Every active cooperative developer knows that having a good attorney to call for information and advice is a key good business practice. There are always legal questions starting with entity selection, corporate structure, along with stock and security issues. Multiply these by several states (KDC serves PA, NJ, MD, and DE) and you will understand why we regularly have these webinars with Tony.
The 90 minute session focused on incorporation options in New Jersey and compliance with federal/state securities laws.
New Jersey Incorporation
New Jersey is one of the few states without a general cooperative enabling statute. This is needed to permit the incorporation of a general cooperative in the state. (New Jersey does have an agricultural cooperative enabling law and a housing cooperative law.) Because of this impediment from the lack of a state cooperative enabling law, groups seeking to operate a New Jersey business as a cooperative typically chose one of the following two alternatives:
 Form the entity as nonprofit corporation under the New Jersey Nonprofit Corporation Act, and then operate on a cooperative basis.
 Incorporate the cooperative corporation in another state, and then make the requisite NJ foreign corporation filings to permit the cooperative to engage in business operations within New Jersey.
Compliance with Federal/State Securities Laws
Tony provided general guidance for planning purposes on the available exemptions from state and federal securities registration requirements in the issuance of a PA cooperative's preferred stock, investment certificates or loans from members. Mr. Adonizio began this section reminding everyone that this is a complex area of law, which changes frequently, and which can result in significant corporate and personal liability exposures and penalties, including criminal penalties, in noncompliance situations. He strongly encouraged a developer to seek qualified counsel to assist in specific matters.
The basic message Tony had on compliance is unless a transaction is exempt, the Federal Securities Act of 1933 requires that before making a sale or offer to sell, the issuer of a security must first file a registration statement with Securities and Exchange Commission (SEC). Likewise at the state level, unless a transaction is exempt, the PA Securities Act of 1972 requires that before making a sale or offer to sell, the issuer of a security must first file a registration statement with Pennsylvania Securities Commission (PSC). Particularly for a small cooperative, these are costly and burdensome requirements, which can often make the issuance of securities cost-prohibitive. Thus, it is vital to plan in advance to structure a cooperative’s plan of raising capital so that the requirements for filing full registration statements with the SEC and PSC may be avoided, by meeting certain available allowable exemptions.
Tony went on to cover what is considered to be a regulated security under Federal and state law, and then outline allowable exemptions from the SEC and PSC registration statement requirements, which are available to cooperatives in Pennsylvania.
The message I took home is that if the business is limiting its stock to membership stock or forming as a non-stock cooperative, things are very simple. But if the business is going to raise money with preferred shares, membership/investment certificates, and loans from members, the cooperative must prepare a Confidential Offering Memorandum/Prospectus. This document discloses all of the material terms of the equity or debt regarding its business and related risks to prospective purchasers of the securities, regardless as to whether the securities are exempt from federal or state registration. All disclosures related to the offer or sale of a security are subject to the anti-fraud provisions of the securities laws, which means that the disclosure cannot contain any untrue or misleading statement or omit any statement which makes the information untrue or misleading. Basically the business is never exempt from disclosure requirements.
Tony went on to discuss the exemptions. In conjunction with the webinar he also put together an excellent set of supporting resources.