Proposed Changes to Community Interest Company Regulation to Encourage Investors

Draft regulations have been published to amend the Community Interest Company Regulations so that the maximum dividend per share is removed. It is proposed that these changes will come into force 1 October 2014.

Community Interest Companies (CICs) limited by shares are able to distribute profit to their shareholders who are private investors subject to the dividend cap. The dividend cap currently has two elements:

• The maximum dividend per share (known as the share dividend cap); and
• The maximum aggregate dividend.

The regulations propose to amend the dividend cap to remove the share dividend cap. The maximum aggregate dividend is being retained.

At the moment the share dividend cap limits the amount of dividend that can be paid per financial year per share as a percentage of the paid up value of the share (currently 20%).

If this is removed then only the maximum aggregate dividend will remain. The maximum aggregate dividend restricts the aggregate dividend that can be paid out per financial year to 35% of the CIC's distributable profits.

It was put forward during the consultation process that the combined effect of the share dividend cap and the maximum aggregate dividend was off-putting to potential investors because these are not mutually exclusive and both have to be fulfilled.

The proposal to remove the share dividend cap will leave only the maximum aggregate dividend and therefore the more profit a CIC makes, the more can be distributed to investors and also retained for the benefit of the community (potentially a win-win situation).

It remains to be seen whether this encourages more investment in CICs.

It could be argued that a lot of investors in CICs and other social enterprises are not primarily motivated by financial return. However, it will remove the maximum dividend per share which can be difficult for people from a non-financial background to understand particularly those who are new to share investment. Some CICs may also be encouraged to re-think their business models as a result and people thinking of setting up new CICs may also be encouraged to consider alternative forms of investment.

We will follow the progress of the draft regulations to keep up to date with the proposed changes.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.