What is an “Accredited Investor”? Why you should care.

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 If you're setting up financing for your next film, theatre, or new media production, and you're planning to talk to potential investors, you need to know the rules.  Whenever a company sells investment opportunities, in which the investors will be ‘passive', not taking any meaningful role in the management of the business, the transaction involves the offering and sale of the company's securities.

Securities Registration and Exemptions

Under the Securities Act of 1933, a company that offers or sells its securities must either: (1) register the securities with the SEC, or; (2) conduct the transaction under an exemption from the registration requirements.

Since registration is a colossally time consuming and expensive process, it is best left to larger financing projects;  those in the tens- or hundreds-of millions of dollars, such as the IPO's we typically hear about and other transactions involving publicly-traded securities. Most low- and mid-budget motion pictures, plays, musicals and media productions simply can't afford the time or money involved with a registered, public securities offering.  So, the exemptions become important.

The Act provides companies with a number of exemptions.   The most commonly recommended by lawyers for entertainment projects  arise under the SEC's Regulation D.   For some of the exemptions, such as rules 505 and506 of a company may sell its securities to what are known as “accredited investors.”

What is an Accredited Investor?

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;
  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
  4. a director, executive officer, or general partner of the company selling the securities;
  5. a business in which all the equity owners are accredited investors;
  6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
  7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.

Why does it matter whether my prospective investor is Accredited?

Under some of the exemptions from securities registration, offerings may only be made to Accredited Investors.  Under others, there are strict limits to the number of non-accredited investors who may be approached (even if those approached don't ultimately invest).

 

So, producers raising investor financing typically prefer to approach only those who qualify as Accredited Investors, in order to keep the most advantageous exemptions available.

2 Responses to What is an “Accredited Investor”? Why you should care.

  1. (this message has been redacted a bit to remove specifics)

    Gordon, I read your piece on Accredited Investors with interest as it does enlighten me. We spoke last year prior to the premier of my musical comedy/drama ***, which had an artistically successful 10 performance run in October. I am now looking to re mount the show in an expanded format. [That previous] engagement was financed solely out of my pocket and obviously drained me. I need full financial backing to carry on. Could you matchmake me with interested parties for this purpose? A great deal of material is available to present to support the show.

    • Bill,

      Ordinarily, this kind of question isn’t really right for the “comments” on the blog, but your question is a common one, so I want to post a brief answer here.

      As a lawyer, it’s my role to document the deals my clients enter into.

      It’s not really proper for lawyers to act as a “Finders” or “matchmakers”. Were we to engage in this kind of thing, the potential for conflicts of interest and clouded judgment would be too high.

      The best way to identify investors for your project is to start with your immediate circles, and ask everyone “whom do you know who might be interested in learning more about this opportunity?”

      Expand the circles until you’ve got the folks you need. Theatre and Film investors tend to make their assessments based on the People, not the “materials”, so it’s important to build good relationships, and avoid the hard sell.

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