Running a loanstock scheme
Loanstock is a simple yet legally watertight way for members of the public to invest in Communities. It is recommended by the Industrial Common Ownership Movement and Radical Routes, among others. The investment is placed with the community for a fixed period of time; it may carry interest and (subject to certain conditions) it may be withdrawn earlier than the closing date. The investor does not get any decision making power in the organisation.
It is ideal for a highly targeted ethical investment because it does not require legal advice to issue, and so is available to smaller groups. There is no danger of the investors having control over the project, and the stability of the investment can provide a great deal of support to a new enterprise.
It is a form of loan repayable in full on its 'closing date' which means that the community does not need to budget for regular repayments in the difficult early stages. It is also unsecured, and this all adds up to a package which is typically not very attractive to cautious investors. For this reason, it is usually most appropriate to approach members, friends, relatives, committed supporters and others with a very strong interest in the project.
At the same time, it does offer some benefits to the investor - a high level of accountability (since you know exactly where your money is invested and what it is being used for), interest to prevent your investment losing value, and a close personal connection with the project.
It is a form of loan repayable in full on its 'closing date' which means that the co-op does not need to budget for regular repayments in the difficult early stages. It is also unsecured, and this all adds up to a package which is typically not very attractive to cautious investors. For this reason, it is usually most appropriate to approach members, friends, relatives, committed supporters and others with a very strong interest in the project.
It is used mostly by Industrial and Provident Societies (for example, Housing Co-ops) who are exempt from the strict legislation on soliciting investment. Companies absolutely should not advertise loanstock schemes to the public. Even I&PSs should be very cautious in the claims they make.
Loanstock schemes should have a clear closing date, and where necessary a rate of interest. This rate of interest could be whatever your community feels is necessary to raise the investment usually between 0-5%(but, according to co-operative principles, no more) and whatever you feel is possible within your business plan. The interest could be paid in the form of further loanstock, if that is clear in the conditions of the issue, with the same closing date. Many loanstock schemes also specify the maximum size of the issue, but given that common ownership enterprises do not divide their profits among investors, this is unlikely to be an issue; the accompanying business plan will be of more interest to potential investors.
To see a sample loanstock certificate (in it's original form for Co-operatives) follow this link sample loanstock certificate
A few tips on record keeping: always keep a register of certificates issued, always number and retain the application form, always ensure that the conditions do not oblige the community to make repayments earlier than the closing date, and always stay in touch with your investors with regular newsletters and updates. It can be a real pain if you lose track of where they are living over the years!
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