By John W. Cones
As we have noted in previous articles, if an independent filmmaker is seeking to raise money from passive investors, he or she is selling a security, thus in order to make the offering legitimate and prevent a cease and desist order from being issued by a securities regulator, it is important to comply with the federal and state securities laws. Usually, independent film offerings are structured as offerings of units in a manager-managed limited liability company (LLC) or limited partnership (LP), and sometimes, though less often, as corporate stock offerings.
These securities may be sold in three ways: (1) broker/dealer sales, (2) finder sales or (3) issuer sales. Unfortunately, broker/dealers are typically not that interested in raising money for independent films. Such investments are considered too risky. As discussed in my earlier article re finder sales, the activities of finders are limited to merely introducing the buyer and seller (i.e., the investor and the film producer for purposes of this article), and in private placements (i.e., Regulation D, Rule 505 or 506 offerings) that finder introduction must occur prior to the start of the offering. Thus that leaves us with the third option: issuer sales.
The SEC has a rule, commonly referred to as the “issuer exemption” or “issuer sales rule” (Rule 3a4-1 of the Securities Exchange Act of 1934), which sets out the parameters under which someone associated with the issuer of a security would be able to sell the securities for the issuer without being considered to be a broker and thus required to register as a broker. In other words, certain persons associated with an issuer (i.e., the film producer seeking to raise money from passive investors for purposes of this article) may help to raise money on behalf of the producer/issuer without having to register as a broker. The term associated person of an issuer means any natural person who is a partner, officer, director or employee of that issuer. Again, the securities issuer for purposes of this discussion is the independent film production company, or the actual investment vehicle (i.e., the LLC, LP or existing corporation).
Here is a summary of those parameters:
1. The associated person must not be statutorily disqualified – meaning he or she has not engaged in certain prohibited acts in the past five years (e.g., mail fraud). See section 3(a)(39) of the ‘34 Act for a more complete listing of the prohibited acts.
2. The associated person must not be compensated in connection with his or her participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities. In other words, no transaction-related remuneration is allowed.

3. The associated person is not at the time of his or her participation an associated person of a broker or dealer.
4. The associated person primarily performs, or is intended primarily to perform at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection with transactions in securities.

5. The associated person was not a broker or dealer, or an associated person of a broker or dealer, within the preceding 12 months.
6. The associated person does not participate in selling an offering of securities for any issuer more than once every 12 months.
Thus under current law, when independent film producers seek to raise money from private investors in a private placement context (e.g., Regulation D, Rules 505 or 506) and they need to enlarge the pool of prospective investors with whom they have a pre-existing relationship, such producers may be able to bring persons meeting the above requirements on board, and then rely on the pre-existing relationships of such persons for purposes of expanding the available pool of prospective investors.  Such an arrangement significantly increases the likelihood that the offering will be successful, and based on a experience, such an approach is more effective for the investor financing of independent films than either broker/dealer sales or finder sales.
But stay tuned! The “Final Report of the 2010 SEC Government-Business Forum on Small Business Capital Formation” (dated June 14, 2011), included a recommendation that the SEC should allow so-called “private placement brokers” to assist issuers in raising capital through private placements of their securities offered solely to “accredited investors” in amounts per issue of up to 10% of the investor’s net worth (excluding his or her primary residence), with full written disclosure of the broker’s compensation and any relationship that would require disclosure under Item 404 of Regulation S-K, in aggregate amounts of up to $20 million per issuer. As of this writing, the SEC has not yet acted on this recommendation.
John Cones, Attorney, Author, Lecturer
Copyright 2011 by John W. Cones