What is a Cooperative?: Debunking the Cooperative Capital Myth and Acknowledging its Black Roots
At the root of cooperatives is the African-American community. However, many Black cooperatives throughout history found it hard to sustain themselves due to the lack of sufficient capital in the community. This is true for many cooperatives, but especially for Black cooperatives. This blog is going to highlight the African American history of cooperatives and also provide information on how a cooperative, especially one owned and controlled by marginalized communities, can raise capital to fund its enterprise. Before we begin, it is important to note that you should always consult a securities attorney when considering raising capital from investors.
What is a cooperative, you may ask? Think of a business that is owned by the very people who use its services. These people are called members. Cooperatives are established to satisfy an economic or social need, provide a good or service at a more affordable price, and/or create an alternative economic structure. There are three main types of cooperatives: consumer-owned, producer-owned, and worker-owned.
ChiFresh Kitchen is an example of a Black worker-owned cooperative in Chicago, Illinois. Not only is this Black cooperative worker-owned, but they are also controlled by all women. ChiFresh Kitchen provides healthy, cooked food to organizations throughout the city and each worker is able to receive an equal share of the profits of the business. ChiFresh Kitchen is just one of many Black-owned cooperatives.
Did you know prior to this blog that U.S. cooperatives have an origin within the African American community? Yes, African Americans would often form cooperatives to pool their money together in order to buy their freedom from slavery. In addition, many abolitionists, including Frederick Douglass and Sojourner Truth, were some of the earliest cooperators, forming the 1842 commune Northampton Association of Education & Industry.
This intentional cooperation among the marginalized Black community continued into the Jim Crow era where dejure segregation and discriminatory laws encouraged African-Americans to use cooperatives as a means of providing for their collective economic, and social needs. Also in the early 19th century, the Pioneer Cooperative Society was formed in Harlem. This cooperative focused on providing affordable foods for the Black community. With a membership of 120 people and $5 per share, the group managed to open a small grocery store in September of 1919.
W. E. B. Du Bois, a notable civil rights activist, professor, author, and one of the founders of the NAACP, was also a strong proponent of the cooperative movement during the early 20th century. Unfortunately, he did not receive the support that he needed to continue his research and advocacy in this area. Still, he made great strides. For instance, he found that education for members was essential in the development and success of the cooperative. In fact, many cooperatives today still provide education through training, orientation, networking conferences, and more.
Although education has proven to be necessary to successfully start a cooperative, funding is still needed to ensure its long-term sustainability. The lack of institutional and financial support has been a longstanding challenge among many cooperatives, especially Black cooperatives. In order to ensure long-term sustainability, cooperatives need to create long-term financial plans that take account of expenses as well as needs. For instance, the Freedom Farm Cooperative, led by historic icon Fannie Lou Hamer,
owned six-hundred acres of farmland through foundation support, federal grants, and
individual membership fees. Unfortunately, Freedom Farm Cooperative was unable to sustain itself due to insufficient foundational support and member contributions.
So, how can cooperatives, especially Black cooperatives, sustainably fund their operations? Well, there are several ways: (1) membership shares, (2) preferred stock and other limited equity, (3) debt, (4) donations, (5) micro loans, and (6) direct public offerings and other crowdfunding tools. Cooperatives require members to make equity contributions by purchasing shares or membership interests within the company, hence membership shares. The members of a cooperative may collectively decide how many shares and at what cost is required to become a member. The distribution of profits within a cooperative is also determined by the cooperative members. For instance, the members could decide to reinvest all profits back into the cooperative or distribute to members based upon their individual use of the cooperative, i.e. "patronage."
Another way that cooperatives may raise capital is through preferred stock. A cooperative can sell preferred stock to both members and non-members. However, cooperatives may find some difficulty in getting non-members to invest in them. Depending on the State, some cooperative entities are not even allowed to have non-member investors. Additionally, voting rights within the cooperative are only reserved for members, which makes it difficult for cooperatives to attract non-member investors. Still, outside investors could really help the long-term sustainability of a cooperative. It is therefore, important that a cooperative find a way to attract mission-aligned investors.
Generally, cooperatives can use a combination of debt and equity to provide needed capital. Debt is borrowed money that the borrower makes a promise to pay back. Usually, this money comes from a bank or another financial institution called a lender. A lender does not have any ownership rights of a company. For cooperatives, debt can come in two forms: (1) short-term loans and (2) long-term debt.
A short-term loan is borrowed for day-to-day operations and expected to be repaid to the lender in less than a year. This could be used to purchase goods and pay for marketing and other expenses. Alternatively, a long-term loan could be used to purchase larger needs such as a storefront or some other real property for the cooperative. Usually, a cooperative would repay this long-term loan in annual installments.
In addition to debt, a lot of cooperatives are getting creative with their financing by utilizing donations and microloans. Donations are funds that are made without an expectation of return or ownership interest within the cooperative. Donation-based crowdfunding websites like www.Kickstarter.com and www.Indiegogo.com are used regularly to solicit these types of donations. Likewise, obtaining a micro loan has also proven to be helpful for cooperatives. A micro loan is a smaller, low-interest rate loan that is generally provided by socially conscious organizations. For instance, the Chicago Neighborhood Initiatives (CNI) is a microloan group that provides economic resources to help “revitalization efforts in Chicagoland’s low to moderate income neighborhoods.”
Another way that cooperatives are raising capital for their enterprises is through direct public offerings (DPO). A DPO is a State crowdfunding security offering that permits cooperatives and other businesses to advertise publicly and sell securities to non-accredited investors (clients, customers, neighbors, friends, and family) without registering with the U.S. Securities Exchange Commission ("SEC"). Regulation crowdfunding or Reg CF is federal crowdfunding securities offering that also allows cooperatives to raise capital from both accredited and non-accredited investors without registering with the SEC. This includes equity capital debt capital, and even rewards-based capital.
East Bay Permanent Real Estate Cooperative (EB PREC) is a great example of a Black-owned cooperative that is currently raising capital for its operations. EB PREC is a permanent real estate cooperative that is addressing housing insecurities for people of color in Oakland and the East Bay area. They are using a few different funding methods to ensure the longevity of their operations. This includes recruiting outside or non-member investors through a DPO, which allowed them to purchase properties where residents can both live and receive a return on their investment. In fact, residents of Oakland, EB PREC staff, and non-member investors “co-own and co-steward” the properties.
Much like other businesses, cooperatives require capital to sustainability run their operations. However, Black-owned cooperatives have a harder time sustaining their enterprises due to a systematic barriers that prevent them from obtaining sufficient funds. Thus, it becomes necessary for a Black-owned cooperative to create a detailed financial strategy to ensure that promotes sustainability such as DPOs, crowdfunding, microloans, and preferred stock. Now, before you leave to start planning out how you will raise capital for your cooperative, keep in mind that you should consult a securities attorney who has experienced working with cooperatives to better help you navigate your rights and obligations. Schedule a consultation with us today!
*co-authored by Elizabeth L. Carter, Esq., Managing Attorney