Community finance and the importance of being honest

The Financial Services Authority recently said that community finance has the potential to be 'explosively good' for society. It is a welcome recognition of the potential for the sector to build and capitalise upon the significant progress that has been made in this area in recent years.

This is clearly a crucial juncture, as the community finance movement grows and matures – and as more political and media attention focuses on its potential to help bring about the Big Society – it is critical that the movement does all it can to make sure its investment offers are up to scratch.

Freedom and Responsibility

Many, but not all, community finance offerings benefit from some form of legal exemption and therefore take place outside the scope of the statutory regulation of financial services. This can lead to the dangerous conclusion that the law is not concerned with protecting investors by ensuring the quality of community offerings.

While community offers are often not subject to statutory regulation, they are subject to the usual legal rules governing contracts and other relationships of trust, including breach of contract, misrepresentation and deceit. It is therefore essential – legally, ethically and commercially – that offers are rigorously prepared, properly checked and correct in every respect. The best way to do this is to seek to bring unregulated community offerings as close as possible to the standards of regulated commercial offerings, with appropriate adaptation to reflect their social nature.

Investing in consistent, clear and comprehensive offer documentation pays dividends. This is obvious from the example of Energy4All, a client of ours which sets up renewable energy co-operatives and promotes community-owned renewable energy in the UK. Energy4All has managed to build very loyal and committed constituencies of community investor-supporters, who understand the risks involved with their investments and so remain resilient and supportive and happy to reinvest.

Some Key Principles

Here are some key principles to think about when seeking to draft good, accurate offer documents:

1. Make sure the offer discloses its regulatory and legal status prominently, so that readers are able to understand immediately what they are reading and how it has been prepared.
2. Set out clearly and boldly all the risks associated with investing in the offer, including general risks, industry risks and risks associated with the particular circumstances of the offer.
3. Get the balance right between the social and financial reasons for investing.
4. Be very careful about making any forecasts, projections or comparisons with other offers.
5. Double-check and verify all statements of fact to make sure they are correct and that readers are not misled by the omission of important details.
6. Disclose all substantial contracts, conflicts of interest and related party agreements.
7. Ask an independent third party to read, question and critique the offer document, preferably someone who has experience of drafting and reviewing offers.

All for One and One for All

The release of a Practitioners Guide to Governance and Offer Documents (available at www.communityshares.org.uk) is great news and a big step in the right direction.

There is no room for complacency when asking people to part with their money. A single misrepresentative offer could tar the whole self-regulated community finance sector, so it is vital that those who cut corners or fail to disclose important information are held to account. It is now up to the whole sector to work together to eliminate bad practice, improve the quality of offer documentation and spread best practice. Trust takes a long time to acquire but it can be easily lost.

Luke Fletcher is a solicitor at Bates Wells & Braithwaite and acts for a number of community and social finance offerors and investors