View this narrated presentation to learn about the different sources a co-op can use to raise capital, including direct investment, debt, and other sources.
Some cooperatives are organized as stock cooperatives, offering stock as a method to raise capital from direct investments. Co-ops can utilize various types of stock, such as common stock and preferred stock.
Common Stock
- Common stock is issued to members when they make an initial equity investment into the cooperative. It represents a claim on profits the cooperative will earn in the future. Common stock confers voting rights.
- Members vote to elect a board of directors, which make financial decisions on behalf of the cooperative, including whether dividends are paid and the amount paid and retained. Common stock has variable dividends that are never guaranteed.
- Members may lose the entire amount invested in common stock if the co-op goes out of business. In the case of bankruptcy, common shareholders do not receive money until the creditors, bondholders, and preferred shareholders are paid.
Preferred Stock
- Some cooperatives offer preferred stock to raise capital for the cooperative. Members and non-member investors may purchase shares for a guaranteed fixed dividend in perpetuity.
- Preferred stock has lower risk because preferred shareholders are paid off before the common shareholders, however preferred shareholders are still paid after debt holders and other creditors.
- Often the cooperative has the option to re-purchase the shares from preferred shareholders at a premium.
- Unlike common stock, preferred stock does not confer voting rights.
- Cooperatives can customize different classes of preferred stock. The classes are designated as Class A and Class B, etc.
Attorney Carolyn Eselgroth of Barrett, Easterday, Cunningham and Eselgroth, LLP provides insight on cooperative stock.
If the cooperative offers stock, its bylaws contain an additional article addressing types of stock, membership fee, value per share, and how dividends are paid.
References
“Understanding Cooperatives: Financing Cooperatives.” (1994). (U.S. Department of Agriculture Rural Development Cooperative Information Report 45, Section 7). Washington, D.C.: U.S. Government Printing Office.
Wadsworth, J. & Eversull, E. E. (2012). “Co-ops 101: An Introduction to Cooperatives.” (U.S. Department of Agriculture Rural Development Cooperative Information Report 55). Washington, D.C.: U.S. Government Printing Office.
Williamson, L. (1987). “The Farmer’s Cooperative Yardstick: Should Your Cooperative be “Exempt” or “Non-Exempt.” University of Kentucky College of Agriculture Cooperative Extension Service Publication No. AEC-53. Retrieved from http://www.uky.edu/Ag/AgriculturalEconomics/pubs/aec53.pdf.