information, see Community Shares Handbook Section 7.3, http://communityshares.org.uk/resources/handbook/financial-services-and-...