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Community investment for Australian co-operatives

A Handbook

BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

Community investment for Australian co-operatives2BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

AcknowledgementIt is sometimes said that co-operatives make money to ‘do things’, rather than doing things to make money. It’s a simple way to think about the co-operative difference where the structure of the business is designed

to put people before profit. But it is also a truism that it is the profit (or surplus) generated by the co-operative that makes it possible to do just that – to serve the needs of people. The ability (and the difficulty) of co-operatives to raise capital to ‘do things’ is often referred to as the capital conundrum. The global

body that governs co-operatives, the International Co-operative Alliance has even set up a Blue Ribbon Commission on Capital1 to examine all of the ways of improving the access of co-operatives to capital.

Whilst co-operatives do have their challenges in the capital department, as the original peer to peer lenders, they are also pretty good crowdfunding vehicles. That’s why we’ve put together this self-help manual to

assist communities in Australia to use the co-operative model to raise capital to do more good stuff together. In this endeavour we are indebted to the author of the Handbook, Robyn Donnelly, for her amazing brain

power, and to our colleagues at the Community Shares Unit in the UK. A special shout out to the very co-operative Jim Brown.

Friends, please note that this Handbook is produced as a guide only and should not be relied on as legal advice. As always, seek professional advice for anything you are unsure about.

1 http://ica.coop/en/blueprint-themes/capital

Published October 2016 by the Business Council of Co-operatives and Mutuals (BCCM) | GPO Box 5166, Wynyard, Sydney 2001 | www.bccm.coop

© Business Council of Co-operatives and Mutuals (BCCM)

This work is licensed under the Creative Commons Attribution 3.0 Australia Licence (CCBY 3.0). This licence allows you to copy, distribute and adapt this work, provided you attribute the work and do not suggest that BCCM endorses you or your

work. To view a full copy of the terms of this licence, visit: http://www.creativecommons.org/licenses/by/3.0/au/

DISCLAIMER: While the BCCM endeavours to ensure the quality of this publication, the BCCM does not accept any responsibility for the accuracy, completeness or currency of the material included in this publication, and will not be liable

for any loss or damage arising out of any use of, or reliance on, this publication.



Co-operatives and community investment 4

Part 1 Introduction 51.2 Who is this Handbook for? 6

1.3 What is community investment? 7

1.4 Community Shares: the UK experience 7

1.5 The UK ‘community shares’ business model 9

1.6 Starting a community investment programme 10

1.7 Crowdfunding 13

1.8 Crowd sourced equity funding (CSEF) 14

Part 2 Australian co-operative types and active membership 162.1 What is a co-operative? 17

2.2 Different co-operative types 18

2.3 Choosing between co-operative types 19

2.4 Co-operatives and active membership 21

2.5 SMART active membership rules 23

Part 3 Co-operative Securities 263.1 What is meant by investing in securities? 27

3.2 Co-operative securities 28

3.3 Co-operative Shares 28

3.4 Community Shares – can Australian co-operatives issue them? 31

3.5 Co-operative liquidity and withdrawable shares 31

3.6 Shareholder motivation 32

3.7 Debt Securities 34

Part 4 Offering Securities 364.1 What law applies to security offers by co-operatives? 37

4.2 Guiding principles for offer and disclosure documents 38

4.3 What is being offered? 38

4.4 Basic information 40

4.5 Processes and specific Information for different offer types 41

4.6 Disclosure for additional shares 44

4.7 Disclosure for debentures or CCUs – member offers 46

4.8 Offers of debentures and CCUs to non-members 50

4.9 A Note about cross border security offers by co-operatives 51

Part 5 Additional Information 525.1 Examples of SMART active membership rules 53

5.2 Example of a debenture disclosure statement 57

5.3 Additional resources 59

Contents


Co-operatives and community investmentCo-operatives have played a key role in many Australian communities for more than one hundred years. Their popularity began in rural communities when agricultural producers combined their efforts to process and market their products economically. Co-operatives presented a legally recognised and democratically governed option for people to join together and invest in building a strong business foundation for their local communities. Today, co-operatives exist in all sectors of the Australian economy contributing 7% to the country’s GDP (including superannuation funds) and an immeasurable amount of social and economic benefit to the not-for-profit sector and the communities they serve.

The United Nations declared 2012 to be the International Year of Co-operatives. This declaration has increased global awareness about the co-operative business model as a robust and sustainable means of enterprise that can deliver more to communities and economies than other corporate forms.

In Australia, 2012 was also a key milestone in the development of a uniform legislative regime for co-operatives called the Co-operatives National Law (CNL). In this same year co-operative and mutual enterprises combined to form a national peak body called the Business Council of Co-operatives and Mutuals (BCCM). The BCCM’s purpose is to raise awareness of the co-operative model and develop resources to help the sector grow and realise its potential in today’s legislative and economic environment.

Access to capital has always been a hurdle for the growth of the co-operative sector, partly as a result of what is seen as a ‘traditional financial operating method’ and because co-operatives tend to sit outside financial markets. Co-operative shares are not tradeable on financial markets, and other securities are generally not used for financing.

The Report of the Australian Senate inquiry into cooperatives, mutuals and member-owned firms found, “There are currently limited options for co-operatives and mutuals to raise capital that avoid the debt to equity ratio problem.”1 The Senate even made a recommendation that government support small and medium co-ops to raise capital in flexible ways. Recommendation 15 asks that Commonwealth

1 The Senate, Economics References Committee, Commonwealth of Australia, March 2016, “Cooperative, mutual and member-owned firms”, Page 22, [ONLINE] Available at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Cooperatives , [Accessed at 18 September 2016]

and State Governments “support the formalisation of some of (sic) innovative market-based approaches to raising capital for small and medium sized co-operative and mutual enterprises, in the form of advice and information, as they become available.” This handbook has been developed to introduce communities and existing co-operatives to methods of financing for co-operatives and to demonstrate that co-operative shares, despite their unique characteristics, are flexible capital instruments, ideally suited to community enterprises. The Handbook will give co-operatives information to increase their ‘financial literacy’ and familiarity with co-operative financing methods under the CNL, and provide some guidance for communities wishing to start up co-operatives that are suited to community investment.

The 2009 launch of the Community Shares Unit by Co-operatives UK and Locality in the United Kingdom provides a modern day example of the vibrancy and potential of community investment through co-operatives to build self-sustaining community enterprises. This Handbook owes much to resources produced by the Community Shares Unit with the kind permission of that organisation.

Part 1 – Looks at the concept and potential of community investment as a fundraising model, and examines the potential of crowdfunding and its availability as a tool for the promotion of community investment.

Part 2 – Examines the different types of co-operative under Australian law and identifies factors in each type that may influence a community’s journey to decide the design of an appropriate business model. Part 2 will also deal briefly with the process of forming a co-operative, but more particularly with the Australian regulatory requirements for active membership.

Part 3 – Explains the characteristics, restrictions and flexibility of different types of co-operative securities and their classification as either equity or debt.

Part 4 – Provides a guide to the disclosure requirements for co-operative securities under the Co-operatives National Law.

Part 5 – Contains some examples and additional resources.


Part 1

Introduction

Community investment

How to start within a community

Crowdfunding

Part 1 - Introduction6BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

Summary

Part 1 introduces concepts of community investment using the UK model of community shares through crowdfunding campaigns. This Part relies on resources produced for communities in the UK, and provides simple guidance on how to stimulate community engagement in a project based on a community investment enterprise. It also examines the Australian regulatory environment for crowdfunding, in particular crowdfunding for co- operative securities.

Financing any business, whether it is a start-up enterprise or an existing one that needs to grow and develop, is always difficult. Co-operatives have faced problems in raising finance like any other business, largely because of the lack of information, practice and professional advice in this field. For smaller community enterprises, the problem is magnified because accessing professional assistance is often beyond their resources, particularly those communities that face the closure of local services and have high unemployment.

This Handbook is a ‘first base’ resource for communities to be able to understand different forms of finance available for co-operatives and how to use them to raise funds for community-based enterprises using a co-operative legal model.

This Handbook builds on the resource provided for co-operatives in the United Kingdom by interpreting the model in an Australian context for Australian co-operatives. Co-operatives in the United Kingdom operate under different legislation, however, it is

based on the same co-operative principles that underpin Australian laws.

In recent years, Australian states and territories have strived to update the law for co-operatives through a uniform scheme of legislation called the Co-operatives National Law - CNL. References in this Handbook are to this law.

Recent experience in community shares in the UK provides concrete examples of the power of communities in raising capital to service local needs.

The Community Shares Unit1 has kindly given permission to use information and material published in the Community Shares Handbook and the Practitioner’s Guide to Community Shares.

1 The Community Shares Unit is a joint enterprise by Co-operatives UK and Locality to assist co-operative enterprises to understand, raise and manage community investment through the issue of shares. The Community Shares Handbook and the Practitioner’s Guide to Community Shares are available in Part 5.

Who is this Handbook for? The Handbook is written primarily for communities that have little or no experience in raising funds for a local or community enterprise. It uses plain English where possible to explain legal concepts and it is a general guide that is not intended to be a substitute for professional financial, business or legal advice.

It also provides a roadmap for practitioners to understand the differences between co-operatives and companies and the current regulatory regime for fundraising for co-operatives.

As the title suggests, the Handbook is about ‘community investment’. It is not designed for large enterprises that are looking for large-scale investments. Multi-million dollar enterprises are likely to require professional advice and management.

Rather, the focus of this Handbook is to help small scale, startup enterprises or existing community organisations to recognise and encourage local support through community investment and engagement and in doing so to access the social and financial capital that is available in communities.

Understanding the available methods and regulatory requirements for fundraising by co-operatives in Australia will demonstrate the potential for co-operatives to use modern social media techniques such as crowdfunding platforms to marshal community investment.

1.2

http://communityshares.org.uk/sites/default/files/the_community_shares_handbook.pdf

http://communityshares.org.uk/sites/default/files/resources/practitioners_guide_to_community_shares.pdf


What is community investment?Community investment builds on community engagement. It is about ordinary people investing their own money – sometimes small sums, sometimes larger amounts – to support the development of something they need or care about.

Communities have an innate collective power. When community power is engaged it can wield political and commercial strength that provides both tangible and intangible benefits to the community and beyond.

Local or geographical communities already exist as social units. However social media provides a ready-made platform for persons with a common interest to form a community that can exist without geographical boundaries. Our daily newspapers publish stories about how communities can achieve change, support development and demonstrate satisfaction or strength, particularly when faced with a common problem or goal.

When we think of investment, we primarily think about placing money or value into a venture with the purpose of gaining a reward or profit. Community investment is much broader than this.

For individuals in a community it means placing money or value into a venture that may provide a monetary gain or that may provide a service or other intangible benefit either for themselves as individuals or to their broader community. For the community, it means that a small or medium enterprise can access the social and financial capital of individuals in the

community not only to sustain that enterprise but also to support its growth for the benefit of the whole community.

Communities may be geographically local groups of people defined by a town, suburb or rural location or they may be a geographically diverse group that is linked by a common interest or goal. Communities such as these may identify a common need or service that they believe will bring a benefit to their community but it is likely to need funding to operate. Some communities may turn to the government to fund and operate such a service, but this has the drawback that funding may or may not be available or may be withdrawn in the future and the service may be delivered in a manner that complies with government design or policy but does not necessarily satisfy the community’s need.

Communities may need to start their own enterprise to supply these services, and this means starting a business that requires funding. While some funding may be available through governments, it will not be ongoing and it will require effort by the community to use it effectively. Community enterprises are not all about the satisfying of altruistic goals, such as the provision of services that are needed within a community. They can be any enterprise that satisfies a community’s needs or interests. More importantly, as a community enterprise funded by community investment it is owned by community members. Ownership is crucial to community engagement and sustainability.

A community that does not have a retail store is unlikely to be able to access direct funding to open a retail store; a community interested in renewable energy may find that government funding is not readily directed towards developing a renewable generator to serve that community.

Community Shares: the UK experienceThe launch of community share offers in the UK demonstrates the potential for communities to invest in local enterprises.

Since 2010 there have been over 250 community share offers by UK co-operatives, raising in excess of £50 million from more than 50,000 people. Co-operatives were formed and issued shares to

establish or support a diverse range of projects from the Manchester football club, FC United, to the saving and ongoing operation of a local pub in Bath, the Bell Inn, to establishing community solar projects. These share offers are facilitated by a crowdfunding platform, Microgenious2.

2 http://www.uk.coop/developing-co-ops/community-shares

1.3

1.4


In the 2014 Nesta report on alternative finance in the UK3, it was found that the average amount raised in a community share offer was £174,286 and the average investment was £368. In a survey of community share investors, Nesta reported that:

Community shares, however, are not just about raising capital. The community share is a door-opener for individuals who may never have considered investing in shares or debentures, but who have

3 “Understanding Alternative Finance: The UK Alternative Finance Report 2014” Baeck, P., Collins, L. & Zhang, B., Nesta, University of Cambridge, November 2014, p62.

an interest in supporting enterprises in their local community, particularly when those local enterprises provide services that the community members want. In this way they become a vehicle for community engagement.

Translating the success of community share issues in the UK to the potential for similar capital raising campaigns in Australia requires a closer examination of the nature of co-operative securities and the local regulatory landscape.

FC United

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FC United in Manchester (UK), is a community owned football club. Formed in 2005 to ensure the continuation of their local club, it launched a community share offer in 2009 and raised £2 million to acquire the club and its ground.

“Not only is FC a great club, but it’s mine…I’m a part owner of my team” (FC Investor)

in 2009 FC United launched

raising £2 millionA COMMUNITY SHARE OFFER

When deciding to invest through community shares, the factors identified as being most important are the social aims of the project receiving investment. More than 90 per cent of respondents reported ‘doing social or environmental good’, ‘feeling their money is making a difference’ and that ‘the organisation or projects invested in will create a stronger community’ as important or very important factors. The prospect of achieving financial returns was only important or very important to 24 per cent of investors. 68 per cent of respondents say they invested amounts that they felt they could afford to lose.

http://www.fc-utd.co.uk/index.php


The UK ‘community shares’ business model Investing in community shares engages communities in a ‘virtuous’ circle where it is in their interests as members and investors to also be active as customers, supporters, and volunteers. The same applies to other stakeholders, including employees and suppliers, giving new meaning to the term multi-stakeholder, where the same person engages with the enterprise through a multiplicity of stakeholder roles.

This is in contrast to the conventional business model, where the interests of shareholders are at odds with other stakeholders. Profit maximisation for shareholders is at the cost of customers, suppliers, employees and other investors. There is no incentive to volunteer, or to become an active supporter of an enterprise that works in someone else’s interests.

Community shares promote a different sort of business model, where it is in the interests of all stakeholders to work together to create wealth and to use their democratic rights to determine how that wealth is distributed. It is in the mutual interests of all stakeholders to become members and investors, not just when the co-operative is established, but on a continuing basis as the enterprise grows and develops. New customers, suppliers and employees can be encouraged to become members and shareholders, to replace the shares being withdrawn by older members when they leave the co-operative.

Issuing community shares relies heavily on community engagement - the involvement of people in the life of the enterprise. Co-operatives need to define and understand their target communities, and to develop a co-operative purpose that aligns with the identity of these communities. Most communities are geographic in nature, but it is not always obvious where the boundaries of geographic communities lie, and whether people within or beyond that geographical community have a shared identity.

Community identity can transcend geography and focus instead on shared interests, values, concerns, or beliefs. Examples include a shared interest in renewable energy, local food production, affordable housing, and support for a football club, or community services provided by a faith group.

Community shares can provide an enterprise with a competitive advantage by engaging stakeholders in new responses to the causes of market failure. For instance, many small businesses fail because the owner is unable to find a buyer willing or able to purchase the business. Communities can spread the cost and risk of acquisition across a large number of shareholders. A business might be failing through a lack of demand; communities can address this by aggregating demand and ensuring that the business serves the community. A business might be unable to control costs resulting in unaffordable prices; a community can reduce costs by volunteering, or by providing cheaper capital.

1.5


Starting a community investment programme

1.6.1 Initial stimulus In the UK the community shares programme began in 2009.

Since its launch, more than 90% of community share offers have been made by new co-operative societies. Most of these societies have been formed by communities in response to one or more of the following:

• a community is about to lose a significant local service, for instance, a pub, shop or post office, or any other community service that is encountering market failure.

• a community is being poorly served by an existing enterprise, for instance, supporters of a football club may feel that the current owners do not serve their interests, or a local service is too expensive or fails to address local needs.

• a community need or interest is not being met, for instance, there may be no local sports facilities, poor broadband connections, or a lack of flexible workspaces for new businesses.

• a community is inspired by new ideas or opportunities to act collectively, for instance, by the scope to establish community renewable energy schemes, local food initiatives, or develop community land trusts for affordable housing.

These stimuli result in new co-operatives being formed as pre-start initiatives, or to act as the vehicle for acquisitions and buy-outs of existing enterprises that are failing in these communities.

Community share offers, however, are not confined or restricted to new start-ups. Co-operatives in both the UK and in Australia have the legal capacity to issue shares as part of their membership. The procedures required for the issue of shares by a co-operative – either a new co-operative or an existing one- are the same.

1.6

1.6.2 Pre-start initiatives There are four main challenges facing all community enterprise pre-start initiatives:

obtaining the resources to pay for the pre-start development costs, which can amount to at least 5% to 10% of the capital costs at start-up. A lack of resources is probably the greatest barrier for pre-start initiatives. In a strongly engaged community these resources may already be available because community members themselves have business professionals willing to provide initial pro bono advice. It is also possible to form a co-operative and the first capital raising would fund development or start up, or as a registered legal entity it may be eligible for grant funding. Alternatively, crowdfunding for start up costs may be a good means to raise this initial capital. Whatever path is followed to equip the organisation with start up costs, the steering group or development team will need to plan for the time needed to achieve the initial capital requirement.

identifying the target community for the initiative; establishing contact with this community, and winning their support for the initiative; engaging the community in the development process.

establishing the business case for the proposed enterprise; testing the business viability of the idea and showing that the enterprise will be profitable; ensuring that the proposed development is in scale with the target community.

developing a robust, competent steering group or development team capable of taking the idea forward to startup.


1.6.3 Acquisitions and buy-outs• Acquisitions and buy-outs mainly arise when a

community is driven to rescuing a local business threatened with closure or, in exceptional circumstances, where the community feels poorly served by the business. Communities engaged in acquisitions and buy-outs face all the same challenges as pre-start initiatives, but with the extra burden of:

• having to act quickly, especially if there is competition to buy the business or its principal assets.

• having to commit to development costs with no certainty that it will be successful in acquiring the business, with the risk of substantial losses.

• the difficulty of agreeing a fair valuation for the business, especially when the principle assets may be worth more as non-business assets, such as a building with a heritage or community value.

The first of these challenges can be difficult to overcome without access to immediate capital or the patience and benevolence of the existing owner. The third of these challenges requires extreme caution and preparedness to engage independent advice4.

1.6.4 Start-ups Even when a new enterprise has got through the pre-start stage and is able to prove that the project or enterprise is investment-ready, there is still a lot to do before it can launch a community share offer. The enterprise first needs to be incorporated. Incorporation of a co-operative with share capital under Australian Law - the CNL - requires two main documents5.

• Constitution: sometimes referred to as a governing document that sets out the rules of the society. The constitution defines the co-operative’s purpose, activities, management structure and the minimum obligations of members to acquire share capital and engage with the co-operative.

4 www.uk.coop/the-hive The Hive provides a step by step guide for community or employee buyouts of an existing business including information about the need to obtain independent advice.

5 A distributing co-operative requires both a set of approved rules and an approved disclosure statement. A non-distributing co-operative requires a set of approved rules and MAY be required to have an approved disclosure document for incorporation. It is advisable to have a disclosure document for both co-operative types as this will be the information needed by potential ‘investors’ to decide whether to become members and shareholders.

• Disclosure statement: is the document that sets out the details of an offer of membership, including shares aimed at the target community.

Once the co-operative is registered then it is able to offer membership shares to the public within its ‘home’ state or territory6.

Of course, just being able to offer shares does not mean that the community will apply for membership and acquire shares. It is important that the co-operative has a third document:

• A community engagement plan: for recruiting members to the co-operative, involving them in the business model, and securing their investment7.

Community share offers are markedly different to share offers made by companies.

Companies usually only make public offers at a relatively late stage in their development, either as part of an exit strategy for private equity or to fund expansion. Public offers by a company are usually aimed at raising a specific amount within a short period of time and the offer documents make provision for under or over subscription by the market. The offers are for large amounts and they will be managed by underwriters and brokers. In contrast, community share offers tend to be made by new enterprises with no proven record of success, sometimes referred to as a ‘blue sky’ proposal. Whilst the offer will aim for a stated minimum amount there is no limit on the number of members who may join and subscribe for shares.

New company enterprises usually raise share capital from family, friends, ‘angel investors’ and other types of sophisticated investor, whereas community share offers are aimed at people who are unlikely to have had any prior experience, knowledge or competencies in investing in enterprise.

Start-up company enterprises tend to raise share capital through private placements, which might lead to a handful of investors purchasing stakes in lots of $50,000 or more. In contrast, the average investment of share capital under a co-operative share offer is significantly smaller.

6 Co-operatives are incorporated under state or territory laws. For a co-operative incorporated under the CNL in New South Wales, its ‘home’ state is New South Wales. If a co-operative seeks to offer shares or other securities in another state or territory it may need to comply with federal law.

7 Co-operatives UK and Locality published “The Practitioner’s Guide to Community Shares”, Brown, J, in 2011. This publication provides detailed guidance on how to engage communities and develop a plan for ongoing community ‘embededness’. There is a link to this document in Part 5 of the Handbook.


Hopsters Cooperative Brewery

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Hopsters Cooperative Brewery is a new co-operative enterprise attracting members to take up shares in a craft beer enterprise based in Sydney that focuses on interest in craft beer brewing – “Own it, Craft it, Drink it”

It will be this legal entity that will provide the investment opportunity to enable funds to be raised across the whole community and to ensure that it is managed in a business like and accountable manner.

for the enterprise so that there is a clear definition about theoperation of the enterprise and the ownership of any assets.

legal vehicle or entityThe community will need a

http://hopsters.com.au




CrowdfundingThe very nature of the community shares business model leads to the conclusion that techniques for crowdfunding are a good fit for community based funding initiatives.

Crowdfunding is a relatively new means of raising money. There is no legal definition of crowdfunding and there is no specific crowdfunding regulation in Australia8.

Crowdfunding is a product of the enormous reach and power of the internet, particularly, social media. The internet provides an instant means to communicate messages from people or organisations

8 Crowdfunding by a charitable organisation is likely to be controlled by the need to obtain a charitable fundraising permit. Crowdfunding campaigns that offer goods or services in return for a payment may be impacted by laws that govern the sale of consumer goods or contracts. Crowd sourced funding techniques to issue company shares are the subject of new (yet to be finalised) regulations. These regulations do not apply to offers of shares by co-operatives within their ‘home’ state: see Part 1.8 on Crowd Sourced Equity Funding.

that want some help. Charitable or international aid organisations use the internet to raise funds for disaster relief or to help raise funds to develop cures for diseases. If individuals have faith in the credibility of the organisation seeking funds then they will readily donate money to that cause.

This method of raising funds has more recently been used to fund innovative business start-ups or artistic proposals. Individuals that seek funding across social media generally ask for small amounts as donations or moderate amounts in return for some benefit. For example, a person wishing to make a music album may seek donations of very small amounts in return for a notification that the album has been produced and they may ask for larger amounts in return for a copy of the album to be supplied once it has been produced, like a pre-payment for goods.

The most successful of these campaigns for funding over social media are those that offer a credible promise of an outcome, particularly where the outcome or product is seen as innovative or popular.

A proposal in 2015 to produce an innovative means of harvesting honey from beehives by an Australian inventor managed to net some millions of dollars to enable the inventor to produce the specially designed beehive on a large scale basis. Much of the funds received were in the form of prepayments for the product. The crowdfunding campaign was promoted by Indiegogo.com, a platform established in the US.

Money paid by the ‘crowd’ is paid in the knowledge that the payment will not provide an investment return like a dividend or interest. It is paid on the basis that it is either a donation or a prepayment for a product or service. It is also paid with the knowledge that the innovative enterprise may not succeed and if that is the case, then the money will be lost.

‘Crowd’ members who make these payments take a risk in a similar way that shareholders take when they buy shares in a new company. They are willing to take risks where the amount to be paid is small and the information about how it will be used is credible.

Today, crowdfunding is seen as a legitimate means of raising funds for start-up enterprises. There are a number of websites devoted to crowdfunding campaigns. These websites provide guidance on how to construct a campaign, they host the campaign information and they provide a point for the collection of payments under the campaign9.

9 Pozible. 2016. Pozible. [ONLINE] Available at: http://www.pozible.com/. [Accessed 23 March 16]. Indiedgogo. 2016. Indiedgogo. [ONLINE] Available at: https://www.indiegogo.com/#/picks_for_you. [Accessed 21 April 2016]. Chuffed. 2016. Chuffed. [ONLINE] Available at: https://chuffed.org/. [Accessed 21 April 2016].

In Australia the use of crowdfunding for business is limited to the start-up period of a profit making enterprise. In other words, people are willing to get the project ‘off the ground’ but once it starts trading, the enterprise must fend for itself by actually delivering a saleable product that the initial funder may or may not be able to acquire. However, there is evidence that using the ‘crowd’ to fund the ongoing operations of an enterprise is feasible where the enterprise is something that communities believe in strongly.

Despite the similarities of crowdfunding to ‘risk capital’, there are different regulations that apply where an enterprise wants to offer persons a share or ‘stake’ in the ongoing enterprise. Crowdfunding to enable persons to take a financial interest in a new venture is generally referred to as ‘crowd sourced equity funding’. Crowd sourced equity funding is regulated as a share offer. See UK examples of a range of crowdfunding options by donation and equity at http://support.crowdfunder.co.uk/support/solutions/articles/4000078872-what-types-of-crowdfunding-are-there.

1.7


The Climate Council was born as a result of the dismantling of the federally funded Climate Commission in September 2013. A crowdfunding campaign to set up and run an independent climate change scientific organisation launched on 24 September 2013 had raised $165,000 in one day and $1 million by the end of the first week. The Council’s Annual Report discloses that for the 2014 financial year it received $2,120,227 in community donations from more than 16,000 donors. The median donation was $80. It continues today as an independent organisation funded through public donations to provide independent advice on climate change

Crowd sourced equity funding (CSEF)Australian companies are regulated under the federal Corporations Act. This legislation provides for the circumstances and manner in which companies can issue securities, and thereby raise funds, from the public.

Whilst a company may engage in crowdfunding for donations or prepayment for goods or services just like an individual, issuing shares under the current law using a crowdfunding platform has not yet been permitted under the Corporations Act. Only public companies are permitted to offer shares across the public generally, and these offers are governed by the requirements for a prospectus.

There are exceptions to the prospectus requirements for private offers or small scale offers. The nature of these exceptions are such that using a crowdfunding platform is possible. This is largely because the offer would be open to the public, as opposed to a small number of larger investors and because the Corporations Act prohibits an offer of securities without having first lodged a prospectus.

The regulation of crowd sourced equity funding for companies under the Corporations Act is likely to change in the future. Whilst these changes will facilitate crowdfunding by companies, it is likely that the changes will be limited to public companies and they will potentially involve relatively high costs because they will require crowdfunding intermediaries to hold a financial services licence.10

Crowd sourced equity funding for co-operatives is different.

10 Parliament of Australia. 2016. Corporations Amendment (Crowd-sourced Funding) Bill 2015. [ONLINE] Available at:http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5588. [Accessed 23 March 16].

Offers of securities by a co-operative are primarily governed by the CNL. When a co-operative offers membership shares, there is no separate requirement for a prospectus and there is no limit on the number of people that can be targeted – provided they are within the co-operative’s ‘home’ state.

Co-operatives are required to prepare a disclosure statement prior to incorporation11 and this document is the disclosure required prior to any share offer and any advertising of such share offers.

The disclosure required for a co-operative share offer, is consistent with best practice and experience with community share offers in the UK. The ability to advertise security offers after the preparation of the necessary disclosure effectively permits co-operatives to raise modest but adequate share capital using a crowdfunding platform at a significantly low cost.

Separate disclosure is required in the event that a co-operative wishes to offer other securities such as debentures or Co-operative Capital Units, however, the disclosure requirements will depend upon who is the target investor.

Community investment should not be seen as a cheap way to attract capital. Community investors through a co-operative model may be happy to accept little or no financial reward for their investment, but they demand disclosure that matches the risk, purpose and engagement between the member and the co-operative.

The disclosure requirements under the CNL are examined in Part 4 of the Handbook.

11 See Part 1.6.4 Start ups and Part 4 where disclosure is discussed more comprehensively.

1.8

http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5588




Pingala Co-operative member shares sell out in 9 minutes

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Pingala Co-operative’s plan to connect people interested in renewable energy involved negotiating with an innovative craft brewery in inner Sydney to erect solar panels on the brewery’s rooftop. The business model allows members to invest in renewable energy by potentially funding many city based roof top solar ‘farms’ and satisfy their aim for a renewable energy future.

Building the community interest and demonstrating the financial and environmental benefit delivered a solid equity crowdfunding event.

Totalamountraised $17,500

Pingala did not use a crowdfunding platform, their community engagement work at the start up phase

meant that they actually had a crowd in the room and held an event to sell their membership shares.



Part 2 Australian co-operative types and active membership

What is a co-operative?

How to form a co-operative

Active membership

Examples

Part 2 - Australian co-operative types and active membership17BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

Summary

Part 2 examines the nature of the co- operative legal model and provides some comparative analysis of co- operatives and companies under Australian law. It describes the different types of co- operative that might be formed under the CNL including the limitations on non- distributing co- operatives and the impact of these limitations on fundraising to inform the choice of legal model. This Part also closely examines and explains the requirement under Australian law for co- operatives to have active membership requirements in their rules and includes guidance for co- operatives on how to draft this requirement in the form of a ‘SMART’ active membership clause.

What is a co-operative?Co-operatives are autonomous legal entities formed by people to serve their needs or the needs of their community. They are democratically controlled and operate on the basis of open membership and economic participation.

Co-operatives are incorporated bodies. This means that the co-operative has a separate legal identity apart from its members so that it can buy, own or sell property itself and its members are not liable for the co-operative’s debts: it is a limited liability entity.

As an incorporated body it has a governance model similar to a company with a board of directors that is accountable to members. Members of a co-operative have only one vote each regardless of the number of shares they may hold.

As vehicles for community investment purposes, co-operatives have the power to issue equity and debt securities.

Under the CNL, Australian co-operatives require an active ongoing commitment from members to support the objectives of the co-operative. The requirement for active membership means that co-operatives are not merely static investment vehicles; they must be based on the notion of co-operation between individuals. The consequent strength of the active membership requirement is that it requires a long term commitment by both the co-operative and its members within a mutually beneficial relationship. This mutuality contributes strongly to the model’s self-sustainability.

Co-operatives are regulated under state and territory laws specifically drafted for co-operatives, although many provisions are borrowed from the law relating to companies in Australia. The Co-operatives National Law (CNL) is a scheme for the uniform regulation of co-operatives in each State and Territory12.

The CNL adopts seven internationally recognised co-operative principles and makes specific provision to enforce or facilitate co-operatives adherence to these principles.

Section 11 of the CNL provides that the legislation is to be interpreted so as to promote the co-operative principles. The co-operative principles make the co-operative model an ideal legal entity for community or social enterprise. Equipped with corporate fundraising tools they can serve communities by recognising and serving the specific needs or wants of a community and by engaging those communities through investment and participation.

12 The CNL was passed as template legislation by New South Wales in 2012. Under the scheme, states and territories may either adopt the CNL as template legislation or they may pass separate consistent legislation. Check with the local regulator to see whether the CNL has commenced in a particular state or territory. A list of state and territory regulators is in Part 5 of the Handbook.

Section 10 of the CNL states the co-operative principles: 1 Voluntary

and open membership

54 Education, training and information

Autonomy and independence

2 3Democratic member control

Member economic participation

6 7Co-operation among co-operatives

Concern for the community

2.1


Democratic community engagement is a powerful force for regeneration of local communities and for the fostering of new business ventures. Co-operatives combine and blend the roles of member, investor, customer and volunteer.

Regulations governing the issue of securities by co-operatives have always been geared towards offers to invest in securities in small amounts. The types of securities that may be offered as investments by co-operatives depends on the type of co-operative, as not all co-operatives can issue share capital.

Different co-operative typesThe CNL enables the incorporation of two categories of co-operative13:

• Distributing co-operatives (with a share capital), and

• Non-distributing co-operatives,

• with share capital

• with no share capital.

• As the name suggests, a distributing co-operative may distribute dividends or rebates based on share capital or on patronage (business done by the member with the co-operative). Distributions will be based upon the co-operative achieving an operating surplus or profit, or there may be a distribution of surplus assets if the co-operative is wound up.

13 Earlier Co-operatives Acts refer to the two types as being “trading” co-operatives and “non-trading” co-operatives, respectively.

• A non-distributing co-operative may not distribute surpluses or assets to members either during its life or when it is being wound up.

• Non-distributing co-operatives meet the definition of ‘not for profit’ as set out in Australian taxation legislation. If a non-distributing co-operative has a charitable purpose, then it may also be able to be registered as a charity.

If the non-distributing co-operative has share capital, any shares issued to members cannot carry a dividend, although shareholders may be entitled to services from the co-operative as members, and may be entitled to rebates as a result of their transactions with the co-operative. These co-operative types can issue shares to members to raise capital, and these shares may be withdrawable, thereby providing interest free capital for the co-operative’s activities.

A co- operative formed to establish a craft beer brewery could be incorporated as a non- distributing co- operative. Shares in the co- operative would not carry a dividend, however, members would benefit from the provision of services such as discounted products or events. The non- distributing co- operative form is frequently used by sporting or other interest focussed clubs, such as ski clubs, where capital is required to set up the enterprise, but the overwhelming purpose is to provide a service, such as accommodation at the ski club lodge.

A non-distributing co-operative without share capital will not be able to issue shares to raise capital.

All co-operative types can issue other securities such as debentures and Co-operative Capital Units (CCUs) that carry an interest payment.

The ability to issue shares, pay dividends, interest or rebates will be important in considering what type of co-operative will best serve the interests of a particular community.

2.2


Choosing between co-operative types The reasons for choosing a distributing or non-distributing co-operative form will differ between communities.

All co-operatives may be formed to provide services to members by carrying out some form of enterprise. Member benefit in a co-operative is shaped by co-operative values and principles, which distinguishes it from the private benefit of company shareholders.

Non-distributing co-operatives, however, may be formed to provide broader social, public benefit or charitable services, and for communities wishing to establish services for broader public benefits, this type of co-operative will offer certain advantages:

• a not for profit co-operative that also has a charitable purpose will be able to obtain charitable tax exemption status and possibly deductible gift recipient status. Depending on the type of service to be offered, tax exemptions may deliver significant operational savings for the enterprise. Deductible gift recipient status will make donations to the enterprise more attractive to potential donors.

• An asset lock – the prohibition on distributing any surplus assets of such a co-operative effectively locks the entity’s assets into the co-operative’s purpose. When a non-distributing co-operative is wound up, any surplus assets must be gifted to

another not for profit organisation with a similar purpose. An asset lock provides a level of comfort to persons who wish to donate to or invest in a community purpose, and who want to ensure that any resulting assets remain dedicated to that purpose or community. This is not to say that a co-operative will not ever lose its assets, such an event is possible if the co-operative is badly managed so that its assets are dissipated.

• Active membership requirements for non-distributing co-operatives can be simply stated as an obligation to pay an annual subscription, which may even be nominal. A modest obligation will mean that it is easier for members to comply with this requirement and this broadens the field of community ‘investors’.

• A not for profit entity may be eligible for other public funding to augment community investment.

• Potential community investors are more likely to trust or feel comfortable investing in a not for profit, particularly if the purpose is one that is important to the community.

• Non-distributing co-operatives that are not charities may be formed for a variety of reasons that will serve a community’s needs. Members of these co-operatives benefit because the service they need or desire is secured and it may even be delivered at a better price to members.

A community that may be about to lose its local football club may form a non- distributing co- operative with share capital where members are entitled to either free or reduced cost services compared with non- members. The investment of the share capital by the community may serve to buy out the club and provide working capital. The provision of member services at the reduced rate would encourage members to engage with and use the club so that it remains operating in the community.

A distributing co-operative will present more favourable investment options for those interested in financial returns.

• Distributing co-operatives can pay dividends or rebates to members based on either the number of shares held or the amount of business done by the member with the co-operative, which can incentivise member loyalty and strengthen the business model.

• In the event of the co-operative winding up, the members may potentially receive a share in the net assets of the co-operative over and above their share capital investment.

• Dividends issued by a co-operative are now capable of being franked, thus delivering franking credits to shareholders.

• Co-operative shares are usually linked to membership and not equity and so do not have a

capital gain component. There are limited means available for co-operatives to deliver capital gains to shareholders via share transfers.

• Active membership requirements can significantly contribute to the sustainability of a distributing co-operative. Active membership requirements are discussed later in this Part of the Handbook.

• Distributing co-operatives do not have a statutory asset lock. However, shares in distributing co-operatives are not tradeable on a stock exchange and can only be acquired by members. This is an effective protection against takeover by other organisations and provides a level of security for assets built up by the co-operative through community support.14

14 Takeovers are possible, however the process requires a decision by 75% of members, and will include a conversion of the co-operative to a company.

2.3


Distributing co-operatives are not the equivalent of a ‘for profit’ company. They do present more of the investment features of a company, however they achieve more because of their adherence to the co-operative principles, in particular the third principle. This principal is fully stated in the CNL as follows:

Member Economic ParticipationMembers contribute equitably to, and democratically control, the capital of their co-operative. At least part of the capital is usually the common property of the co-operative. They usually receive limited compensation (if any) on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes:

(a) developing the co-operative, possibly by setting up reserves, part of which at least would be indivisible;

(b) benefiting members in proportion to their transactions with the co-operative;

(c) supporting other activities approved by the membership.

This principle not only entrenches the member focus of a co-operative, but it also provides for an ongoing capital asset that can have broad community benefit. This is not the same as an asset lock, however, it creates a context for the development and accumulation of a community asset.

The existence of a distributing co-operative in a community will of itself deliver a broader benefit to that community through the mere existence value of

Hepburn Community Wind Farm

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Hepburn Community Wind Farm is a distributing co-operative. As well as providing employment within the Hepburn community, it also manages a local community grants programme. Members can receive dividends on their shares and have access to information about renewable energy and the satisfaction that their co-operative is working to change

public opinion and regulatory policy to grow the renewable energy sector. These are issues that the Hepburn Community feel strongly about and this co-operative is remarkable in that it was able to raise substantial share capital to construct its wind farm, but has yet to pay a dividend on its shares

Provides employment within the Hepburn community

Manages a localcommunity grantsprogramme

access to informationabout renewable energy

Members canreceive dividendson their shares


the service and any multiplier effect (e.g. job creation, minimizing the need for service users to relocate to the urban centres etc). It is the mutual commitment by the community and to the community, however, that differentiates this model of doing business.

The choice of whether to form a distributing or a non-distributing co-operative will come down to the type of enterprise that the co-operative will undertake to deliver and the degree to which financial reward is a factor in attracting investment within a particular community.

In Australia, it is possible to form a company that looks and operates like a co-operative. A company must have a special constitution that imports the co-operative principles and provides for one member: one vote, democratic governance and a community ethic. It is even possible to obtain permission to use the word ‘co-operative’ in the company’s name, provided that the constitution clearly incorporates the co-operative principles. Companies formed in this manner would need to be public companies.15 Public companies are regulated by the Corporations Act and their ability to offer securities through a crowdfunding platform is yet to be determined.16

2.3.1 Forming a co-operative under the CNLForming a co-operative in Australia is a two stage process.

First, the persons who wish to form a co-operative,

15 A proprietary company is limited to 50 shareholders which may not provide sufficient numbers for a community share issue.

16 A prospectus is required for issues of securities to more than 20 people in 12 months and where those offers raise more than $2million. The proposed changes to the Corporations Act to permit crowd sourced equity funding are yet to be finalized.

referred to as ‘promoters’, need to draft a set of rules or constitution, and a disclosure statement (the ‘formation disclosure document’) and present both of these documents to the relevant state or territory Registrar of Co-operatives for approval. The CNL provides model sets of rules for each co-operative type and these can be accessed through the website of the relevant state or territory Registrar. The approval process also entails choosing a name for the co-operative.

Second, once the relevant first stage approvals have been obtained, the promoters, (must be a minimum of 5 persons), must formally meet and agree to form the co-operative under the terms of the rules and in the knowledge of the material presented in the disclosure document. This is referred to as the ‘formation meeting’. The evidence of the formation meeting is presented to the Registrar using a standard form and the Registrar then registers the co-operative.

The websites of each Registrar provide guidance and links to the necessary forms and fees for this two stage process. See Part 5 for a list of Registrars in each State and Territory.

For co-operatives that propose to seek share capital from members, the share capital required is a clear and separate requirement of membership. In addition to share capital investment, the members must also agree to actively support the co-operative enterprise. This requirement is set out in the active membership rule.

One of the most difficult aspects of the formation process is drafting what is referred to as the ‘active member rule’. The difficulty arises not only because it needs to meet strict legislative requirements, but it needs to be flexible enough so that it serves the needs of a broad range of community investors.

Co-operatives and active membershipA defining feature of Australian co-operatives is the mandatory requirement for an express active membership requirement in its rules.

The historical reason for this requirement was to ensure that democratic control remained with those members who had dealings with the co-operative, particularly agricultural or producer co-operatives that relied on members to trade with the co-operative. Members who ceased trading with the co-operative but continued to hold shares were still able to vote and this meant that control could be had by members whose interests were divergent from the purpose of the co-operative.

Australian co-operatives benefit from legislative requirements for active membership because they

contribute to the life and vibrancy of the co-operative and tend to engender greater membership engagement in the co-operative’s enterprise. This is in stark contrast to a company and its shareholders. The active membership requirement, however, presents the single most complex part of the rule approval and formation process of a co-operative.

The regulatory requirements for active membership rules are more rigorous for a distributing co-operative than for a non-distributing co-operative.

A distributing co-operative’s rules will require its members to contribute in some way to the achievement of the co-operative’s objectives. This requires the co-operative to identify its objectives or mission and additionally to specify what activities

2.4


A wholefood co-operative:

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Objective:

To establish a sustainable healthy food resource in the local community

Primary activities:

1. Operate a retail store that buys healthy or wholefoods and sells to the community, and

2. Develop information resources about healthy food preparation and consumption.

Active membership rule:

Members must:

a. Buy $x of product from the co-operative retail store, or

b. Sell $x of wholefood product to the co-operative store, or

c. Subscribe to the co-operative’s information resource.

(referred to as ‘primary activities’) it will undertake to achieve those objectives.

The active membership rule will then require members to support one or more of the activities.

This may sound simple, however, the more broad the objectives, the more difficult it is to state what practical activities will be undertaken.

There are many ways members may be able to support the activities of a co-operative, the skill is in articulating this in a simple manner that requires a minimum of commitment. This does not prevent a member supporting the co-operative in more than one way or above the stated minimum. Those that do provide additional support can be rewarded through additional or cheaper access to the co-operative’s services.

A non-distributing co-operative is frequently the legal model of choice for public benefit or charitable pursuits.17 The rules for such a co-operative must contain a statement of its primary activities; however, it is sufficient that the active membership rule merely specify an annual subscription. That is not to say that they can only have such a rule. A non-distributing co-operative formed to carry on a child care centre may require members (parents) to do other activities to support the co-operative, such as providing volunteer time during the year or attending parental educational courses.

Non-distributing co-operatives that have a public benefit or charitable purpose will endeavour to recruit everyone in their community as members, blurring the

17 The non-distributing form can be used for other purposes, and there are many examples of this legal form in the services sector in Australia: see National Health Co-operative Ltd http://www.nhc.coop; Bathurst Wholefood Co-operative Ltd http://www.bathurstwholefood.org.au

boundary between member and community benefit. They have no ability to raise capital through shares, and they will often rely on public funding to pursue their objectives. They do have the power to raise finance through issuing debt securities that entitle investors to the payment of interest. However, the nature of their activities will often mean that they may not have the capacity to pay interest.18

This does not mean that non-distributing co-operatives may not be useful vehicles for community investment. A non-distributing co-operative may be the ideal vehicle to provide a much needed service within a community, and its restriction of distribution of surplus and assets can provide a firm degree of certainty that the community effort to build the enterprise will endure as a long term community asset through the operation of an asset lock.

For co-operatives to have the best chance of accessing capital through issuing shares or other securities, it is important that the active membership rule is not overly restrictive and does not limit the community or ‘crowd’ who may wish to contribute. Co-operatives are meant to be organisations with an open and voluntary membership. The more restrictive or onerous the active membership requirements - the fewer members who will be attracted to join and invest.

Remember, the active membership rule is in addition to whatever the co-operative sets as the minimum share investment required to become a member.

18 Non-distributing co-operatives that are formed to provide a public or charitable benefit may also be registered as a charity. Registration as a charity does not have any impact upon the ability of a non-distributing co-operative to carry out its enterprise, rather it provides charitable tax exemptions and an additional ‘layer’ of regulatory oversight from the Australian Charities and Not-for-profits Commission (ACNC).

http://www.nhc.coop

http://www.nhc.coop


2.5 SMART active membership rulesThe CNL describes the general nature of an active membership requirement.19 The Registrar of Co-operatives provides some guidance on how to draft an active membership rule.20 An underlying theme for an active membership rule is that a person who is contemplating becoming a member must be able to readily understand and calculate his or her obligations to the co-operative by reading the active membership rule. This means that it cannot be something that is determined according to an external circumstance that might change. If there is a monetary component it is expressed in terms of the maximum amount that might be required of a

19 Section 149 CNL provides that a co-operative’s primary activity or activities must form the basic purpose for the co-operative along with comprising a significant (10%) contribution to the co-operative’s business. It is for the board then to decide which activities are the primary activities and how a member is required to support those activities. Whilst s149 CNL clearly states this is a matter for the board, these matters must appear in the co-operative’s rules, which are matters for the whole co-operative. Section 150 CNL further provides that the active membership for a distributing co-operative must require a member to use an activity of the co-operative for carrying on a primary activity.

20 NSW Fair Trading. 2016. Co-operatives active membership . [ONLINE] Available at:http://www.fairtrading.nsw.gov.au/ftw/Cooperatives_and_associations/Running_a_cooperative/Cooperative_membership/Co-operatives_active_membership.page. [Accessed 23 March 16].

member. This is not to say that a member may be required to contribute a lesser amount, merely that the requirement may not be increased without a change in the rules voted upon by all members.

A further ‘rule of thumb’ is that the obligations should be minimal. If the active membership rule requires a significant or onerous contribution, then members will not be attracted. Members are always free to contribute more to their co-op and they will do so when such contributions are met with a reward. So a consumer co-operative that provides members with discounted products might only require a minimum spend over a year, but the more the member spends, the greater the overall discount.

The SMART acronym is a simple checklist to help first time drafting for active membership rules.

A co-operative’s rules must specify not only the obligation of membership, it must also state the period of time that a person can be ‘inactive’ before their membership is cancelled. The default rule, if no period of time is specified, is 3 years.

There are examples of SMART active membership rules in Part 5.

A renewable energy co-operative:

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Objective:

To establish a community owned renewable energy resources

Primary activities:

1. To construct a wind/solar/geothermal energy generation plant

2. To sell renewable energy to consumers in the community

3. To encourage community members to conserve energy resources through the publication of information and guidance.

Active membership rule:

Members must:

1. Agree to buy energy from the co-operative or from an electricity retailer that sells renewable energy

2. Subscribe to the co-operative’s information resource on energy saving

2.5

http://www.fairtrading.nsw.gov.au/ftw/Cooperatives_and_associations/Running_a_cooperative/Cooperative_membership/Co-operatives_active_membership.page




Simple the support or action required needs to be simple and expressed in clear simple terms. If it is complex it may be difficult to understand and difficult for the co-operative to determine whether a member is complying with it. It will also present a problem for prospective members who may question what it is that may be expected of

them as a member. The simplest requirements are those that require a member to either buy or sell a specified quantity of an identifiable product or service. If the co-operative provides more intangible services, such as information, then the requirement might be simply to either provide information at specified times or subscribe to an information service offered by the co-operative.

Measurable it is important that if the co-op requires members to buy, sell or use a service, that this is identified in a measurable way. For example an agricultural co-operative might require members to provide a quantity of grain or milk. This should be expressed in a manner that is objectively measurable, such as tonnes or litres and not expressed by reference to variable

or other factors, such as a percentage of their output. The ability to measure the requirement objectively will enable any intending member to readily ascertain the full extent of their obligation as a member. For co-operatives formed to pursue an interest or to provide a service, such as a ski club or a health services co-operative, the requirement would be expressed as using the club facilities or co-operative service on a specified number of occasions each year.

Alternatives not all potential members will have the same ability to comply with a single active membership requirement, and usually co-operatives are able to identify more than one purpose or primary activity. For example, a co-operative formed to operate a local retail store will not only need customers, but also suppliers as well as workers. The store might also be a community hub

for social, health or educational purposes. For such a co-operative the primary activities would be multiple and there will be a number of alternative ways in which a member might support the activities of the co-operative such as supplying products, buying products, volunteering time, providing content for educational or health promotional activities. Within this range of possible supporting activities, the potential community of members will be broad and will bring the ‘crowd’.

Reasonable what is a reasonable obligation for a member of a co-operative will differ according to the co-operative’s proposed enterprise. Legislation governing restrictive trade practices prevents co-operatives from requiring their members to do all or a significant portion of their business through the co-operative. So the active membership rule should be expressed as a requirement somewhere between a ‘significant commitment’ and the bare minimum that a co-operative needs to ensure that its members stay engaged with their co-operative.

Where members are required to buy reasonably substantial shareholdings to become members, then it would be prudent to ensure that the active membership rule is a bare minimum.

For example, setting up a community renewable energy co-operative will require a substantial amount of capital for construction, planning and licensing. The nature of the product of the co-operative is one that members may not readily access the electricity generated because of national or local electricity distribution networks. A co-operative embarking on this type of enterprise is likely to want a large share buy-in amount, but the active membership rule may be as simple as subscribing to the co-operative’s information service. See Hepburn Community Wind Co-operative rules https://www.hepburnwind.com.au/wp-content/uploads/2014/06/hw-rules-20131123-final-2.pdf

Where the member has a substantial share investment in the co-operative, it is likely that the member will have a strong engagement to ensure that the co-operative is pursuing its objectives.

Timely an active membership rule should expect an ongoing commitment from its members in order to be self-sustaining over the long term. It is essential that the requirement to support a primary activity is expressed with reference to an identifiable time period that is relevant to the enterprise. A retail store co-operative might express the requirement to supply or purchase in a 12 month period. A dairy co-operative will express its supply requirement on

a weekly time period. Longer term projects such as renewable energy projects will be likely to require a continuous subscription to their information service. The time bound commitment for active membership is not only important for the ongoing operation of the co-operative, but it also sets the basis for determining when a member is inactive and this, in turn, sets in motion requirements for cancellation of membership. For this reason, it is important to specify what is meant by a ‘year’ or such other period. For example, is it a calendar year or a financial year?

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2.5.1 Active members and inactive membersFailure to comply with the active membership rule may lead to cancellation of membership, and a consequent obligation on the co-operative to repay that member’s share capital. When a member stops complying with the active membership rule and before the membership is cancelled, the member is simply referred to as inactive. For example, if a member is required to purchase a specified value of products from the co-operative in a calendar year and fails to do so from January to December, then that member is ‘inactive’. If the active membership rule specifies that the member must be inactive for 3 years, then this member will still be a member for the next 2 calendar years.

At the end of the 3 year period there is a statutory obligation on the board to cancel the membership.

Inactive members forfeit their right to vote in the co-operative. For members who wish to retain this level of engagement, remaining active, or revive their activity is the means of retaining or recovering this democratic right.

Members who lose interest in their co-operative and remain inactive will face cancellation of their membership. Cancellation requires the co-operative to repay any share capital invested by the member. The obligation to repay share capital is a challenge to a co-operative’s financial viability and must be managed by prudent financial provision and planning and ongoing community and member engagement. 21

21 Repayment of share capital resulting from cancellations can be managed to some degree by the co-operative issuing substitute securities – debentures or CCUs, but these effectively only extend the time for repayment. For small amounts of share capital there is scope, with the agreement of the member for the co-operative to retain this capital as a donation: see s163.


Part 3

Co-operative Securities

What are securities?

Equity

Debt and Co-operative Capital Units

Part 3 - Co-operative Securities 27BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

Summary

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.

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

Corporate law distinguishes two types of capital:

a. Ownership capital or shares (equity) and

b. Loan capital (debt).

Ownership capital or shares is capital that is committed to a corporation (a company or a co-operative) in the hope that it will be successful and will return a profit resulting in a dividend. If the corporation is not successful this capital may be lost or reduced. For this reason it is often referred to as ‘risk capital’.

In return for risk capital, shareholders will generally have a vote in the corporation’s affairs, can expect a dividend if it is profitable and may also make a capital gain, if the shares are in a company (because the value of these shares is linked to the perceived value of the company’s net assets).

The value or price of a company share is initially set by the company and an investor buys shares either individually or in multiples of the share price. Large and successful companies may list their shares on a stock exchange to facilitate the issue of shares and share owners have the opportunity to trade their shares in an attempt to maximise any capital gain. Shares listed on a stock exchange are freely transferable and therefore have high liquidity.

Share capital is considered to be ownership or equity in the company, even though the company is a separate legal entity, because if the company is wound up, the remaining assets are distributed to the shareholders.

Loan capital is simply money that the corporation

borrows. It may be from a bank or credit union or it may be from members or other individuals. The capital is usually repayable after a period of time and the loan agreement will usually require the payment of interest at regular intervals.

From the perspective of the company the loan is a debt and this type of capital is usually referred to as ‘debt capital’ or ‘debt financing’. Debt capital obligations are set out under a contract that will specify repayment date and interest. These contract terms will apply whether the company is profitable or not.

Loans can be structured in many different ways. They can carry a fixed rate of interest payable periodically, a variable rate or a combination of the two. The interest rate might be linked to a dividend rate. They may carry no interest during the loan period, but the repayment amount might be higher than the capital loaned – a bit like a calculation of a deferred interest payment.

Loan or debt capital can be issued under a variety of different terms and names, and for different unit amounts. For example, a company wishing to borrow $10,000 might issue debt securities in units of $100. An investor may ‘buy’ one or multiple securities at $100 each. The most common name for a debt capital security is a debenture.

Together, shares and debentures are referred to as ‘securities’. This term is used to describe the document (either on paper or notionally via electronic means) issued by the corporation that is evidence of the rights of the investor’s claim against the corporation for capital, dividend or interest, as the case may be.

A co-operative can issue both equity and debt securities, although shares in a co-operative are significantly different from shares in a company.

3.1


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

Co-operative Shares 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 reversal of this notion is the starting point for an understanding of co-operative share capital. Co-operatives are formed by and for members to serve their common need or goal. Whilst the right or obligation to take up shares may be part of the individual’s relationship with the co-operative, the right to hold or acquire shares only arises through the individual’s status as a member.

Some key characteristics of co-operative share capital are:

• Shares can only be issued to members. A co-operative cannot issue shares to a person, (or permit a transfer of existing shares to a person) unless that person also agrees to become a member including committing to any active membership obligation. Once the person is a member, then the co-operative may issue or offer any number of additional shares to the member, provided that the member does not hold more than 20% of the total issued share capital. Where the requirement for membership includes an obligation to acquire a minimum number of shares, these are generally referred to as ‘membership shares’. Any shares acquired by the member above the minimum amount may be referred to as additional shares. Additional shares may be issued to members with different rights to membership shares.

• Shares do not carry a vote. Only a member can vote and each member has only one vote, regardless of how many shares the member holds.

• Shares have a fixed or ‘par’ value. They do not represent a share in the underlying asset value of the co-operative and so their value does not fluctuate with the changing fortunes of the co-operative. They are not tradeable on a stock exchange although there is scope to transfer shares to another member and this may be done at a premium22 where the membership of the co-operative is limited. A co-operative’s constitution may provide additional distribution to members on capital at winding up if there is a surplus. This is not the same as the capacity of company shares to be sold with a capital gain. The fixed share value, lack of capital gain and the restriction of selling only to members, means that it is difficult or rare for a co-operative to be taken over by another entity.

• Shares may be repurchased or repaid by the co-operative. The ability to repay share capital is a feature of co-operatives that lends itself to issuing community shares, although obligations to repay share capital will also present challenges to co-operatives to manage their capital prudently.

22 A premium is an added amount to the price of the share. For example, if the fixed share price is $1, the co-operative or a member who is transferring his or her shares to a new member, may demand $1.10 for the share because there are limited shares and the demand for the shares may be strong.

Co-operative Capital UnitsShares Debentures

3.2

3.3


• Shares may deliver a limited dividend. Member benefit in a co-operative is shaped by co-operative values and principles, which distinguishes it from the private interest of shareholders. Members benefit from the co-operative pursuing its objectives and delivering services to members. They benefit either because they can acquire these services at the best price or because the service would not be otherwise available. Dividends on shares are limited to an amount that is considered sufficient to encourage members to leave their capital with the co-operative and it is regulated by a formula that ties them to 10% above the

rate of return on a 5 year bond. More commonly, members buy shares in order to receive the services offered by their co-operative”

• Shares may have different terms of issue. It is possible for co-operatives to issue different classes of shares that carry different rights. For example, membership shares, might have different rights to dividends, different priority and different rights to repayment from the rights that attach to additional shares. Some shares might be issued to fund a particular project and these shares might have entitlements to different services that exist because of the funded project.

A co- operative formed to run a football club might first offer membership shares that carry a right to attend football matches at a discounted price. If the co- operative then decides to fund the construction of a covered grandstand, it might fund this by issuing “Grandstand Shares” to members. The members who buy Grandstand Shares may have a right to a grandstand seat at a discounted price.

3.3.1 We all need capitalAll enterprises need capital to start, to grow, and to be sustainable. Start-up capital is usually provided by the shareholding owners of the enterprise. Debt capital from lenders and the option to reinvest any surpluses from the business will come later when there is an established enterprise.

As well as providing the start-up funding, risk capital or shares invested by members allows the enterprise to ride the ups and downs of start-up and development, which are faced by all enterprises. It is the investment or stake that members are willing to risk to start or to grow the enterprise. The more innovative or ambitious the enterprise, then the more risk there is to the members’ investment stake. In the context of different share classes that a co-operative might issue, it is important to consider the rights that might attach to membership shares, to ensure that they perform a similar role to risk capital.

When the co-operative is at a different stage of development, it might then consider issuing additional shares (or debt) to fund the requirements of this period of development.

One of the main reasons why co-operatives can find it difficult to start, grow and compete with private enterprises is the restriction on issuing shares only to members. This is perceived as a capital barrier. To overcome this perceived barrier it is necessary to focus on acquiring members who bring capital with them. There is a need to change the way we think when we plan how to raise capital for co-operatives.

There is no limit to the number of members a co-operative may attract, other than the restrictions posed by the co-operative’s purpose and its active membership requirement. Members bring funding through capital or regular subscriptions. It becomes a question of planning to determine the type, amount and recurrence of funding.

If co-operatives can attract the ‘crowd’ as members, the capital input required from each member will be less. Along this same theme, the lower the capital required from an individual, the more likely it is that the individual member will be content to contribute and be content with the knowledge that the desired outcome is the provision of a needed service. The possibility of a return on the investment, whilst attractive, will not be a key motivation for the investment.

Pingala has a business model which combines rooftop solar with community financing to deliver much more than solar leasing on its own. The customers that Pingala targets are local organisations who would like to reverse or avoid a situation where they are suffering from being disconnected from the community in which they operate. Their business model depends on their ability to engage and mobilise the community that surrounds each customer. It might be a community of geography but it could also be a community of interest in relation to an organisation. A school, for example, has residents in its local area, parents, students, and staff.


3.3.2 Co-operatives offer member capitalIn the co-operative legal model, there is no room for a shareholder whose relationship with the co-operative is no more than the investment of capital for a dividend or capital gain23. The co-operative looks to the long term purpose of providing a service to its members in a sustainable way.

Not only are co-operative shares fundamentally different from company shares, as we have seen, they are not traditionally used as a means of finance in the same way that companies use or access share capital. Having said this, however, capital raised through the offer of membership shares is as real as capital raised through company share offers.

Companies that wish to start up or to expand may use a share issue to achieve a target amount of funding. For example a public company engaged in the transport industry may wish to expand its operations by acquiring another business. To do so it may need substantial capital and it may seek to raise share capital for that purpose through a public offer under a prospectus.

Co-operatives can only offer memberships with shares attached. However, co-operatives are able to continually attract new members who will be required to acquire shares in the co-operative. In other words, co-operatives must think in terms of offering memberships rather than simply offering shares. This does not mean that a co-operative cannot seek to offer memberships in a concentrated fundraising event similar to a public company share offer24. Many membership share offers by co-operatives are continuous in that they are made under the disclosure document initially lodged when the co-op was formed. The disclosure document is required to be updated so that any change in the co-operative’s circumstances as it develops is accurately reflected in the continuous offer. The uptake of membership offers will rise or fall with the amount of effort that the co-operative puts into their community engagement plan and the attractiveness of the offer as shown in the disclosure document.

23 All co-operative types can have investor relationships through debt securities such as co-operative capital units or debentures. Debenture or CCU holders do not have voting rights in the co-operative.

24 The offer of membership and shares in Hepburn Community Wind Co-operative was an offer seeking to raise approximately $9million to fund the initial construction of the wind farm and this was raised in a relatively short period of time.

Issues of membership shares by a co-operative are governed primarily by the CNL. There are no limitations on the number of offers that can be made nor the amount of share capital that can be raised under such offers. The disclosure requirements are set out in the CNL and, where the issue of membership shares is within the co-operative’s ‘home’ jurisdiction (State or Territory), there are no restrictions or requirements imposed by the federal Corporations Act25.

In offering memberships, as opposed to simply offering shares, the impact of an active membership requirement is crucial. Co-operatives are formed to satisfy the common needs of their members. Once a community identifies the service or need, then it will be clear what is required of the community to maintain the service.

Co-operatives in the UK do not have to specify an active membership requirement; however, registration requirements for co-operatives in the UK include a clear active connection between members and the co-operative through the requirements that only a “bona fide co-operative society” may be registered. To qualify as a bona fide co-operative society, and then to issue community shares, a co-operative must have a purposeful relationship with its members to meet their common economic, social or cultural needs or aspirations by accessing goods, services or employment. The UK regulator for co-operative societies determines this through an examination of the co-operative’s rules and its operations. An entity that exists merely for the financial returns on investment by members is not a bona fide co-operative society26.

UK requirements that a co-operative be a bona fide co-operative society are not dissimilar to active membership requirements for Australian co-operatives. This similarity makes it possible to translate the success of community shares in the UK to the Australian regulatory environment.

25 Currently, an offer of securities by a co-operative within its ‘home’ state is exempt from the disclosure requirements under the Corporations Act. If an offer is made outside the jurisdiction, then some provisions of the Corporations Act will apply to the co-operative.

26 Finalised Guidance 15/12 “Guidance on the FCA’s registration function under the Co-operative and Community Benefit Societies Act 2014”, Financial Conduct Authority, November 2015.


Community Shares – can Australian co-operatives issue them?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 Unit27.

A community share offer generally refers to non-transferable, withdrawable share capital issued by co-operative entities28. Community share offers are made to the public and a person who takes up these shares becomes a member of the co-operative entity.

Under the CNL, it is possible for a member to request that the co-operative repurchase the member’s shares. Additionally, shares in a co-operative are repayable, if a membership is cancelled because the member has become inactive. In this sense, shares in Australian co-operatives are withdrawable29.

27 The Community Shares Unit is jointly managed by Co-operatives UK and Locality: see www.communityshares.org.uk

28 Co-operative entities in the UK are now regulated under the Co-operative and Community Benefit Societies Act 2014. Broadly, a co-operative society is able to issue shares and distribute dividends or interest on investments, a community benefit society will have a broader public benefit or charitable purpose and is similar to a non-distributing co-operative under the CNL.

29 Section 107 CNL permits a co-operative to have rules to allow members to request a repurchase of shares. A co-operative may not generally repurchase more than 5% of its issued capital in any year, and the board may refuse to repurchase where to do so would

This is in contrast with company shares, which are generally not withdrawable whilst the company is operating.

The obligation on a co-operative to repay share capital is tempered by the ability for the rules to restrict or prohibit members from requesting a repurchase and board’s power to protect the co-operative’s financial viability30.

Whilst the withdrawable nature of community shares is frequently used to describe this category of share capital, it is possible, and indeed advisable, that there be restrictions on the withdrawal of these shares. There is little evidence about the rate at which community shares are withdrawn in the UK, however it appears that shareholders tend to leave their investment in the co-operative entity, because of their investment motivation.

compromise solvency. It is possible for the rules to specify that only certain classes of shares may be able to be repurchased.

30 The directors of a co-operative are charged with the same duties as directors of companies, in short, they are responsible and accountable for the good management of the co-operatives’ enterprise. A loss of share capital may present a challenge to financial viability. In all circumstances where there is a request or an obligation to repay share capital, the board has power to defer the repayment or to substitute the capital with some other type of security where repayment will compromise the financial viability of the co-operative.

Co-operative liquidity and withdrawable sharesThe 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.

3.4

3.5


Shareholder motivation 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.

The commonly accepted purpose of private enterprise is to maximise financial returns on risk capital. Shareholders are motivated by the revenues they receive in the form of dividends, and by the capital gains they may achieve through any increase in the value of the enterprise. Company law caters for this by allowing companies to use their profits to pay unrestricted dividends, by giving shareholders full rights over the surplus assets of the enterprise upon liquidation, and by allowing shareholders to sell or transfer their shares to a third party at a mutually acceptable price.

However investors in social enterprises such as co-operatives, are primarily motivated by the collective achievement of social objectives and social purpose. For social enterprises registered as co-operatives, this achievement of social purpose is for the mutual benefit of co-operative members or for the broader benefit to the community.

The different motivations for share acquisitions in a co-operative are recognized by regulatory limits on the financial return on share capital investment, the absence of capital gains, the subordination of share ownership to membership, asset locks and restrictions on takeovers.

The primary motivation for purchasing shares in a co-operative is to support the social purpose and objects of the enterprise. The purpose or objects of the enterprise may well provide a significant financial or economic benefit to members by providing a service that the member is either not able to acquire or can only acquire at great cost. The financial return on share capital is at best a secondary motivation,

and any return on capital is better understood as compensation rather than a reward for risk taking.

The difference in investor motivation for co-operative shares also means that the financial disclosure regulations attaching to share capital offered by co-operatives are different to those required for public offers by companies.

Under the CNL, disclosure requirements focus upon the requirements of membership. Where membership includes a requirement to purchase shares, or to transact with the co-operative, the disclosure requirements will scale up or down depending upon the amount of investment or transactional commitment that is required as a condition of membership.

3.6.1 Return on investment Unlike other types of business, it is not the object of a co-operative to maximise profits for shareholders. Instead, dividends payable on share capital are generally no more than is necessary to obtain and retain enough capital to run the business. This is consistent with the third co-operative principle of Member economic participation.

In respect of non-distributing co-operatives there is a prohibition on giving returns or distributions on surplus or share capital to members31. The whole of the non-distributing co-operative’s capital and revenue is to be devoted to achieving its purpose. This prohibition means that a non-distributing co-operative will satisfy the definition of ‘not for profit’ enterprise under tax legislation. However, it does not prevent the repurchase or repayment of member share capital at its fixed or par value.

31 Section 19 CNL

3.6


3.6.2 Capital gains It is not intended to explore circumstances where a capital gain may occur in this Handbook in any detail. The impact of regulation on capital gain and some instances are mentioned, however, the investor motivation for capital gain in a community investment context would not be relevant, other than as posing a risk for the enterprise to remain in community hands.

The scope for a shareholder in a co-operative to make a capital gain is either severely restricted or eliminated by a variety of mechanisms.

Section 76 CNL requires that shares be issued at a fixed amount that is specified in the rules of the co-operative. Shares cannot be offered at a discount.

Shares can only be offered to members and membership is determined by application to the co-operative. This requirement effectively prevents shares being offered on a securities exchange32.

32 Additionally, in order to meet the definition of a ‘co-operative company’ under tax legislation, shares cannot be offered for trade on a stock exchange. A restriction on a transfer of shares would make the shares in a co-operative ineligible for listing on the Australian Stock Exchange (ASX).

For a distributing co-operative there is some, albeit modest, scope for capital gain. A distributing co-operative can issue shares at a premium, and the premium may be available to issue bonus shares that would recognize the contribution of original or earlier members33.

These limited opportunities for capital gains do not replicate the scope for gains that are possible for company shares.

The scope for capital gain by a member who chooses to transfer his or her share capital to another person who proposes to become a member is limited by the requirement for consent by the board of the co-operative and subject to any requirements under the rules of the co-operative. In theory, these transfers may have scope for a capital gain or a loss where the member transfers shares to another person who is either already or about to become a member and where the membership value proposition to the purchaser may be different from the par value of the shares.

33 Section 80 CNL, the procedure for issuing bonus shares requires a special resolution: ss83-85 CNL.

A member of a taxi or transport co- operative who wishes to retire may sell his or her shares to a new member and because of other restrictions on the carrying on of a taxi or transport enterprise, the membership of the co- operative may represent an entry to a business that is otherwise restricted. In this way, the incoming member, or transferee of the shares may be willing to pay a premium to the outgoing member for the shares.

There may be capital gains if the co-operative winds up or converts to a company.

In the case of a distributing co-operative, the distribution of any residual assets is governed by the same rules that apply in the dissolution of a company. In other words, they are pooled and distributed after payment of debts and claims on a pro rata basis against the number of shares held by the member. A capital gain may be achieved by shareholders of a distributing co-operative whose rules permitted the distribution of residual assets in the event of the co-operative being dissolved or wound up.

For non-distributing co-operatives, there is a prohibition on the distribution of residual assets to members under the statutory asset lock34. However, reserves set up by a co-operative, or statutory asset locks may be subject to distribution if the co-operative makes a structural change.

A non-distributing co-operative may convert to a distributing co-operative or a company and thereby avoid the statutory asset lock. Transfers of this

34 Sections 19 and 448 CNL

nature are subject to approval by the Registrar35. It is likely that where there are assets that ought to be protected by an asset lock, other requirements will be imposed to protect those assets as part of the transfer process.

Distributing co-operatives may also convert to become a company. Such an event would enable members to access capital gain that would not otherwise be available under the co-operative legal structure. A conversion requires the co-operative to identify certain former members who had contributed capital to the co-operative and provide them either with a distribution or share allocation in the new entity to recognize the capital gain arising from the transfer36. The entitlement of former members in this event spreads the distribution across generations of members (although limited to former members over the previous 2 years) rather than confining it to the current membership. These requirements recognize the early economic contributions of former members, and tend to dissuade against conversion from a co-operative to a company.

35 Section 60 CNL – transfers from non-distributing to distributing; and section 404 CNL - transfers to company incorporaiton

36 Sections 167-171 CNL


Debt SecuritiesAll 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).

There are no legal restrictions on the terms and conditions of the loan arrangements a co-operative may make with commercial lenders. As a borrower in this market, co-operatives are no different from any other borrower. The board of a co-operative, however, is obliged to make careful business decisions in the best interests of the co-operative.

In addition to borrowing from a commercial lender, co-operatives can also borrow from their members or the general public by issuing debt securities.

Co-operatives can issue debentures or Co-operative Capital Units (CCUs).

3.7.1 DebenturesDebentures are loans, usually specified in dollar units and subject to repayment of the capital loaned after a period of time (the debenture ‘term’) and the payment of interest on the amount borrowed.

Debentures do not have any voting rights attached to them, other than a vote at a meeting of debenture holders37. Debentures may or may not be secured against specified assets of the co-operative, and there are requirements in respect of the manner in which a debenture can be described based on any security backing that it may have.

Debentures are commonly transferable under the co-operative’s rules and subject to a fee and approval by the co-operative board.

Both distributing and non-distributing co-operatives may issue debentures. The payment of interest to debenture investors in a non-distributing co-operative is not impacted by the prohibition on distributing to members, because the interest paid on debentures is merely a borrowing expense and not part of the co-operative’s surplus.

Significantly, debentures issued by a co-operative may be offered to either members or to any member of the public, although a public offer will be governed by different disclosure requirements. The ability to offer debentures to the general public overcomes restrictions, either real or perceived, from active membership requirements.

37 In rare circumstances, a co-operative may wish to change the terms of issue of debentures and this can only be achieved if the debenture holders meet and agree to such a change.

Where interest is payable on a debenture, it is payable whether the co-operative is profitable or not. It is no different in this respect from a loan through a commercial lender. Interest payments are tax deductible, as are the costs of issuing the debentures. By contrast, dividends are only payable on shares if there is a surplus, and not all costs associated with a share issue are tax deductible.

A debenture is usually issued in small denominations. For example, the face value of the debenture might be $100, and investors may acquire 1 or more debentures in multiples of $100. The co-operative will issue a document as evidence of the debenture and maintain a register of debenture holders.

The rights attaching to a debenture are determined by the co-operative in a manner that accommodates its funding requirements, its ability to pay interest installments, repay capital and the target investor market. Like any borrowing it may be structured to accommodate known or expected cash flows either by a variable interest rate, the periods when interest will be paid or an expected surplus from the project to be funded. Debentures may be issued at a discount to face value, but will be repayable at the face value at the end of the term, thereby deferring the ‘interest component’ until the time for repayment. This flexibility permits the issue of debentures in some cultures that prohibit the payment of interest.

Generally, issuing debentures is a source of finance for a co-operative that will cost less than borrowing commercially, primarily because a commercial borrower seeks to make a profit from the business of lending. Certainly, investors expect to receive interest from their investment, however, the community targeted for investment will be likely to invest for the same reasons that they invest in community shares – because they want to support the co-operative’s objectives.

In the unfortunate event that a co-operative is wound up, the monies owing to debenture holders (particularly if they are secured against specific property) is paid prior to any repayment of share capital to members.

In any borrowing, the lender will require information about the borrower’s financial position to ensure that the loan will be repaid. In a commercial borrowing situation, the lender will dictate what information must be provided or disclosed. In a debenture issue, the CNL dictates the type and quality of disclosure required for such an activity.

The disclosure requirements and procedure for a debenture issue is different according to whether the issue is targeted at members only38 or whether the offer is made to the general public. There will also be additional requirements and costs if the debentures

38 A ‘members only’ offer is an offer to members and employees of the co-operative.

3.7


are to be secured against specific assets of the co-operative39. The different disclosure requirements appear complex, but they pursue the same objective, namely to provide sufficient information to enable an investor to make an informed investment decision.

The disclosure requirements for debenture issues are the same for an issue of co-operative capital units.

3.7.2 Co-operative Capital UnitsCo-operative capital units or CCUs are relatively new types of securities that may be issued by co-operatives.

CCUs are defined in the CNL as ‘an interest in the capital (but not the share capital) of the co-operative’.

CCUs were only able to be issued by co-operatives in New South Wales up until the commencement of the CNL40. There is little information about CCUs and this will remain the case until the sector begins to use this power to issue securities.

They were initially introduced in the 1990s to assist co-operatives to overcome the barriers to accessing capital and so may be structured to look like shares, but they may not carry any voting rights. By being able to structure these securities to have characteristics of equity or debt and by providing that these securities may be quoted on a stock exchange, it was anticipated that they would overcome the problems for co-operatives to access capital.

Limited ability to issue this hybrid form of capital, until recently, means that CCUs have not been considered for capital funding and the finance market has no familiarity with these instruments as an investment tool. There have only been 7 issues of CCUs by co-operatives since their introduction to NSW law in 1992, with one issue being quoted on the Australian Stock Exchange. Terms of issue will determine whether the CCUs can be classified as debt or equity on the co-operative’s balance sheet according to current Australian accounting standards, although the application of the accounting standards to co-operative securities generally may come under review in the near future.

39 A secured debenture issue would require the creation of a personal property security in favour of the debenture holders, and where there are many debenture holders, there is a requirement for the appointment of a trustee to hold the security on behalf of the debenture holders and otherwise protect the interests of these lenders.

40 CCU provisions were part of the uniform law, CNL, which was commenced in NSW and Victoria in 2014. The CNL or its equivalent has commenced in SA, Tasmania and NT (2015). The ACT is likely to commence in 2017.

CCUs have been likened to redeemable preference shares because they tend to be issued under terms where the capital is repayable and they may carry dividends but do not carry a vote in the co-operative’s affairs.

The transferability of CCUs, particularly through the Australian Stock Exchange (ASX), and the ability to issue them to the general public gives them liquidity for an investor. These aspects of CCUs however, do not make them necessarily useful in the community investment market, unless the enterprise is one requiring substantial capital, perhaps in the renewable energy sector.

CCUs, like their name suggests, are securities that create an interest in the co-operative’s capital. Arguably this is the core capital of the co-operative that would normally form part of the indivisible capital of the co-operative referred to in the third co-operative principle41. The terms of issue of CCUs may specify a priority for repayment after the priority for debentures and unsecured debts. CCUs with this level of priority would be similar to risk capital.

If CCUs are structured to look like risk capital, they could also be issued on similar terms to share capital, namely they would carry an interest equivalent to a dividend that would only be payable if the co-operative operated with a surplus.

CCUs have potential to enable a broader target community for investment. Their flexible structure and the ability to issue them to non-members means they can ‘look’ like community shares, but are not subject to active membership requirements.42

Both debentures and CCUs can be repaid by issuing debt securities with the same terms, thus creating a revolving loan fund. As for company securities, debentures and CCUs may also be convertible to shares where the holder of the debt security is also a member and the co-operative has a share capital.

41 Member economic participation

42 Issues of CCUs to the public are governed by more complex requirements than issues of membership shares or debentures - see Part 4



The regulations

Guiding principles for offers and disclosure

Membership share offers

Extra share offers

Debenture and CCU offers

Other offers

Part 4

Offering Securities

Part 4 - Offering securities 37BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

Summary

Part 4 provides an overview of the regulatory compliance regime for offering securities by a co- operative. In particular it describes the preconditions, processes and the disclosure requirements for offers of co- operative securities, being membership shares, additional shares, debentures and CCUs. Most disclosure obligations will require the co- operative to provide information about its business plan to explain the nature of the co- operative’s activities and how it will use any capital raised through an offer. The basic inclusions for a business plan will also be covered in this Part.

What law applies to security offers by co-operatives?The Australian legal system is federal and there is almost always an interaction between state and federal laws.

Laws governing co-operatives are state and territory laws, however, federal laws governing the issue of securities will impact:

• Directly if the security offer is across a state or territory border

• Indirectly if the offer is a public offer of debentures or CCUs43.

When a federal law impacts, either directly or indirectly with a co-operative security offer, the costs of making the offer will escalate. The high costs arise from higher regulatory fees and more preparation costs due to the greater compliance requirements. The higher cost of such an offer may be justified if the amount of capital to be raised is correspondingly high.

The amount of capital sought under most community investment offers is unlikely to warrant the higher costs of a cross border or public offer. This is consistent with experience in the United Kingdom under Community Share Offers44.

43 The term ‘indirectly’ is used here because the federal law has no legal impact on these activities, but there is impact because the CNL replicates or applies the same requirements as the federal law.

44 In 2014 the average community share offer was £327,000 ($AUS637,000) with the minimum investment being £10 - £500 ($AUS19 - $AUS967): Community Shares: Inside the Market Report 2015, Co-operatives UK & Locality.

Offers that are within the co-operatives’ ‘home’ state and that are made to members involve lower lodgement fees, lower preparation costs and are likely to aim for modest investment amounts. Confining offers to members should not be seen as a limiting factor. Offers of membership and subsequent or consequent offers to members can reach a sizable ‘crowd’ when active membership is well drafted to enable reasonable participation by members. In 2014, an estimated 23,000 people became members of co-operative entities in the UK through community share offers45.

Public offers and offers across a state or territory border will involve greater caution and consideration because of the increased costs and possible need for specific professional assistance. Accordingly, the information provided in respect of disclosure requirements is focussed on offers of securities to members, as these offers are more closely aligned to the scope of a community investment offer.

45 Community Shares: Inside the Market Report 2015, Co-operatives UK and Locality

4.1


Guiding principles for offer and disclosure documentsAn offer document is any form of promotional literature that encourages persons to invest in a co-operative.

Offer documents under the CNL are called disclosure statements and they may or may not include terms of issue for the securities on offer. They perform a similar disclosure function as a prospectus under a company share offer.

Disclosure statements for the offer of membership shares and for the offer of debentures or CCUs to members are subject to a formal process of approval by the Registrar.

The Registrar’s approval does not add to the reliability or veracity of any of the information in the offer document, the final responsibility for accuracy and transparency lies with the co-operative and its officers. The Registrar’s role in approving offer documents is merely administrative in that the Registrar is satisfied that the document meets the disclosure requirements under the CNL and is not inconsistent with other material already in the possession of the Registrar46.

Generally, disclosure statements are regulated to ensure that they provide adequate disclosure to enable a potential member or investor to make a decision to become a member or to invest.

46 The Registrar’s discretion to approve a disclosure document is limited to ensuring that the document includes material specified under the CNL. There is additional discretion for the Registrar to require other information to be included but there is no guidance yet published in respect of what other information might be required and under what criteria. There are published ‘template’ disclosure statements provided by some Registrars.

Not only should the disclosure be adequate, it should also be truthful and responsible. Information contained in a disclosure statement may change over time, and the obligation on a co-operative and its officers is to ensure that any changes to this information are communicated to potential investors as soon as possible. This may involve lodgement of an amended or updated disclosure statement.

The obligation to make proper and accurate disclosure applies not only to the actual disclosure statement but also to any associated materials or information that the co-operative produces to promote or advertise the securities.

Accordingly, officers of a co-operative involved in offering securities have a duty to ensure that any information in the offer document or other promotional material is accurate, not misleading and is the result of careful consideration and due diligence.

Co-operatives are subject to the same obligations as to accuracy in a disclosure statement as companies. More importantly, they are required to keep their disclosure statements current47. Requirements to maintain currency, combined with the potential for both civil action and prosecution for misdescription or misleading statements helps to keep the co-operative’s disclosure material ‘live’.

47 The CNL requires a distributing co-operative to lodge amendments to their disclosure statement within 14 days of any significant change to the co-operative’s circumstances, including by updating the disclosure statement with each year’s annual financial information

What is being offered?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.

4.2

4.3


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.

48 Co-operatives considering issuing CCUs must ensure that their rules contain the minimum necessary rules in order to issue these securities. Model Rules prescribed under the CNL National Regulations contain drafts of the necessary rules.

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.

49 Community Shares Offers: Inside the Market 2015, published by Locality and Co-operatives UK provides key information about investor motivation in community share offers from 2009 to 2014.


Basic information The following information should be provided in all disclosure statements, unless the information is not relevant to the offer.

4.4.1 Financial risk All offer documents should make it absolutely clear that anyone buying securities could lose some or all of the money they invest. This warning should be prominently positioned in all disclosure statements and expressed in plain English.

4.4.2 Share capital The nature of the share capital – whether they are membership or minimum holding shares or whether they are additional shares should be explained. This means explaining that there is no capital gain, what the dividend arrangements are, if any, and the full terms and conditions that apply to the particular shares should be provided.

If withdrawable share capital is being offered, applicants need to know:

• How they may be able to request a repurchase or when they are entitled to repayment,

• Limits or processes for withdrawing capital should also be fully disclosed, including the circumstances under which the co-operative may substitute another security in lieu of repaying the share capital,

• If only some of the shares are withdrawable, then the different circumstances applying to these different classes of shares, and

• The power of the board to refuse to repurchase share capital either completely or under certain conditions instead of repurchasing the shares.

It should be made clear that shares do not change in value, unless the rules provide for a reduction in share values, in which case the details of such provision should be made clear. If the share capital being offered is non-withdrawable, the scope and process, if any, for selling or transferring the shares should be explained.

4.4.3 Democratic rights The co-operative principle of one-member-one-vote should be explained, and contrasted with the company convention of one-share-one-vote.

4.4.4 Investment limits The upper and lower individual investment limits should be stated, and the reasons for these limits should be explained.

4.4.5 Restrictions on financial returns Restrictions on financial returns, such as dividends or rebates on transactions, under the co-operative’s rules or the CNL50, should be disclosed, along with any policy or practice for setting a dividend or rebate, in particular the requirement that dividends may only be paid if there is a surplus.

4.4.6 Conflicts of interest Conflicts of interest can arise in some share offers, particularly those made by new co-operatives where the founders, board members or promoters have a financial interest in the outcome of the offer.

4.4.7 Financial Information All disclosure statements must include information about the financial position of the co-operative. The type or scope of financial information will differ depending on whether the co-operative is a new or existing co-operative and the purpose of any capital raising. The accuracy of any financial information in a disclosure statement is paramount, and it is this aspect of the disclosure statement, more than any other, that exposes the co-operative and its directors to liability. Financial information in a disclosure statement should only be included in a disclosure statement when it has been compiled as a result of due diligence processes.

In security offers that are to fund the acquisition or buy out of another enterprise or asset it is extremely important that accurate financial information about the proposed acquisition is included in the disclosure statement. Where the co-operative is taking on an existing business the vendor of the business will have an interest in obtaining the best price. Scrutiny of financial information and valuation of the enterprise will be a paramount concern for the co-operative and its officers51.

50 Section 357(1)(c) permits the payment of a limited dividend on share capital. A limited dividend is prescribed under the CNL National Regulations and it is linked to 10% more than the relevant current rate of interest on a Commonwealth Bank term deposit. Non-distributing co-operatives are prohibited from paying dividends or making distributions of surpluses to members: section 19 CNL

51 There is a good guide for community or employee buy outs in ‘Keeping Rural Business Alive: Community and Employee buyouts of rural Business” . A link to this guide is in Part 5 of the Handbook.

4.4


Processes and specific Information for different offer types

4.5.1 Membership share offers The following Flow Chart shows the steps in an offer of membership shares for a distributing co-operative.

Note: If the co-operative is a non-distributing co-operative, it may not have been required to prepare a formation disclosure statement. A disclosure statement should still be prepared in accordance with the guiding principles in this Handbook

Ensure that the co-op rules are current

Ensure that your disclosure statement is current (if you are a newly formed co-operative, this will be your formation disclosure statement)

An existing co-operative will need to check that the information in their formation disclosure statement is current. If it is not current, then an amended disclosure document should be lodged with the Registrar (no fee)

Application for membership is attached to your disclosure statement

Does the disclosure statement accurately reflect the active membership requirement(s)?

Material advertising the offer (either web based or in writing) must state:

Document Checklist

Publish offer

Does the disclosure statement clearly set out the terms of issue for the membership shares:

Minimum shareholding

Withdrawable or are there limits to withdrawal

Transfereable – what conditions are there on transfer

Will there be different classes of shares on offer to members? If there are to be additional shares, the terms of issue for these should be available

Will the shares carry dividends or will they provide access to services or both?

Offer only open to residents of ‘Home’ State or Territory

Persons wishing to take up the offer must acknowledge having read the disclosure statement and rules

Offer is of membership, along with the minimum number of shares to be taken up. Offer can include an offer of membership shares and additional shares, provided that membership is a precondition to taking up any additional shares

Applicant to include money as payment for shares

4.5


If application for membership is accepted, the member’s name is to be entered on the register of members and shareholders, and the membership shares must be allotted. If there is also an application for additional shares, these can also be allotted.

If application for membership is not accepted, the applicant must be informed and any money paid is to be returned.

4.5.2 Specific disclosure for a membership offerWhen a distributing co-operative is formed, the CNL requires promoters to prepare a set of rules and a formation disclosure statement for approval by the Registrar52.

The formation disclosure statement is the first ‘offer document’ of the new co-operative and any prospective members must be provided with this disclosure document prior to being required to take up any shares53.

The specific information required for a formation disclosure statement focuses on the requirements expected of a member, including a person’s eligibility for membership and any active membership requirements along with any minimum and maximum obligations to acquire shares or to pay any annual subscriptions.

The active membership requirement for a co-operative will be part of the co-operative’s rules, and the disclosure statement should ensure that this requirement is accurately set out.

In addition to specific information about the membership obligations, including the minimum and

52 Section 21 CNL requires both of these documents to be submitted for approval to the Registrar prior to the holding of a formation meeting.

53 Section 70 CNL

maximum shareholding requirements, the formation disclosure statement must contain information about the rights and liabilities attaching to shares (these are the ‘terms of issue’) and information about the proposed financial arrangements for the new co-operative.

The terms of issue of membership shares would include the minimum subscription and whether they can be issued partly paid, whether they may be repurchased (withdrawable) and whether and how they may be transferred. Membership shares would be expected to have the last priority in repayment if the co-operative is wound up and this should be stated. For a co-operative proposing to issue additional shares, this fact should also be included, and if the terms of additional shares are known at this time, then it is appropriate to include this fact in the formation disclosure statement. An example of a formation disclosure statement is in Part 5.

This type of information is intimately linked to what the co-operative would include in a Business Plan. The requirements for capital and the timing of those requirements along with estimates of the costs of the enterprise at various stages are all matters that would normally be included in a business plan.

The preparation of a Business Plan and its inclusion as part of the disclosure statement is likely to satisfy the remaining requirements for a formation disclosure statement under s25 CNL, namely,

• the estimated costs of formation;

• the capital required for the co-operative at the time of formation;

• the projected income and expenditure of the co-operative for its first year of operation;

• information about any contracts required to be entered into by the co-operative;

• any other information that the Registrar directs to be included.


Purpose and objectives: the purpose and objectives of the co-operative, a summary of its origins, and why a co-operative structure best suits the proposed enterprise.

Demand for services: any scoping study or other evidence of demand or need for the services to be delivered through the co-operative.

The investment project: capital required and how this capital will be used:valuations, assessments, terms and conditions affecting any major assets to be acquired or any contracts that need to be entered; planned sources and costs of capital. Cover the pre-conditions that must exist for the successful commencement of activities such as minimum subscription levels, purchase of property etc. Explain what happens if the co-operative is unable to satisfy these conditions54.

Proposed trading activities: description of trading activities; manager competencies; staffing plans; market analysis and marketing plans; member engagement in trading activities.

Financial forecasts: cashflow forecasts; projected balance sheets and profit and loss accounts covering at least the first three years of the investment project. It must be stressed that information in relation to financial forecasts must be able to be supported by reference to known facts and responsible research through a due diligence process.

Share offer: fundraising targets, timetable, contingencies, terms and conditions, and share liquidity provisions; tax relief (if relevant).

54 Where the project is an acquisition or buy out of an existing enterprise particular care needs to be taken in what statements are made. There is excellent guidance on how to meet this challenge and ensure due diligence in the process in “Keeping Rural Business Alive” see link in Part 5.

Risk analysis: identification of the key risks facing the investment project, and plans for mitigating these risks.

Governance: details of the board arrangements: including any persons who have agreed to become initial directors of the co-operative once it is formed and an outline of their competencies.

Community engagement: profile of the community targeted by the offer document; community engagement activities to date; evidence of community support; plans for promoting the offer55.

Expert opinion: If the proposed activity of the co-operative is to conduct or buy out an existing enterprise or asset, then it will be essential (and most likely will be required by the Registrar) that there be a valuation of such enterprise. Valuations or information that is normally something within the province of an expert should be included in a Business Plan because they will be important pieces of information for an investor to use to make a decision. Expert opinions can be included in a disclosure statement with the consent of the particular expert. Once an expert consents to his or her opinion being so included, then the expert will be liable in respect of any misstatements or negligence in forming that opinion. The co-operative and its directors may also bear some liability if they have not properly briefed the expert or if they choose an expert to provide the opinion and that person does not have relevant expertise because the co-operative has not made appropriate checks regarding their expertise.

55 For guidance on preparing a community engagement plan, see “The Practitioner’s Guide to Community Shares”, Brown J. in Part 5.

4.5.3 What should be in a business plan?There are many templates produced for the preparation of a business plan, however, in order to satisfy the requirements for a formation disclosure statement the following information should be addressed in proportion to the scale of the co-operative’s proposed enterprise:


4.5.3 Relationship of the formation disclosure statement to capital raisingAs the name suggests, the formation disclosure statement is a requirement for the formation of a distributing co-operative under the CNL. Once a distributing co-operative is formed, however, the formation disclosure statement becomes a more fluid and enduring document. It is no longer referred to as the ‘formation disclosure statement’, rather it is the disclosure statement that the co-operative must provide to any person who is considering becoming a member of the co-operative. The formation disclosure statement will be registered with the Registrar once the co-operative is formed, however, the co-operative then has a statutory obligation to ensure that the disclosure statement is current56.

56 Section 68 CNL. There are different requirements for lodgment in some States. For example, in NSW if the minimum share capital requirement is less than $200, there is no requirement to lodge any updated disclosure statement. However, a co-operative should maintain the currency of its disclosure to new members.

Distributing co-operatives are required to provide a person who proposes to become a member, both a copy of the co-operative’s rules and a current disclosure statement57. It will be referred to in this Handbook as the ‘member disclosure statement’.

The member disclosure statement will contain the same type of information as specified for formation, but the requirement that it be ‘current’ imposes an obligation on the co-operative to update or amend the disclosure statement when there is a significant change in the rights and obligations attaching to any shares or in the financial position of the co-operative. There is no fee for the lodgement of an updated disclosure statement.

By requiring the co-operative to maintain a current member disclosure statement, the CNL ensures that new members receive the best disclosure possible at the time of joining and taking up shares. It reflects the nature of co-operative capital raising as a continual process of offering memberships.

In many respects the member disclosure statement constitutes the ultimate community share offer. It is continuous and relies on continual building and growth of community engagement.

57 Sections 70 and 122 CNL

Disclosure for additional sharesA co-operative may need additional share capital from its members. There are a number of ways to achieve this.

Co-operatives are empowered to issue shares, provided shares are only offered to members. If these shares are additional to the minimum share subscription required for membership, then the co-operative may simply offer additional shares to its existing member base. It is not essential that the co-operatives’ rules specify that it may issue either additional shares or different classes of shares, however, for a new co-operative it would be a matter of good practice that the power to issue additional shares and different classes of shares is clearly set out in both the rules and in the formation disclosure statement.

The offer of additional shares can be a simple time bound offer or the co-operative may provide for a dividend reinvestment plan.

An offer of additional shares to members does not normally require a separate disclosure statement. The CNL makes no provision for a disclosure statement where the offer is merely an offer to existing shareholders.58

In a similar vein, offers of shares to existing members (shareholders) generally do not require disclosure by corporations59, however it would be usual that an offer to take up additional shares would require the co-operative to prepare terms of issue so that members can make a decision about whether to invest in further shares. The offer of additional shares may constitute a significant change in the position of the co-operative and this would be required to be included in any updated member disclosure statement required to be lodged with the Registrar. Additional shares may have different dividend or repayment rights that will impact upon the rights or obligations of existing shareholdings, such as membership shares. As such this will need to be included to maintain currency of the member disclosure statement60.

58 Note that a co-operative has power to compel its members to take up additional shares. There is a requirement for a disclosure statement and a special resolution by the co-operative for this to occur. This type of capital raising is not explored in this Handbook.

59 Section 708(13) Corporations Act

60 See 4.5.3

4.6


The terms of issue would describe the rights attaching to the shares such as:

• whether they are capable of being repurchased by the co-operative upon request by the shareholder; whether there are any restrictions on repurchase such as statutory restrictions, restrictions under the co-operative’s rules or any special restrictions imposed on the particular class of shares.

• whether the shares are transferable and any restrictions, costs or other requirements, such as transfer to another member61.

61 It is possible for a co-operative to maintain a listing of persons who are interested in acquiring additional shares to facilitate transfers between existing members or new members.

• whether the shares must be fully paid on allotment or may be partly paid (the CNL requires a minimum part payment of 10%) and if partly paid whether the balance will be at call or by installment.

• whether the shares carry any dividend or access rights that are different from membership shares. If the dividend is not known, then an indication of how it will be determined should be disclosed.

• whether there is any different right to priority of repayment for the additional shares - in other words, if the co-operative winds up which class of share capital is repaid first.

It is common for some agricultural co- operatives to offer members different classes of shares specific to the different services that a co- operative proposes to deliver. For example, members of the Batlow Apple Co- operative could acquire membership shares and ‘cool storage’ shares. The issue of cool storage shares enabled the co- operative to construct cool store facilities and the shares entitled holders to use a specific volume or area within the co- operative’s cool storage facility. This same principle may work well for a renewable energy co- operative that proposes to construct different types of renewable energy generation plants, or for a health services co- operative that proposes different levels of health care service.

• Information made available in respect of an additional share offer would be subject to the same requirements as to accuracy that attach to offers of other securities by a co-operative.

• An offer of additional shares, like membership shares can be continuous, where the shares offered are of the same class. If the shares are likely to pay a dividend, then co-operatives can consider providing for a dividend reinvestment plan for shareholders to acquire additional shares. Dividend reinvestment plans, if any, would need to be included as part of the terms of issue for additional shares, and this fact would also need to be included in any member disclosure statement that is lodged with the Registrar.

• It is a common practice for co-operatives to credit the share accounts of existing members with dividend or rebate payments, and, if the member so elects, to issue fully paid shares in respect of the accumulated amounts. Depending on the scale of these payments, this can be a significant source of reinvestment for a co-operative.

• Share reinvestment plans, like all share issues, need to be managed to ensure that a member does not accumulate a large amount of share capital that would either breach the 20% limit or, if withdrawn, would adversely impact the co-operative’s financial position. The concept of community investment as an offer of securities to a large number of persons in small parcels will mitigate against this, although, the co-operative’s community engagement activities need to be continuous to accommodate the ‘churn’ of new and retiring members.


Disclosure for debentures or CCUs – member offersAs for share capital, investor motivation in debt securities will be biased in favour of a project that is seen as having value to the community. As in any crowdfunding campaign, the interest of the

community must be piqued. The attractiveness of any offer of debentures or CCUs will be measured against the thoroughness and clarity of any disclosure and the robustness or veracity of any financial projections.

Investors will commit when they are both interested and satisfied as to the risk. If the risk is high, they will commit less, if the risk is low they may invest more.

To date, co-operatives in Australia have not utilized this fundraising power to any great extent. There is little research to indicate why this method is not well used.

The power to issue debt securities is not limited by any investment cap (either per member or in total). The board of a co-operative is required to manage the co-operative’s affairs according to standard corporate duties of care and diligence. They may also bear liability if the co-operative operates in circumstances where it may become insolvent. These duties dictate prudence in the decision to issue debentures.

The Registrar does have a power to make directions regarding the obtaining of ‘financial accommodation’ under s335 CNL. The Registrar’s power is very broad and extends not only to a power to direct that a co-operative cease obtaining finance in a particular manner, but may also require repayment of any funding received and a direction about how the funding is to be used by the co-operative. The ‘safety net’ of Registrar oversight on fundraising has been rarely, if ever, used in practice. This may be because of the role of the Registrar in approving disclosure statements prior to any offer of debentures or CCUs.

There is no information available to indicate the circumstances when a Registrar might exercise his or her power nor any policy guidelines as to its use. It would be prudent for a co-operative seeking to raise funds from its members via a debenture issue to be aware of the existence of the Registrar’s oversight of these matters. It is imperative that boards do not abuse the fundraising power by issuing debt securities that would compromise the stability and sustainability of the co-operative.

In the context of community investment, issuing debentures to members and employees is a good way for either distributing or non-distributing co-operatives to raise funds to pursue their objectives. Providing a door to investment to members will have the added impact of increasing member engagement with the co-operative. Members will quickly develop a stronger interest in their co-operative when there is an investment risk even if it is for a small amount. Similarly, employees will have a strong commitment to a work ethic when they also have an investment in the co-operative.

It is expected that the level of funding required for a community based enterprise would be relatively small. A modest fundraising target will mean that the co-operative can appeal to a membership by asking for investments in small units. In the theme of crowdfunding campaigns, a large number of small ‘investments’ will amount to a large overall amount of funding.

Of course, a co-operative with a large membership will achieve a better fundraising outcome than a co-operative with smaller member numbers. This raises the question of whether a co-operative should seek to increase its membership or whether it should seek to raise funds from beyond its membership.

Increasing membership of a co-operative depends upon the purpose of the co-operative and its active membership requirements. A co-operative with an objective to provide community services and a simple active membership requirement of paying a nominal annual fee may consider promoting its services to increase membership before it seeks to raise funds through a debenture issue.

By contrast, a co-operative that is formed to provide a narrow set of objectives, such as marketing services for blueberry growers in a particular location, may find it difficult to increase its membership significantly.

It is important therefore, to consider the membership profile of a co-operative and any scope for increase in membership when determining whether to use a debenture issue to members and employees.

A co-operative that seeks capital to fund growth may do so by increasing promotion of its membership offers in tandem with a debenture or CCU offer, provided that the offer is clearly restricted to members only.

Investments by communities who want to retain or build services within their community will be attractive to community members who have never considered investing in securities. Having a ‘share portfolio’ is often considered to be for wealthy or retired people with advice from a stockbroker. The size and remoteness of enterprises run by larger public companies is a disincentive for small or

4.7


Include most recent financial information

Include application for debentures at end of disclosure statement

Fee approx, $254

Wait time – up to 28 days

Prepare disclosure statement in accordance with s338 CNL

Lodge draft disclosure statement with Registrar for approval:

Ensure terms of issue for debentures are clear

Include purpose of debenture issue

inexperienced investors. Despite this attitude, small or regional communities have strong social and support networks. There is potential to encourage a willingness to become a member of and lend to an enterprise that is owned and governed by a community of members when that investment will secure its ongoing operation and sustainability as a community service provider.

There are different processes for the issue of debentures and CCUs.

The cost of issuing debentures or CCUs to members and employees is comparatively small. Preparation and drafting the disclosure statement may require professional input, however, it may well be within the skillset and capability of the co-operative’s board to be able to prepare it without specialist or professional costs.

Regulatory lodgement fees are modest, although the approval process can take approximately 28 days. This time frame, including any additional requirements from the Registrar, should be factored into the co-operative’s business and fundraising plans.

Pre-offer Checklist

4.7.1 Process and disclosure for debenture offers to membersThe following Flowchart shows the procedure for an offer of debentures to members. The same process applies to all co-operative types.

Disclosure statement approved.

Offer will be open for 6 months

Disclosure statement not approved

Resubmit to Registrar with appropriate amendments

• Advertising material either web based or written should clearly state offer is to members only

• Members wishing to acquire debentures must be referred to full disclosure statement

• Issue debentures and create entry in register of debenture holders

Publish Offer to members only


4.7.2 Disclosure for debenture offers to membersRequirements for the disclosure statement for issuing debentures to members are set out in the CNL62, and they are:

• Information about the purpose for raising the funds;

• the rights and liabilities attaching to the debentures (terms of issue);

• the financial position of the co-operative;

• any interest that the directors or officers of the co-operative might have in the issue including any compensation they may receive in respect of the issue63;

• other matters directed by the Registrar.

A co-operative wishing to issue debt securities will be an existing entity. It is usual in any lending situation that the lender will require evidence of the borrower’s capacity to repay. For a co-operative to issue debt securities, it is important that it is able to provide reliable information in its disclosure statement about its ability to repay capital under the terms of the security and to service any interest payments. Just as a lender would require evidence of this, the co-operative should be prepared to provide this information to potential investors.

Conversely, the disclosure statement should include information about the risks in investing in the securities offered.

62 Section 338 CNL

63 This requirement assists in determining whether the directors have any conflict of interest in recommending the take up of debentures and would include whether any director or officer receives payment in respect of their work or contribution in drafting the disclosure statement or terms of issue.

Where the risk is high, the co-operative may need to consider whether to secure the debentures against specific assets of the co-operative. Issuing secured debentures can provide a greater level of comfort for investors, but will necessarily involve the preparation and lodgement of security documents under the Personal Property Securities Act, and may possibly require the appointment of a trustee for debenture holders64.

An example of a disclosure statement for the issue of debentures to members is included in Part 5 of this Handbook.

Where the debenture issue seeks to raise a substantial sum, the Registrar may require that the disclosure statement contains expert opinion regarding the basis for any forecasts or statements about the viability of the enterprise to be funded.

Once the disclosure statement is approved, then it is usually valid for a period of six months. The co-operative needs to set up administrative processes for receiving any investments and issuing any certification of the debentures. Investment monies received by the co-operative are generally held in trust until the debenture security is issued. Thereafter the cost of servicing the debenture issue is minimal other than the cost of making any interest payments and maintaining statutory records of debenture holders.

Because debentures are a form of debt, the co-operative will be able to deduct the costs of issue and interest payable from its taxable income.

64 Trustees for debenture holders are required if the issue is made to the public. A trustee is appointed as the ‘holder’ of the security over the co-operative’s assets and he or she must act on behalf of all debenture holders to ensure that the security remains intact and available in the event of insolvency or non- payment of the debentures.

4.7.3 Process and disclosure for issuing CCUs to membersCCUs issued by a co-operative are a different class of security from debentures or shares. They are described at 3.7.2 of this Handbook.

Depending on how the CCUs are structured as to priority or interest payment and perhaps whether they can be converted to shares or other securities, they may appear to have characteristics of equity or debt.

When considering whether to issue CCUs, co-operatives should look at how the structure of

these securities might be of value to the entity’s balance sheet if they bear equity characteristics and whether the issue of this special hybrid security can be marketed in a similar way to equity. In other words, if it can look and behave like share or risk capital, it may satisfy the community investor’s desire for ‘ownership’ of the enterprise, whilst not providing a vote.

The following Flowchart shows the procedure for a CCU issue to members, for all co-operative types.


Entitlements to interest including whether it is cumulative

Priority on winding up

If they are offered to non-members are there any limits?

Transferability

Ensure co-operative’s rules permit offer of CCUs

Prepare disclosure statement – same as for debentures under s338

Prepare Terms of Issue including:

Details of repayment entitlements

Any participation in surplus assets or profits

Document Checklist

If approved proceed to special resolution.

If not approved, make amendments and resubmit to registrar.

• A special resolution is a decision by members to approve the issue of CCUs. It can be done either by holding a general meeting or conducting a postal ballot.

• 21 days’ notice is required for a special resolution.

• A special resolution is passed if two third of the members entitled to vote and who cast a vote support the resolution.

If special resolution is passed:

Make offer to members as if it is a debenture offer.

If special resolution is defeated – CCU offer cannot be made.

Special Resolution

Registrar Approval

Submit • disclosure statement • Terms of Issue and • summary statement –

section 350 CNL

to Registrar for approval

• Fees are 2 x $254 approximately

• Wait up to 28 days


The regulatory process for issuing CCUs requires more steps than a debenture offer. This is because they are part of the capital of the co-operative and they are capable of being quoted on the ASX. The CNL provides that

• The Registrar must separately approve the terms of issue for CCUs, and a statement that sets out the terms of issue, rights of CCU holders, redemption terms and how they may be transferred,

• The members of the co-operative must approve the issue by special resolution,65 and

• The same disclosure statement as though the issue was a debenture issue.66

The terms of issue must include:

(a) details of entitlement to repayment of capital;

(b) details of entitlement to participate in surplus assets and profits;

(c) details of entitlement to interest on capital (whether cumulative or non-cumulative interest);

(d) details of how capital and interest on capital are to rank for priority of payment on a winding up;

(e) whether there is a limit on the total holding of CCUs that may be acquired by persons who are not members of the co-operative and, if there is a limit, what the limit is;

(f ) the terms upon which they can be redeemed, and

(g) the manner in which they can be transferred.

The restrictions on how a co-operative may redeem CCUs, puts these securities in a position akin to

65 Section 350 provides for approval and also specifies minimum requirements for the terms of issue. A special resolution under s350 requires a majority of 66%.

66 Section 347 CNL applies the same requirements as though they are debentures.

share capital as they are not able to be redeemed except out of profits or a fresh issue of shares or CCUs. It is possible to place a clear restriction on their redemption through repayment by allowing the board of the co-operative a complete discretion to repay.

As CCUs can be traded on a stock exchange (see 3.7.2) they have free transferability and may be structured to look like permanent risk capital. Still relatively new securities, CCUs may require further research and testing for a community investment issue.67

The cost of any approval of the terms of issue for CCUs is modest. The criteria for approval of terms of issue in s350(4) CNL is expressed as a “bottom line” test that ensures at least that the CCUs comply with the co-operative principles and they are not contrary to the co-operative’s rules. There is no other guidance material published on what criteria the Registrar will adopt in this process.

The second step in a CCU issue is to seek approval for the issue from the members of the co-operative by a special resolution. Special resolutions require a majority vote of two thirds of members and a general meeting or using a postal ballot process.

This additional step is required because CCUs as hybrid capital, arguably, have rights to the capital or surplus and this will have an impact on the rights of shareholders if the co-operative is wound up.

By contrast, the decision to issue debentures, is a decision that can legitimately be made by the co-operative board without referral to the membership.

The disclosure statement for a CCU issue to members must cover the same ground as a disclosure statement for debentures. The disclosure statement is also subject to approval by the Registrar prior to issue. The terms of issue and disclosure material can be combined in the one document.

67 Two research papers published by the Centre for Entrepreneurial Management and Innovation, University of Western Australia, look at the potential for CCUs and options for structuring these securities. The papers linked in Part 5 of the Handbook .

Offers of debentures and CCUs to non-membersThe process and disclosure requirements for the offer of debentures or CCUs to non-members, referred to as ‘public offers’, are governed by s337 of the CNL.

A common legislative drafting technique in the CNL is to use the same provisions of the Corporations Act by simply applying them as part of the CNL. This does

not make the Corporations Act, which is a federal law, applicable to co-operatives, rather it reproduces the effect of the Corporations Act as a state law as if the same provisions were written in the CNL. The applied provisions are slightly modified to replace the word ‘company’ with ‘co-operative’ and substituting the Registrar as the regulator instead of ASIC.

4.8


Importantly, by applying provisions from another piece of legislation, the CNL imports the same requirements of the other legislation as if it was actually written in the CNL. It follows then, that if there are changes to the Corporations Act to permit crowd sourced equity funding, this will also be imported into the CNL.

Public offers of debentures and CCUs require professional assistance and are aimed at raising substantial capital. Applying Chapter 6D of the Corporations Act to public offers of co-operative debt securities also imports the process for these offers and the requirements to appoint a trustee for security holders.

The public offer process varies from the member offer process as it requires the lodgement of the disclosure statement and an embargo on offering the securities for 7 days. During this time the Registrar has the power to place a stop order or make a direction in respect of the offer. Compared with the 28 day process for approval under a member offer, this process is more streamlined. The lodgement fee for this type of offer is substantial; it is commensurate with the fee for the lodgement of a prospectus. The combination of the higher fee, the risk of a stop order, the need to appoint a trustee and the possibility of higher preparation costs places this option outside the scope of smaller community investment offers.

In the event of amendments to facilitate CSEF offers under the Corporations Act being passed, state and territory legislative bodies may consider whether such amendments should ‘flow through’ to co-operatives in the same manner or whether the CNL should modify or adjust their application to co-operative securities.

4.8.1 Public offer or member only offer?An offer to the public attracts significantly higher costs than an offer to members. However, the size of the project and the potential to attract investment, even in small amounts, across a very large population may justify the higher cost.

As well as examining the comparative regulatory costs of choosing either a member only offer or a public offer, a co-operative needs to consider the value of having a large number of external investors as opposed to a large number of members with membership rights and obligations. The question of offering to the public or to members only also should be considered in the context of whether to offer shares or debt or a mix of shares and debt in order to raise funds.

Most corporate enterprises prefer to issue shares rather than debentures. The reasons for this are fairly straightforward. Debt has to be repaid according to a pre-agreed schedule and normally carries a pre-arranged interest rate. Equity is not subject to any pre-arranged repayment schedule or interest rates.

In a co-operative with share capital, the offer of membership with shares is particularly attractive because there is no additional requirement for a disclosure statement. The disclosure obligation is satisfied by the maintenance of a current member disclosure statement that must be provided to prospective members. Additional share offers are relatively simple to make to members, and the requirement to maintain a current member disclosure statement is one that serves the interests of the community.

Co-operatives that wish to pursue a public offer will need professional advice on whether this is viable and guidance throughout the compliance process.

A Note about cross border security offers by co-operativesThere is a regulatory restriction on the issue of securities by a co-operative outside its ‘home’ jurisdiction. The reasons for this are bound up in the complexity of a federal regulatory system. Suffice to say that where a co-operative’s target community of members or investors extends across a state or territory border, it may be necessary to examine whether such an offer will attract the disclosure requirements under Chapter 6D of the Corporations Act, and if so whether it is appropriate to seek an exemption from ASIC.

If the offer is likely to extend in this manner, a co-operative should obtain professional assistance to advise on the impact of the Corporations Act.

It is not intended that this Handbook deal with the requirements of such an offer. This is partly because each offer that possibly requires consideration of this issue will be different and such complexity is beyond the scope of this resource as a plain English resource for communities.

4.9


Part 5

Additional Information

Part 5 - Additional Information53BUSINESS COUNCILOF CO-OPERATIVES AND MUTUALS

Examples of SMART active membership rulesSMART active membership rules state the activities (called primary activities) first and then link the active membership requirement to a real and measurable action that the member needs to contribute to one or more of the primary activities.

Non-distributing co-operatives, (whether they have a share capital or not) are permitted to have an active membership rule that merely requires the payment of an annual subscription. Distributing co-operatives must have an active membership requirement that directly connects with an activity of the co-operative. An annual subscription alone in a distributing co-operative is not sufficient.

To be an active member of the co-operative a member shall pay an annual subscription of not less than $5.

Note 1: This active membership requirement provides a simple certainty regarding who has a voting right at meetings of the co-operative. It is easy for members to comply with this requirement, however, it lacks any real contribution to the activities because it does not require any participation through attending events, using services or volunteering. This kind of co-operative will be likely to have a heavy reliance on grant funding.

Note 2: if the non-distributing co-operative also has a share capital, there will be a separate rule requiring the member to subscribe for the minimum number of shares.

A non-distributing co-operative

A non-distributing co-operative may be formed for a range of purposes that suit a community enterprise. It may or may not have a charitable purpose. Whether it has a charitable purpose is determined by the Australian Charities and Not for Profits Commission (ACNC). Examples of charitable purposes and how

these might be appropriately expressed can be found at www.acnc.gov.au.

Where the purpose of the co-operative is to provide access to community services through a neighbourhood centre.

The primary activities of the co-operative are:

(a) To establish and manage a neighbourhood centre,

(b) to develop and provide services to the local community that promote a sense of community identity and inclusion, and

(c) to support other community organisations with a similar or associated purpose.

5.1

http://www.acnc.gov.au


A food co-operative Where the purpose of the co-operative is to support local food production and consumption


(a) To purchase products that are produced/grown/value added within a locality [this could be defined as a geographical region or by reference to a distance from the co-operative such as ‘100 km radius’],

(b) sell products produced within the [defined] locality through wholesale or retail outlets or services, and

(c) promote the economic, social and health benefits of buying or consuming local produce.

(a) Pay the annual subscription specified in the rules AND

(b) do one of the following things:

• supply local products to the co-operative to the value of $xyz* in each financial year, or

• purchase products from the co-operative to the value of $abc** in each financial year, or

• provide x hours of volunteer time to the co-operative in each financial year.

(a) Supply local products to the co-operative to the value of $xyz* in each financial year, or

(b) purchase products from the co-operative to the value of $abc** in each financial year, or

(c) provide x hours of volunteer time to the co-operative in each financial year.

*The value of produce supplied should be set as a minimum that producers are able to simply comply with. The co-operative can require the supply of additional produce through separate contracts. The value could be expressed at a wholesale or supply price.

**The value of produce purchased could be expressed as the total paid for produce sold by the co-operative.

Note: Many food co-operatives are incorporated as non-distributing non-share co-operatives. This means they cannot issue shares, but may only issue debentures or CCUs. There is no reason why they cannot be incorporated as co-operatives (non-distributing or distributing) with a share capital. Food co-operatives without a share capital often have an annual subscription requirement. This can be a separate requirement under the rules or it can also form part of the active membership rule. If the annual subscription is to be part of the active membership rule then it is best expressed as follows, and should specify a maximum to permit discounted subscriptions if desired.

To be an active member of the co-operative a member must do one of the following things:

To be an active member of the co-operative a member must:


A renewable energy co-operativeWhere the purpose of the co-operative is to construct and generate renewable energy

Where there is less certainty about the ability of members to directly acquire energy from the co-operative or where the broader purpose of the co-operative is to increase demand for renewables an alternative rule might be:

To be an active member of the co-operative a member:

(a) Must purchase or consume energy generated directly or indirectly by the co-operative; or

(b) subscribe to the co-operative’s information advisory service relating to energy usage and efficiency; or

(c) subscribe to the co-operative’s newsletter.

To be an active member of the co-operative a member must:

(a) Purchase ‘green energy’ of not less than $50 (plus GST) each financial year; or

(b) acquire and install renewable energy generation facilities for sale of electricity to the grid installed at a member’s residential or commercial premises and provide evidence of the sale of energy to the grid each financial year; or

(c) attend a co-operative strategic planning event at least once a financial year; or

(d) undertake a minimum of 2 hours of volunteer work for the co-operative each financial year.

The primary activities of the co-operative are to:

(a) Develop, own, operate and manage a renewable energy facility [wind farm or farms, solar farm or farms, etc];

(b) generate and supply energy from the co-operative’s facility or facilities;

(c) provide advice and assistance to its members to reduce energy usage and increase members’ energy efficiency.


(a) Owning, operating and maintaining renewable energy generators and associated infrastructure;

(b) investing, managing and/or participating in programs to achieve local uptake of renewable energy;

(c) advocating for programs to facilitate local uptake of renewable energy;

(d) researching, educating, producing and disseminating information to promote renewable energy generation; and

(e) generating renewable energy.


A product marketing co-operative

Many agricultural producers use a co-operative to combine their strength to compete in a larger market. The model works well for all persons or individuals who have something to sell and where it is too difficult or costly to advertise or market their goods, particularly if the products require processing or packaging before they can be sold. The goods might be agricultural products, home or cottage industry products, artworks or event tickets. There

are co-operatives of real estate agents who combine to reduce advertising costs, or travel agents who combine to get discounted deals on travel packages and then advertise the same at shared cost. It is important in these co-operatives that the active membership rule focuses upon getting members to supply a product to enable the co-operative to market and sell it.

To be an active member a member must:

Product marketing co-operatives cover a diverse range of activities and in order for members to comply with active membership the requirements must be linked to at least one primary activity and be reasonable. They will normally be expressed as a minimum requirement. Additional services through the co-operative are available under separate contracts. Below are some examples of how a co-operative might expect its members to support its marketing activities.

(1) Supply xyz kgs (fish/organic vegetables) each (week/month/financial year) at the price set by the co-operative at the beginning of each financial year; OR

(2) provide one item of artwork for sale through the co-operative each financial year; OR

(3) list one theatre event through the co-operative for promotion each financial year.

Note 1: For marketing co-operatives that wish to ensure that product is of a particular quality or criteria, the product could be described with respect to that criteria eg ‘First Grade’ produce. In respect of artworks or theatre productions, perhaps a value or scope of the artwork or production could be specified if desired.

Note 2: Some co-operatives are formed to not only market products but also to promote a particular product because of its quality or origin. Co-operatives may want their members to strive towards achieving particular quality standards and will possibly develop training programs in this respect. Participation, in clear terms, can also be included in active membership rules, however, the more requirements there are, the smaller the potential number of members (and share capital).


(a) The marketing of (fish/organic vegetables/jewellery/artworks/theatre productions/fresh truffle) on behalf of its members;

(b) the development of standards for the classification, packaging, labelling and processing of (agricultural products/fairtrade products/ ‘local’ marques etc);

(c) the collection, packaging and processing of (fish/organic vegetables/ fresh truffles etc); OR

(d) the display/ framing/transport of artworks/jewellery or theatre production equipment.


A consumer or buying co-operative

These co-operative types are formed by persons who, as individuals, are not able to buy goods or services at a reasonable price because they only require small quantities. If the consumers are in an area that is remote or does not have a ready supply of goods and services, then they are disadvantaged by having to be ‘price takers’ of these commodities.

The active membership requirement should focus on ensuring that there is a ready group of consumers who will buy if the co-operative acquires the goods or service at a bulk discount rate. The goods might be consumables or might be services such as medical or health services.

To be an active member a member must:

(a) Acquire or purchase ($x of food/y medical services/ z litres of petrol/ w educational courses from the co-operative each (week/month/financial year).

Note: In some instances it may not be possible for a member to acquire goods or services in a particular period. It is appropriate to provide an alternative, such as providing volunteering time or a specified

annual subscription. For example, a health co-operative formed to provide medical services in a remote area will need to employ medical staff so that the service is available as and when needed. Members may not need a service in a particular year, these members could pay a subscription as an alternative to acquiring a service and the subscription ensures the ongoing availability of the service.

The primary activities of the co-operative is:

To provide (fresh healthy food/affordable medical services/petrol/educational services) to the local area.

Example of a debenture disclosure statementFormation disclosure statement, Pingala Co-operative Ltd, 2016

Invitation to Members to subscribe for Community Investment Notes, Bathurst Wholefood Co-operative Ltd, 2015

5.2

http://bccm.coop/wp/wp-content/uploads/2016/10/DS-Formation-20May16-Pingala.pdf

http://bccm.coop/wp/wp-content/uploads/2016/10/Community-Investment-Notes-Disclosure-statement.pdf


Glossary terms

Co-operatives National Law

Each of the 8 states and territories of Australia had a Co-operatives Act. In 2012 they all signed an agreement to pass an updated law that was either identical or consistent with a template or model law. The template law is referred to as the Co-operatives National Law. All states except Queensland, Northern Territory and the ACT have now passed such a law. The impact of this is that there are no effective differences between the laws in one state and a co-operative formed in one state is recognised and able to carry on business in any other state (except Queensland, Northern Territory and the ACT) without any further requirements to register.

Community Shares

Community Shares is a term coined in the United Kingdom for shares issued by co-operatives. They have the same characteristics as shares issued by Australian co-operatives. The term is indicative of the purpose of these kinds of shares as being different from shares that investors buy and trade on a stock market. Community shares are not traded in this way, but represent a means by which ordinary community members can own and invest in local community enterprises.

Legal vehicle or entity

Persons wishing to start a business can be sole traders, start a partnership, or incorporate a company or a co-operative. Using a separate incorporated company or co-operative distances the business from the individual persons operating it. This means that if the business fails and there are debts to cover the separate incorporated company or co-operative is responsible for the debts, not the individuals. This is referred to as limited liability. Sole traders and partnerships do not have limited liability and the individuals who own these businesses under these types of structure will have personal liability for any debts of the business.

Private equity

Private equity is a share in the ownership of the company and it is referred to as equity. Often a company that was started by an individual will have a large or the majority of its shares issued to the person who started it. If that person wishes to get out of the business, he or she needs to be able to sell their large equity or shareholding. If the company is very successful, it will be easier to sell these shares if the majority shareholder offers them to the public as a way to exit the company with the most value for his or her shareholding.

Equity and debt securities

An equity and debt security is a share, and a debt security is a loan by an investor to the company. The most common debt security is a debenture or a bond.

Active membership

All Australian co-operatives must be designed so that there is an active relationship between members and the co-operative. This is achieved by having a rule that requires members to either transact with the co-operative or otherwise support its activities.

Debenture

A debenture is a medium to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.

https://en.wikipedia.org/wiki/Financial_instrument


Additional resources

AUSTRALIAN CAPITAL TERRITORY

Registrar of Co-operatives

Office of Regulatory Services

225 Canbera Avenue,

Fyshwick, ACT, 2609

ors.act.gov.au

NEW SOUTH WALES


Department of Fair Trading

154 Russell Street

Bathurst, NSW, 2795

fairtrading.nsw.gov.au

NORTHERN TERRITORY


PO Box 1722

Darwin, NT, 0801

nt.gov.au

QUEENSLAND


Office of Fair Trading

GPO Box 3111

Brisbane, Qld, 4001

fairtrading.qld.gov.au

SOUTH AUSTRALIA


Office of Consumer & Business Services

GPO Box 1407

Adelaide, SA, 5001

cbs.sa.gov.au

TASMANIA


Consumer Affairs and Fair Trading

GPO Box 249C

Hobart, Tas, 7001

consumer.tas.gov.au

VICTORIA


Consumer Affairs Victoria

PO Box 4567

Melbourne, Vic, 3001

consumer.vic.gov.au

WESTERN AUSTRALIA


Department of Commerce

Locked Bag 14

Cloisters Square, WA, 6850 commerce.wa.gov.au

Australian Charities and Not-for-profits Commission

Advice Services

Australian Charities and Not-for-profits Commission

GPO Box 5108,

Melbourne VIC 3001

www.acnc.gov.au

Business Council of Co-operatives and Mutuals

GPO Box 5166,

Wynyard 2001

Sydney NSW 2001

www.bccm.coop

Community Shares Handbook

The Practitioner’s Guide to Community Shares

Structuring Co-operative Capital Units – Symposium Findings, Limnios, E., Watson, J. & Mazzarol, T. Centre for Entrepreneurial Management and Innovation, University of Western Australia, 2012.

Co-operative Capital Units as a solution to co-operative financing, Limnios, E., Watson, J.,

Mazzarol, T. & Soutar, G. Centre for Entrepreneurial Management and Innovation, University of Western Australia, 2014.

Keeping Rural Businesses Alive, Community and employee buyouts of Rural Businesses, Co-operatives UK, 2004

http://www.microgenius.org.uk

http://www.crowdfunder.co.uk

List of co-operative regulators in each state and territory:

Other organisations:

5.3

http://communityshares.org.uk/sites/default/files/community_shares_handbook.pdf

http://bccm.coop/wp/wp-content/uploads/2016/10/practitioners_guide_to_community_shares_0-1.pdf

http://www.cemi.com.au/sites/all/publications/CCU-Symposia-Outcome-Report-Final.pdf

http://www.cemi.com.au/sites/all/publications/CCU-Symposia-Outcome-Report-Final.pdf

http://www.cooperativeswa.org.au/Documents/Co-operative_Capital_Units_as_a_Solution_to_Co-operative_Financing.pdf

http://www.cooperativeswa.org.au/Documents/Co-operative_Capital_Units_as_a_Solution_to_Co-operative_Financing.pdf

http://www.partnerships.org.au/Keeping%20Rural%20Businesses%20Alive.pdf

http://www.partnerships.org.au/Keeping%20Rural%20Businesses%20Alive.pdf

http://www.microgenius.org.uk/

http://www.crowdfunder.co.uk
