Back in 2011, a group of neighbors decided they were fed up with their lackluster commercial corridor, and got together to start the country’s first investment cooperative to buy and develop real estate. Today, the Northeast Investment Cooperative in Minneapolis has more than 200 members, and in the two buildings first purchased by NEIC, there are three thriving businesses. NEIC is unique in the U.S., but similar investment cooperatives are sprouting up in Canada, primarily in Alberta.
These new investment cooperatives have relied primarily on the resources of the communities starting them, but the initiatives in both Minneapolis and Alberta have also benefited from favorable state and provincial policies. Building on these policies, and expanding them to other states, could open the way for this model to scale up and spread.
One of these is a securities exemption for cooperatives. In the laws of both Minnesota and Alberta, there’s an exemption that allows cooperatives to raise capital directly from their members, above and beyond the purchase of membership shares, without having to go through the complex and prohibitively expensive process of registering a securities offering. In the United States, about half of states have laws allowing these exemptions for cooperatives that are raising money from members within the state, but the laws vary widely. Minnesota’s is among the most liberal, and is partly responsible for the state’s thriving cooperative sector, including the existence of the Northeast Investment Cooperative.
In Canada, the policy support goes even further. First, an organization called the Alberta Community and Cooperative Association provides essential technical assistance through a program called “Unleashing Local Capital.” The ACCA launched the program using a $1.26 million grant from the Alberta government’s Rural Alberta Development Fund, and $440,000 in investment from other sources. With those funds, the ACCA invested in legal and accounting guidance to draft professional templates for the investment coop model, developed a guide to train communities interested in starting investment cooperatives of their own, and helped those communities launch pilot projects.
Second, Canada’s laws allow much broader access to self-directed retirement funds than the U.S.’s laws do, both for investors to open that type of account and for them to then steer their savings toward local investment opportunities. Federal laws govern the retirement savings plans known as RRSPs, which are comparable to the U.S.’s IRAs, and they allow investors to hold within the RRSP several kinds of private capital investment, including funds for small business corporations, as long as the businesses are operating only in Canada.
The ACCA realized that investment cooperatives were eligible for these self-directed RRSPs, and that the credit union Concentra Financial and the Canadian Worker Co-op Federation already had programs to help cooperatives access these plans. The ACCA now explicitly frames its Unleashing Local Capital program as a way to get Albertans’ investments in retirement plans out of the Toronto Stock Exchange, and into their local community. Like in the United States, even though self-directed retirement plans are available, only a small portion of Albertans have historically used them, and primarily people already comfortable navigating the financial system. Part of the ACCA’s work now is raising awareness about the tool, for both the cooperatives and their members.
Today, there are seven investment cooperatives in Alberta, and five more developing, which are engaged in projects that range from a mechanic to senior housing. Crucially, about 90 percent of the funds raised for the coops so far have been through investments from self-directed retirement plans.
In some Canadian provinces, notably Nova Scotia, the support goes even further through investment tax credits. Nova Scotia has created a program called the Community Economic Development Investment Funds, or CEDIFs, that couples the self-directed RRSP option with a substantial tax credit of 35 percent for investment in local businesses, which is capped at $17,500 annually on a $50,000 investment. The program allows individuals to form pools of capital that they can then use to operate or invest in local for-profit businesses. Between 2000 and 2014, the program enabled Nova Scotians to invest $64 million in local businesses.
Though such a tax credit is generous, similar investment tax credits in fact already exist in several U.S. states. The difference is that those in the U.S. are designed mainly to benefit large companies in select sectors. Maine, for instance, grants a tax credit of 40 percent for wealthy accredited investors who put money into biotech and other advanced manufacturing businesses. It’s time that states reconfigure these credits to benefit middle- and low-income people and steer capital to growing locally owned businesses, particularly in economically marginalized communities.
To help the investment cooperative model spread, we need to do three pieces of the heavy lifting.
1. More states should look at adopting securities exemptions for member investment in cooperatives, like Minnesota’s.
2. Coop organizations can look to the role played by the ACCA in Alberta, and provide training and support for this particular kind of cooperative, such as a library of legal and tax templates that investment coops can use to help them avoid having to reinvent the wheel on their own.
3. Policymakers and community leaders need to explore ways to steer more capital to these kinds of cooperatives. This could include making self-directed retirement plans more accessible, offering tax credits for local investments, and, in poor communities particularly, adding investment dollars from sources like public pension funds and community foundations.
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by Olivia LaVecchia, Feb. 24, 2015
The following is an excerpt from Minnesota Statute 80A.46 Section 202, which dictates which transactions are exempt from the requirements of the state’s securities law.
The following transactions are exempt from the requirements of sections 80A.49 through 80A.54, except 80A.50, paragraph (a), clause (3), and 80A.71…
(25)(A) the offer and sale by a cooperative organized under chapter 308A, or under the laws of another state, of its securities when the securities are offered and sold only to its members, or when the purchase of the securities is necessary or incidental to establishing membership in the cooperative, or when the securities are issued as patronage dividends. This paragraph applies to a cooperative organized under chapter 308A, or under the laws of another state, only if the cooperative has filed with the administrator a consent to service of process under section 80A.88 and has, not less than ten days before the issuance or delivery, furnished the administrator with a written general description of the transaction and any other information that the administrator requires by rule or otherwise;
The following is an excerpt from the Articles of Incorporation of the Northeast Investment Cooperative.
ARTICLE I: NAME
The name of this association shall be Northeast Investment Cooperative (“the Cooperative”).
ARTICLE II: PURPOSES
The purpose of the Cooperative shall be to engage, on a cooperative basis, in real estate acquisition, development, and management for the benefit of its members, and to otherwise engage in any lawful activity connected with or related to its purposes. The Cooperative shall have the power:
(a) To borrow money from its member-owners and others upon adequate security; to issue bonds, debentures, notes and other obligations and to secure the same by pledge, mortgage or trust deed on any property of the Cooperative; to draw, accept, endorse, guarantee, execute or issue promissory notes, bills of exchange, drafts, warrants, certificates and other obligations and other instruments for any purpose deemed necessary to further the objects for which the Cooperative is formed.
(b) To acquire, purchase, hold, manage, lease, mortgage, encumber, sell, exchange and convey such real estate, buildings and personal property as the business of the Cooperative shall require.
(c) To purchase, acquire, sell, transfer and own capital stock, bonds, and obligations of other corporations; and to purchase, acquire, and hold capital stock, notes, bonds, and other obligations of such organizations.
(d) To join with other cooperative corporations or associations to form district, state, national or international purchasing, marketing and service organizations; and to purchase, acquire, and hold capital stock, notes, bonds, and other obligations of such organizations.
(e) To do and perform every act and thing necessary and proper to the conduct of its business for the accomplishment of its purposes or as permitted by the existing laws of Minnesota and any subsequent amendments.