The ability to withdraw an investment solves a liquidity problem faced by any minority shareholder in a small enterprise. The potential liquidity for community investors can be a significant reason underpinning the suitability of the co-operative structure for a community enterprise with a large number of small member investors.
By comparison, shares in companies are usually transferable, but not refundable. Under normal circumstances company shareholders are not allowed to withdraw their shares. Instead, the shareholder must find a willing buyer for the shares. This can be very difficult for shareholders with small investments, especially if the company is too small to be listed on a stock market. Share trades through broker private placements or a stock market provide liquidity, but this will not always suit investors who hold relatively small parcels of shares.
These companies will typically have significant amounts of share capital on issue and will not be in the genre of ‘community’ or ‘social enterprises’.
In solving the liquidity problem for its shareholders, co-operatives can create a liquidity problem for themselves. A co-operative must plan how it will generate enough cash reserves to allow share capital to be withdrawn or repaid without impacting the financial viability of the enterprise. The most effective way of doing this is by attracting new member shareholders, to replace member shareholders who wish to leave the co-operative. Co-operatives can maintain a list of willing buyers of shares if an existing member needs to exit the co-operative and wishes to transfer shares. An ongoing community investment and engagement programme is essential. Liquidity issues can also be mitigated through terms of issue of shares that specify or restrict rights to withdraw shares or different classes of co-operative shares.