6 changed files with 40 additions and 6 deletions
@@ -36,7 +36,7 @@ Mondragon's original split was similar: 10% to education and the community, at l
 The members' share is then split again, between cash now and the account:
 - **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how US co-op tax law works ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash. If they leave some in their account, by default they aren't taxed on it until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
+- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash, or the standard split, with nothing in between, so nobody chooses how much to invest. If they take the standard split, by default they aren't taxed on the account part until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
 - **The rest goes into each member's account.**
 Members can also raise their own salaries instead of taking profit, but that doesn't get around the reserve. It takes its share of pay above the going rate too (see [Investing for the Long Run](the-long-run.md#the-rules)).
@@ -46,7 +46,7 @@ Members can also raise their own salaries instead of taking profit, but that doe
 ## How the account grows
 - **Interest is set by formula, not by vote.** A current member's account earns the one-year Treasury rate plus two percentage points in years the co-op makes a profit, and the plain Treasury rate in loss years. Once a member leaves, their balance earns the plain Treasury rate. So does the slice of a current member's account that's protected by [insurance](savings-guarantee.md), since it's no longer at risk. If current members voted on the rate, they could set it to zero on accounts that mostly belong to people who've left. Or senior members could set it high to pay themselves out of the firm. A formula stops both.
- **Why the extra two points.** Money in a current member's account is at risk: it shares in losses and ranks behind lenders. If it only earned what a risk-free government bond pays, every member would take as much cash as they could, and the co-op would have less of its own money to invest. Once you leave, your balance stops sharing in losses, so it stops earning the premium. See [Investing for the Long Run](the-long-run.md#the-rules).
+- **Why the extra two points.** Money in a current member's account is at risk: it shares in losses and ranks behind lenders. If it only earned what a risk-free government bond pays, members would vote to pay out as much in cash as the rules allow, and the co-op would have less of its own money to invest. Once you leave, your balance stops sharing in losses, so it stops earning the premium. See [Investing for the Long Run](the-long-run.md#the-rules).
 - **Losses are shared.** In a year the co-op loses money, the loss is charged partly to the reserve and partly to members' accounts, in the same proportions as profits. Your account can go down, just like shares in any company.
 ## How it's paid out
@@ -77,6 +77,31 @@ A pension plan would break the account. Its money has to be held in a trust, apa
 **The cost is capital.** Money paid back after five years is money the co-op can't keep using for fifteen. So a co-op that wants to invest more has to keep more in its permanent reserve, and that weakens the model's answer to the horizon problem ([Investing for the Long Run](the-long-run.md#who-pays-for-an-investment-and-when)).
 ### Are accounts securities?
 Securities law covers far more than stock. Its definition includes any "note," any "evidence of indebtedness," and any "participation in any profit-sharing agreement" ([15 U.S.C. 77b(a)(1)](https://www.law.cornell.edu/uscode/text/15/77b)). An account credit is a promise to pay a set amount, with interest, on a set date. If credits counted as securities, a co-op would need an exemption from registering them, and anything misleading it told members about them could be grounds for a lawsuit.
 **The case that they aren't:**
 - **Members don't buy them.** Credits come out of each year's profit share, by one split the bylaws set for everyone. The Supreme Court held that a pension plan workers didn't pay into wasn't a security, because an employee "is selling his labor primarily to obtain a livelihood, not making an investment" ([*Teamsters v. Daniel*, 1979](https://www.law.cornell.edu/supremecourt/text/439/551)).
 - **Membership isn't like stock.** The Court held that shares in a housing co-op weren't securities. They paid no dividends from profit, couldn't be sold or pledged, gave no extra votes for extra shares, and couldn't rise in value ([*United Housing Foundation v. Forman*, 1975](https://www.law.cornell.edu/supremecourt/text/421/837)). Membership here is the same: one vote per member, and a buy-in of at most $1,000 held apart from the account at its face value, earning nothing ([When People Don't Stay Long](high-turnover.md#joining-costs-nothing-up-front)). The profit share comes from hours worked, not from the membership.
 **The case that they might be:**
 - **Notes are presumed to be securities.** In 1990 the Court held that a farm co-op's notes to its members and others were securities. It looked at why the co-op issued them and why people held them, how widely they were offered, what the public would expect, and whether anything else protected the holders. It stressed that the co-op used the money for its business, and that the notes were "uncollateralized and uninsured" and would otherwise "escape federal regulation entirely" ([*Reves v. Ernst & Young*](https://www.law.cornell.edu/supremecourt/text/494/56)). An account is also an unsecured promise from the co-op, the co-op uses the money, and the extra two points of interest are there to make keeping it in worthwhile. The [savings insurance pool](savings-guarantee.md) covers only part of it.
 - **This model gives up the protection *Daniel* relied on.** The Court said workers didn't need securities law there because pension law already protected them. Accounts here are designed to stay outside pension law.
 - **A former member is simply owed money** by a company they no longer work for, and a payout paused for two years becomes a new debt to them (below).
 **So the model keeps accounts on the safe side of each test:**
 - **Nobody can put money in.** Accounts are filled only from profit shares. No member can choose to leave more in. Lower-income members can take everything in cash or the standard split, nothing in between.
 - **Accounts can't be sold, pledged or borrowed against** (below), and they aren't offered as an investment. A co-op can't advertise account interest to recruit workers, and statements describe accounts as "partly covered by a private insurance pool with no government backing," not as insured savings.
 - **Members get the facts.** Every account holder, former members included, gets the yearly statement and the co-op's checked accounts. Anything misleading in them could be grounds for a claim either way, so the federation writes the model statements and buys directors' liability insurance for member co-ops as a group. That's a cost [What the Rules Cost a Small Co-op](compliance.md) doesn't count yet.
 - **The bank asks the SEC for a general answer.** The first pilot co-ops ask the SEC's staff to confirm they won't treat credits as securities, and the bank pays. A staff letter binds no court, no state and no member who sues, so the bank also asks the SEC for a rule that covers profit allocations paid on a short fixed schedule, as it does with the Labor Department.
 - **State law too.** Each state has its own securities law. The bank's checked entry for each state ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)) covers it, alongside wage law. California, for example, exempts "credits to a member's capital" in co-ops formed under its co-op law, for voting members, and doesn't count patronage dividends toward its $1,000 limit on what a member puts in ([Cal. Corp. Code § 25100(r)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=25100)). That shows how a state can handle credits. It doesn't settle federal law, and it doesn't cover former members, who no longer vote.
 **The fallback has a price.** If credits did count as securities, the nearest federal exemption covers securities a company issues to its employees under a written compensation plan, up to the largest of $1 million, 15% of its assets, or 15% of that kind of security outstanding, each year ([17 CFR 230.701](https://www.law.cornell.edu/cfr/text/17/230.701)). But using it means calling credits pay, in writing. The tax, pension and wage-law positions elsewhere all rest on credits being an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), and the IRS or a state wage agency could point to that document. It also doesn't cover a paused payout that becomes a new debt to a former member, who isn't an employee anymore. So the model doesn't plan on it. It's a last resort, and the conflict is listed in [Open Problems](open-problems.md).
 ## Protecting the co-op, and the people who stay
 A payout system can also be used to strip a failing firm. People who see trouble coming leave first and get paid in full, while everyone who stays absorbs the loss. So:
@@ -21,4 +21,13 @@ There is one limit, though. A claim that takes 90% of the profits for 40 years i
 **The consequence, priced in.** Capital charges for risk. An instrument with equity-like downside and a terminating upside gets funded last, or demands a bigger profit share. Revenue-based financing already exists in today's market and stays niche for exactly this reason. It bites hardest on brand-new ventures and barely at all on mature, profitable firms.
 **Investors are buying securities.** A share of profits sold to an investor is a "participation in any profit-sharing agreement," which federal law lists as a security ([15 U.S.C. 77b(a)(1)](https://www.law.cornell.edu/uscode/text/15/77b)). A co-op raising outside money has to register the offering or fit an exemption, and it answers for anything misleading it tells investors. The usual routes for a small business:
 - **Crowdfunding:** up to $5 million a year through a registered online portal. Most investors have a yearly limit. If either their income or their net worth is under $124,000, it's the greater of $2,500 or 5% of whichever of the two is larger ([17 CFR 227.100](https://www.law.cornell.edu/cfr/text/17/227.100)).
 - **Selling locally:** only to residents of the co-op's own state, under that state's rules ([17 CFR 230.147A](https://www.law.cornell.edu/cfr/text/17/230.147A)), or up to $10 million a year under each state's own rules where it's sold ([17 CFR 230.504](https://www.law.cornell.edu/cfr/text/17/230.504)). Both leave the co-op to state review.
 - **Wealthier and experienced investors:** any amount, to investors who meet the federal wealth or income test, plus up to 35 others who are experienced in business ([17 CFR 230.506](https://www.law.cornell.edu/cfr/text/17/230.506)). States can't require these offerings to be registered, so it's often the cheapest route, though not one for a co-op's neighbors.
 - **One large investor:** a parent co-op funding a [spin-off](growth.md), or a lender joining the bank, can invest privately without a public offering ([15 U.S.C. 77d(a)(2)](https://www.law.cornell.edu/uscode/text/15/77d)).
 Each route costs legal and filing fees, which weigh most on small raises. The federation keeps standard offering documents for these claims, with a standard warning about the risks: the claim can't be sold easily, it ranks behind the bank, and it can be worth nothing. So each co-op doesn't pay a lawyer to write its own. The co-op's directors, often members who earn an ordinary wage, answer for anything misleading in an offering, so the federation's group liability insurance covers them. A co-op that just wants to borrow can also take an ordinary loan with fixed payments, which courts usually don't treat as a security. Members' own [capital accounts](capital-accounts.md#are-accounts-securities) are a different case.
 This rule applies only to co-ops. Conventional firms keep conventional equity. That makes the cost-of-capital question an empirical one: [the test](the-test.md) will show whether co-ops can raise enough on these terms, alongside the bank, to grow.
@@ -62,7 +62,7 @@ The model makes spin-offs the standard path for a new line that earns less per w
 - **The new line becomes its own locked co-op,** with its own members, its own profit split, and a [lock share](the-lock.md#how-the-lock-is-made-to-hold) held by an independent lock-holder from the day it's founded.
 - **The parent invests, but doesn't control.** It can fund the new co-op from its reserve, on the terms any investor gets ([Capital, After](capital.md)): repayment plus a share of profits, for at most 15 years, with no vote. If the new co-op borrows from the bank, the parent's claim ranks behind the bank and needs the bank's approval, like any other.
- **Reserve money stays reserve money.** When the new co-op repays the money, it goes back into the parent's reserve. Only the profit share counts as profit, and the reserve takes its cut of that too ([Investing for the Long Run](the-long-run.md)). No single spin-off can take more than a quarter of the parent's reserve.
+- **Reserve money stays reserve money.** When the new co-op repays the money, it goes back into the parent's reserve. Only the profit share counts as profit, and the reserve takes its cut of that too ([Investing for the Long Run](the-long-run.md)). No single spin-off can take more than a quarter of the parent's reserve. All of a parent's investments in spin-offs together stay under a third of its assets, not counting cash and government bonds. Above 40%, federal law can treat a company that holds investments as an investment fund, with its own heavy rules ([15 U.S.C. 80a-3(a)(1)(C)](https://www.law.cornell.edu/uscode/text/15/80a-3)). A co-op that mainly runs its own business is probably outside that law anyway, but the cap keeps it from having to argue the point.
 - **The spin-off is still a co-op.** Its own workers become members, and it's in the same federation as the parent, so a failure in one doesn't leave the other's workers with nothing ([The Federation](federation.md)).
 In the example, the parent's members keep their $20,000 and earn a return on what they put in. The 20 new workers build full shares of their own co-op's profit instead of partial shares of someone else's. Without the spin-off, the members would most likely have turned the line down, and the jobs wouldn't exist.
@@ -55,7 +55,7 @@ A retirement plan and a co-op aren't the same, and the same study found that peo
 Existing home care co-ops charge refundable fees of $25 to $1,000, often taken from paychecks a little at a time (PHI, 2005). That's a real cost for someone earning an aide's wage, and in many states a deduction from pay needs the worker's written permission.
-So in this model, **the buy-in comes out of the member's own profit shares, not their paycheck.** It's capped at $1,000. Until it's covered, part of each profit share goes toward it instead of being paid out in cash, though never the cash a member needs to pay tax on their share. A member can choose to pay it faster from their pay if they ask in writing. Either way, it sits in their own [capital account](capital-accounts.md) and is paid back to them on the account's normal schedule, whether or not they stay.
+So in this model, **the buy-in comes out of the member's own profit shares, not their paycheck.** It's capped at $1,000. Until it's covered, part of each profit share goes toward it instead of being paid out in cash, though never the cash a member needs to pay tax on their share. It's held apart from their [capital account](capital-accounts.md), at its face value. It earns no interest and isn't charged with the co-op's yearly losses, and it's paid back in full within a year after they leave. Nobody pays it from their paycheck, so nobody puts cash into the co-op to join ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)).
 ### A short probation
@@ -13,7 +13,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
 2. **The horizon problem.** *(Mostly answered.)* Members near retirement have little reason to vote for investments whose payoff arrives after they leave. The evidence from France and Italy finds no underinvestment where co-ops must keep a reserve, and [Investing for the Long Run](the-long-run.md) closes the main routes around this model's reserve: pay above the going rate, sales of assets, development spending, high pay that turns into losses, and worn-out equipment still in use. A warning light shows when a co-op stops replacing its equipment, and big bets get an independent opinion before members vote. Still open: nothing forces a co-op to maintain what it has, a bad bet that fails after its backers leave falls on the people who came after, and it's unsettled whether 30% is enough and whether the account rate is right. Members' accounts now pay back within three to seven years ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)), so they help less with long-lived investments than accounts held until members leave. Letting members sell their places to incoming workers was rejected, because that is how the plywood co-ops ended up sold.
-3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers. It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), so members there build no savings in the co-op.
+3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers. It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), so members there build no savings in the co-op. A third: account credits look like the notes the Supreme Court has held to be securities, so the model keeps members from putting money in and asks the SEC for an answer ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). If the answer is no, the nearest exemption means calling credits pay, which works against the model's positions on tax, pension and wage law.
 4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
@@ -141,4 +141,4 @@ Both Fagor and the Italian co-ops got into trouble partly because members' money
 - **It starts small.** It will be weakest in its early years. That's why coverage phases in, current members' slices come later, and account cover starts only after three years.
 - **Members pay for it, and it isn't cheap.** Premiums come out of account interest and profit. Insuring current members' savings could take most of the interest on the protected slice, which is why co-ops can choose not to. That's the honest price of making savings safer.
 - **Bankruptcy law may not cooperate.** Courts can push former members' claims to the back of the line, behind other creditors, which makes the pool's recoveries even smaller. That's another reason it assumes nothing comes back.
- **The legal form needs Congress.** Without the federal charter, a pool like this is insurance under state law, needing a license in every state. Whether insured capital accounts raise questions under securities law is also unsettled. Both are listed in [Open Problems](open-problems.md).
+- **The legal form needs Congress.** Without the federal charter, a pool like this is insurance under state law, needing a license in every state. Whether capital accounts count as securities is also unsettled ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). Both are listed in [Open Problems](open-problems.md).