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Category Archives: Film Finance

How (and why) to set up a special purpose production entity for your film or show

In the fields of independent film and theatre, the use of Special Purpose Entities is very common. This article explains what these are, why they're used, and how to get started.

What is a Special Purpose Entity (or Vehicle)?

An SPE is a legal entity (usually a limited liability company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. In the case of film and theatre projects, the SPE would be created to produce a single film or production.

In a common scenario, the producer of the company may have several projects in various stages of production at any given time. This producer or company would establish a single, umbrella company (a “holding company”) which would then create individual SPE's (subsidiaries, essentially) for each project. This allows projects to be developed as wholly-owned or Joint-ventures.

Why form a Special Purpose Entity?

Using a Special Purpose Entity for each project carries a number of benefits. First, it permits clarity as to administration, control, and ownership of the company. The Company's Bylaws, Operating Agreement or Limited Partnership Agreement can identify the ownership structure, voting rights, and other rights of the various owners, and afford important protections for investors and the hands-on producers as well.

Secondly, the SPE provides the structure through which to sell equity investment. Depending in the entity type, investors may purchase shares of corporate stock, limited partnership interests, or LLC membership interests.

Next, the use of the SPE allows for the separation of assets of the particular project from unrelated ones. This keeps accounting much simpler, and prevents the cross-Collateralization of revenues and expenses from multiple projects.

Finally, and possibly most importantly, the use of Special Purpose Entities affords important protection against liability. Owners of Corporations, LLCs and Limited Partnerships are protected from the company's exposure to claims, and each shareholder, member or partner (as the case may be) has his or her risk of loss limited only to the amount invested.

How to form an SPE/SPV

Determine the Entity Type

There are a number of possible entity types available, but the specifics of each, and the factors to be considered in the selection of the appropriate form are too numerous to be addressed in an article of this type. This is not a decision to be taken lightly, as it can have long-lasting and wide-ranging consequences. Seek professional advice from financial, tax and legal advisers.

Select the Jurisdiction

Where to form your company is also an important consideration. While many companies are formed in the home-state of the founders, many others opt to form in distant states to gain advantages offered there, or avoid unnecessary costs at home. Many companies elect to be organized under Delaware's law, which offers a number of provisions that favor the mangement of the company, while still protecting those who invest.

But ultimately, the size and scope of the project in question may influence this decision. Since companies will have to “qualify” as so-called “foreign” companies in all states where they do business, the cost and tax savings state-to-state may be illusory.

Prepare & File the Papers

Forming an Entity to operate as a SPE seems deceptively simple. In most jurisdictions, it's a simple matter of completing a form (often called “Articles” or “Certificate” of Organization), or preparing a document outlining a few basics, name, address, number of shares/units available, etc. But in this simplicity lie traps for the unwary. Inclusion of certain provisions can alter the application of certain “default” state-law provisions, or change the rights and obligations of officers, directors and shareholder/members.

Depending on the type of organization and the jurisdiction, there may be other governing documents that need to be filed with the government.

Draft governing Documents

Next, the company will need a set of Bylaws or an Operating Agreement to set forth the specifics of how the company will operate, be managed, and financed. While default rules might be suitable for your business, it's likely that variations will be desirable.

Once the company is formed, it becomes a separate “person” in the eyes of the government, particularly for tax purposes. The company will need to obtain a tax-identification number, and make certain tax-elections that will influence how the business will pay its taxes, as well as how (and when) the owners will be realize their share(s) of company profits and losses.

Still another consideration is whether the company, if held by a very small number of stakeholders, will be subject to any voting agreements, or a buy-sell agreement governing how, when, and to whom an owner may sell his or her interest in the company.

Obviously, custom-tailored professional advice is called for in making these determinations. It is unwise and risky to rely on hearsay, popular belief, and out-of-context research in deciding on such matters.

When to form an SPV

Ideally, the SPV should exist before any assets are acquired, liabilities incurred, or investment accepted. In practice, this is quite difficult to achieve, but it certainly makes sense to form the entity before taking in investors' funds. Assets can be transferred into the company by the founders (often called “promoters”), and liabilities can be addressed through insurance policies and indemnity agreements. But with only a few exceptions, investments must be made in an existing company.

Should I use an online filing bureau to start my SPV?

“Would you stick your head in a machine that promises to give you a perfect haircut?”

Well, maybe if your head was the exact same size and shape as everyone else… and your hair is the same texture, length, moisture content, and so on, and you want the same basic haircut as everyone else who uses this machine gets.. then yes, you might. But, you know that you're not exactly like every other person who comes along… so you're going to go to a professional. A trained hairstylist who can take a look at you, help you figure out what kind of cut is best, and then do it so you look great.

Well, your business isn't the same as every other one. Heck, one SPV will vary in some ways from the next. You really need more than a plain-vanilla set up. Especially because you're going to be conducting a round of financing to fund your project, right? So the “standard” operating agreement isn't going to cover the bases properly.

And, let's face it, producing films, plays and musicals is not like making widgets.. A cookie-cutter approach to setting up the company is not the way to go.

A bad haircut will grow out if it's messed up. A badly structured company will be around a lot longer, and give you a whole lot more grief.

You want the people that are helping you with the production to be tuned in to the company structure and financing setup… So they should be the ones putting together the SPE as well. It'll save you time, hassle and money. Plus, there is the added advantage of one-stop shopping, so you have one less thing to juggle.


So, if you are financing a film, play, musical or other media project by taking in investment, loans or Presales, setting up a Special Purpose Entity is just the first step on the road to getting things up and running. Consult your lawyer about what type of entity is best for your next project.


Is Equity Crowdfunding a game changer?

Is Equity Crowdfunding a Game Changer?

Equity Crowdfunding is finally a reality. Almost.

In a long-awaited move, on October 30, 2015 the Securities Exchange Commission (SEC) finally adopted a set of rules mandated by the 2012 JOBS act. These rules are designed to facilitate small businesses with capital formation through the use of a crowdfunding approach to sell securities. The rules are designed also to provide investors with additional protections.

The new rules are slated to go into effect around May1, 2016.

What Equity Crowdfunding is.

Crowdfunding is an evolving method of raising capital that has been used to raise funds through the internet for a wide variety of projects, including quite a few arts, media, and entertainment productions. Historically, these fundraising activities operated either under nonprofit donation-based models, or gift-based transactions, with the funders contributing without any expectation of seeing anything substantial in return.

Title III of the JOBS Act created a federal exemption under the Securities Law to allow companies to offer and sell securities through crowdfunding portals.

Under the new rules, individuals can invest in securities-based crowdfunding transactions, up to certain limits on investment. The limits are tied mostly to the investor's financial position. There are also limits on the amounts that can be raised using the new system and some fairly broad disclosure requirements on companies selling such securities. Finally the rules establish, a regulatory framework for the establishment of funding portals and broker-dealers involved in the transactions.

How does Equity Crowdfunding work?

Unfortunately, this new crowdfunding mechanism isn't likely to be a real game-changer for entertainment productions with budgets over about $1 MIllion. That's the annual limit on crowdfunding. Investors are also limited by how much they can invest through crowdfunding ($100,000 in the aggregate). For investors with a net worth or annual income of $100,000 or less, they can invest up to $2,000 or 5% of net worth / annual income (whichever is less). For investors having more financial resources (and presumably acumen), the limit is 10%.

So, crowdfunding isn't for big projects or big investors. It's intended for small offerings looking to large numbers of regular people who'd like to invest in and support them.

Will it work for you?

Like any crowdfunding project (equity or otherwise), much depends on the company's ability to reach a very large number of prospective backers, and convince them that the project is worthy of their support.

So, if you've got a small project (maybe a developmental production of a play, or a micro-budget film) and you've got a big email or social-media list of friends, fans, and supporters, equity crowdfunding might be worth a try. For larger projects, crowdfunding might be a useful tool in raising initial “seed” capital (“front money”) from a small handful of backers. Time will tell.

Beyond that, however, I think most independent films and theatre projects over $1,000,000 will still need to raise capital under the prior approaches of the “private offering” exemptions under Regulation D, Rule 506, and/or Regulation A.

So, for now, I'm not all that excited. When the new rules go into effect, and have been tested a bit, maybe I'll change my tune. Meanwhile, I wouldn't counsel anyone to wait for the new rules to go into effect. If you've got a project you're developing and financing, plan to fund it through the more traditional channels. Equity Crowdfunding isn't going to be a big game changer.

Transitioning from Kickstarting to Company Starting

The differences between contribution crowdfunding and equity funding

Sites like Kickstarter and Indiegogo have been enormously successful in popularizing the new trend in fundraising, crowdfunding. As of the writing of this post, Kickstarter boasts nearly 11 million pledges on over 100,000 different projects. For those looking to create an independent film, theater production, video game, or other creative project, sites like this have opened up new opportunities for reaching out to the public to raise money.

Many of these sites operate on a contribution crowdfunding model in order to avoid the necessity of dealing with securities regulation issues. However, new rules are going into effect on Sept. 23 that open the door to a different type of funding for these projects. This alternate method, which uses a new securities law exemption, allows artists and creators to use the power and reach of the Internet to raise money for their company as a whole, rather than for a specific project.

The Kickstarter “contribution” crowdfunding model

The method of crowdfunding currently used by sites like Kickstarter and Indiegogo is known as contribution crowdfunding. Money is raised when a creator advertises a specific project that they wish to produce. Backers then pledge money in return for the promise of receiving some item or reward upon completion of the project. This could be a copy of a videogame, a movie, or some other tangible item. These pledges are usually organized into different tiers, with each higher tier of funding getting a better reward in exchange. For example, some high tier rewards include being in the cast of a movie or lunch with the project creators.

Traditional equity funding methods

In contrast to the contribution model, an equity funding model raises money by selling equity shares in a project or company. There is no expectation of a product reward; the part ownership of the new project and potential growth of the investment is the reward under this model. Typically, raising money in this way involves strict federal and state securities laws. These laws require expensive and time-consuming registration process, making them difficult for new businesses to take advantage of.

A popular way around this registration requirement that many businesses rely on is known as a Rule 506 exemption. This exemption allows an entrepreneur to raise an unlimited amount of money without registering the securities, as long as shares are only sold to a specific class of investor and the opportunity is not generally advertised to the public. There has to be a pre-existing relationship between the business owner and the investors.

Fundraising under the newly passed “general solicitation” rules

New rules, mandated by the JOBS Act and set to go effective on Sept. 23, now allow these equity investment opportunities to be advertised to the public. Called the Rule 506(c) exemption, it permits the use of the Internet, social media, and other mass media advertising to get the word out on new projects looking for funding. As long as the investors meet the net worth or income requirements, the legal hoops to jump through are fewer than they would be for a registered investment offering. With a greater pool of potential investors found through the power of general solicitation and advertising, getting the necessary funding for a creative project could be easier than ever.

Before you start advertising your investment opportunity

Even though the regulations are less stringent under the new Rule 506(c) exemption, there are still very specific filing requirements with the SEC. The penalties for not filing these properly can be quite harsh, and prevent future offerings under the exemption. An attorney who has experience with raising funds under this exemption can help.

For more information on this new securities exemption that can open up brand new fundraising opportunities, check out this free report.

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