Co-operatives with high capitalisation and investment needs may require capital other than that which members can provide. This is particularly so in areas of enterprise that are capital intense, such as electricity supply co-operatives, financial co-operatives and co-operative banks, renewable energy co-operatives and worker co-operatives in manufacturing industries. Indeed, it is perhaps the historic difficulty of raising capital which is the cause of the limited number of industrial production co-operatives.
Co-operatives with high capitalisation requirements may need to source debt or equity capital from the financial markets. This can be through loans secured on the co-operative's assets, co-operative investment certificates or the issue of other formal financial market investment instruments such as bonds with assured yields. Crowd funding via the internet and social networking sites too is increasingly a source of capital, particularly for a socially responsible and ethical business like a co-operative. Great caution is needed in raising capital from sources other than active trading members because financial regulators in some countries have real concerns about the danger that co-operatives raising capital, or worse, pseudo co-operatives raising capital, could circumvent regulatory requirements designed to protect all investors.
This is not the place to give detailed guidance on the complexities and risks of raising capital that is in addition to what a co-operative's members can provide. The Alliance's Blue Ribbon Commission on Capital is studying the issue of raising co-operative capital in depth. Its report should be studied.
Co-operatives should, however, always be aware of the relative weight and balance between capital of its members' own providing and external sources of capital. If external sources of capital become the dominant source, members risk losing democratic control to external investors. Where is it practical to do so, investment rules should be set to ensure that any withdrawal of capital by investors does not destabilise or endanger the co-operative.
Co-operatives raising capital from external sources also need to be aware of the risk of loss of member democratic control to senior executives. If capital is of a co-operative's own providing, through membership shares and non-voting capital and the establishment of indivisible reserves, control by members is assured. If capital is raised from external sources, such as banks and other investors, it is a co-operative's senior executives who negotiate with and manage the co-operative's relationship with the providers of capital, who gain greater control of a co-operative. Co-operatives using external capital need to ensure that democratic governance is an effective guard against the risk of senior executives hijacking control for their own self-interest.
The same risk arises if the largest proportion of a co-operative's capital base changes from being members' withdrawable share capital to reserves, especially revaluation reserves created by the revaluation of fixed assets at times of high inflation. Reserves are controlled by senior executives. The sanction of the threat of members withdrawing share capital is lost through this restructuring of the balance sheet unless control of reserves is vested in members through reserves policies which require specific approval of members in general assembly to the use of the co-operatives reserves.
Co-operatives should always consider the relative priority for raising capital from the following sources: