Stephen Lloyd moots new legal structure for hybrid social businesses 4

Finance | Tania Mason | 21 Mar 2011

Charity lawyer Stephen Lloyd, one of the architects of the Community Interest Company structure, is leading a drive to convince the government to create a new legal form that advances a social purpose but also allows financial returns to private sector investors.

Social Enterprise Limited Liability Partnership would be similar to the new US hybrid legal structure known as a Low Profit Limited Liability Company, or L3C. Under this model, companies must have a social aim as their primary goal but they can be run as regular profitable businesses.

The SELLP would be employed by charities and commercial firms that want to work together to advance a social purpose. Lloyd, a senior partner at Bates Wells and Braithwaite, is working together with Arthur Wood, founding partner of Total Impact Advisers, and others to draw up the new legal form.

Lloyd (pictured) said the introduction of CICs has been useful, but limited in terms of impact because the asset lock can deter investors. In creating CICs, the government had recognised the need for a new type of legal form for social entrepreneurs, but now there is a need to go further.

“This is an attempt to create a hybrid mixed-purpose legal vehicle to achieve charitable purposes but also allow injections of finance from charities, government and the private sector,” he told Civil Society.

“It aims to ensure charities can invest easily and sensibly without worrying about whether they are breaching their charitable purposes and being sure that HMRC will see the investment as a qualifying investment and there will be no tax risk.”

He said the charity would take the first risk in any investment in order to attract private sector money. The financial returns generated will flow to reward the secondary investors.

Lloyd is proposing that if there are better-than-expected financial returns these should go to the charity, but he admits this part needs more work in order to ensure that caps on profit don’t deter investors.

“It’s a layered financial concept that requires a dedicated vehicle that needs to be legislated for,” Lloyd said, “because for charities to be able to invest in it, it needs to be accepted by the Revenue and Charity Commission as appropriate investment.”

Lloyd is suggesting that the CIC regulator should also regulate SELLPs. He has already proposed the model to Dfid and is meeting the Cabinet Office next month.

Lloyd and Wood will present the case for their proposals at the Skoll World Forum for Social Entrepreneurship at Said Business School in Oxford on 31 March.

An example of how a Social Enterprise Limited Liability Partnership might be used:

Research shows that for every £1 invested in sanitation projects in poor countries there is a saving or return of £8, derived from consequences such as lower demand on public health services, less work days lost to illness etc. So say a charity invests £20m in building an effective plumbing/sanitation system in a slum in a developing-world country. A private company or other investor is persuaded by the charity’s own investment that it is a worthwhile project and so stumps up a further £80m. Because the slum-dwellers are already paying some money for their existing, low-quality water supply and plumbing system, there is an opportunity for a financial return on the private investment alongside the social return that helps the charity to achieve its charitable aims.

Directory: Bates Wells & Braithwaite
Who's Who: Stephen Lloyd

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Dave Hollings
Director
Co-operative and Mutual Solutions (CMS)
7 Apr 2011

I don't think we need another legal form.

If the concern of the private investors was the asset lock, then there would be an issue about how social was the enterprise.

But all the issues Stephen Lloyd mentions could be handled in an Industrial and Provident Society. There is no need for an asset lock; the limit on return on capital is what 'is needed to retain investment' so a return higher than 20% is possible; the shares could be transferable and withdrawable so the private sector partner could get out; and the society could be co-ownership rather than common ownership. Frankly, its not a million miles form the model used by successful farmers co-ops up and down the country for over a century.

If there are relatively minor changes to existing leislation (such as allowing charities to invest in this way) this will be easier than creating Parliamentary time for a whole new Act. It might be done by Private Members Bill, Legislative Reform Order or Statutory Instrument.

[Reply]

Edward Harkins
http://uk.linkedin.com/pub/edward-harkins/15/40/635
4 Apr 2011

On Stephen Lloyd you report:

“He said the charity would take the first risk in any investment in order to attract private sector money.”

I cannot anticipate any legitimate lending/investing institution engaging on that basis. The institution would risk having to contend with a situation where a significant risk has been realised in the hybrid entity with a severely negative, perhaps terminal, knock-on impact on the ‘charity parent’. In such a scenario, the media would have a field day as in, ‘Fat Cat Lenders walk away with their money, leaving deserving charity to go to the wall’.

Why would a legitimate private sector player want to risk that scenario? If there are (and there are) private sector institutions who are highly CSR-aware, they would surely seek a more appropriate, not to say uncluttered, channel.

The scenario also reminds me of the episode of Dragons’ Den when the ‘dragons’ ran for the hills when they found that a pitcher was a social enterprise. They could not get their heads around the difference between a charity and a social enterprise. One ‘dragon’ spoke for them all, anyway, when he said he would be unhappy at earning returns out of a organisation that was a ‘charity’ with none of the other directors earning anything.

Incidentally, Stehpen Lloyd's language is yet another example of the lazy and confusing terminology across this domain whereby the concept of charity, social enterprise, trading company, etc. just gets more and more conflated.

[Reply]

Paul Edwards
Community development worker
22 Mar 2011

This proposal is a distinct muddying of the waters around organisations with a social purpose. Loans are one thing but investment is another. One reason that CICs are acceptable is the asset lock that prevents assets being soaked away from the charitable sector. A loan creates a specific liability that is transparent to all stakeholders but investment creates an unspecified return geared to the success and profitability of the enterprise and paid to investors rather than being reinvested to the benefit of the social purpose. One can imagine businesses set up to benefit from the cachet of having a social purpose but whose real aim is to trade on the cachet to generate greater private profit. This is abridge too far, I think.

[Reply]

Jeff Mowatt
Director
People-Centered Economic Development
21 Mar 2011

This would appear to be a move away from the concept of 'social business' as prescribed by Muhammad Yunus, in which investors are repaid only what they contribute. In the model that P-CED conceived, for example it's not a question of whether business make a profit - which it must do to survive, but how those profits are directed toward a social objective, which is the point. For us, there is scope in 'for profit' partnerships, but the preference and our own core operations remains non dividend distributing.

P-CED is a model which was conceived by a pioneer of what is now known as the 'for profit' model of social enterprise who first published it in synopsis on the web in 1997 before deploying it in a proof of concept project which created a microfinance based initiative in the Russian city of Tomsk. It was introduced to the UK in 2004 based on what was available at the time, the guarantee company model.

The Tomsk initiative was to lead to the creation of 10,000 micro enterprises over the next 5 years from an initial investment of $4000 in research.

Since 2004 major focus in Ukraine has been on reform of the childcare system and from a strategy plan delivered in 2006, one of the consequences has been a 40% increase in domestic adoptions over the next 4 years. The paper lays out the concept of a social enterprise investment fund which as a soft power approach is weighed against the weekly cost of war in Iraq.

http://en.for-ua.com/analytics/2007/08/09/110003.html

Perhaps there would be benefit in the collaboration of lawyers and those with field experience?

[Reply]

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