Table of Contents 

I. Introduction 

II. Cooperatives (Create Resilient Local Economies which) are in the Public Interest 

A. Cooperatives promote local circulation of a dollar 

B. Cooperatives attach capital to place 

C. Cooperatives drive environmental action 

1) Attached capital in cooperatives sustains critical infrastructure 

D. Cooperatives drive social equity 

E. Cooperatives reposition capital as a commons 

III. Access to Capital Must be Democratized 

A. Existing cooperative capital mechanisms are insufficient 

1. Member capital contributions, sweat equity, and loans form the entity 

2. Nonprofits and grants can help 

3. CDFIs and impact investors pave the way 

4. Multi-stakeholder cooperatives: harmonizing interests or toeing the line? 

5. The SBA facilitates microscopic access to capital… at usurious rates 

B. Conventional capital is inaccessible to cooperatives 

1. Consolidation impacted credit philosophies 

2. Cooperatives are less risky than conventionally-owned firms 

3. Personal guarantees hinder cooperative startup financing 

4. Cooperative access to private capital should be commensurate with actual risk 

IV. Congress Should Level the Playing Field 

A. Establish the Cooperative Business Administration 

1. Incentivize cooperative finance advisors in finance institutions 

2. Incentivize local depository institutions providing liquidity to local lending institutions 

3. Promulgate regulations for a credit pre-screening process for cooperative borrowers 

4. Discount Capital Loans to Promote Cooperative Development 

5. Leverage contingent funding to encourage States to enable cooperative development 

B. Direct the SEC and IRS to promulgate regulations to incentivize cooperatives 

1. Define the “G” and Regulate Disclosure 

2. Create a subset of convertible securities–dissolvable securities 

3. Provide guarantees on cooperative loans which convert to tax liability upon default 

4. Implement identical personal guarantee exemptions for cooperatives and ESOPs 

C. Commission a report on the Dormant/ Commerce Clause impacts on local and regional self-determination and environmental factors 

V. Congress Can Stimulate Resilient Local Economies by Eliminating Systemic Barriers to Cooperative Development 

I. Introduction 

Cooperatives create a structural and contractual mechanism by which disparate parties find common interest. Nevertheless, cooperative startups have historically been plagued by lack of access to capital on the basis of their corporate structure. This paper analyzes the issue of cooperative access to startup capital, holding such access in tension with the 7 Cooperative Principles and values adopted by the International Cooperative Alliance in its Statement on the Cooperative Identity in 1995.2 These values include self-help, self-responsiblity, democracy, equality, equity and solidarity. Its ethical values include honesty, openness, social responsibility and caring for others.3 The 7 Cooperative Principles include: 

1. Voluntary and open membership - open to all persons willing to accept responsibilities of membership 

2. Democratic member control - controlled by their members in setting policy and making decisions, who have equal voting rights (one member, one vote) 

3. Member economic participation - members contribute equitably to and democratically control capital, and surplus is distributed on the basis of patronage 

4. Autonomy and independence - external agreements and capital must not vitiate cooperative autonomy

5. Education, training, and information - training members to help the cooperative grow, and informing the general public about the nature of cooperatives 

6. Cooperation among cooperatives - commitment to working with local, regional, national, and international cooperative organizations 

7. Concern for community - working toward sustainable development of their communities 

Of particular interest for this analysis are the values of democracy and equity, and the principles of democratic member control and member economic participation. The issues examined below include: 

1. Whether proliferation of cooperative corporations is in the public interest, specifically with respect to environmental attributes; 

2. Whether cooperative corporations face barriers that conventionally-owned firms do not face, namely whether cooperatives have equitable access to startup capital commensurate with actual risk; and 

3. Whether Congress should incentivize cooperative corporate forms, and if so, how. 

II. Cooperatives (Create Resilient Local Economies which) are in the Public Interest “Resilience is a measure of a system's ability to survive and persist within a variable environment.”4  

Cooperatives cultivate resilient local economies.5 This is principally due to four factors. First, cooperatives promote local circulation of a dollar. Second, cooperatives attach capital to local communities. Third, cooperatives drive social equity. Fourth, cooperatives drive environmental action. Taken together, cooperatives create economies of scale for distributed ownership of the means of production and consumption which drives resilience and sustainability. In the words of Elinor Ostrom, cooperatives mold capital into a “commons”. 

A. Cooperatives promote local circulation of a dollar 

When a dollar is spent at a locally owned business, it directly supports the livelihoods of individuals and families within the community. The business owner(s) and employees, in turn, use that dollar to purchase goods and services from other local businesses. This cycle of exchange keeps the dollar circulating within the community, amplifying its impact and strengthening the local economy. This phenomenon is called the Local Multiplier Effect, and conservative analysis shows that a dollar spent in local business circulates three times as much as the same dollar spent in non-local businesses.6 

In addition to its direct economic impact, encouraging circulation of a dollar also fosters a sense of community and shared prosperity. When individuals spend their dollars locally, they are not only supporting their neighbors' businesses but also contributing to the overall well-being of their community. In fact, local businesses are over 250% more likely to donate to charitable causes.7 This sense of shared responsibility and investment in the community creates a positive feedback loop, encouraging further local spending and fostering a vibrant and resilient local economy. 

Cooperatives promote local circulation of a dollar because they tend to be locally owned.8 This creates local jobs with local dollars, which in turn creates local consumers for other local businesses. In this manner, cooperatives empower local communities to capture $68 of value for every $100 dollars spent, as compared to $43 for every $100 spent in non-locally owned businesses.9 

B. Cooperatives attach capital to place 

Place-based impact investing is a powerful tool for promoting local economic, social, and environmental well-being. By connecting businesses with local sources of capital and expertise, these relationships can help to create more vibrant, equitable, and sustainable communities.10 Cooperative corporate structures provide a mechanism that attach capital to place.11 This distributed equity ownership scheme leads to increased community resilience by fostering collaboration and innovation in shifting economic environments. Local communities are better suited to determine the best use and best fit for their particular markets. 

Place-based capital also supports sustainable development by aligning local economic activity with local environmental and social goals. Many place-based impact investing advocates propose significant community engagement prior to investment to ensure that the investment is oriented toward providing goods and services delivered in a manner consistent with community interest.12  

Such is the case with the East Bay Permanent Real Estate Cooperative,13 a strategic practice of the Sustainable Economies Law Center,14 which 

“aligns the technical, financial, and organizational inputs to support Black, Indigenous, People of Color, and allied communities to cooperatively organize, finance, purchase, and steward mixed-use and residential property in the East Bay.” 

Through this model, the members of the community collaborate to counter extractive land ownership models and California’s notorious runaway property values and rents,15 by creating a multi-stakeholder private entity tasked with providing affordable housing and mixed-use space for its residents. This returns land ownership and control to local interests, while shielding low- and moderate-income communities from exorbitant rent. The cooperative retains title to the land and keeps it off the speculative market, but still empowers member-owners to accrue equity through long-term lease agreements and capital improvements.16 

While the example above demonstrates the capacity of cooperatives to dedicate capital to provision of goods and services in the housing sector, the ownership model is by no means sector-specific. In New York City, The Drivers Cooperative is countering the extractive modes of the emerging “gig economy” by creating a ride-hailing platform owned and managed by the drivers.17In Minneapolis, Cooperative Energy Futures is aggregating offtakers to collectively own and operate energy generation assets, giving the average consumer more control over the price of their electricity.18In these and many other examples, cooperatives attach capital to place through distributed ownership of the means of production and consumption. This imbues capital with a fiduciary duty to the local community for a particular purpose. 

C. Cooperatives drive environmental action 

In addition to being better for local economies, cooperatives are generally leading environmental actors.19 Cooperatives embody the triple bottom line value model.20 They play a crucial role in encouraging the circulation of a dollar and promoting environmental benefits within local communities. One of the key ways co-ops foster local economic circulation is through their commitment to buying and selling goods and services within the community.21 This approach not only strengthens the local economy but also reduces the environmental impact associated with long-distance transportation of goods.22 

In addition to their economic contributions, co-ops also actively promote environmental sustainability in their communities.23 Many co-ops adopt eco-friendly practices in their operations, such as using renewable energy sources, reducing waste, and implementing recycling programs.24 They also educate their members and the community about environmental issues and encourage sustainable practices. 

1) Attached capital in cooperatives sustains critical infrastructure 

Cooperatives’ commitment to social and environmental responsibility extends beyond their own businesses, creating a ripple effect that benefits the entire community. In addition to its environmental benefits at the “micro” level of eco-friendly transactions and transportation of goods, cooperatives also empower local communities to avoid crumbling and duplicated infrastructure, the unexplored “macro” environmental externalities of detached capital. When capital flees a region, it often takes with it the primary economic activities needed to maintain civil infrastructure.25 This can lead to a decline in the quality of infrastructure, which can have a number of negative environmental consequences. Roads and bridges become unsafe. Water and sewage systems fail. Power grids become unreliable. These problems lead to pollution, contamination, and other environmental damage. 

In addition, crumbling infrastructure can make it difficult to address environmental challenges. For example, it may be difficult to build new renewable energy infrastructure or to implement new pollution control measures if existing infrastructure is in poor condition.26 As a result, capital flight exacerbates existing environmental problems and makes it more difficult to transition to a sustainable economy. Taxpayers must then ransom stranded local communities with infrastructure grants and incentives, or watch as cities like Flint27 and Detroit28 struggle to remain habitable. Meanwhile, detached capital has moved on to overinflate another host’s infrastructure.29 

D. Cooperatives drive social equity 

Cooperatives address disparities in access to capital, particularly for underserved communities.30 By providing access to capital, these relationships level the playing field and create opportunities for all.31 Cooperatives also preserve and promote local culture by supporting businesses and organizations that are rooted in the community.32 This can help to maintain a sense of place and identity for residents. Cooperatives also tend to score higher in Justice, Equity, Diversity, and Inclusion (JEDI) metrics,33 and promote inclusive economic growth.34 

E. Cooperatives reposition capital as a commons 

In the 1980s and 90s, renowned economist Elinor Ostrom challenged the conventional wisdom that common-pool resources such as fisheries, forests, and grazing lands, are inevitably doomed to overexploitation and destruction.35 Her research demonstrated that communities can effectively manage these resources through self-organization and cooperation, establishing rules and norms that govern their use and prevent depletion. 

In 2023, it is necessary to extend this common-pool resource wisdom to include capital.36 While capital may not be susceptible to depletion in the same way as natural resources, it is susceptible to stagnation, hyperaccumulation, and exploitation. Ostrom identified several key design principles for the sustainable management of common-pool resources, which can be applied to capital as well. Namely, these principles include: 

1. Clearly defined boundaries: The boundaries of the capital commons must be clearly defined to establish who belongs to the community for a particular purpose and who has rights to the resource. This could involve defining geographic boundaries, membership criteria, shared values, shared work, or shared demand. 

2. Congruence between appropriation and provision rules: The rules governing the use and extraction of capital and surplus should align with the rules governing its creation and replenishment. This ensures that the commons is not depleted beyond its capacity to regenerate. This is particularly important in determining an efficient level of locally attached capital. 

3. Local self-determination: The community should have the authority to make decisions about the use and management of the capital commons. This autonomy allows for adaptive and context-specific solutions. 

4. Nested enterprises: The capital commons can be nested within larger systems of governance, such as regional or national institutions. This allows for coordination and collaboration at multiple scales, such as regional energy cooperative conglomerates that empower local communities to leverage economies of scale for self-sufficient energy development. 

In the spirit of Ostrom's work, capital can also be viewed as a commons, a shared resource that can be sustainably managed for the benefit of all. When capital is treated as a commons, it becomes a source of collective empowerment, enabling communities of consumers to fulfill their own demands. By adopting these design principles, communities can transform capital from a source of inequality and exploitation into a tool for efficiency and sustainable development. Capital as a commons empowers communities to take control of their economic destiny, fostering economic resilience, social equity, and environmental sustainability. Cooperatives embody and facilitate these principles through internal democratic governance. Because of these several environmental and economic characteristics, cooperatives are in the public interest. 

III. Access to Capital Must be Democratized 

Cooperatives create a structural and contractual mechanism by which disparate parties find common interest. Nevertheless, cooperative startups have historically been plagued by lack of access to capital on the basis of their corporate structure. Member capital contributions, CDFIs, grants, and angel investors make up substantially all of the startup capital providers for cooperatives at present. However, this represents a small fraction of total startup capital annually. Cooperatives sometimes finance with capital contributions of members through multi-stakeholder cooperatives, but this frequently hazards the principles of cooperatives. 

The Main Street Employee Ownership Act (MSEA) of 2018 has had a significant positive impact on cooperative corporations in the United States, and SBA’s 7(a) Loan Guarantee Program provides additional opportunities to finance cooperative startups. However, this option frequently doubles the cost of capital. Rather than continuing to exist on the fringes of finance, cooperatives should be empowered to compete with conventionally-owned firms by making cooperative guarantees on commercial loans. 

A. Existing cooperative capital mechanisms are insufficient 

1. Member capital contributions, sweat equity, and loans form the entity Member capital contributions generally make up the initial capitalization of corporations. In cooperatives this is no different, except that capital contributions are generally capped to ensure equity. Members may provide additional working capital to the cooperative, but this is in the form of a private loan, rather than equity. Additionally, many cooperatives permit members to acquire membership through sweat equity, especially when serving LMI and SDG communities. While this is an important first step, it is often constrained by real-world factors, such as the adage that entrepreneurs won’t draw a paycheck for three years. Limited to their own capital, cooperatives struggle to get off the ground. 

2. Nonprofits and grants can help 

Some cooperatives have been successful in partnering with or creating nonprofit organizations to grant fund elements of the business model. This can sometimes take the form of asset procurement and management, such as real estate holdings. Grants are not exclusively available to nonprofits, however. Many grants are available to cooperatives whose economic activities satisfy a substantial government interest, such as rural economic development or renewable energy generation.37 While this provides huge benefits, it also comes with significant origination and administrative burdens that many startups cannot shoulder because they lack the technical expertise, staff capacity, or both. 

3. CDFIs and impact investors pave the way 

As loss leaders, CDFIs provide an important avenue for patient capital and impact investors to act as first movers in the cooperative finance sector.38In 2021, global impact investments surpassed $1 trillion.39 While this sounds impressive, total US stock market investment in the same year reached $48.6 trillion.40 Additionally, information asymmetry, financially inexperienced startup entrepreneurs, and lack of cooperative financial advisory infrastructure mean this approach is still a fledgling subsector. 

4. Multi-stakeholder cooperatives: harmonizing interests or toeing the line? 

Multi-stakeholder cooperatives (MSCs) provide another option to capitalize cooperative startups. In MSCs, the bylaws generally provide for several classes of ownership, such as worker-owner, consumer-owner, investor-owner, and community-owner.41 This option does provide a mechanism to harmonize interests across stakeholder groups, but requires significant attorney time and board administration to implement and maintain. The hazard is always whether outside investors vitiate member economic participation and democratic control. 

5. The SBA facilitates microscopic access to capital… at usurious rates 

The Main Street Employee Ownership Act (MSEA) of 201842 had a significant positive impact on cooperative corporations in the United States–easing access to capital, providing technical assistance, and raising awareness of the cooperative business model. MSEA provides funding for technical assistance to cooperatives to develop business plans, raise capital, and comply with regulations.43 The SBA has a network of cooperative development centers that provide technical assistance to cooperatives nationwide. MSEA also helped to raise awareness of the cooperative business model by funding public awareness campaigns and requiring SBA to develop educational materials about cooperatives. 

Important among provisions of MSEA is § 3 which made cooperatives eligible for loans from the Small Business Administration (SBA).44 This was a major breakthrough for cooperatives, which had previously been excluded from SBA loans. The SBA is the largest provider of small business loans in the country.45 These loans have helped cooperatives to create jobs, invest in their communities, and expand their businesses. 

These developments notwithstanding, the issue of cooperative access to capital is far from resolved. The SBA’s FY 2023 Lender Activity Report shows that only 0.056% of the value of loans made under the SBA 7(a) program went to cooperative banks in the past six months.46

Since MSEAs enactment in 2019, many cooperative advocacy groups have continued to call for waiver of the personal guarantee requirements.47 Regardless of whether cooperatives can qualify for a personal guarantee or find a corporate guarantor, the SBA 7(a) Loan Guarantee Program is troublesome to the user, as this supposed incentive for entrepreneurship effectively doubles the cost of capital for cooperative startups, with steep prepayment penalties lying in wait for those who succeed.48 This makes the SBA the last resort in capitalizing cooperative startups. 

B. Conventional capital is inaccessible to cooperatives 

Consolidation of finance institutions after Riegle-Neal has significantly impacted credit philosophies and availability in the United States. Despite the fact that cooperatives are less risky than conventionally-owned firms, cooperatives are often excluded from commercial loans by personal guarantee requirements. Cooperative corporations should have access to capital commensurate with the actual risk posed to the lender. Such access can be achieved by creating cooperative guarantees, and creating mechanisms which facilitate cooperative risk analysis. 

1. Consolidation impacted credit philosophies 

In retail banking, small business and commercial lending follows the bank’s credit philosophy and policies. Credit philosophies are the guiding principles that lenders use to assess a borrower's creditworthiness. These philosophies are typically based on a combination of factors. One common credit philosophy is the "Five Cs of Credit,”49 which includes: 

1. Character/ Credit History: The borrower’s track record for repaying debts, relevant reports on collections, bankruptcy, FICO Scores 

2. Capacity: The borrower's ability to repay the loan, comparing income against 

recurring payments and the debt-to-income (DTI) ratio 

3. Capital: The borrower's existing financial resources, ability to make down payment 

4. Conditions: The terms of the loan, such as interest rate, repayment period, and 

collateral requirements, intended use of loan, economic trends, pending legislation, 

borrower industry trends, cash flow 

5. Collateral: Assets the borrower can pledge as security for the loan 

Taken together, these factors form lender credit philosophies and guide institutional risk tolerance. However, these philosophies are not as numerous as those without a reason to know might assume. 

Since the 1990’s, investment banks have merged with commercial banks, creating financial powerhouses with national reach and outsized resources.50 The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed federal restrictions on interstate banking,51 effectively undoing the antitrust protections created by the McFadden Act of 1927.52 While Riegle-Neal was ostensibly for the purpose of opening banking markets to competition and stabilizing institutions constrained by regional economic trends, it has led to a dramatic agglomeration of financial institutions that lack efficiency and adapt slowly to market trends.53 Notoriously, these new mega-banks financed oil, gas, and coal firms in the 1980s and 1990s.54 While the Riegle-Neal Act did enable financial institutions to diversify geographic risk,55it also made larger banks less likely to take local and regional interests into consideration. In particular, banking infrastructure in both depository and lending institutions are tied to the presence of capital locally. Where capital does not exist, finance institutions do not have adequate incentives to invest in banking infrastructure, absent policy demand. This creates a positive feedback loop, leading the invisible hand to cultivate “credit deserts.”56 

2. Cooperatives are less risky than conventionally-owned firms 

In conventional-owned firms (CFs), the failure rate of startups is over 90% at the five-year mark, with 1 in 5 failing in the first year.57 By contrast, worker cooperatives (WCs) have a success rate between 80-90% at the five year mark.58 This makes WCs 8-9x more likely to succeed. The Cooperative Fund of New England, a community development financial institution (CDFI), reports a repayment rate of over 98% on the $57 million loans made to cooperatives since 1975.59 By contrast, CFs in Small Business Administration (SBA) loan guarantee programs default on their loans at a rate of 17.4%.60 Commercial lending default rates at large have fluctuated, with a default rate of 6.75% in 1987 to .95% in 2023.61 These data demonstrate that cooperatives are substantially less risky to lenders than conventionally-owned firms. 

3. Personal guarantees hinder cooperative startup financing 

Corporate guarantees and personal guarantees are both forms of security that lenders may require when providing financing to businesses. However, there are some key differences between the two types of guarantees. A corporate guarantee is a promise by a corporation to repay the debt of another corporation if the debtor defaults. This means that if the borrowing corporation is unable to repay its loan, the guarantor  will be responsible for repaying the debt. 

Corporate guarantees are typically used when the borrowing corporation is a subsidiary of the guarantor, or when the two corporations have a close business relationship. In some cases, lenders may also require a corporate guarantee from a third-party corporation if they believe that the borrowing corporation is a high credit risk. 

A personal guarantee is a promise by an individual to repay the debt of a business if the business defaults. This means that if the business is unable to repay its loan, the individual who signed the personal guarantee will be personally responsible for repaying the debt. Personal guarantees are typically required when the business owner is the sole proprietor of the business, or when the business is a partnership. In some cases, lenders may also require personal guarantees from multiple individuals, such as the business owner and the business's key managers. 

Corporate guarantees present a rich opportunity for established cooperatives to support cooperative startups, and some apex financial institutions are already at work.62 Nevertheless, the personal guarantee requirement hinders cooperative development. Generally banks will not lend to a corporation unless an individual owning at least 20% equity provides a personal guarantee.63 The liquidity of owners is analyzed as part of the underwriting process, with owner assets collateralized as security. 

The problem this presents for cooperatives stems from its corporate form and values. Traditionally, startup corporations have an owner or small group of owners owning more than 20% of the company. In cooperatives, emphasis is on equitable ownership across workers or consumers. If, for instance, a 6-member worker coop were to apply for a commercial loan to start a driver cooperative, no member would own more than 17% of the company. If a 60-member consumer cooperative were to apply for a commercial loan to supply their own renewable energy, the bank would have to process 60 sets of tax returns, 60 credit ratings and reports, then balance them in a group DTI. Feasibility constraints in underwriting, efficiency in debt collections, and stringent criteria for secondary loan markets preclude this option. 

In a single-owner LLC, credit history related to startup is imputed by the lender from the entrepreneur to the entity. In cooperatives, credit history begins with the entity. Cooperative startups are disadvantaged because they cannot access capital on equal terms with sole proprietors or principals with adequate collateral owning ≥ 20%.64  

4. Cooperative access to private capital should be commensurate with actual risk 

When the SBA responded to a Congressional inquiry into the personal guarantee requirements for cooperatives in 2019, the SBA recommended that cooperatives form an additional entity which would act as guarantor to loans for the cooperative, or seller-financing a conversion from conventionally-owned firms to cooperatives.65 While these recommendations work for conversions and individuals with adequate wealth, it does nothing to address the social equity considerations that motivate many cooperative startups. 

At scale, cooperatives start to function with respect to financing in a similar manner to conventionally-owned firms because they have collateralizable assets, or a credit and revenue history. Conventional lending limits startup cooperatives by applying personal guarantee requirements, rather than relying on an existing corporate structure that distributes liability pro rata. This practice artificially distorts the free market for cooperative startups. 

Conventional risk analysis is not appropriate to the cooperative form. Instead, cooperatives should be able to make pro rata cooperative guarantees on corporate loans. Rather than a single member owning ≥ 20% of the company guaranteeing 100% of a $100,000 loan, 20 members owning 5% each should be able to guarantee $5,000 of a loan, assuming their respective credits can support it. Because cooperatives are 8-9x more likely to succeed, and because cooperatives report repayment rates more consistent than conventionally-owned firms, financial institutions should rethink cooperative lending. 

IV. Congress Should Level the Playing Field 

“...if you see a behavior that persists over time, there is likely a mechanism creating that consistent behavior.”66 The environmental crisis is frequently center stage in contemporary political discourse, and for good reason. Yet, interventions have historically missed the mark, because the environmental crisis is a symptom (or structurally predetermined output) of ownership structure.67 While environmental policy tracks down negative externalities, the latent behavior of detached capital and information and value asymmetry continue to generate new negative externalities. Without intervention at the paradigmatic level, business-as-usual will continue to adapt to a growing list of concerns and constraints. As Donella Meadows states, “paradigms are the sources of systems.”68 Cooperative economics shifts the economic paradigm, altering the downstream stocks and flows, buffers and feedback, rules, organizations, and goals of systems. 

Congress can shift the economic paradigm from one marked by growing wealth divides and environmental degradation to one marked by socioeconomic and environmental equity by encouraging cooperative development. Congress should establish the Cooperative Business Administration; direct the Securities Exchange Commission (SEC) and Internal Revenue Service (IRS) to promulgate regulations that encourage cooperative development; and explore how the Dormant/ Commerce Clause impacts local and regional self-determination and environmental factors. 

A. Establish the Cooperative Business Administration 

“Whenever the people are well-informed, they can be trusted with their own government.”69 

Congress should enact a Cooperative Business Act and Cooperative Business Investment Act, creating a department tasked with aiding, counseling and protecting the interests of cooperative business concerns. 

1. Incentivize cooperative finance advisors in finance institutions 

Congress should incentivize cooperative finance advisors in local lending institutions to: 

● Champion financial empowerment: advisors embedded in communities can provide accessible, culturally-sensitive financial guidance, tailoring solutions to underserved populations often overlooked by traditional banks, ultimately promoting financial health and reducing wealth inequality; 

● Boost lending efficiency: collaborative advisors working alongside lenders can streamline loan applications and navigate complex regulations, reducing administrative burdens and increasing access to capital for local businesses and individuals; and 

● Foster local economic development: advisors can connect local lenders with community-driven projects, directing investments towards initiatives that address specific needs and fuel sustainable growth, fostering a more vibrant and inclusive local economy. 

By incentivizing this unique model, Congress can empower communities to take ownership of their financial well-being and drive economic prosperity from the ground up. 

2. Incentivize local depository institutions providing liquidity to local lending institutions Congress should incentivize local depository institutions (DIs) to provide liquidity to local lenders because it strengthens the local financial ecosystem, fosters local economic growth, and promotes financial inclusion. By ensuring DIs have the resources to support local cooperatives, Congress can create a virtuous cycle where local deposits fuel local investment, boosting economic activity, creating jobs, and empowering underserved communities. This approach, in contrast to reliance on larger, national banks, can foster financial stability and resilience by diversifying the financial landscape and mitigating risks associated with systemic shocks. Ultimately, incentivizing local DIs to serve as engines of local lending is a win-win for both communities and the national economy. 

3. Promulgate regulations for a credit pre-screening process for cooperative borrowers 

In a group credit pre-screening process for cooperative startups, potential members undergo a transparent and collaborative assessment to gauge their financial suitability and shared commitment to the venture. This involves: 

● Individual credit checks: Each member provides individual credit reports, fostering openness and trust; 

● Group credit assessment: A collective evaluation of financial statements and business plans ensures the cooperative's overall financial health and viability; 

● Peer review: Members discuss individual financial strengths, weaknesses, and support plans, building solidarity and shared responsibility; and, 

● Joint action plan: Based on the assessment, the group develops a collective credit-building strategy, potentially involving shared accounts or joint loan applications, demonstrating commitment and financial discipline. 

This process fosters collaborative decision-making, risk mitigation, and a strong foundation for successful cooperative ventures. Local lenders do not have adequate incentives to foster this process, but local communities benefit from it. The Cooperative Business Administration should provide this program. 

4. Discount Capital Loans to Promote Cooperative Development 

To incentivize cooperative development, Congress could direct the Cooperative Business Administration to implement a graduated capital loan discount program based on a threshold of collateral or revenue. This program would offer cooperatives progressive interest rates on loans, from the maximum discount up to market rate, as their collateral value or annual revenue increases. This enables cooperatives to build their financial strength and achieve financial independence while lowering their borrowing costs upon startup. The specific discount rates and thresholds would be determined by Congress, but the principle is to provide the most significant support to cooperatives in their early stages, when access to capital is most critical. 

5. Leverage contingent funding to encourage States to enable cooperative development 

As with many other policy areas, Congress should condition funding for Cooperative Business Administration programs upon enactment of state statutes enabling cooperative corporate formation and incentivizing conversions. For example, last session Republicans in both houses of the Tennessee state legislature sponsored bills that would encourage conversions from sole-proprietorship and LLCs to ESOPs and Employee Ownership Trusts.70 However, Tennessee does not have a cooperative corporate statute, meaning cooperatives wishing to operate in the state must incorporate elsewhere, like Colorado or California.71 

B. Direct the SEC and IRS to promulgate regulations to incentivize cooperatives 1. Define the “G” and Regulate Disclosure727374 

Conventional capital investments should be subject to an Environmental, Social, and Governance (“ESG”) tax. In order to determine whether cooperative capital investments satisfy triple bottom lines to the benefit of society, the SEC should promulgate regulations characterizing minimum standards in ESG portfolios. By regulating disclosure of SG standards, the SEC will promote free market awards to cooperative entities and distributed ownership. From a messaging perspective, this could help shift ESG regulatory development discourse from “why are we copying the EU,” to “why aren’t we promoting democratic workplaces?” 

2. Create a subset of convertible securities–dissolvable securities 

Dissolvable securities, a novel financial instrument, could offer investors the upside of equity with a unique twist: they convert from ownership shares into tax credits upon reaching a predetermined trigger, like the company achieving a specific milestone or reaching profitability. Imagine it as a stock that melts away, leaving a valuable tax deduction in its wake. This innovative approach incentivizes investment in startups and social impact ventures by providing investors with both potential financial gain and a tangible societal benefit. While the equity portion offers the traditional reward of stock appreciation, the tax credit conversion acts as a safety net, mitigating risk and potentially offsetting losses. This unique blend of financial return and social impact could unlock new funding avenues for ventures that might otherwise struggle to attract capital, ultimately fostering innovation and positive societal change. 

3. Provide guarantees on cooperative loans which convert to tax liability upon default 

In a bold shift, the IRS could incentivize cooperative lending by providing contingent loan guarantees that convert to tax liabilities upon default. Imagine a safety net woven from corporate taxes, where the IRS shoulders the risk for a portion of cooperative loans, encouraging lenders to extend credit and fostering cooperative growth. This innovative approach offers several benefits: reduced risk for lenders, increased access to capital for cooperatives, and a potential fiscal windfall for the government upon successful ventures. While defaults would trigger tax liabilities, the potential for increased cooperative success and economic growth could outweigh the risk, creating a win-win situation for both the government and the cooperative sector. 

4. Implement identical personal guarantee exemptions for cooperatives and ESOPs 

Under the current tax code, Congress exempts ESOPs from liability for corporate loans, and further limits the classes of assets to be given as collateral to “those acquired with the proceeds of the loan and those that were used as collateral on a prior exempt loan repaid with the proceeds of the current exempt loan.”75 This effectively releases ESOPs from personal guarantee requirements. Seeing that Congress has exercised this power, Congress should exercise its power again to benefit substantially similar organizations. Not all cooperatives are worker-owned, or exclusively worker-owned. Expanding this exemption will facilitate formation of consumer and multi-stakeholder cooperatives across the nation. 

C. Commission a report on the Dormant/ Commerce Clause impacts on local and regional self-determination and environmental factors 

Congress should explore developing legal mechanisms allowing the Dormant/ Commerce Clause to yield to efficient local closed-loop systems in cooperative corporations that generate significant positive environmental externalities. This has prevented (re)development of local food and energy systems, among other sectors, that could otherwise reduce transportation costs and line losses. By finding an efficient level of self-determination, Congress will allow local governments to measure, manage, and control local capital for the benefit of local communities and the environment. 

V. Congress Can Stimulate Resilient Local Economies by Eliminating Systemic Barriers to Cooperative Development 

“By pursuing [their] own interest [they] frequently [promote] that of society more effectually than when [they] really [intend] to promote it.”76 

The awkward contemporary rendering above of an oft-quoted passage from The Wealth of Nations illustrates the necessity and timeliness of rethinking capital in the modern era. Cooperative capital creates roving engines of economic and ecological liberation because cooperatives tend to engender the triple bottom line, creating more resilient socioecological systems. Cooperative corporations are private sector actors with private sector incentives, but their local attachments yield more perfect signaling, leading to fewer externalities. Cooperative entities require the organization to answer to social equity considerations in financial equity, and necessitate active participation in democratic systems in everyday living. 

Cooperatives are by no means a departure from free market systems; rather, they produce efficiency through inclusion of stakeholder incentives. By encouraging a fractal democratic seizure of the means of production and consumption through cooperatives, Congress can encourage local communities to harmonize social, environmental, and economic values. Cooperatives empower local communities to have the say over their economic and ecological environments–prerequisite to self-determination and self-sufficiency. Congress should therefore act to promote economic democracy through cooperative development, especially by eliminating barriers to access to startup capital.

__________________________

1 Special thanks to Benny Overton, Rosemarie Hienkel-Rieger, Josh Corlew, Sandra Santiago-Mendoza, Marc Mihaly, Marsha Wimble, and Matthew Cropp for your guidance 

2 “Cooperative Identity, Values & Principles,” International Cooperative Alliance. 

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3Ibid. 

4 Donella Meadows, Thinking in Systems: A Primer. Chelsea Green Publishing, White River Junction, VT. 2015. p. 76. 5 Darrah Perryman, “More than just a co-op: How Cooperatives Strengthen Economic Power,” USDA Rural Development. 24 Oct. 2022. https://www.usda.gov/media/blog/2022/10/24/more-just-co-op-how-cooperatives-strengthen-economic-power (last visited 12/14/23). 

6 “The Local Multiplier Effect: How Independent Locally Owned Businesses Help Your Community Thrive,” American Independent Business Alliance. 

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7 “10 Ways Small Businesses Benefit Their Local Communities,” Better Business Bureau. April 23, 2019. https://medium.com/@BBBNWP/10-ways-small-businesses-benefit-their-local-communities-7273380c90a9 (last visited 12/14/23). 8 “The Local Multiplier Effect: How Independent Locally Owned Businesses Help Your Community Thrive,” American Independent Business Alliance. 

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9 “10 Ways Small Businesses Benefit Their Local Communities,” Better Business Bureau. April 23, 2019. https://medium.com/@BBBNWP/10-ways-small-businesses-benefit-their-local-communities-7273380c90a9 (last visited 12/14/23). 10 Lauryn Agnew and Stephen Malta, “What is Place-Based Impact Investing?,” Net Impact. 

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11 Theodo, Scally, and Edmonds, “The ABCs of Co-Op Impact,” The Urban Institute. December 2018. https://ncbaclusa.coop/content/uploads/2021/06/ABCs-of-Impact-FINAL.pdf (last visited 12/14/23). 

12 “Fostering Impact: An Investor Guide for Engaging Communities in Place-Based Impact Investing,” Impact Investing Institute. 2023. 

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13 “What We Do,” EB PREC. https://ebprec.org/mission-vision (last visited 12/14/23). 

14 Sustainable Economies Law Center. https://www.theselc.org/ (last visited 12/14/23). 

15 Stefan Lembo Stolba, “California Leads Nation in Rent Costs,” Experian. November 6, 2019. 

https://www.experian.com/blogs/ask-experian/research/median-rental-rates-for-an-apartment-by-state/ (last visited 12/14/23). 

16 “What We Do,” EB PREC. https://ebprec.org/mission-vision (last visited 12/14/23). 

17 “Ready to Drive?,” The Drivers Cooperative. https://drivers.coop/drivecoop (last visited 12/14/23). 18 “Become a Member,” Cooperative Energy Futures. https://www.cooperativeenergyfutures.com/membership (last visited 12/14/23). 19 “How Cooperatives Contribute to Sustainable Consumption and Production,” COPAC Coop, United Nations Department of Economic and Social Affairs. https://social.desa.un.org/sdn/how-cooperatives-contribute-to-sustainable-consumption-and-production (last livisted). 

20 Karthikeyan and Karthika, “Cooperative Economy as a Triple Bottom Line Value Model to Sustain the Attire of New Global Dynamics,” CIRIEC. 15 June 2022. https://ciriec.es/valencia2022/wp-content/uploads/COMUN-215.pdf (last visited 12/14/23). 21 “Co-ops: A Key Part of Rural America,” USDA. https://www.usda.gov/topics/rural/co-ops-key-part-fabric-rural-america (last visited 12/14/23). 

22 “National Farmer’s Market Week: Think Local… and Global,” USDOE. August 1, 2022. 

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26 Shelly Poticha, “Infrastructure is an Environmental Issue,” Natural Resource Defense Council. May 12, 2017. https://www.nrdc.org/bio/shelley-poticha/infrastructure-environmental-issue (last visited 12/14/23). 

27 Jennifer Dixon, “Flint Lawsuits Could Cost Michigan Taxpayers Millions,” Detroit Free Press. February 20, 2016. https://www.freep.com/story/news/local/michigan/flint-water-crisis/2016/02/20/flint-water-crisis-lawsuits/80514276/ (last visited 12/14/23). 

28 Jackie Calmes, “$300 Million in Detroit Aid, but No Bailout,” New York Times. September 26, 2013. https://www.nytimes.com/2013/09/27/us/300-million-in-detroit-aid-but-no-bailout.html (last visited 12/14/23). 29 Omer Yusuf, “TDOT Plans to Build a New Road Off I-40 to BlueOval City,” Memphis Commercial Appeal. June 9, 2023. https://www.commercialappeal.com/story/money/business/2023/06/08/ford-blueoval-city-tennessee-new-road-interstate-40/70262716 007/ (last visited 12/14/23). 30 Josephine Ecklu, “How Inclusive Business Relationships Give Farmers Access to Capital and Training,” Rikolto. April 21, 2020. https://www.rikolto.org/stories/how-inclusive-business-relationships-give-farmers-access-to-capital-and-training (last visited 12/14/23). 

31 “Cooperatives in Social Development,” UN Dept. of Economic and Social Affairs. 

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32 “Importance of Incorporating Local Culture into Community Development,” PennState Extension. February 2, 2023. https://extension.psu.edu/importance-of-incorporating-local-culture-into-community-development (last visited 12/14/23). 33 Dr. Laura Hanson Schlachter, “Diversity, Equity, and Inclusion Trends in the Cooperative Community,” NCBA CLUSA. November 2021. https://resources.uwcc.wisc.edu/Research/DEI-Survey-Report-11-10-21.pdf (last visited 12/14/23). 34 “Strength in Diversity: How Cooperatives and Credit Unions Catalyze Inclusive Growth in Their Communities,” USAID. https://www.workwithusaid.gov/blog/strength-in-diversity-how-cooperatives-and-credit-unions-catalyze-inclusive-growth-in-their-co mmunities (last visited 12/14/23). 

35 See generally Elinor Ostrom, “Governing the Commons: The Evolution of Institutions for Collective Action,” Cambridge University Press. 1990. 

36 Ballier and Conaty, “Democratic Money and Capital for the Commons: Strategies for Transforming Neoliberal Finance Through Commons-Based Alternatives,” Heinrich Böll Foundation, September 2015. 

https://www.boell.de/sites/default/files/democratic_money_capital_for_the_commons_report_january2016.pdf (last visited 

12/14/23). 

37 I have intentionally left out Department of Energy and Department of Agriculture programs for sector-specific cooperatives to keep the issue on the corporate form per se. 

38 CDFI Coalition. https://cdfi.org/ (last visited 12/14/23). 

39 Fang Block, “Global Impact Investments Surpass $1 Trillion for the First Time,” Barron’s Penta. October 12, 2022. https://www.barrons.com/articles/global-impact-investments-surpass-1-trillion-for-the-first-time-01665605984 (last visited 12/14/23). 40 Sifma Research, “202e Capital Markets Fact Book,” July 2023. 

https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf (last visited 12/14/23). 41 East Bay Permanent Real Estate Cooperative Inc. Bylaws, p. 9. 

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42 S.2786–115th Congress (2017-2018). https://www.congress.gov/bill/115th-congress/senate-bill/2786/text?s=1&r=35 (last visited 12/14/23). 

43 Elizabeth Lechleitner, “Landmark Employee Ownership Act, Signed Into Law Yesterday, Will Amend Lending Landscape for Worker Co-ops,” NCBA CLUSA. 14 August 2018. 

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44 Id at §3. 

45 “Fact Sheet: The US Small Business Administrations is Delivering Support to America’s Small Businesses, Helping Them Recover from the COVID-19 Pandemic,” SBA Press Release 21-111. November 24, 2021. 

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