Independent Film Private Placement Memorandums & SEC Regulation D
Raising capital to produce a film represents one of the greatest challenges even an experienced filmmaker will face. There are of course negotiations with investors. And the offering which generally consists of a film private placement memorandum. As well as the proposed operating agreement. Which must be established in order for the investor to assume potential risk of investing in your film. Then of course you have to determine whether or not the investor is actually “qualified” to invest in your production.
On top of all that, many filmmakers are surprised to find out that they don’t have to register their offering with the SEC under certain circumstances which are clearly laid out under SEC Regulation D.
Complying with all of the federal and state requirements involved in introducing shares of your film business to investors is not just a matter of “hoping” that you’ve done everything correctly. It’s an absolute must!
Misrepresentation, failure to register with the SEC in the event that such federal registration was in fact required, or otherwise making a mistake.
As you’re navigating the independent film, private placement memorandum documentation and SEC Regulation D requirements could result in more than just a problem. You could go to jail!
Team Beverly Boy’s Recommendation
At Beverly Boy Productions, we realize how stressful it can be for an independent filmmaker to navigate the typical film private placement memorandum and the associated rules regarding offering stock shares to investors.
That’s why we recommend any aspiring filmmaker first consult with a professional production company like Team Beverly Boy or a private entertainment attorney.
Someone that knows how this process works prior to ever moving forward with the raising of capital. Especially through film investments or the sale of corporate shares.
Film Private Placement Memorandum Basics
To help you understand the film private placement memorandum and how securities law works. It makes most sense to explain some key phrases that you must understand in navigating this process.
They are:
- Issuer – as a filmmaker that has formed an LLC for the movie your producing, the company that you formed is the “Issuer.”
- Securities – these are the stocks or other kinds of debts that might be offered in exchange for investment capital.
- Registration – this is the required process of letting the Securities and Exchange Commission (SEC) know that you (the issuer) will be offering stocks (securities) to investors.
- Offering – this is the public, or private, release of stocks or other securities for sale to investors.
Passive Investors
While there are many different options that the filmmaker can approach in raising capital for your production. Issuing a film private placement memorandum allows your film’s LLC to sell shares to passive investors. Who actually have no role in the production of your film.
Why is a Film Private Placement Memorandum Important?
You might be wondering. If the film company (usually an LLC that is formed at the start of the plan to produce an independent film) is owned by me…Why would I need to take this added step of issuing a Private Placement Memorandum (PPM) just to raise money through investors?
The answer is, somewhat, simple. A PPM acts similar to a business plan. And contains a lot of incredibly important information. That will help investors decide whether or not investing in your film is truly something that they want to (or should) do.
Like Insurance
The film private placement memorandum effectively acts like insurance. In the sense that, when carefully and accurately prepared to include vital information regarding all of the potential risks involved in the investment.
Including the potential risk of not finding a distributor for the film once it’s ready. Or the risk of the film never fully achieving commercial success (profit).
Investors will have trouble claiming that they were not properly warned of the potential risks involved in their decision to invest in your film.
The Consequences Without
In short, without a PPM there’s a risk. One that the offeror (you/the LLC) could be held liable for misrepresentation or the omission of material facts.
Things that investors could have otherwise used in the making of a secure financial decision. In other words, it covers you’re a** should things go wrong.
Film Private Placement Memorandum and SEC Regulation D
In a typical securities exchange or the typical selling of stock. A business must have all of its financial documents and records made publicly available for investors to see and review. In advance of their investment into the company.
The availability of such documents is made through a process called registration. Which involves the business (in this case the film LLC) registering with the SEC. Making all such documentation and financial records readily available to the public for review.
Keeping Records Private
When a film private placement memorandum is issued, SEC Regulation D exemptions allow companies to keep their financial records private. While also exempting them from registering with the SEC.
What this does is it allows for the business to disclose important financials through the PPM. So that investors can still make educated decisions on their investments. Without the business disclosing these details to the general public.
Prove Your Worth
The PPM will prove your worth to investors. And should include things like cast BIOs, crew details, the Director’s Statement. As well as a Script Synopsis in addition to the financial disclosure.
The idea is to pique the interest of your investors with the PPM. But you absolutely should not overpromise! The PPM is a legal document. Which will likely be prepared in combination with you and your Entertainment Lawyer.
Under SEC Regulation D, you’ll have several potential options for exemption from registration.
The most common, and frequently used exemptions that apply to the financing of motion pictures include:
- Rule 504 Offerings – exempting registration for companies that offer and sell up to $1M of securities. Within a 12-month period.
- Rule 505 Offerings – exempting registration for companies that offer and sell up to $5M of securities. Within a 12-month period.
- Rule 506 Offerings – exempting registration for companies that wish to raise unlimited amounts of capital through private solicitation as no public solicitation or advertising may occur. Additional rules apply.
In Summation
As you can see, there are many considerations that must be made in advance of any decision to offer securities for sale. In an effort to raise capital for a film project.
As with other legal matters, when it comes to a film private placement memorandum and the registration exemptions that are afforded to film business LLC owners and other corporations under SEC Regulation D.
At Beverly Boy Productions we recommend you work closely with an entertainment lawyer prior to making any decisions on capital financing and the interactions which take place between your film business and potential investors.
While there are many potential safe harbors, exemptions, and other helpful scenarios in place for filmmakers, only qualified legal counsel will truly understand the extent to which these apply to your unique situation.
