1. The Law of Cooperative Corporations University of Arkansas LLM Program, Agricultural Law, 2007 Fayetteville, Arkansas April, 2007 James R. Baarda Securities Law

2. Syllabus: Securities 5. Current issues 4. Sarbanes-Oxley implications 3. Blue sky laws 2. Is it a “security”? 1. Statutes and exceptions SecuritiesLaw Securities Law

3. Basic Securities Questions Syllabus: Securities 1. Is the instrument a security? 2. Cooperative exemptions 3. Instruments exempted 4. Extent of exemption 5. Exemption or non-security

4. Syllabus: Securities, pp. 2, 3 1. Statutes and exceptions

5. Statutes Syllabus: Securities, p. 2 Securities Act of 1933 [T]his subchapter shall not apply to any of the following classes of securities:… (5) any security issued … (B) by (i) a farmer’s cooperative organization exempt from tax under section 521 of Title 26….

6. Syllabus: Securities, p. 3 Securities Exchange Act of 1934 [Registration requirements] “shall not apply in respect of – (E) any security of an issuer which is a “cooperative association” as defined in the Agricultural Marketing Act, approved June 15, 1929, as amended [12 U.S.C. 1411 et seq.],Statutes

7. Syllabus: Securities, p. 3 Securities Exchange Act of 1934 or a federation of such cooperative associations, if such federation possesses no greater powers or purposes that cooperative associations so defined.Statutes

8. Syllabus: Securities, p. 3 Securities Exchange Act of 1934 (F) any security issued by a mutual or cooperative organization which supplies a commodity or service primarily for the benefit of its members and operates not for pecuniary profit,Statutes

9. Syllabus: Securities, p. 3 Securities Exchange Act of 1934 but only if the security is part of a class issuable only to persons who purchase commodities or services from the issuer, the security is transferable only to a successor in interest or occupancy of premises serviced or to be served by the issuer, and no dividends are payable to the holder of the security.Statutes

10. Other exempt activities Other exempt activities - Intrastate offerings - Limited offerings - Qualified investors Statutes Applicable law Applicable law - Anti-fraud - Other

11. Syllabus: Securities, pp. 4 - 10 2. Is it a “security”?

12. Security Defined Syllabus: Securities, pp. 4 - 10 United Housing (1975) United Housing (1975) Housing cooperative Housing cooperative Membership stock Membership stock Broad statutory definitions Broad statutory definitions

13. Syllabus: Securities, p. 6 United Housing (1975) United Housing (1975) “We reject... Any suggestion that the present transaction … must be considered a security transaction simply because the statutory definition of a security includes the words ‘ any … stock’” Security Defined

14. Syllabus: Securities, p. 6 United Housing (1975) United Housing (1975) “[I]n searching for the meaning and scope of the word ‘security’ in the Act[s], form should be disregarded for substance and the emphasis should be on economic reality.” Security Defined

15. Syllabus: Securities, p. 6 United Housing (1975) United Housing (1975) “These shares have none of the characteristics ‘that in our commercial world fall within the ordinary concept of a security’.” Security Defined

16. Syllabus: Securities, pp. 4 - 10 United Housing (1975) United Housing (1975) Missing characteristics Missing characteristics - No dividends contingent on an apportionment of profits - Not negotiable - Cannot be pledged Security Defined

17. United Housing (1975) United Housing (1975) - Confer no voting rights in proportion to number of shares owned - Cannot appreciate in value - Not mislead into reliance on Federal protection Security Defined Syllabus: Securities, pp. 4 - 10

18. United Housing (1975) United Housing (1975) - Did not invest in the hope of receiving profits from the efforts of others - Did not purchase stock for any reason other than to obtain a place to live Security Defined Syllabus: Securities, pp. 4 - 10

19. United Housing (1975) United Housing (1975) Security Defined “[T]he basic test for distinguishing the transaction from other commercial dealing is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” Syllabus: Securities, pp. 4 - 10

20. Syllabus: Securities, pp. 10 - 14 B. Rosenberg (1976) B. Rosenberg (1976) Stock, equity credits in cooperative Stock, equity credits in cooperative Security Defined Economic realities Economic realities - Nothing more than membership - Non-negotiable

21. B. Rosenberg (1976) B. Rosenberg (1976) - Bears no dividends - Equity credits not profit - Only member ownership - Non-transferable Security Defined Syllabus: Securities, pp. 10 - 14

22. Syllabus: Securities, pp. 12 - 13 B. Rosenberg (1976) B. Rosenberg (1976) “The distinguishing feature of a security transaction is that the investor is motivated solely by the prospects of a return on his investment from the efforts of third persons. However, when a purchaser is motivated by a desire to use what he has purchased, the securities laws do not apply.” Security Defined

23. Syllabus: Securities, p. 13 B. Rosenberg (1976) B. Rosenberg (1976) “Equity credits or patronage dividends are not profits similar to income from ordinary stock investments but are rebates or refunds to members based solely on patronage and not on the amount of money invested in the stock.” Security Defined

24. Syllabus: Securities, p. 13 B. Rosenberg (1976) B. Rosenberg (1976) “The fundamental characteristic[] of an agricultural cooperative is that it is operated for the mutual benefit of its members as producers – not as stockholders. Advantages which accrue to a member of a cooperative accrue primarily because of his patronage with the association and not because of any financial investment he may have made therein.” Security Defined

25. Control Benefit Finance USE

26. Syllabus: Securities, pp. 16 - 22 3. Blue sky laws

27. Blue Sky Laws Syllabus: Securities, pp. 14 - 20 Coverage Coverage Exemptions Exemptions

28. Syllabus: Securities, p. 24 4. Sarbanes-Oxley implications

29. Syllabus: Securities, p. 24 Direct application Direct application Implications for accounting Implications for accounting Implications for governance Implications for governance The “convergence project” The “convergence project” Sarbanes-Oxley

30. 5. Current issues

31. Creative instruments Creative instruments Evolving views of cooperatives Evolving views of cooperatives New generation cooperatives New generation cooperatives Reliance on other statutes Reliance on other statutes Conversions Conversions “Outside” equity investment “Outside” equity investment What is a cooperative? What is a cooperative? Current Issues

32. Syllabus: Securities 5. Current issues 4. Sarbanes-Oxley implications 3. Blue sky laws 2. Is it a “security”? 1. Statutes and exceptions SecuritiesLaw Securities Law