Part 3 – Co-operative Securities

This Part looks at general concepts of equity and debt investment and then describes the three main types of securities that can be issued by co-operatives. The concept of membership, withdrawable shares and additional shares are described and explained. The specific characteristics of share capital issued by co-operatives are described in detail with reference to the need to consider capital requirements at different stages of a co-operative’s development. Methods of dealing with liquidity issues arising from withdrawable share capital are also considered.

To understand basic principles of investment it is necessary to have a clear idea of what is meant by ‘corporate securities’.

Distributing co-operatives (and non-distributing co-ops with a share capital) can issue three types of security.

Co-operative shares are similar, but not the same as share capital in a company. In a company a member is any person who holds shares.  Voting control of the company is generally proportional to the number of shares held. In a co-operative with share capital, members may be required to hold shares as part of their membership, but voting control is linked to membership and not to the number of shares held.

The term “community shares” is not a term with an accepted legal definition. It was coined in the United Kingdom by the Development Trust Association. Today, community share offers in the UK are supported by the Community Shares Unit.

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.

The motivation to buy shares in a co-operative is wholly different from the motivation to buy shares in a company. This is reflected in the differences between company law and co-operatives law, and in how these corporate forms are regulated when they seek to raise capital from the public.

All co-operatives have power to borrow from commercial lenders, members and the public. Some older co-operatives have the power to take deposits from members. There are very few of these co-operatives, as deposit-taking is a federally regulated activity under the Banking Act. Hence, credit unions are called Authorised Deposit Taking Institutions (ADIs).

Related Raising Finance