Securities Law and the Solidarity Economy



*co-authored by Elizabeth L. Carter, Esq., Managing Attorney



What is the Solidarity Economy?


The current solidarity economy movement rose from the Financial Crisis of 2007-2008, which witnessed one of the largest wealth transfers to the top 1% of wealth holders in U.S. history. Beneficiaries of this wealth transfer to the top 1% (also known as a“bailout”) is still being paid for by current and future generations of American taxpayers. As an alternative to the now embedded profit-first, financialized capital system, the solidarity economy is a people- and environment-first economic system rooted in economic democracy, social solidarity, and sustainability.


Regardless of business structures (individuals, organizations, small businesses, social enterprises, cooperatives, worker self-directed nonprofits, community land trusts, time banks), participants in the solidarity economy are “collective experiments that seek to build alternative mechanisms for both economic justice and social liberation.” Accordingly, the solidarity economy rests on five unifying principles: (1) solidarity, (2) social equity, (3) pluralism, (4) participatory democracy, and (5) sustainability.


The solidarity economy movement has led to a growth of cooperatives, which the United Nations found to reduce poverty. That’s because cooperatives allow people to operate collectively in order to meet the needs of their community caused by market failures, economic discrimination, and underdevelopment.


Cooperatives are not business entities new to this century. At the turn of the 20th Century, cooperatives flourished in African-American communities. Today, many of us are familiar with them through consumer-owned cooperatives known nationwide, such as REI, and producer-owned cooperatives also known nationwide, such as Ace Hardware. Lesser known, but legally significant, are agricultural cooperatives – with special taxation rules that give these cooperatives passthrough status similar to that of a Partnership.


In recent years, there has been overwhelming support for organizations to move toward a worker-owned cooperative model. For instance, between 2013 - 2019 there was a 35.7 percent net growth in verified worker cooperatives. These member-owned democratic institutions provide a mechanism for pooling of resources, increasing employee-related benefits, and sharing of profits for workers - features that are often uncommon in other employment contexts.


Securities Law and the Solidarity Economy

Securities, defined broadly but includes equity, debt, and investment contracts, are financial arrangements between a contributor of funds and a business whereby the contributor of funds receives a financial return through the efforts of the managers of the business in exchange for their contribution to the business. These types of contributions are called passive investments. For more on this topic, read Securities 101.


Both State and federal securities laws regulate investments. Unless otherwise exempt, a business interested in receiving investments from investors (i.e. raising capital), will have to meet federal and/or State registration requirements. Registering an offer with either State securities regulators or the U.S. Securities Exchange Commission (SEC) can be expensive, which could prohibit a business from being able to raise capital altogether. Thus, securities lawyers helping businesses navigate the complexities of filing for an exemption from registration are important.


Qualifying for an exemption from the legal requirement of registering an investment offer, largely depends upon whether an investor is an accredited investor or a non-accredited investor.


An accredited investor is an individual with at least $200,000 in annual income or $1 million in net worth, excluding their primary residence. A non-accredited investor is anyone who makes less than $200,000 in annual income or has less than $1 million in net worth, excluding their home. In other words, non-accredited investors are 90% of the US population.


Securities laws assume accredited investors are better able to protect their financial interests more than non-accredited investors. If only this was actually true. Consider the many financial bailouts of major corporations and wealthy individuals by the government. Wealth doesn’t create investment intelligence, nor does the lack of wealth determine an investors ability to intelligently invest. In 2020, the SEC updated it’s accredited investor definition to include non-wealth markers, they are limited to investment-related professional certifications, positions that often require financial means and access to obtain. Without real alternatives to wealth determining an investor's ability to invest, this system perpetuates wealth, distinctly leaving out low-income individual’s ability to build wealth.


The accredited investor requirement for most investment opportunities shuts out most people from investing in early stage businesses – investments which generally carry the most profit / wealth-generating potential. The federal government even prohibits collective action from a group of non-accredited investors that don’t have pre-existing relationships, although unrelated accredited investors can form syndicates (investment vehicles allowing investors to co-invest with reputable investors) without the need to have a pre-existing relationship.


While Title III of the JOBS Act, lets startups raise money from non-accredited investors through general solicitation and public advertisements, regulation crowdfunding is limited to raising $5 million per year. While there are no limits for accredited investors, non-accredited investors with an annual income over $107,000 may invest up to 10% of their income or net worth, whichever is greater. All other non-accredited investors are limited to the greater of $2200 or 5% of their annual income or net worth.


So while this legislation has opened up investment opportunities to non-accredited investors, the income limits makes it more difficult to raise funds because it requires more investors to achieve the same financial goal.


Providing Investment Legal Services for the Solidarity Economy


Instead of using an issue-based approach, lawyers rooted in the solidarity economy will serve clients from a community-based perspective. This may mean acting beyond the role of Securities lawyer and incorporating other areas of the law directly impacting communities, such as Community Development Law, Immigration Law, and Employment Law, in order to help solve social issues intertwined with business outcomes.


A securities lawyer supporting a solidarity organization will help develop mission-aligned fundraising strategies. This might mean getting creative with equity vs debt offerings or, structuring investment offerings that include delayed and/or performance based dividend payouts and debt payments to investors (i.e. “Slow Capital”). It may also mean asking investors to accept lower interest rates, as the many state statutes limit dividends paid on cooperative stock to 8% in alignment with requirements of the Capper Volstead Act.


Finally, lawyers rooted in the solidarity economy can serve as legal translators by producing educational resources on the current state of the law. That’s why we at Elizabeth L. Carter, Esq., LLC, find it important to provide writings on timely topics, a glossary of key terms in securities law, and educational events. Subscribe to our newsletter for updates.


Sources:


26 U.S. Code § 1381


Hatcher, Renee (2019) "Solidarity Economy Lawyering," Tennessee Journal of Race, Gender, & Social Justice: Vol. 8 : Iss. 1 , Article 2. trace.tennessee.edu/rgsj/vol8/iss1/2.


Kassan, Jenny (2017). Raise Capital on Your Own Terms. Berrett-Koehler Publishers. jennykassan.com/raisecapitalbook/.


Nembhard, J.G. (2014). Collective Courage: A History of African American Cooperative Economic Thought and Practice. University Park: Penn State University Press. muse.jhu.edu/book/31238.


Palmer, Tim (2019). “2019 Worker Cooperative State of the Sector Report,” Democracy at Work Institute. institute.coop/resources/2019-worker-cooperative-state-sector-report.


Pitman, Lynn (2020). Cooperative Preferred Stock: Basic Concepts. University of Wisconsin Center for Cooperatives.


ProPublica (2009). Bailout Tracker: Tracking Every Dollar and Every Recipient. Updated August 20, 2021. projects.propublica.org/bailout/


SEC Final Rule 2020/33-10824


SEC Final Rule 2020/33-10884


Tanzi, Alexandre and Michael Sasso (2019). “Richest 1% of Americans Close to Surpassing Wealth of Middle Class,” Bloomberg.



Shirah Dedman is a Legal Fellow at Elizabeth L. Carter, Esq., LLC. Her focus is on blockchain, NFT, and cryptocurrency matters.

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