The Government should ease restrictive rules on how much community interest companies can pay investors, according to an association of charity legal specialists.
The Charity Law Association said the CIC structure, which was intended to act as a legal model for social enterprise, was not being taken up by potential social entrepreneurs because of worries over caps on interest and dividend payments.
In response to a consultation carried out by the CIC regulator, which closed last week, the association said the cap limiting how much CICs can pay in performance-related interest should be abolished.
It said the rules imposed on CICs in this area were stricter than those imposed on charities.
It was not necessary to have a cap both on the total amount of dividends a CIC could pay and on the maximum dividend it could pay per share, the association said.
It would like to see CICs able to distribute up to 49 per cent of their profits and have no maximum return on investment per share, it said.
"There is no reason why investors in a CIC that does well should not receive a good, even a great, return," the association said.
"Arguably, it is for the market to decide what return investors should receive rather than the regulator, provided the fundamental principle that most of the profit is reinvested for the benefit of the community is adhered to."
It added that the risk to reward ratio imposed on investors by the existing regulations was likely to discourage investment.
The CLA response concluded that the regulator should survey both philanthropic and commercial investors to find out what levels of return they thought were reasonable.
It said the Bank of England base rate should be used to calculate caps.