How not to use the internet to find investors for your film or theatre project.

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In recent weeks, I’ve begun to see more and more independent filmmakers and theatre producers using forums, chat rooms, and other internet-services to seek out investors for their projects. In most cases, these inquiries are couched in plain language: “Seeking investors for independent film” or similar.

Unfortunately for these producers, their use of the internet as a tool in identifying and securing the financing for their projects may actually serve as an impediment to their efforts, making the sometimes improbable chances of raising funds virtually impossible.

Projects financed through the use of funds contributed by investors must comply with myriad laws and regulations governing the manner in which the investment opportunity is communicated and the transaction completed. First among these laws is the 1934 Securities Act, which established the Securities Exchange Commission, and gave that agency authority to regulate the offer and sale of securities.

What is a “security”?

Generally speaking, any sale of an investment in a venture where the investor’s role is “passive”, in that he or she does not share meaningfully in the right to control the day-to-day operations of the venture, and/or does not share the risk of loss with those in control, is likely to be considered a security, subject to the rules and regulations of the SEC.


The Registration Requirement

The general rule is that every offering or sale of securities must be registered with the SEC unless there is an available exemption on which the issuer relies. Registration of securities is a time-consuming and often cost-prohibitive option for low-budget filmmakers and producers of theatrical plays and musicals.

Exemptions from Registration: Advertising not permitted.

Although there are several exemptions from registration available, those that are most commonly available to producers of entertainment arise under SEC Regulation D. Unfortunately, these exemptions are intended for private, limited offerings, rather than offers made to the general public. As such, the regulations prohibit the use of advertising in the offer and sale of the securities.

Internet postings seeking investors ARE advertisements.

Lawyers are in agreement that any communication put on the internet for the purpose of raising money via sales of securities WILL be considered an advertisement, and thus, renders the Regulation D exemptions inapplicable. Therefore, by posting in an internet forum, chat room or social networking site, producers often make things much harder for themselves.

Solutions

So, how can a producer effectively use the internet in her efforts to finance her project?

One possible solution is to work outside the securities realm. By this I don’t mean to skirt the law, but rather to ensure that the offering being made does not involve securities, but instead, an opportunity to become an “active” investor and participant in the production. Typically, this is done by posting or offering prospects the chance to review the business plan for the project, and the chance to join as a partner, co-venturer or founder of an initial incorporation for the purpose of producing the project.

This drastically limits the universe of likely financing partners, since by being “active”, the partner shares in the downside (liability) as well as the possible upside from the profitable project.

Another viable approach (if executed carefully), is to use the internet as a tool for developing and building relationships with people whom you may later approach on a personal, private basis with the investment opportunity. Care should be taken, however, that this relationship building is in fact more than merely window-dressing. The common interests of those involved must go beyond the project being financed. The internet in such situation isn’t involved in making the offer, but merely in networking with like-minded individuals.

Finally, there ARE some internet based organizations that focus on attracting “accredited” investors and building a pool or network of people interested in investing in entertainment projects. By engaging the services of such an organization, (which has a pre-existing relationship with pre-qualified investors), some producers have succeeded in securing financing.

Ultimately, however, the internet should be thought of as simply another medium for communication. It cannot be used in ways that older, more traditional communication methods would be prohibited. Before starting any campaign to raise funding for a film or theatre project, producers should consult with a qualified and experienced entertainment lawyer (like the author), as the pitfalls for noncompliance with securities regulations are onerous.

NOTE: This article addresses U.S. Law only. Securities laws vary from one country to the next, and from state-to-state within the U.S. This article is not a substitute for legal advice obtained from an experienced entertainment attorney you’ve hired to counsel and represent you.

15 Responses to How not to use the internet to find investors for your film or theatre project.

  1. Hello, Very good article.
    I have a question for you, can you support me to find investors in USA for a film project about a hero in century XIX, in Pacific War.
    If you can, please how much is your fee and how I can spend it??
    Regards
    Erich Astudillo

  2. I really loved your article, and had I not read this could have faced some penalties as I’m a new producer however did not take the time to educate myself in terms of the laws regarding solicitations of my projects.

    Can you recommend some books that would be helpful in educating myself. Clearly I should consult a lawyer, however I want to understand more before approaching one so that I may speak intelligently on the subject at hand and ask the right questions.

    Thank you.
    Christopher

  3. […] Unfortunately for these producers, their use of the internet as a tool in identifying and securing the financing for their projects may actually serve as an impediment to their efforts, making the sometimes improbable chances of raising funds virtually impossible. — Gordon P. Firemark | Read The Full Article […]

  4. I wonder how this legal situation applied to the recent Obama political campaign? My understanding is that people donated, rather than invested. Could you comment on the difference? I’d be very interested.

    My understanding of Australian securities law is that the situation is similar here to investment, strictly regulated with obligations on the part of the organisation to provide business plan and disclosure document under certain circumstances.

    However, I am still interested to know if there is a difference under the law between investing and donating.
    cheers

  5. Doesn’t an investor share in the downside as well? My experience in the movie industry has been that if they put money up, they want a say in how it’s spent. In fact, I don’t know of any investor that wouldn’t want this type of participation.

  6. Thanks for the advice Gordon – it was really useful. Do you know if the same applies in the UK?

    Thanks for your comment, Maria.

    The information I’ve given applies only to U.S. Securities law. Consult an experienced entertainment attorney in your jurisdiction for details about your country’s securities laws and regulations.

    -Gordon

  7. Most investors who contribute toward the budget of a film or play want assurances that they’ll enjoy “limited liability”, which means while they DO have a downside, it’s limited to the loss only of what they’ve actually invested in the project.

    By contrast, an “active” investor” (one who exercises any meaningful right of control over the business… such as casting, script approvals, etc.) will NOT enjoy this limited liability, and may be subject to the full amount of the production’s losses in the event of a business failure, injury, lawsuit, etc.

    Essentially, a “passive” investor trades the right to influence day-to-day business and artistic decisions for the protection of Federal and State securities laws, and the limited liability offered by the use of a securities transaction.

    Once the “passive” investor has reviewed the materials provided by the producer, and decided the venture is worthy of investment, his rights are limited to a share of the proceeds from the venture”

    Filmmakers and theatrical producers prefer this approach BECAUSE it limits the right of the investor to meddle in these artistic and business decisions.

  8. Donations to political campaigns are a completely different animal, covered by Campaign Finance regulations.

    Generally, donations are different from investment because the donor is not promised any participation in profits or other return on investment. Donations are often tax-deductible, and so are governed by provisions of State and federal tax laws, as well as other laws governing non profit organizations, etc.

    I’m not very well informed about Australian securities laws and regulations, so prefer not to speculate on that subject. If you are raising money in Australia for a film, consult an Australian securities lawyer for advice on the subject.

  9. It probably doesn’t violate SEC regulations, since it’s characterized as a donation. (Donors don’t expect a return of money from the project if it’s a success)… but, it MIGHT violate tax law or certain other laws that require donation solicitations to be registered with state and/or local government. (Such as in Los Angeles).

    It’d be wise to consult an entertainment lawyer / attorney before using such a scheme, to make sure it won’t cause you problems later on.

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