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Selling Preferred Shares in Cooperatives

This final post in the series addresses sales of preferred shares.  Unlike common shares, preferred shares can offer dividends and in most states, can be sold to both members and non-members.  Preferred shares offer cooperatives an opportunity to obtain funds from investors for specific projects or for general expenditures.  However, because preferred shares are treated as investments, they are treated as securities and are subject to a different set of rules than a cooperative’s common shares.  Preferred shares are also treated differently in the cooperative’s articles of incorporation and bylaws.

One important difference between common shares and preferred shares is the shareholder’s ability to vote on cooperative matters.  Many state corporation statutes, including the statute in Georgia, allow corporations structured as cooperatives to eliminate the ability of preferred shareholders to vote on matters affecting the cooperative.  This limitation is typically accomplished in the cooperative’s articles of incorporation to ensure that only members of the cooperative have the right to control the cooperative.

Another difference between common shares and preferred shares is the payment of dividends.  As discussed in a prior post, common shares, which signify membership in the cooperative, are not investments and thus, do not pay dividends.  Preferred stocks can pay dividends and are attractive to those who want to support the cooperative and also obtain a return on their investment.  Because of the various options available in determining when and how dividends will be paid, cooperatives offering preferred stock must achieve the proper balance between providing terms that attract investment and safeguarding the financial stability of the cooperative.  The various options available will be discussed in the next post in this series.

Finally, unlike common shares, preferred shares are considered an investment by the shareholder and as such, are securities subject to the federal and state securities laws.  Because registration requirements are onerous and expensive, cooperatives typically rely on exemptions from federal and state requirements when offering preferred shares.  While there are various exemptions available, smaller cooperatives that operate in a single state often use an intrastate exemption that reduces filing requirements to a simple notice filing with the state’s securities commission.  The U.S. Securities and Exchange Commission recently amended its rules to simplify intrastate offerings and allow offerings to be made online, and many states have enacted similar exemptions.  These exemptions, often referred to as crowdfunding exemptions, make it relatively easy for cooperatives to offer preferred shares.

Even if a cooperative’s offering falls within an exemption, the cooperative must still provide a disclosure document to potential purchasers/investors that describes the cooperative and the purpose of the offering and includes financial information, risks, and various other information about the offering.  While such disclosures are required by law, preparing the document can be very helpful in forcing the cooperative and its members to distill the reasoning for the offering, the status of the cooperative’s finances, and the cooperative’s future plans into a single document.