Co‑ops and equity
Equity is money that is invested in a business in exchange for a stake in it. This usually involves ownership and governance rights as well as ways for investors to have a share of the profit of the business.
Depending on their legal form, co‑ops can issue different types and classes of shares based on the benefits and conditions attached to them, which must fully respect the seven co‑operative principles.
Equity can be a powerful form of finance for platform co‑ops, as it is a way to increase your funding hand-in-hand with growing your community. Given the potential for scale of platform co‑ops, this funding stream could provide significant capital for the business.
Types of shares
Co‑op shares are classified based on whether they are:
- Transferable or not to other shareholders.
- Withdrawable or not by shareholders.
Membership shares are usually non transferable and non-withdrawable and tend to be fixed at a nominal value.
Membership shares are issued when someone joins the co‑op, and are cancelled and transferred to the general reserves of the co‑op once the shareholder ceases to be a member.
The rules determining how membership is terminated are important in deciding the price of a membership share. For example, a co‑op can charge a member an annual subscription, and non renewal of the annual subscription is normally grounds for terminating membership.
Issuing membership shares is not a regulated activity according to the Financial Services and Markets Act (FSMA).
Transferable, non-withdrawable shares are shares that can be traded, but not withdrawn.
A co‑op is free to issue transferable shares, as long as provision is made for this in its governing document. Since the shares can’t be withdrawn, such share capital is part of the permanent capital of the co‑op.
Since 2012, there has been no upper limit on the amount of transferable share capital an individual can hold in a co‑op. A share offer of transferable shares is a regulated activity according to the FSMA and therefore it must respect certain requirements which can be costly to fulfill.
We advise co‑ops thinking of issuing transferable shares to consult a regulated person or company before launching a share offer.
Withdrawable, non transferable shares are shares specific to the co‑op sector and can only be used by societies.
They can be withdrawn, but cannot be transferred to someone else (unless a member dies, in which case their shares are transferred as part of the member’s estate). These shares are very different from shares in standard companies, as they cannot gain in capital value, instead they offer shareholders a return in the form of interest.
Share offer terms can specify the period of notice for a withdrawal and the proportion of total share capital that can be withdrawn at any one time, including a period of non-withdrawal and/or no interest payments in the first years after the share offer. The terms will also set out the rights of the management committee or the board to suspend, in certain circumstances, withdrawal or interest payments, or to limit the withdrawal amount or provide reduced interest payments.
It is the responsibility of the co‑op to monitor its capacity to repay the shares to investors if requested to (liquidity).
There is a legal limit on the amount of withdrawable share capital that can be held by an individual member – currently standing at £100,000 – unless the investor is another co‑op, in which case there is no limit.
A share offer of withdrawable, non transferable shares is not a regulated activity according to the FSMA, and therefore has less scrutiny and lower costs to launch compared to other types of share offers.
Withdrawable, non transferable shares have been used extensively by co‑op Societies and Community Benefit Societies. In addition in 2012 The Community Share Unit (CSU) was established to promote these types of shares under the brand of Community Shares. The CSU developed the Community Shares Standard Mark to provide guidance and confidence in the unregulated market and set up with Power to Change the Community Shares Booster Programme to provide match funding to Community Shares offers. Since 2012, £155 million has been raised in community shares from over 100k investors.
Share classes
In addition to the types of shares, co‑ops can issue more than one class of shares of the same type, with different rights attached to each class. These rights often relate to membership and voting rights that are clearly stated in the governing document of the co‑op.
Different classes of shares might offer different interest rates to their shareholders. For example a co‑op might offer higher interest rates for investors at the early stages of their start-up (pioneer offer), compared to those that invest at a later stage. Or a share offer that doesn’t allow withdrawals for a few years might offer higher interest rates than one that allows it sooner. A multi-stakeholder co‑op might also issue different classes of shares based on its membership, for example it could have different classes of shares for its employees and its founders if these form separate membership groups.