Question for FilmTVLaw.com:
I’m raising money for a movie and one of the executive producers said that if we are raising money under Regulation D that we don’t need to file anything anymore because it is under the Reg. D exemption. I didn’t think that sounded right but he sent me this link: sec.gov /fast-answers/answers-regdhtm.html. Is this too good to be true?
Answer by Brandon Blake, Entertainment Lawyer:
I am happy you asked this question because I have been getting hundreds of questions about it and I hope this article will answer a lot of film and television producers’ questions. If you have not yet, please take a look at my library of entertainment industry articles at https://filmtvlaw.com/entertainment-lawyer-qa where I answer questions twice a month for clients and friends of the firm.
REGISTRATION OF SECURITIES
This all started with how Google links to part of a question and answer on the SEC’s own website. When I saw it online, I confess I was confused at first as well, even though I have practiced securities law for 19 years.
Here is the excerpt as it appears on Google:
What is a Regulation D exemption?
Regulation D Offerings. ... Regulation D under the Securities Act provides a number of exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the SEC. Dec 2, 2009
sec.gov › fast-answers › answers-regdhtm
At first glance it seems conclusive. “Some companies” can offer and sell securities without a registration, and it is all based on Regulation D. One thing to notice is the “…” in the middle of the Google excerpt. That indicates that Google has edited and excerpted this from another source, in this case, from the SEC website.
I’m not surprised that a lot of film and television producers have been confused by this statement. However, the key to understanding it involves knowing a little more about securities laws.
For a securities lawyer like me, the word “registration” does not mean what it usually means in casual conversation. In SEC-lingo “Registration” means the same thing as “IPO.” The SEC usually deals with really big companies that are raising billions of dollars. Companies that want to “go public” or conduct an “IPO” are required to “Register” their securities with the SEC.
When Facebook and Google sell securities, the SEC works with them directly, something like an IRS audit, making sure that the offering is being conducted according to all of the rules and regulations in place in the United States to govern an IPO.
This process generally costs several million dollars. Just to repeat that, “Registration” with the SEC will cost more than $1,000,000, because it is so much legal work to comply with all of the requirements, including filing the IPO in all 50 states.
For companies like Facebook and Google, a few million dollars in legal fees is like a rounding error and represents an insignificant percentage of the funds being raised. But for a film or television producer who wants to raise five million dollars, paying 20% of those funds for Registration doesn’t make any sense.
FILING FOR EXEMPTION
So, the SEC enacted Regulation D in 1982 to create a simplified way of filing an offering with the SEC of smaller amounts of money. It is true that an offering filed pursuant to Regulation D is “exempt” from Registration, meaning that you don’t have to pay millions of dollars on an IPO that will be filed in all 50 states.
However, that does not mean that there is nothing to do to file a company for exemption under Regulation D. In fact, the very link provided by Google leads to the following discussion on the SEC.gov website:
Companies that comply with the requirements of Regulation D do not have to register their offering of securities with the SEC, but they must file what’s known as a "Form D" electronically with the SEC after they first sell their securities.
And the SEC website continues:
Even if a company takes advantage of an exemption from registration, a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements.
You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has received notice of the offering.
In other words, there is still a lot of work to do when you are filing an “Exempt” offering. As the SEC states above, that work is broken down generally into 1) Filing the SEC Reg D. electronically, 2) Providing investors with required disclosures and disclaimers to avoid securities fraud charges, and 3) Complying with state law requirements to file your offering.
The work required to comply with SEC Regulation D makes up what is called an “Exempt Offering”. Preparing this material includes a PPM and other investor disclosures and disclaimers. While it is a lot less work that Registering your offering, it still is a complicated process.
KEEPING INVESTORS HAPPY
All this work is basically done to keep investors happy. Investors want to know what producers are going to do with the money, what is expected of them, what is expected of the producer, and what they can do if the film or television project ends up not making money.
If done correctly, complying with securities laws answers a lot of investor questions and provides a framework for how to compensate them if there are profits, and how to let them take tax deductions if there are losses.
Another benefit of filing for exemption is that it will allow your investors to take advantage of the Tax Cuts and Jobs Act tax deductions that are available to support film and television productions. This is a great benefit that you can provide to your investors by properly setting up a securities offering.
And the cost of not complying is first, securities fraud on both the federal and state level, and second, the investors will have the right of rescission, meaning that the investors will have the right to get back their money, even years after the movie was produced. When nothing at all is done to inform investors about the terms of the investment, ultimately the FBI can get involved, and their have been recent cases of the FBI arresting producers involved with what many filmmakers feel is “normal” business practice, meaning doing nothing more than filing an LLC when raising investor funds.
Please feel free to contact our firm about setting up a securities offering for your film or television project. As with all complex entertainment matters, please seek experienced entertainment legal counsel before making legal and financial decisions. This article is for informational purposes only and does not represent legal, accounting or tax advice. Do not act on this article without hiring legal representation.
- By Brandon Blake, Entertainment Lawyer