In January 2016, a law went into effect creating a new type of corporation in California, the worker cooperative. Worker cooperatives, also known as employment cooperatives, are for-profit companies that are owned by their employees. Rather than distributing profits based on capital investment, worker cooperatives (like all cooperatives) distribute profits based on a member’s contribution to the cooperative. In a worker cooperative that means that profits are distributed based on a measure of each employee’s relative contribution of labor. This could be measured as an employee’s percentage of total labor hours performed or total salary earned in the prior year. Thanks to a special provision of the tax code, cooperatives are able to distribute these profits to their member-owners while avoiding double-taxation at the corporate level.
The new law is known as AB 816, the California Worker Cooperative Act. Governor Brown signed AB 816 into law in August 2015, and it became effective January 1, 2016. AB 816 amended the existing cooperative law to provide both an organizational framework for worker cooperatives and a pathway for these businesses to raise capital from their community.
Small Dollar Investors in Worker Cooperatives
AB 816 created a new category of investor for worker cooperatives. These community investors are outsiders, i.e. they don’t work for the cooperative, but they can invest up to $1,000 per person and they have have limited voting rights. The worker cooperative can advertise investment opportunities publicly, within California, and only to California residents, thanks to an existing exemption from the California securities law.
To allow worker cooperatives to offer investments to outsiders, AB 816 made significant changes to an existing securities exemption for cooperatives, found in Section 25100(r) of the Corporations Code. Section 25100(r) is an exemption from the California securities law for voting memberships or shares in cooperative corporations. The aggregate investment amount under this exemption used to be $300, but AB 816 increased it to $1,000 per shareholder. AB 816 also permits non-worker community investors to invest alongside worker-members, provided that they have limited voting rights. A worker cooperative utilizing the 25100(r) exemption must give community investors an approval vote over certain decisions specified in the law, which must be stated in the corporation’s articles or bylaws.
Typically the type of investment a worker coop would issue would be preferred, nonvoting shares with a target dividend rate. This is similar to what other worker coops are already doing with redeemable preference shares and preferred Class B shares.
By creating a balanced system in which community investors are permitted limited voting rights, AB 816 allows worker cooperatives to balance the need for outside capital with the need to preserve employee-owner control of the business. Now worker cooperatives can crowdfund for start-up or expansion capital from a wide pool of small investors.
This is not legal advice. It is for informational purposes only. The author was directly involved with drafting and passing this law