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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?

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Why people invest in entertainment

Every week, I speak with producers developing their film or theatrical projects who struggle with the big challenge: finding the financing. In many cases, they've come to me as an entertainment lawyer, thinking I have the magic solution. Sadly, I don't. In fact, most film and theatrical attorneys steer clear of helping clients find the money, focusing instead on the deal structures needed to lock-in the financing, once the funding source is identified.

As often as not, these folks are looking for the bulk of the project's funding to come from private investment. But, these producers frequently miss the mark when pitching their project to prospective investors.

In my two decades of experience bridging the gap between the creative and business sides of the entertainment industry, I've learned a thing or two about what really drives investment in entertainment.

Investors put their money into entertainment product for any number of reasons. Often among the least important of these, it turns out, is the profit motivation. Sure, it's of interest, and it would be very nice if the investment generated a meaningful return, but that is rarely the big motivator, In this article, we'll explore some of the other reasons behind the decision to invest in a film, play or musical.

Friends/Family Support for the filmmaker or others involved in the project

  • Often, the first place producers find money for their projects comes from their immediate family, and their friends. Who else, after all, has a greater interest in supporting a budding filmmaker or theatrical producer's career?
  • Sometimes, the investor backs a project for the opportunity it presents to a family member to appear in or work on the project.
  • Occasionally, the writer or director of the picture will contribute to the financing in order to advance his or her own career
  • As cliche' as it sounds, it's not at all uncommon for a financier to attach ‘strings' to his money, requiring a role for a spouse, girlfriend, or child as a condition on the investment. Sometimes, the financier actually expects the role for him- or herself.

Breaking in

  • Some people back projects because doing so offers an opportunity to “learn the ropes” in anticipation of a deeper involvement in future projects.

Social Status value of association with the project

  • Investors in film and theatre projects may become involved simply out of an attraction to the glamour of the business. The opportunity to say he or she was part of the production can be a powerful motivator.
  • Likewise, the opportunity to rub elbows with the cast and crew, perhaps even visiting the set, and certainly attending premieres and festival screenings is often a driving force behind the decision to invest.

Social and Community Consciousness

  • Some investors select projects based on the topic or message communicated by the material. Advancing a particular social cause through entertainment is a very worthwhile endeavor.
  • Sometimes, the motivation to invest comes from the desire to provide economic stimulus to the community where the project will be produced. Film and theatre productions provide jobs, attract audiences to patronize nearby businesses, and generally create a “buzz” around a community.

Boredom

  • Sometimes investors choose to put their money into entertainment out of sheer boredom. After all, chatting over cocktails about your investment in ordinary businesses is far less interesting and stimulating than engaging in a discussion about a movie, theatre or other entertainment property, and how you'll benefit if it's a success.

Conclusion

People are complicated. While it might be nice to think that investors make their decisions about where to allocate their assets on the basis of sound, rational thinking, the mere fact that anyone invests in theatre or film proves that there are other factors at work. Playing to a prospective financier's other motivations is important to securing financing for your next project.

Need help developing your strategy to attract investors to your project?

Sign up for the next Film Finance Boot Camp, an all day intensive designed to get your financing plan organized, and ready to pitch to your prospects.

Update on status of Jobs Act revisions to Regulation D, Rule 506 securities offerings

Raising capital

Last April, Congress passed, and President Obama signed into law, the JOBS Act.  One important component of that act loosened restrictions on the way film and theatre producers companies can obtain financing through private offerings under Rule 506.  This has been the preferred approach to independent financing for films and theatre projects for some time, largely due to simplified State “Blue Sky” procedures.  Now, things are getting even better for those seeking investment under this system.

The JOBS Act requires the SEC to implement rule changes to allow  previously prohibited general solicitation (i.e., public advertising) of offerings, provided the offering is made only to Accredited Investors (investors who satisfy certain wealth, income and investment sophistication standards).

These changes represent the most significant change to the Regulation D private placement  system in several years.  This will result in far more effective promotion of Regulation D 506 offerings to investors.  Under the new rules, issuers can create what is essentially a quasi-public offering allowing general advertising and solicitation,  while  keeping the benefits of a true private placement.  

The SEC is expected to finalize the rule changes within the next 90 days.  For now, I'm counseling clients to treat their offerings as  “Rule 506 Accredited Investor Only”  to  allow  us to use the new 506c exemption  once it is available.

If you're considering financing a film or theatre project, it makes sense to plan for the implementation of the new rules, and if appropriate, take advantage of the option for general solicitation.  But, before doing so, it's important to consult with a qualified, experienced entertainment lawyer.

If you're planning a film project in 2013, you won't want to miss our Film Finance Bootcamp. Enrollment is limited, and opens again in January. So, sign up at http://filmfinancebootcamp.com, and we'll let you know as soon as spots are available.

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