In 1959, some enterprising developers bought land in Marin County to develop a country club.  To pay for some of the costs of building the club, they sold charter memberships in the club.  The members would not share in the profits or ownership of the club but would have the right to use club facilities.

Under the federal definition, these memberships would not be securities because the members joined the club to get the benefits of membership, not for a financial return.

But the California Supreme Court, in a landmark case called Silver Hills Country Club v. Sobieski (1961), found that these memberships are securities.

The court formulated a new test for whether something is a security, called the “risk capital test” which considers

(1) whether funds are being raised for a business venture or enterprise;

(2) whether the transaction is offered indiscriminately to the public at large;

(3) whether the investors are substantially powerless to effect the success of the enterprise; and

(4) whether the investor’s money is substantially at risk because it is inadequately secured.

This test is used by many states.

What does this mean for coop memberships?

Memberships in an existing coop that is adequately capitalized would not be a security under the risk capital test because the funds are not “being raised for a business venture.”  However, memberships in a start-up coop where memberships are needed to pay for start up-costs would likely be considered securities.

California has an exemption for the sale of coop memberships for less than $300.  It would be risky to offer memberships in a coop in California for more than $300 if the membership revenue us going to be used for the development of the business.

Worker coops in which the workers are actively involved in management should be able to avoid this problem because the members are not “substantially powerless to effect the success of the enterprise.”

In People v. Syde, the court said the California securities law “was not intended to afford supervision and regulation of instruments which constitute agreements with persons who expect to reap a profit from their own services or other active participation in a business venture.”