Since filmmaking is typically a business venture that seeks to generate revenues on a worldwide basis and an increasing percentage of such revenues for many films appear to be coming from the international markets as opposed to the domestic marketplace (U.S. and Canada), it is not uncommon for U.S. based filmmakers to seek out opportunities to raise money to develop, produce and/or distribute one or more motion pictures exclusively from investors who reside in other countries. In those instances where a security is being sold (e.g., when units in a limited partnership or manager-managed LLC are offered) such offerings may be conducted pursuant to the SEC’s Regulation S.
Regulation S allows U.S. issuers to sell securities to foreign investors without regard for the sophistication, number of purchasers or dollar amount of the offering. In addition, Regulation S permits issuers to advertise the offering offshore, an activity that may be prohibited in a Regulation D, private placement offering conducted under current law.
The SEC’s Regulation S is found in the Code of Federal Regulations (“CFR”) at 17 Code of Federal Regulations Sections 230.901 through 230.905. These regulations are also known as Rules 901 through 905. Regulation S provides another “safe harbor” to issuers of securities from the registration requirements of the 1933 Securities Act (similar to Regulation D), as long as the offer and sale of securities occurs exclusively “offshore”. In other words, so long as the issuer complies with the rules set out in Regulation S in making offers and selling securities overseas, the offering can be safely conducted without having to register the securities with the SEC.
Even though the phrase “offering materials” is mentioned, Regulation S does not specifically address disclosure issues (i.e., the information that must be provided to the investors in advance of their purchase). Presumably that’s because if the offering is otherwise properly conducted pursuant to the provisions of the regulation the SEC does not have jurisdiction over the offering. However, it is important to keep in mind that other countries, the countries where the offering’s investors reside, may have securities regulations of their own. So, to be safe, some inquiry ought to be made into what disclosure requirements, if any, exist in those subject countries. Unfortunately, that may be difficult and/or expensive to do.
In the alternative, it may be good practice to provide each investor with a disclosure document (i.e., a private placement offering memorandum) similar to the same PPM provided to investors in Regulation D, Rule 505 or 506 offerings, just to cover your bases with respect to the regulators in those other countries. At minimum, the SEC’s anti-fraud rule standard for disclosure with which to voluntarily comply. That standard requires the disclosure of all material facts relating to the proposed transaction, that no material facts be omitted and everything stated in the disclosure document be set out in a manner that is not misleading in a material way. In addition, you will want your securities attorney to include language in the subscription agreement to be signed by the foreign investors certifying that they have inquired and are in compliance with the rules of their own countries regarding investment in a U.S. securities offering. The two above suggestions, however, are not a substitute for knowing that the offering is in compliance with whatever laws exist in the foreign country. And, U.S. issuers must be forewarned that non-compliance with the laws of another country in the sale of securities to their residents can, in some cases, subject the U.S. issuer to severe penalties including arrest and incarceration if you actually visit the other country.
An issuer that wants to conduct a Regulation S offering through an Internet website may do so without putting the exemption at risk by including prominent statements on the web pages indicating that the offer is directed only to persons outside the U.S. and by taking steps to preclude sales to what are defined as “U.S. Persons”. U.S. Persons are defined as U.S. residents or citizens, U.S. companies and persons living in the U.S. regardless of nationality, or U.S. residents living abroad [Rule 902(k)].
No SEC filings are required for a private Regulation S offering.
Another important set of issues to consider before embarking on a Regulation S offering are the so-called homeland security issues. For example, certain individuals and countries identified by the federal government are prohibited from investing in U.S.-based entities. To see the list of such prohibited individuals and/or countries go online to:
An issuer of securities to foreign investors will be held to a standard of strict liability and failure to comply may subject the issuer to civil and/or criminal penalties. In order to avoid the possibility that such penalties will be imposed, the issuer must determine whether its prospective investors are prohibited from investing in U.S. companies.
In addition, the issuer must determine whether the proposed investment is the result of pooled funds, in which case, the issuer is obligated to determine whether the individual investors in the pooled fund are prohibited investors. In either situation, the issuer must not only verify such information but keep written records on hand to demonstrate compliance.
Any issuer seeking to conduct such an offering should seek out securities counsel familiar with Regulation S and carefully review the text of the law which is available online at the SEC’s website.