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This story first appeared in the June 5 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
The SEC has passed regulations implementing a streamlined securities registration process referred to as “Reg A+,” and it will change the landscape for film financing. These rules permit investment offerings (including for films) to the general public beginning June 19 as long as the following requirements are met:
? The offering cannot exceed $50 million within a 12-month period.
? The investors cannot invest more than 10 percent of the greater of (a) their annual income or (b) their net worth (excluding their home).
? The company making the offering (the “issuer”) has to complete a lengthy document containing detailed information in a format required by the SEC (“Form 1-A”). This document then has to be submitted and approved by the SEC before accepting any investors.
? The individuals involved in the offering (the “promoters”) cannot have been found guilty by a court or administrative agency of violation of securities or certain other laws.
? The offering material must accurately state all material facts.
? The issuer must file audited financials with the Form 1-A and must file follow-up reporting to the SEC with audited financial statements for at least one year (and annually if it has more than 300 investors).
? The promoters cannot directly sell their own interests in the issuer in excess of the lesser of (a) 30 percent of the offering or (b) $15 million.
? The issuer must use a registered transfer agent to record ownership and transfers by investors.
? Most importantly, the issuer does not have to comply with state securities laws (other than filing fees), which is a huge advantage compared to the impossible aggravation of having to comply with myriad conflicting state securities laws.
As long as these requirements are met, the issuer is allowed to undertake the following activities:
? The issuer is permitted to advertise the offering, including using social media.
? The issuer is allowed to “test the waters” by sending out general marketing materials as long as it doesn’t accept any investors before delivering the SEC-approved Form 1-A.
? The issuer can accept investment from all investors, not just “accredited investors” (meeting certain net worth requirements), and with no limit on the number of investors.
? The issuer can raise investments on a crowdfunding website. For example, IndieCrowdFunder.com provides all the required forms and handles filing them with the SEC as well.
Reg A+ should revolutionize crowdfunding. Until now, the public has been giving away millions of dollars to startup companies on sites like Kickstarter, and some of these startup companies have gone on to sell for billions, with no reward to the initial public funders. It had been difficult for the startup companies to issue equity in exchange for this funding because of the restraints of securities laws, and the fact that the public was funding these companies with nothing in return made a mockery of those laws, since it is hard to make a worse investment than just giving money away for free (or even for a Veronica Mars T-shirt). Now the public will have a choice of either giving money away for free or giving the same money in exchange for some ownership (with the same usual risks of investment). Which do you think they will choose?
Reg A+ can work for the independent film companies, but it especially could be used by the studios since they more easily can afford the cost of the offerings and they will be able to replicate the offerings by raising up to $50 million for each film, and probably with a lower distribution fee and better terms for the studios than a slate financing transaction with one sophisticated party.
Perhaps more important, by permitting the public to invest in upcoming films, the studios would create a groundswell of public interest in the films by a large number of people with a vested interest in their success.
Schuyler Moore is a finance attorney at Stroock & Stroock & Lavan.
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