The first step in planning an offer of securities is to identify which of the three types of offer is most appropriate for the co-operative at that time. This will change as the co-operative develops, and it is helpful to prepare a longer-term strategy for how the co-operative will plan its future capital needs so that its rules are broad enough to encompass those future needs.
Initially, a co-operative would need to propose an offer of membership shares to engage the community in the enterprise and gauge how much support there is for their objectives.
Sometimes, it might be useful to raise funds through a simple crowdfunding campaign for donations. This will provide some start up funds to help prepare any necessary documents to either form a co-operative or prepare an offer document and it will give information about the level of community support for the initiative.
Initial crowdfunding may not be appropriate if the project is subject to a short time framework such as in an acquisition or buy out of an existing enterprise.
After a membership offer, it may be useful to launch an offer of additional shares designed to raise further share capital and commitment to the enterprise or this may be part of the initial membership offer.
The co-operative may not require substantial capital in the beginning, but will need a certain sum during its establishment phase. The scale of the offer of membership shares as an initial offer or any subsequent offer of additional shares will depend upon the co-operative’s capital needs as identified in its business plan.
A co-operative may consider that it needs capital of $100,000 in the first 12 months, but not all of this is needed to commence operations. If there are approximately 100 individuals who appear to be interested in membership – this would require $1000 from each member.
The membership offer may be that members acquire one share for $100 and the
co-operative will issue additional shares to members at a later time. Members could acquire as many additional shares as they wish.
Alternatively, the membership share offer may be to require members to buy 100 shares at $100 each and members need only pay 10% of the share price, the remaining $900 would be subject to calls made by the co-operative as the capital is needed.
If the co-operative seeks to raise membership capital on a partly paid basis or where it proposes to raise additional capital this should be clear in the disclosure statement and it is important to ensure that the co-operative’s rules specify the minimum share subscription required and that the co-operative may issue additional shares under different terms of issue.
When a co-operative is already established and operating with a reasonable member capital base, then it may consider issuing additional shares or debt securities either to members or to the broader public to finance further growth.
The decision to offer securities needs to consider
- the various characteristics of each security type,
- whether the co-operative has power to issue the proposed securities under its rules48,
- what terms of issue will benefit the co-operative and be attractive to members or investors,
- the overall sustainability of the co-operative and its enterprise, and
- the risks to sustainability associated with any obligations to repurchase shares.
Co-operatives must have a clear understanding of their target community and be prepared to foster high levels of engagement and commitment in order to raise and preserve the stability of their capital.
A co-operative that fails to service its members will lose its membership base and community support along with its capital. Understanding investor motivation within a community will provide the best guide to attract investment and commitment from a community for a co-operative enterprise49.
The type of information required for a disclosure statement will vary depending upon what type of security is offered.
An offer of membership shares is aimed at the general public and should explain the reasons why they are being invited to become members and buy shares in the co-operative. As this is an offer of membership, the focus of the information will be weighted towards the rights, benefits and obligations of becoming a member of the co-operative. It will also provide sufficient detail about the enterprise and its business plan to enable prospective members to decide that it is an enterprise in which they want to participate and ‘own’.
Offers of additional shares to members or offers of other securities will tend to focus more upon the risks associated with the particular investment security, and the terms and conditions that apply to the offer.
It is important to use simple, non-technical language that is engaging to read from beginning to end. Disclosure statements should be brief, but they must address the legislative requirements under the CNL. The phrase “clear, concise and effective” is used to describe disclosure document requirements under the Corporations Act and the same description should apply to disclosure statements for co-operative securities.