The increasingly harsh realities of the UK arts funding climate are leading a growing number of organisations to look at raising investment funds to support their activity. Neil Adleman explores the legal implications for arts charities.
In general terms, investment involves a relationship whereby a person providing money has some expectation of it both being repaid and of earning a return on it. While investment is increasingly being seen as a part of a mix alongside more traditional sources of income, there are a number of key considerations that arts organisations need to address when contemplating raising investment funds.
" Be clear as to what the investment relates to.
By its nature, investment is linked to financial return, and a number of factors may mean that an organisation will be unable or unwilling to pay a return linked to its day-to-day operations. Investment is therefore more likely to be linked to a particular discrete project. This would need to be a project which, with the acceptance of a greater risk by the organisation (cushioned by the investment funds), has the potential to generate a return above and beyond everyday activity. For example, it might be a theatrical production that has the potential to transfer to the West End or an exhibition that could tour internationally.
" Ensure that the organisations mindset adjusts to working in the world of investment.
This includes accepting the fact that the motivations of potential investors, whether they are corporate or individual, may differ from those of the sources the organisation taps when it is seeking sponsorship, gifts or donations. After all, an investor is coming on board because they hope to get their money back and maybe even make a profit on it. This contrasts with someone making a donation on a charitable basis. The likelihood of the investment being returned and a profit being made will need to be modelled and the tax perspective will need to be considered.
" Comply with charity law requirements.
Many charitable organisations assume that it is impossible for them to raise investment. That is not the case, and with careful structuring it is possible to raise investment within the confines of charity law and in such a way that the other activities of the organisation are not exposed to an undue level of risk.
" Comply with regulatory requirements.
Raising investment is likely to take an organisation into the realms of the Financial Services and Markets Act 2000. This is a wide-ranging piece of legislation that regulates investment in all its forms. In particular, it will impact on how an organisation structures the investment it is raising and, importantly, how it promotes the opportunity to invest. This, more than anything else, is a subject that trips up even those operating in the commercial sector, so it needs early consideration.
Going out to raise investment is not something that a subsidised organisation should take on lightly and, indeed, when they dig into the detail, some organisations decide that it is not for them. However, with creativity, it can provide a method by which to tap existing supporters in a different way and to reach new sources of money. It can also offer organisations the chance to exploit opportunities that they might otherwise have to pass up.
Neil Adleman is a partner and Head of the Theatre Group at solicitors Harbottle & Lewis LLP.