INDIE FILM SECURITIES OFFERINGS
By John W. Cones
As an 18-year Los Angeles based securities/entertainment practitioner focused primarily on what I refer to as investor-financing of independent feature films (one of many ways to finance indie films), I was horrified recently to witness a prominent entertainment attorney telling an audience of filmmakers that when it comes to equity financing, "there are no rules". I am certain that the U.S. Securities and Exchange Commission, the California Department of Corporations and all of the other state securities regulatory authorities would be shocked and surprised to learn that some entertainment attorneys are carelessly leading filmmakers to believe that the Hollywood-based film industry is somehow exempt from all of the existing rules and regulations relating to equity or investor-financing of feature films.
That sort of gross misinformation is apparently responsible for the many instances in which filmmakers decide without benefit of accurate advice to post their offerings on the Internet and advertise or conduct what, in effect, or general solicitations for investors online. From an enforcement standpoint, the securities regulatory authorities actually love this because they can easily spot such online solicitations and issue the cease and desist orders to offending filmmakers. After all, the federal and state securities laws clearly state that when selling a security (i.e., trying to raise money using some sort of securities investment vehicle) the offering must be registered with the SEC at the federal level and with each of the state securities regulatory authorities in which the security is being offered or sold. Typically, the only alternatives are (1) to identify available exemptions from the registration requirement (at both the state and federal levels) and comply with all of the conditions and limitations imposed on the use of such exemptions (i.e., private placements or combinations of private placements and public offerings), or (2) don't offer a security (i.e., utilize some form of active investor vehicle that is not considered a security, for example, investor financing agreements, joint ventures, initial incorporations with a small group of founding shareholders or active-investor limited liability companies).
Of course, for filmmakers, one of the principal disadvantages of getting money from investors who are actively involved on a regular basis helping to make important decisions (a good working definition of an active investor) often brings about a severe compromise in creative control and all of the headaches that go along with it. Compared with filmmaking by committee, including a few individuals who contribute lots of money to the deal, compliance with the securities laws may not be so bad after all.
An overly simplistic but quite useful way for the practitioner and the filmmakers to quickly recognize whether a securities offering is contemplated by a proposed film financing scheme is to ask the question: "Are one or more of the investors going to be passive, (i.e., not regularly involved in helping to make important decisions relating to the management of the project)?" If one or more passive investors are involved in the deal, you have, more than likely, created a security whether it is properly labeled or not. So, it is time to either review the securities laws or bring in a specialist to help with that narrow aspect of representing the independent feature film producer. Many informed entertainment law practitioners choose the latter alternative while still reserving all of the remaining more purely entertainment law transactional work relating to acquisition of literary rights, packaging and employment agreements, production documentation, serving as a producer's representative and negotiation of distribution deals for themselves.
The securities law specialist can then focus on advising the producer on choice of entity questions, legitimate techniques for expanding the available pool of prospective investors (and thereby helping to insure the success of the offering), preparation of the required disclosure document, proper use of the Internet, federal and state notice filings, preparation of financial projections and other matters more specifically associated with securities offerings. Such offerings in California, most commonly occur as limited partnership or passive-investor limited liability company offerings.
Some of the information that either needs to be disclosed in film offerings or is typically presented with such offerings, includes the title of the screenplay, screenwriter name and biography, descriptive phrase regarding the film's genre, a screenplay synopsis, production schedule and shooting locations, box office comparables, name of the investment vehicle (entity), the entity's address and phone, name of the management entity or individual(s), narrative bios and screen credits for all key people committed to the project; total amount of the offering (including offering expenses), number of investment units and cost of each unit, revenue sharing ratio as between the producer/management group and investors, subscription agreements, along with a budget topsheet or estimated use of proceeds (again, including offering expenses). Some of this information is best developed in consultation with the securities attorney.With this sort of information regarding the film project and the offering, an experienced securities attorney can generally produce a first draft of the disclosure document in short order and that creates a good working document on which the team can focus. Quite, often an independent producer and associates can be on the street selling a feature film private placement offering within two to three weeks of the start of the process, if all goes well.