Social Investment - what is an asset lock?

What is an asset lock and how does it impact my investment in a social enterprise?

In answer to the first question, an asset lock is a legal device preventing the distribution of residual assets to members.

It is important to note that the purpose of an asset lock is to ensure that the public benefit or community benefit of any social investment is maintained, and cannot be of private benefit, thus ensuring that funds are used for the purposes intended. (Also read our prior blog called "Social Investment - is it for me?".)

And secondly, how does this affect my investment in a social enterprise?

If your investment is made by way of a loan then the "lock" will not affect the investment. You will be entitled to a contractually agreed rate of interest and entitled to the return of your monies at the end of the investment term.

The majority of social enterprises in the UK are not structured by way of Share Capital so it is realistic to expect much more investment through this debt equity option.

Social investment through Share Capital.

If your investment is by way of shares then a lock may impact your social investment in the case of dissolution or reorganisation of the social enterprise. As a shareholder you will be entitled to a dividend, and a refund of share capital at the end of your investment, according to the rules of the society.

However, if the social enterprise wants to transfer any assets or profit (aside from those distributed in accordance with the society rules on dividends and redemption of shares as noted above), then the lock will define how this is undertaken.

The only bodies to which assets can be transferred to are other “asset-locked bodies” – i.e. those organisations which already have an asset lock. This means that assets may be transferred to:

• another prescribed community benefit society,

• a community interest company,

• a charity,

• a charitable community benefit society,

• a registered social landlord (subject to conditions).

Charities and Community Interest Companies are obliged to have asset locks, but co-operatives and community benefit societies are not; however, the Financial Conduct Authority (FCA) does have oversight to ensure that social enterprises are being run as intended and have controls in place which prevent the profits or the assets (outside of society rules) from being distributed to members.

So there is a clear relationship between the asset lock and the community interest test, in that the test may not be seen to be met if it is considered that the activities of the social enterprise are being carried out for the benefit of the company’s directors, employees, or service providers, rather than for the benefit of the community.

The good news is that, for most of us, an asset lock is something that we should certainy know about but will not need to deal with.