Re-Selling Units of a Private Film Offering
By John W. Cones
Independent producers seeking to raise funds to produce a motion picture and conducting a so-called exempt or private placement type offering in reliance on the SEC’s Regulation D, often are asked the question by their prospective investors: “Can I resell these LLC units to someone else?” This brief article seeks to answer that question.
Units in a manager-managed LLC or limited partnership offering are securities. If the offering is not registered with the SEC (i.e., a public offering – and such independent film offerings rarely are) then it must qualify for an available exemption from the registration requirement. The SEC’s Regulation D is the most commonly used exemption. Units sold pursuant to Regulation D are considered restricted securities (i.e., one of the conditions imposed on the use of the Regulation D exemption is that the units cannot be resold unless certain other conditions are met).
The SEC’s Rule 144 sets out five conditions under which such restricted securities can be resold. The final three of those five conditions as set out below only apply to affiliates of the issuer. Purchasers of securities who are not affiliates of the issuer need only comply with conditions (1) and (2). An affiliate of the issuer is a person in a control relationship with the issuer of the securities. In this sense, “control” means the power to direct the management and policies of the company in question, either through the ownership of voting securities, by contract or otherwise.
Conditions That Apply to Non-Affiliates:
(1) Holding Period – Unless the entity that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934, the investor must hold the securities for at least one (1) year (six months for the securities of reporting companies). The holding period begins when the securities were bought and fully paid for.
(2) Current Information – There must be adequate current information about the issuer of the securities before the sale can be made. As a practical matter, this means that the information provided to the original purchaser of the units (most likely in the form of a private placement offering memorandum – PPM), assuming it met whatever disclosure standard applicable to the original offering, needs to be brought current and made available for review by the this secondary investor before the sale is made.
Additional Conditions That Apply to Affiliates:
(3) Trading Volume -- If the original investor was an affiliate of the issuer, the number of equity securities he or she may sell during any three-month period after the one year term, cannot exceed the greater of 1% of the outstanding units sold.
(4) Ordinary Brokerage Transactions – If the original purchaser is an affiliate of the issuer, and the resale is to be made through a broker/dealer, such sales must be handled in all respects as routine trading transactions, and the broker may not receive more than a normal commission. Neither the individual re-seller nor the broker can solicit orders to buy these restricted securities.
(5) Notice of Proposed Sale – If the original purchaser is an affiliate, such person must file a notice with the SEC on Form 144 if the sale involves more than 5,000 units or the aggregate dollar amount is greater than $50,000 in any three-month period. The sale must take place within three months of filing the Form and, if the securities have not been sold, an amended notice must be filed.
In situations where the issuer provides some form of certificate to the original investor with a legend stating that the securities are restricted, the legend has to be removed before re-selling the security.
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Note: All prices in US Dollars