Part 1 of this series outlined the basic principles governing traditional cooperatives, with reference to the operations of Black Star reflecting each principle. Part 2 explored the fundamentals of patronage refunds. In Part 3, we’ll explore cooperative investment arrangements. The rules and practicalities of co-op investment, and how such investment jibes with patronage rebates, are fairly complex. While a detailed presentation is beyond the scope of this short article, here are the basics:
Like many co-ops, BSC periodically offers a preferred share program allowing Owners to invest in BSC beyond the membership payment required of all Owners. This program — called the Member Investment Share Offering or “MISO” program — provides crucial funds for the development and expansion of our Co-op. BSC’s initial MISO phase raised more than $630,000, which is part of the reason why the brewpub was able to open so quickly and become so successful. The Board anticipates another round of fundraising soon after plans are solidified for a new brewing facility, first, and then a new brewpub. Because we want to allow as many members as possible to invest, we’ll likely set the minimum purchase amount at $1000 (10 shares at $100 apiece).
Some co-ops do not offer investment shares beyond the required membership payment, but co-ops may appropriately offer investment shares if the program is carefully structured to maintain both the cooperative nature of the business and their favorable tax treatment. Co-ops also do not want run afoul of state and federal securities laws—but, happily, there are exemptions available to co-ops. One of these exemptions, for example, applies to an entity selling shares only to intrastate members. It is virtually prohibitive for a small business to pay the fees and comply with the regulatory requirements of a state/federal registered stock sale, so exemption from such laws is critical.
The various limitations on co-op investment reflect the cooperative principles of Democratic Member Control, Member Economic Participation and Autonomy and Independence. It would not be very cooperative to allow investors to control a co-op by purchasing large amounts of stock. Therefore, co-ops would want to restrict sale of shares to persons who are members of the co-op and limit the amount of their investment. State and federal laws also limit the amount of return on co-op investment (up to 8%), and limit the amount of the co-op’s assets that can be used to pay interest on the investments (Texas law allows only 50% of the co-op’s net profits to be used for investment dividends). Perhaps most significantly, co-ops should apportion no additional voting power based on an additional investment. All these limitations are referred to as the subordination of capital requirements for co-ops — that is, the structure and control of the co-op should be strictly based on the principle of one person, one vote. Co-ops are free to raise money, but they must also retain the attributes of a co-op.
Some co-op experts contend that additional member investment alters the nature of a co-op, necessarily shifting its goals from generating only a return to members on patronage to a combined goal of return on patronage and return on investment. The co-op now has two potentially conflicted types of members, each with different types of property rights and different expectations. Some view the use of such additional investment, particularly from nonmember investors, as subverting or diluting the co-op business model. Others view such investment as far preferable to loans from predatory banks and other outside sources. Additional member investment keeps the equity and interest payments “in the family.” The Directors of the co-op must be mindful of the dual interests in carefully managing the potential conflict.
Based on the above considerations, BSC intends to continue its program of raising expansion equity with a blend of new MISO investment and bank loans, as well as through increased sales of our delicious food and beer — now including beer distributed to other pub and retail locations around town. The BSC Board will continue to carefully analyze the interplay between patronage rebates and MISO dividends to ensure that all members are treated fairly and beneficially.
John Vinson is an elected member of Black Star Co-op's Board of Directors.