Equity Drive

Once the business plan is prepared, the NGC is ready to conduct an equity drive.  An equity drive’s purpose it to raise capital by selling membership and special investment shares in the cooperative.  The cooperative may also plan to issue investment shares to non-members.  Capital is raised to finance the NGC’s purchase of assets such as land, buildings, and equipment.  Capital is also raised to finance any start-up losses and initial working capital requirements.

The number of special investment shares (i.e. those that convey or create delivery rights) issued will be set according to the level of processing capacity that was determined in the business plan.  It has been noted that many American NGCs raise between 30 to 50 percent of their total capital requirements from the sale of shares that convey delivery rights.  This percentage may vary according to the level of risk perceived by the NGC’s lenders.  Lending institutions such as banks will usually require a minimum level of equity in the NGC before they agree to provide debt financing.  Organizers of Canadian NGCs should meet with prospective lenders to determine what their requirements will be.

Membership shares in an NGC are usually priced at a nominal amount.  These shares have a stated par value that does not change.
 

Example

Previously, in the “Early Funding Requirements” section, we noted an NGC that raised $150,000 by asking producers to contribute $0.05 per bushel to indicate their level of interest in the project.  Suppose that, after using this seed money and other funds to conduct a feasibility study and business plan, it was determined that the minimum amount of commodity required to be processed each year in order for the facility to be viable is 2.5 million units.  (In order to keep this example as general as possible, the unit of measurement is “units” rather than bushel, tonne, animal, etc.). 

Suppose a well-designed plant, built to the recommended specifications, along with start-up operations, was estimated to cost approximately $10 million.  Suppose the cooperative set a target of 40% of this required capital to come from equity financing.  Each special investment share would obligate the producer to deliver one unit of commodity to the cooperative every year.  In order to meet its annual supply requirement of 2.5 million units, the cooperative planned on issuing 2.5 million special investment shares.  The cooperative determines the price per special investment share by dividing the targeted equity requirement (which is 40% of $10 million) by the number of special investment shares to be issued (2.5 million).  The price per special investment share would therefore be $1.60.  Each producer is required to purchase a minimum of 10,000 special investment shares, so that the minimum investment in the cooperative is $16,000. (Setting a minimum investment level is common practice among NGCs).   Each producer would also be required to purchase one membership share at a price of $100.

The strength of the business plan and the credibility of the NGC’s interim board of directors will play a huge role in the equity drive.  Producers will not be willing to invest in a cooperative if they don’t believe in the merits of the business plan or the trustworthiness of the directors. 

Because many producers who decide to invest in the NGC will need to borrow funds, the NGC’s organizers may find it useful to meet with agricultural lenders prior to the equity drive to inform them of the cooperative’s plans.  For instance, the Manitoba Agricultural Credit Corporation (MACC) has programs such as the Agricultural Co-op Share Financing Initiative to help producers purchase equity shares.  It may be helpful for the NGC’s organizers to meet with MACC representatives to discuss the cooperative’s upcoming equity drive.

Experienced advisors are required when preparing an equity drive.  The cooperative must ensure that it is complying with applicable laws such as the Manitoba Cooperatives Act and The Securities Act. 

Planning and conducting an equity drive involves many decisions.  The NGC’s organizers must decide on the timing of the equity drive and ensure any necessary regulatory clearances are obtained and all supporting documents are ready.  One cooperative development specialist recommends that the best time to hold an equity drive occurs between November and March, when producers are not too busy with their own operations.  Decisions regarding the number and location of equity drive meetings to hold and the deadline date to invest must be made.  The cooperative also needs to consider how it will promote the equity drive.  The time and cost involved in scheduling tasks should not be underestimated.  Some NGCs have held more than 30 grower meetings as part of their equity drive. 

If the NGC fails to meet its minimum requirements in the equity drive, then the money raised is returned to the producers.  If the equity drive fails, the NGC’s organizers may decide to revise their business plan and attempt another equity drive later on, or vote to dissolve the cooperative.  If the equity drive succeeds, then the NGC is ready to move forward with its plans and begin operations. 

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Sources:

Harris, Andrea, Brenda Stefanson and Murray Fulton. 1996. New generation cooperatives and cooperative theory. Journal of Cooperatives : 15-28.

Johnson, Dennis A. 1994. Financing New-Wave cooperative ventures. Year in Cooperation Vol. 1 No. 1 : 16-17.

Manitoba Agricultural Credit Corporation. 2000. Web site. Agricultural Co-op Share Financing Initiative. www.gov.mb.ca/agriculture/macc/aaa21s10.html.

Patrie, William. 1998. Creating ‘Co-op Fever’: A rural developer’s guide to forming cooperatives.  Rural Business-Cooperative Service Report 54. United States Department of Agriculture.