About
Foundation East is a responsible finance provider based in Bury St Edmonds, lending to businesses and social enterprises across the East of England. Foundation East is a community benefit society (Society for the Benefit of the Community), which means it is a co-operative and has member shareholders. This case study demonstrates how individuals and corporates can invest in a CDFI through shareholder capital or equity.
Amount raised
Since 2005 Foundation East has raised £145,000 from 55 individual investors buying shares using CITR. This is an average of £2,600 per investor. The benefit of this model is that it is accessible to a larger market of investors – low net worth individuals, high net worth individuals and corporates. Buying shares is also a way of supporting local economic growth. Investors can invest in shares for a 5 year period. At the end of 5 years they may choose to not reclaim their capital and continue investing for a further 5 years.
Foundation East declares upfront that the investment is not guaranteed and that investors should take independent financial advice before investing. Investing small amounts helps investors spread the risk of investing.
Marketing
Foundation East markets CITR as an investment tool with potential investors. They have a prospectus and information on their website. Several other CDFIs are also community benefit society and offer this investment model.
Benefits
Equity investors typically buy shares in a CDFI for the benefit of supporting local economic growth, therefore the tax relief is an additional benefit. It is useful when raising equity investment from local individuals or corporates who are not as familiar with the CDFI model and may be interested in the social and financial return. Therefore investors benefit from receiving the 5% annual tax relief. Similarly local corporations can buy shares and receive the tax relief while also supporting investment into underserved local businesses.
Challenges
Potential individual and corporate investors may not be aware of the option to buy shares in a community benefit society like Foundation East, and also may not be aware of the financial benefit of CITR. As IFAs and tax advisors may not be familiar with CITR investors may not realise this as an option.
Impact
All of Foundation East’s lending to date is funded through CITR investment. An example of a business supported by a CITR backed loan can be found here.
Lessons learned
Foundation East’s experience targeting individual equity investors has shown that awareness of CITR amongst that investor community is low. EIS and SEIS investments are risky but also have a large potential upside. CITR investments are also risky, but the return is lower, therefore the investor also needs to have a social objective as well.