Membership share offers
The following Flow Chart shows the steps in an offer of membership shares for a distributing co-operative.
Note: If the co-operative is a non-distributing co-operative, it may not have been required to prepare a formation disclosure statement. A disclosure statement should still be prepared in accordance with the guiding principles in this Handbook.
If application for membership is accepted, the member’s name is to be entered on the register of members and shareholders, and the membership shares must be allotted. If there is also an application for additional shares, these can also be allotted.
If application for membership is not accepted, the applicant must be informed and any money paid is to be returned.
Specific disclosure for a membership offer
The formation disclosure statement is the first ‘offer document’ of the new co-operative and any prospective members must be provided with this disclosure document prior to being required to take up any shares53.
The specific information required for a formation disclosure statement focuses on the requirements expected of a member, including a person’s eligibility for membership and any active membership requirements along with any minimum and maximum obligations to acquire shares or to pay any annual subscriptions.
The active membership requirement for a co-operative will be part of the co-operative’s rules, and the disclosure statement should ensure that this requirement is accurately set out.
In addition to specific information about the membership obligations, including the minimum and maximum shareholding requirements, the formation disclosure statement must contain information about the rights and liabilities attaching to shares (these are the ‘terms of issue’) and information about the proposed financial arrangements for the new co-operative.
The terms of issue of membership shares would include the minimum subscription and whether they can be issued partly paid, whether they may be repurchased (withdrawable) and whether and how they may be transferred. Membership shares would be expected to have the last priority in repayment if the co-operative is wound up and this should be stated. For a co-operative proposing to issue additional shares, this fact should also be included, and if the terms of additional shares are known at this time, then it is appropriate to include this fact in the formation disclosure statement. An example of a formation disclosure statement is in Part 5.
This type of information is intimately linked to what the co-operative would include in a Business Plan. The requirements for capital and the timing of those requirements along with estimates of the costs of the enterprise at various stages are all matters that would normally be included in a business plan.
The preparation of a Business Plan and its inclusion as part of the disclosure statement is likely to satisfy the remaining requirements for a formation disclosure statement under s25 CNL, namely,
- the estimated costs of formation;
- the capital required for the co-operative at the time of formation;
- the projected income and expenditure of the co-operative for its first year of operation;
- information about any contracts required to be entered into by the co-operative;
- any other information that the Registrar directs to be included.
What should be in a business plan?
There are many templates produced for the preparation of a business plan, however, in order to satisfy the requirements for a formation disclosure statement the following information should be addressed in proportion to the scale of the co-operative’s proposed enterprise:
Purpose and objectives:
the purpose and objectives of the co-operative, a summary of its origins, and why a co-operative structure best suits the proposed enterprise.
Demand for services:
any scoping study or other evidence of demand or need for the services to be delivered through the co-operative.
The investment project: capital required and how this capital will be used:
valuations, assessments, terms and conditions affecting any major assets to be acquired or any contracts that need to be entered; planned sources and costs of capital. Cover the pre-conditions that must exist for the successful commencement of activities such as minimum subscription levels, purchase of property etc. Explain what happens if the co-operative is unable to satisfy these conditions54.
Proposed trading activities:
description of trading activities; manager competencies; staffing plans; market analysis and marketing plans; member engagement in trading activities.
cashflow forecasts; projected balance sheets and profit and loss accounts covering at least the first three years of the investment project. It must be stressed that information in relation to financial forecasts must be able to be supported by reference to known facts and responsible research through a due diligence process.
fundraising targets, timetable, contingencies, terms and conditions, and share liquidity provisions; tax relief (if relevant).
identification of the key risks facing the investment project, and plans for mitigating these risks.
Governance: details of the board arrangements:
including any persons who have agreed to become initial directors of the co-operative once it is formed and an outline of their competencies.
profile of the community targeted by the offer document; community engagement activities to date; evidence of community support; plans for promoting the offer55.
If the proposed activity of the co-operative is to conduct or buy out an existing enterprise or asset, then it will be essential (and most likely will be required by the Registrar) that there be a valuation of such enterprise. Valuations or information that is normally something within the province of an expert should be included in a Business Plan because they will be important pieces of information for an investor to use to make a decision. Expert opinions can be included in a disclosure statement with the consent of the particular expert. Once an expert consents to his or her opinion being so included, then the expert will be liable in respect of any misstatements or negligence in forming that opinion. The co-operative and its directors may also bear some liability if they have not properly briefed the expert or if they choose an expert to provide the opinion and that person does not have relevant expertise because the co-operative has not made appropriate checks regarding their expertise.
Relationship of the formation disclosure statement to capital raising
As the name suggests, the formation disclosure statement is a requirement for the formation of a distributing co-operative under the CNL. Once a distributing co-operative is formed, however, the formation disclosure statement becomes a more fluid and enduring document. It is no longer referred to as the ‘formation disclosure statement’, rather it is the disclosure statement that the co-operative must provide to any person who is considering becoming a member of the co-operative. The formation disclosure statement will be registered with the Registrar once the co-operative is formed, however, the co-operative then has a statutory obligation to ensure that the disclosure statement is current56.
Distributing co-operatives are required to provide a person who proposes to become a member, both a copy of the co-operative’s rules and a current disclosure statement57. It will be referred to in this Handbook as the ‘member disclosure statement’.
The member disclosure statement will contain the same type of information as specified for formation, but the requirement that it be ‘current’ imposes an obligation on the co-operative to update or amend the disclosure statement when there is a significant change in the rights and obligations attaching to any shares or in the financial position of the co-operative. There is no fee for the lodgement of an updated disclosure statement.
By requiring the co-operative to maintain a current member disclosure statement, the CNL ensures that new members receive the best disclosure possible at the time of joining and taking up shares. It reflects the nature of co-operative capital raising as a continual process of offering memberships.
In many respects the member disclosure statement constitutes the ultimate community share offer. It is continuous and relies on continual building and growth of community engagement.