As discussed in the “preferred stock” section, cooperatives can issue preferred stock to both members and non-members. Preferred stock is typically non-voting and has proportional-to-capital dividends. Preferred stock has a senior claim on assets in respect to common stock and liquidation and typically has a senior claim on dividends. Approval rights or performance benchmarks may also be required before the cooperative can redeem common equity. Preferred stock may or may not have a redemption date.
Preferred shareholders may be given the option to sell their shares to the cooperative at a specified price or formula or redemption may be at the option of the cooperative. In a few large or regional cooperatives, the preferred stock is publically traded. This is an important component if the cooperative desires to create truly permanent equity.
While many cooperatives issue preferred stock only to members or create preferred stock by converting common stock, some cooperatives use preferred stock to access non-member capital and/or to create permanent (non-revolving) equity.
There are several challenges and trade-offs involved with the use of non-member preferred stock.
Dividends on preferred stock have legal, market, and tax constraints.
In order to offer preferred stock to outside investors, the cooperatives may have to register the offering with the security exchange commission. This can be an expensive and time-consuming process. Because most of the registration risks are fixed, regardless of the size of the offering, the cost to benefit ratio for smaller offerings can be prohibitive. The cooperative will also have to comply with other elements of securities laws including equal access to important information, timing of reporting important information, quite periods and avoiding pre-offering solicitation.
In the past, cooperatives attempting to use publically traded preferred stock have found it difficult to generate sufficient liquidity (volume traded) to maintain a functioning market. The lack of liquidity can make the stock unattractive to investors and force the cooperative to create a redemption option or formula. In that case the stock no longer functions as truly permanent capital.