31 March 2006 - Present
production company
Posted on March 31, 2006 at 10:30:27 AM by Scott
John:
I am producing a $300k feature and soon to meet with an entertainment attorney
to prepare a PPM.
You mentioned in a previous post that in a manager-managed LLC the name of the
film is generally used in the name of the LLC and the manager is the production
company.
If there is no production company on record, would you recommend setting that
up at the same time or is it imperative to establish the company before the
LLC?
Also, the company is composed of just two individuals. We intend to make more
than the one film for which this LLC is being created. What company formation
would you say then is ideal?
One extra question if I may: You also once mentioned "the typical cost of
a securities offering?" What might that be?
Many thanks. Your site is outstading.
Scott
Re(1): production company
Posted on March 31, 2006 at 11:03:14 AM by John Cones
Scott:
In the just prior post, I listed a number of options for your production
company: fictitious name company (dba, general partnership, corporation (S corp
or regular "C" corp) or the member-managed LLC. You should discuss
the advantages and disadvantates of each with your attorney, considering your
current situation and future goals. Often, when the producer is using a
manager-managed LLC as the investment vehicle for raising film production or
development monies from a large group of passive investors, the fictitious name
company is adequate, because once the LLC is formed, it offers limited
liability protection to both the LLC investors and the manager. Then, later,
after your production company has made some money you may want to consider the other
options.
It doesn't sound like me to say there is a "typical cost" for
anything, much less a "securities offering", but if you are talking
about a Reg. D private placement for a $300,000 offering in just a few states,
it is possible to get that done for something in the $10,000 to $15,000 range
including legal fees, copying, binding and cover artwork, state notice filing
fees, creating the manager-managed LLC with the operating agreement and
marketing costs. A number of these costs could vary however, depending on the
choices you make.
Out of pocket expense could be substantially less, if the attorney is willing
to work on a flat fee basis and defer a portion of the fee to be paid out of
investor funds once the minimum is raised. In that situation, you might be able
to get by on as little as $7,500 up front and out of pocket during the course
of the offering (for all offering costs, not just legal fees).
Some attorneys charge more for their fees, some do not defer, some work on an
open ended hourly rate, and some do not include all of the above in a flat fee
arrangement. So you want to be clear on what you are getting.
You may also want to inquire as to whether the PPM will contain a federal tax
discussion, an attorney's tax opinion, an attorney's securities opinion, to
what extent will the attorney assist with the preparation of financial
projections and what role will the attorney play in the preparation and filing
of SEC and state notice filings?
You may also want to know whether the attorney has prepared a film offering
before and whether any of the attorney's film offerings have been successful.
John Cones
Approaching Investors
Posted on April 3, 2006 at 11:36:13 AM by RB
John,
This may be a confusing question but here it goes:
While a producer is preparing a PPM is it appropiate to approach potential
investors to pitch the project without a PPM at hand for signing to develop a
relationship and interest for the project?
This approach could be used only to pitch the project and discuss how it would
be financed (equity investment) but not to sell anything yet. This way one can
get gage the investor's interest on the project based on the script, a
marketing DVD, the amount needed to produce and the principals involved.
Thanks in advance.
RB
Re(1): Approaching
Investors
Posted on April 4, 2006 at 11:10:37 AM by John Cones
RB:
Keep in mind that a PPM is the disclosure document associated with a private
placement. One of the distinguishing features of a private placement is that
the securities are not supposed to be offered or sold to people with whom you
do not have a pre-existing relationship. Pre-existing in this sense means
before the start of the offering. Normally, we consider the start of the
offering to be the date on the cover page of the PPM. However, if you go out
and start soliciting investors for the investment vehicle that is going to be
presented in conjunction with the PPM, most securities regulators will consider
that part of the offering (i.e., you've already started the securities offering
whether the PPM is ready or not), thus the rules relating to pre-existing
relationship apply.
On the other hand, if when you first start talking to prospective investors
about your project you do not use any language either in writing or orally that
suggests or implies that you may later re-structure the deal as a security
(i.e., selling units or interests to a large number of passive investors)and
instead, you indicate that at the time of this soliciation you are actually
looking for one or two active investors to fund your project, under those
circumstances, you conceivably could approach and/or talk to any prospective
investors you like, regardless of whether you knew them before or not, because
presumably you are not conducting a securities offering at that time.
On the other hand, if you only approach prospective investors that you and your
company's upper level management already know, it's fine to approach and/or
talk to them about the particulars of the deal that you expect to be
represented later in the PPM recognizing that you have started the securities
offering and everything you say orally needs to be consistent with what later appears
in the PPM, or recognize that the language appearing in the PPM supersedes
anything you say to the contrary in an earlier oral presentation. Hopefully,
there's not much difference, since that could cause a problem.
John Cones
Re(2): Approaching Investors
Posted on April 5, 2006 at 05:17:50 AM by RB
John,
Thanks for your answer. It can obviously be a sensitive subject as to how and
when one can approach potential investors with whom there is no pre-existing
relationship.
RB
Re(3): Approaching
Investors
Posted on April 5, 2006 at 07:31:52 AM by John Cones
RB:
It also depends on which set of securities rules apply. For example, if you are
selling a security (typically interests in a manager-managed LLC or limited
partnership when dealing with "project" financing like a feature
film) and you are not seeking to raise more than $1 million, and you believe
you can raise the amount sought from accredited investors only, you can rely on
the Model Accredited Investor Act which permits some advertising and general
solicitation. With the MAIA you don't have to be concerned with the private
placement requirement of a pre-existing relationship.
John Cones
Re(4): Approaching
Investors
Posted on April 5, 2006 at 11:11:32 AM by RB
John,
Got it. Thanks.
RB
Regular Corporation
Posted on April 5, 2006 at 07:48:33 PM by Dave N
John, as someone that read your book there is a situation that I've come across
that isn't really addressed...Or maybe it is but I don't know under where it
would fall.
I have a C corp that we're almost done structuring. The company will be buying
and distributing indie films, producing our own, a recording label division as
well as handeling many different aspects of the entertainment
"world".
My accountant says that we're not limited to the number of investors and, I'm
happy to say, they're lining up purchase our shares.
Is there some reason I can't sell shares to these people that want to invest in
my C-corp? I don't have a ppm for these people. Do I need one for this type of
investment? Will our business plan suffice?
Re(1): Regular Corporation
Posted on April 6, 2006 at 09:08:13 AM by Dave N
Oops, nevermind...I did find it. But just to be sure, the answers I seek are in
Chapter 22 and 33 of the book. So, I do actually need a PPM for these
investors?
It's also my understanding that under the 504 Offering people still need to be
accredited investors? How do I sell shares to these people that are
Non-accredited but want to invest? I have a lot of friends that want to put a
decent amount of money into the company.
Re(1): Regular Corporation
Posted on April 6, 2006 at 08:04:37 AM by John Cones
Dave:
On an open forum like this I can only provide a general discussion of issues
raised. And such a general discussion is provided based only on the assumption
that legal advice is not being sought and no legal advice is being given, just
a general discussion of issues for informational purposes only. If you need
legal advice, you will want to establish an attorney/client relationship with
an attorney, so that the attorney can ask questions and further investigate
your specific needs.
As a general rule, however, once you've created a corporation, filed the
articles of incorporation with the Secretary of State, prepared the initial
shareholder and board of directors minutes reflecting the board members and
officers, issued shares to the founding shareholders, logged the issuance of
those shares into the corporation's share transfer log book, and actually
physically issued the shares to those founding shareholders, if you choose to
then seek additional shareholders, that clearly constitutes a securities
offering and you must comply with the requirements of the federal and state
securities laws. That means if you want to conduct a private offering (e.g.,
pursuant to Regulation D or other available federal exemption) you must provide
a properly drafted disclosure document to each prospective investor.
In my view, and you must keep in mind that I am not a state securities
regulator and specifically do not know what the position of the state
regulatory authority is in your state, a business plan will not suffice in such
an instance. On the other hand, if you have not formed the corporation and you
are looking for a small number of founding shareholders, a business plan may
suffice, since presumably all of these early investors will have the same
opportunity to ask questions of the new corporation's promoters and to
participate in electing the board of director members, etc. So there seems to
be a difference between a new corporation and an existing corporation for
securities offering purposes. I'd check this interpretation, however, with
local counsel and the duty officer at the Secretary of State's office in your
state.
John Cones
Re(2): Regular Corporation
Posted on April 6, 2006 at 09:11:30 AM by Dave N
My reply was posted as you were posting yours. You have already answered the
question.
...unless you have anything further to add?
LLC Formation
Posted on April 9, 2006 at 06:39:40 PM by RB
John,
I have read in this forum about the idea that it is not necessary to form an
LLC until a producer has raised the minimum of an offering (PPM) to avoid the
expense of creating one.
Could this strategy be seen by investors as a lack of credibility or confidence
in the producer's part not to have an LLC up and running while selling his
project?
Thanks.
RB
Re(1): LLC Formation
Posted on April 10, 2006 at 07:36:00 PM by John Cones
RB:
Well, of course, that is one possible interpretation, but not a reasonable one
in my opinion. What investor would think that a newly-formed, unfunded LLC is
any more credible? In addition, just by filing the articles of organization
with the Secretary of State does not mean that the formation process is
complete. You have to have an LLC operating agreement approved by the members
to complete the process. If you file the articles, and get an original member
to approve of the operating agreement, then that original member has to assign
interests to other members as they become members. The details of executing
those transactions are more cumbersome, again, in my opinion than forming the
LLC after the offering minimum is raised. Further, in the hundreds of film and
other offerings, I've worked on, I've not seen any evidence that investors were
deterred by the idea that the LLC or limited partnership was to be formed upon
funding.
John Cones
Re(2): LLC Formation
Posted on April 11, 2006 at 04:49:21 AM by RB
John,
Thank you.
RB
Lawyers Agreement
Posted on April 10, 2006 at 07:22:14 AM by Al Webber
Hi! Thanks for this great service.
I'm planning to incorporate an LLC in USA to work "Off-shore" from my
country.
Actually where I live there are not entertaiment lawyers specialist. Any way I
count on a respectable local law firm to help in all phases of producing my
project (a feature movie).
They studied my case and then proposed to work under a flat fee deal ascending
2.5 % of the total budget.
Do you consider this is fair offer?
Are there any standard numbers to serve as parameters for this kind of deals?
In case we go ahead (they wait for my answer... Can yon give a check-list of
thing to consider to close the deal?
Thanks. Best,
Al Webber
Re(1): Lawyers Agreement
Posted on April 10, 2006 at 07:43:38 PM by John Cones
Al:
You do not "incorporate" an LLC. LLCs are formed. Corporations are
incorporated.
Also, a 2.5% deal is not a "flat fee" deal it's a percentage of the
budget deal.
I've heard of entertainment attorneys here in the U.S. asking for 5% of the
budget, but that's usually when they are also heavily involved in helping to
finance the production costs of the movie, as well as handling the production
documentation. With either flat fees or percentage deals, the attorney will
either get a windfall or spend more time on the project than it's worth. That's
ok, as long as both parties are satisfied with the deal. Whether it's fair or
not depends on what services they agree in their engagement letter to perform.
Do a quick survey of entertainment attorneys and find out what specific
services and tasks they will perform for their fees as the work relates to a
film project. Then you will be in a better position to compare what you are getting
for the fee.
John Cones
Agency involvment
Posted on April 12, 2006 at 11:27:34 AM by Byron Tully
My partner and I have about 10 projects (completed screenplays) of various
budgets (2-50 million). We've spoken with the "indepedent film"
divisions of various talent agencies. They love our scripts, but we can't seem
to get them to do anything. Nor can we get them to articulate what they need in
order to get involved. Could you enlighten us? Are we wasting our time? Thank
you.
Re(1): Agency involvment
Posted on April 13, 2006 at 11:13:44 AM by John Cones
Byron:
I've not worked with the financing arms of agencies either and if that's all
you're doing, your question is not appropriate for this site. Here we talk
about investor financing. But, it is possible that you might get a better
reception if you first conducted an investor-financed development offering,
raised money to create an investment vehicle, acquire rights in one or more
scripts for that entity, continue to develop the scripts and attach elements to
the scripts, in addition to raising some production money. Then you would be in
a position to make offers (at least in the form of non-refundable deposits for
firm commitments from talent) and reduce your dependency on the agency for
arranging for most or all of the films' financing. You might get better results
that way. You may also want to use some of those development funds to hire an
experienced casting director. He or she would most likely have some useful
experience in working with talent agencies.
John Cones
Active Investors -- Risk
Posted on April 12, 2006 at 03:49:07 PM by John
I am raising approx. $15k for a low budget film for which we have formed an
LLC. I have two potential active investors, both experienced in filmmaking and
willing to be activly involved. What, if any, additional risks (besides of
course no return on investment) do active investors open themselves up to by
participating in this manner as opposed to passive investors?
This seems to be their (investors) biggest concern ie. not wanting such a small
amount of money to open their personal assests up to unnecessary risk especially
in consideration of the fact they have some name notoriety.
Re(1): Active Investors --
Risk
Posted on April 13, 2006 at 11:16:22 AM by John Cones
John:
One of the reasons producers create member-managed LLCs is to create an entity
separate from the individual owners, so that the individual owners would enjoy
limited liability protection. So, you want to be careful that the LLC is
properly formed, then read the LLC statute under which it was formed to determine
what level of limited liability is offered.
John Cones
Re(2): Active Investors --
Risk
Posted on April 13, 2006 at 12:22:45 PM by John
Thanks for your reply -- I have a follow-up question. In regards to using an
Investor Finance Agreement, what is the typical relationship between an active
investor and an LLC, if any. Must they become members if we use an Investor
Finance Agreement?
Re(3): Active Investors --
Risk
Posted on April 13, 2006 at 03:33:19 PM by John Cones
John:
The Investor Financing Agreement is intended to be used when no entity is
involved. When you create a member-managed LLC, the LLC Operating Agreement is
the agreement that the member/owners of the newly-created LLC sign. If you
don't create a member-managed LLC and you use the Investor Financing Agreement,
no separate entity exists and the investors have no limited liability
protection.
Defining "General
Partners"
Posted on April 18, 2006 at 09:30:53 AM by W.F.M.
Hello Mr. Cones,
First, funny but excellent dialogue and explanations about the book,
"Independent Film Producer's Survival Guide" posted on
"MATRIX"...funny!
My question: After forming a manager-managed L.L.C., with one manager, in my
case, with 20% or more owned, by definition in the State of Arizona.
How is a "general partnership" defined when bringing in a
"partner"?
Is defining the "general partnership" done during preparation of the
manager-managed L.L.C. operating agreement? "Partners", to some
extent meaning "two", when a manager-managed L.L.C. can be at least
four: CEO, CFO, COO, President for example.
Second, this sounds weird, but doesn't make sense when investing in a media
project...but, can a "partner" in a general partnership be another
invest vehicle or company? Since from your statment in the discussion about
"Independent Film Producer's Survival Guide", #23, Joint Venture,
states a "joint venture" is a specialized form of "general
partnership"
Re(1): Defining
Posted on April 19, 2006 at 07:24:19 AM by John Cones
WFM:
I don't have all of the facts of your situation here nor do I understand what
you are trying to communicate about the 20% ownership of a manager-managed LLC,
but as a general rule, two entities can enter into a general partnership
pursuant to a partnership agreement to pursue a mutual business purpose. In the
alternative, two entities can enter into a joint venture (that specialized form
of a general partnership) for the purpose of working together on a specific
project, like a media project. That means, for example, that your
manager-managed LLC could enter into a joint venture agreement with another
production company to produce a film or other media project. Your LLC might
contribute the script and some financing. The other joint venturer might
contribute some talent commitments and arrange for some foreign pre-sales, or
something like that. The Joint Venture Agreement sets out the contributions of
each party and how the profits of the venture (in film terms a co-production)
are to be shared as between the two joint venturers. If the LLC is a
manager-managed LLC and has a number of passive investor member/investors, the
joint venture share of the joint venture's profits that go to the LLC will then
be shared as between the LLC's manager and the LLC's member/investors as per
the LLC's operating agreement and the securities disclosure document used to
sell the LLC units.
On the other hand, an existing general partnership could also be an investor in
your manager-managed LLC under some circumstances.
In the joint venture scenario, the joint venture is formed by virtue of a joint
venture agreement which is separate from and not part of the manager-managed
LLC's operating agreement.
John Cones
member-manged LLC
Posted on April 19, 2006 at 03:01:46 PM by Jake
John, as I understand it from your previous posts, when financing, say a $100K
film, from a few active investors through a member-managed LLC, a PPM is not
necessary and a business plan will suffice. Could you explain what documents
are actually required to form this sort of LLC? I assume, perhaps incorrectly,
that it's a lot less involved (and expensive) than the full blown private
placement offering memorandum. Would it be possible to put together without an
attorney?
Also, could you possibly discuss the benefits of a member-managed LLC as
opposed to a Corporation for the purposes of this sort of low-budget project.
Thanks
Re(1): member-manged LLC
Posted on April 20, 2006 at 07:35:02 AM by John Cones
Jake:
The formation of an LLC is based on the state law of the state in which you
choose to form the entity. Each state's law may differ slightly, so either an
attorney in that state or the actual state statute should be consulted (or
both).
As a general rule, however, creating a member-managed LLC, as with a
manager-managed LLC, requires the preparation and filing of the LLC's articles
of organization with the state's secretary of state. Then, the formation of the
LLC requires the drafting (and approval by the members) of an LLC operating
agreement.
It is possible to use services to prepare and file the articles of organization
and that might expedite the filing process. On the other hand,if you have let's
say three or form member/managers, all of whose interests are a bit different
with respect to some issues relating to the management of the LLC, not only
would an attorney be helpful in drafting the document that determines how the
LLC would operate, but technically each member/manager may need their own
attorney. Or, in the alternative, the attorney may have to put something in
writing with respect to who he or she is representing in the transaction,
because of the potential conflict of interest. Is it possible for a
non-attorney to draft an LLC operating agreement? Sure, but there are also
risks, in that attorneys are trained to foresee potential problems and to draft
language to resolve such problems. If the non-attorney drafter doesn't even see
the potential problems, it is less likely that they will be able to draft
language that is helpful in resolving such problems.
For that matter, it is not even necessary to have a business plan, if you are
not selling a security. There is nothing wrong with several people coming
together to form a business and choosing to utilize the member-managed LLC as
the business entity.
Some caution needs to be observed, however, with respect to the securities
issue. I've taken the position that if you bring in a few active investors who
are both capable of being actively involved in helping to make important
decisions with respect to running the business and actually are involved, then
in most instances such a transaction, in all likelihood, would not involve the
sale of a security. However, that's just my view. It does not guarantee that in
all situations, every state or federal regulator is going to agree -- or that
the business is actually meeting the criteria for active investors.
As an example, a few state regulators have recently taken the position that if
a business person (let's say a film producer) claims they are seeking active
investors to produce a film, and advertise on the Internet, these regulators
will take the position that the advertising alone causes what otherwise is not
a security to magically become a security. I disagree with that view, but I'm
not the regulator.
On the other hand, it appears more reasonable that in fact, the regulator
actually called the film producer and asked the question: just how small an
investment would you accept. That has been done. If the producer says they will
accept a $5,000 investor, for example, and the producer is seeking to raise
let's say $500,000, that tells the regulator that if all investors invested
$5,000 then it would take 100 investors to raise the $500,000. So, under those
circumstances, the regulator could safely assume that the producer was actually
selling a security (i.e., seeking to raise money from a large group of passive
investors, after all, it is impossible to have 100 active investors). So, in
reality, this hypothetical producer was selling a security, regardless of the
advertising on the Internet. The advertising, in my view, is a separate issue,
but for some reason, some of these regulators are confusing the two issues: (1)
the manner of the offering -- whether advertising or a general solicitation is
involved in a non-registered offering; or (2) the number and involvement of the
investors -- whether they are or can be active or passive.
In any case, as long as some regulators are out there taking the position that
mere advertising on the Internet converts a non-security into a security, it is
much more difficult to accurately predict what will be considered a security
and what will not.
In the meantime, a corporation is more formal in its creation and maintenance.
An LLC is less formal and requires less maintenance.
However, the two biggest disadvantages of using the member-managed LLC as the
investment vehicle for a business (or in this case a film) are (1) the
member/managers are actually involved in making the decisions (and that can be
a disaster for a creative venture like producing a film) and (2) the risks
inherent in producing an independent film are not spread over a larger pool of
investors, thus each investor is being asked to assume a larger share of the
risk, and therefore it is less likely that a film producer will be able to find
a few investors who both want to be active and assume such a large portion of
the risk in what is clearly a risky investment.
John Cones
Re(2): member-manged LLC
Posted on April 20, 2006 at 11:29:00 AM by Jake
Thanks John, one follow up if I may. Is it possible to have a manager-managed
LLC when there are four or five active investors? In other words, say my
partner and I are getting money to make a film from four or five people total.
In the state of California, can we create a manager-managed, LLC in which the
investors/members elect my partner and I to manage? Can such an arrangement be
stipulated in an LLC Operating Agreement?
LLC Operating Agreement
Posted on April 20, 2006 at 04:38:36 PM by Bill
John:
If you're forming a manager-managed LLC which will require an attorney-prepared
PPM, I understand the filing of the LLC's Articles of Organization are
required, but will you also need an LLC Operating Agreement? Or does the
information outlined in the PPM eliminate the need for an Operating Agreement?
Thanks
Re(1): LLC Operating
Agreement
Posted on April 21, 2006 at 08:05:23 AM by John Cones
Bill:
To form an LLC whether member-managed or manager-managed, you still need an
operating agreement. The PPM is a disclosure document for the entire offering,
meaning that it seeks to put in writing ("disclose") everything about
the offering that would be considered important to know for investors. The
contents of the LLC's Operating Agreement would be important (i.e., material),
thus in addition, to including a copy of the LLC operating agreement as an
exhibit to the PPM, the SEC would also like to see a summary of the provisions
of the LLC's operating agreement in the main body of the PPM.
John Cones
PPM Disclosures
Posted on April 23, 2006 at 10:40:00 AM by RB
John,
The LLC Operating Agreement disclosure in a PPM does it include the following:
1. Who has creative control of the movie?
2. Who has control in a movie's budget?
3. Who has control of the final cut of a movie?
In a manager/managed LLC is this information disclse to investors in a PPM?
Thank you.
RB
Re(1): PPM Disclosures
Posted on April 23, 2006 at 12:31:24 PM by John Cones
RB:
Yes, typically the three questions and others are covered in the LLC Operating
Agreement, since that is the agreement as between the LLC investor/members and
the Manager. Such questions (or their answers) are also disclosed in the PPM
because the securities laws require that the PPM set forth in writing (i.e.,
disclose) all material aspects of the offering, that nothing material be
omitted and the information that is stated must be set forth in a manner that
is not misleading.
John Cones
Financing agreement for
low budget indie?
Posted on April 24, 2006 at 01:36:30 PM by TL
I plan to shoot a $100,000 feature in California this summer. Right now I have
$60,000 of my own money, and I want to get one or two investors to fund the
other $40,000 so I can begin casting and shooting! My friend runs an
investment/money-management firm and he thinks he can steer one or two of his
investors to put in $20,000 a piece as a sort of longshot/diversification
investment.
Questions:
What kind of agreement will I have with these investors? There will only be 1
or 2 of them, and they will probably be active as far as I know. What is the
best and most simple agreement type for this situation: Investor Financing
Agreement, Joint Venture Agreement, Investment Contract?
What will I be able to offer the investors in terms of ownership of the
picture? For example, could I offer them 3% of gross for 20k? Will distributors
have to honor that 3% if I get distribution?
Does HR 4520 make investing small amounts in my movie (say, 20k) attractive as
a write-off for these potential investors?
Do I want to form an LLC for my own production company? Will this be
member-managed or manager-managed? Are the investors involved, or will my LLC
simply have an agreement with the investors? Should I set up an LLC just for
this picture, or make a separate DBA under my LLC just for this picture?
I guess thats enough questions for now! Thanks a million for your time.
TL
Re(1): Financing agreement
for low budget indie?
Posted on April 25, 2006 at 07:36:31 AM by John Cones
TL:
These are all questions that you'll want to discuss more thoroughly with your
attorney, however, if you only plan to have a couple of investors and you and
they are willing to be active investors (and they are capable of being active),
you do not want to use the Investment Contract alternative, since that involves
the sale of a security. The Investment Contract is a profit participation
agreement with passive investors and involves no entity. It is also rarely
used.
Of the other two you mention, the investor financing agreement is probably the
most simple, but it also does not involve an entity and offers no limited
liability protection for the investors. The joint venture agreement is similar
but usually the choice when two or three entities come together for a project.
You'll have to talk to your active investors about what they think will be the
best choice of vehicle for them. For example, they may feel that limited
liability protection is important to them. In that case, the member-managed LLC
may be the best option, since it is an entity and therefore offers limited
liability protection. Keep in mind that forming a member-managed LLC involves
more than just preparing and filing the articles of organization with the
Secretary of State. It also involves the drafting and signing of the LLC
operating agreement.
For both the joint venture and the investor financing agreement, you are not
offering any "ownership of the picture". You are, instead, offering a
profit participation in the film's revenue stream. With the member-managed LLC,
you will be offering an ownership interest in the LLC and if the steps are
taken to transfer rights to the script into the LLC, the LLC will own the
script and the subsequent picture.
It is less likely that you will get a distributor for an independently
produced, ultra-low budget film if you try to burden the distributor with some
sort of investor participation in the distributor's gross receipts. So, I
wouldn't suggest that. I don't even suggest offering a participation in the
film's net profits, after all, the producing entity rarely controls 100% of a
film's net profits. The percentage of net profits that flows to the producing
entity depends on the negotiations between the producing entity and the
distributor. So investor participations should be defined in terms of that part
of the revenue stream the producing entity actually controls. For an LLC that's
going to be something akin to gross or net revenues to the LLC. In some
instances, we refer to that net as the LLC's Distributable Cash, but that's a
term that has to be defined in the LLC's operating agreement.
HR 4520 (Section 181 of the IRS Code) may encourage investors to invest in film
offerings, but it depends on their own tax situation and whether moving the
timing of the tax deduction forward by a couple of years is important to those
taxpayers.
As noted above, if you form a member-managed LLC with your two active
investors, then you have formed an LLC as your production company. Each of you
will be member-managers. It will not be a manager-managed LLC. The
manager-managed LLC is more suited for situations where you have a large number
of passive investors and in that instance, some individual or entity will be
needed to serve as the manager. That manager could be a member-managed LLC, a
general partnership, one or more individuals or a corporation.
John Cones
Member-Managed LLC
Posted on April 25, 2006 at 10:17:24 AM by Jake
John, is it possible to have a manager-managed LLC when there are four or five
active investors? In other words, say my partner and I are getting money to
make a film from four or five people total without the use of a PPM. In the
state of California, can we create a manager-managed, LLC in which the
investors/members elect my partner and I to manage? Can such an arrangement be
stipulated in an LLC Operating Agreement?
Member-Managed LLC
Posted on April 25, 2006 at 01:09:57 PM by John Cones
Jake:
No, that doesn't sound appropriate to me. If the LLC is manager-managed, the
investor/members are passive. The units are securities.
If you had four or five active investors in a member-managed LLC, that might
work from a legal standpoint, but might be more difficult from an operational
perspective.
John Cones
Another donation question
Posted on April 28, 2006 at 00:35:25 AM by MDM
I'm working on a project that is primarily targeted to a "special interest
group". Because of this, I believe if I turn to that community for
donations (vs 'investments') I just may get them.
1. Is there a cap on how much money one may raise via donation?
2.Can anyone seek funds via donations (i.e. 'gift') or is there licensing
required?
Thank you.
Re(1): Another donation
question
Posted on April 28, 2006 at 07:14:05 AM by John Cones
MDM:
At the beginning of this site, we have tried to explain that questions should
be limited to investor financing questions. Questions about donations are not
appropriate for this site.
Best wishes,
John Cones
Full Disclosure on PPM
Posted on May 2, 2006 at 11:43:13 AM by Chris
I am currently in the process of putting together a PPM, and I was wondering
what constitutes 'full-disclosure' as far as revenue projections and other
required data are concerned? And, who is responsible for the oversight ensuring
there is full compliance in the PPM?
Re(1): Full Disclosure on
PPM
Posted on May 3, 2006 at 07:47:08 AM by John Cones
Chris:
All securities disclosure documents are required to comply with the SECf's
anti-fraud rule: disclose all material aspects of the offering, don't omit
anything that is material and state whatever is disclosed in a manner that is
not misleading (paraphrased). In many instances, it is best to rely on the
judgment of an experienced securities attorney in determining whether your PPM
has met this very general standard. The SEC also provides, however, some very
specific disclosure rules and/or guidelines that you need to consult. If you
are relying on Regulation D at the federal level, you need to read Regulation D
and determine what disclosures are required pursuant to that rule. But, you
must also go beyond Regulation D and read and comply with all of the rules and
regulations referred to in Regulation D. Particular attention needs to be paid
to the exhibits required (e.g., attorney's securities opinion, tax opinion,
material contracts, etc.). So, in order to comply with the law, you must first
determine exactly which federal and state exemptions from the securities
registration requirement you are relying on or seeking to comply with, then
carefully review those rules and regulations to make sure you are in
compliance. Then this same methodology needs to be repeated for each state, if
state jurisdiction applies. If you don't do these things and are merely relying
on someone else's disclosure document as a model, the chances are extremely
high that you are not complying with the law. And, the burden of proving that
you complied with the law is on you the issuer of the security, if the question
ever comes up. Private placement enforcement is sort of "after the
fact". In other words, no one is likely to question your offering unless
someone complains. On the other hand, in risky ventures like independent film
where it is quite unlikely that the investors will make their money back much
less make a profit, it is more likely that an one or more investors will
complain to a regulatory authority and cause someone to review your compliance.
All the investor has to show is that you took their money as consideration for
a security and that the security was not registered as a public offering with
the SEC and each state in which it was sold. Then the burden shifts to you the
issuer to demonstrate that you complied with all conditions and limitations
imposed on the use of the specific exemption relied on. If you don't know which
exemptions you relied on at the federal and state level, you clearly do not
know what the conditions and limitations are. And, even if you know which
exemptions you relied on, if you haven't studied them, understood them and
carefully complied in every material aspect, it is also clear that you have not
complied. Thus, it is very likely that the exemption will be voided and that
means you've sold an unregistered security, a felony on the criminal side and a
transaction that allows the investors to demand his or her money back (after
you've spent it) and leaves you without effective defenses. Such a scenario may
not occur often, but the possibility alone ought to encourage those of you who
would like to stay in compliance with the law and not do irreparable damages to
your careers to do whatever is necessary to comply.
If you actually review the rules, you will discover that financial projections
are not required for a private placement, but as a practical matter, investors
tend to want to see some form of financial projections. On the other hand, if
you choose to use financial projections, the SEC does have a rule that
describes what ought to be contained in the financial projections.
Best wishes,
John Cones
Re(2): Full Disclosure on
PPM
Posted on May 3, 2006 at 08:48:39 AM by Chris
John,
Thank you for your very thorough answer, you have helped tremendously.
Questions about Escrow?
Posted on May 9, 2006 at 07:52:05 AM by W.F.M.
What types of conditions or obligations are set on a escrow account when
investors purchase a security for a film or television private placement
offering?
Are the condition(s) or obligation(s) defined in the disclosure document of the
PPM?
Does interest accrue while funds are in escrow?
Who chooses the bank or escrow service to
handle the sale of security transaction until obligations are fullfilled?
Does the bank or escrow service set the condition(s) or obligation(s), when the
sale of the security is completed?
Is there a window or time limit based on how long a escrow account can be
utilized during the process of completing a media project?
Re(1): Questions about
Escrow?
Posted on May 9, 2006 at 05:28:36 PM by John Cones
WFM:
First, you should check with your attorney or the state law in which the
securities are being offered to determine whether an escrow account is required
for a private placement. In California, the Department of Corporations takes
the position that private placements in compliance with the conditions imposed
by the specific exemption available in the state is not otherwise subject to
the state's jurisdiction and therefore no escrow account is required. In
addition, if the offering is conducted pursuant to the National Securities
Market Improvement Act (NSMIA)state jurisdiction is pre-empted by federal law,
and again for purposes of a private placement, no escrow account is required.
For these reasons, instead of an escrow account, we typically offer the
investors a segregated, interest-bearing account from which no funds will be
withdrawn until a specified minimum is reached. That kind of representation
made as part of a securities disclosure document is in some ways stronger than
an escrow account administered by a third party bank because if the issuer does
not comply with the representation, that might amount to securities fraud.
In any case, if an escrow account is used, the production company issuer will
negotiate an escrow agreement with the bank. That will set forth the terms,
conditions and obligations of the production company with respect to the
investor funds. The escrow agreement would then be appended to the PPM as an
exhibit and to provide even more disclosure, its terms would be summarized in
the body of the PPM. Certainly, the bank would offer interest in such funds.
The producer chooses the bank in the passive investor offerings. If you are
raising money from a few active investors, that might be negotiated. The terms
of the escrow agreement would state when the offering minimum has been reached
and what other conditions, if any, are to be imposed. The time limit for the
escrow account is also set by the time period for the offering. That's
disclosed in the PPM and would also be stated in the escrow agreement.
As stated above, however, in my view, using a bank administered bank account is
more trouble than it's worth. It is also more expensive and offers no more
protection to investors. Further, many banks no longer offer the service.
John Cones
Re(2): Questions about
Escrow?
Posted on May 10, 2006 at 10:13:47 AM by W.F.M.
Thank You, Mr. Cones
Minimizing cost of
offering
Posted on May 10, 2006 at 11:49:15 AM by Miles
Like most low budget filmmakers, we're trying to minimize our upfront costs. We
are at the point where we need to raise additional capital (~$1.4MM) through a
private placement and have talked with a couple of attorneys. We've been quoted
rates between $15k and $18k. We have the capital available but those quotes
seem high. Ouch!
My EP has taken it upon himself to create our own prospectus and other required
docs then have a securities attorney "look them over." Is this a good
way to go? Or, a penny-wise, pound foolish method in your experience? Should we
contact someone like yourself to created the docs from the ground up?
Re(1): Minimizing cost of
offering
Posted on May 11, 2006 at 07:57:43 AM by John Cones
Miles:
Offering costs for a private placement involve more than just the attorney
fees. Such costs include: (1) copying and binding costs for the PPM itself, (2)
the possible expense of special artwork for the cover if you choose to use a
cover other than the cover page required by the securities laws, (3) filing
fees for the investment vehicle, (4) marketing costs (i.e., travel, meetings,
postage, envelopes, FedEx, phone, etc.) (5) notice filing fees to the states in
which you intend to offer or sell securities and then (6) the attorney fees for
preparation of the PPM, subscription agreement, along with assistance with
preparation of financial projections, if any, assistance with the state and
fedral notice filings, assistance with the creation of the investment vehicle
and other consultations relating to overall compliance with all of the
conditions and limitations imposed on the exemptions being relied on for the
offering.
It is possible to find a securities attorney with experience preparing film
offerings to do such work for as little as $6,000 up front with a deferred
portion of a flat fee paid out of the proceeds of the offering (see the
previous post re questions to ask the attorney).
The very fact that you use the term "prospectus" to describe a
private placement offering memorandum (PPM) suggests that you have not done
your homework, after all, the term "prospectus" is used in the
securities world to describe the securities disclosure document associated with
a public/registered offering, not a private placement. The term "private
placement offering memorandum" is the term associated with a
private/exempt offering's securities disclosure document.
Of course, no one preparaing a PPM starts from the "ground up". That
would be foolish. Those of us who do this work start with the most recent
similar offering. But, in such cases, we are working with a basic document that
has evolved over many years, with input from many other attorneys, accountants,
clients, consultants and securities regulators. In point of fact, if the
securities attorney you choose to work with has successfully completed small
public film offerings, such as Reg. A or Regulation SB-1 or 2, some of the
language in that attorney's basic document (already in his or her computer)
will have been approved by federal and state securities regulators. That
provides some additional assurance that the language used complies with the
complex securities law requirements for disclosure. To the extent that such
language can be used for another offering puts that basic document ahead of the
game.
Whenever a producer tries to prepare their own draft, and then have a
securities attorney review it, that means that the securities attorney has to
review every line of the document. Whereas, if the attorney is working with a
document that he or she knows and trusts, not all of the basic document has to
be reviewed again. As the producer-prepared document is reviwed, the attorney
is very likely to have to look up some of the law, since such documents usually
raise novel issues or questions not considered by the attorney in a while. That
takes up more time. Then the attorney has to provide some sort of report to the
producer-client. That may take the form of a several hour discussion or a
written memorandum. The last time I did one of those, it consisted of 30 pages
of deficiences, and that document was prepared by a Harvard-educated attorney
turned producer. So, yes, my experience is that producer-prepared securities
disclosure documents never come close to complying with the law and being asked
to review one is more trouble than it's worth. Another of the main reasons for
this is that non-attorneys attempting to prepare a securities disclosure
document seldom, if ever, go beyond just relying on some other disclosure document
that they've found and modifying the language to fit their offering. On the
other hand, you have no assurances that the person who prepared that original
disclosure document actually consulted the law itself when preparing what is
now your model PPM. To do it right, somebody has to determine which exemption
is being relied on at the federal level and which exemptions are being relied
on at the state level in each state in which the securities will be offered or
sold. Then you have to read each of those statutes or regulations, understand
them and effectively implement their terms. As an example, most non-attorneys
trying to prepare a PPM never get to the list of exhibits that are required for
some of such offerings, including the attorney's tax opinion and the securities
opinion. Also, it is not appropriate for a non-attorney or non-accountant to
provide a tax discussion in a PPM. So, whoever got the idea or suggested that
it is appropriate for a non-attorney to prepare an offering memorandum is not well
informed about the actual requirements of the law.
You have to be careful about the advice of the non-attorney film finance
consultants in the film industry who suggest that they or some other
non-attorney could just get a PPM and use it as a "template" to
prepare another PPM. There are significant risks to such an approach and it
ultimately could result in the producer becoming obligated to return all of the
money raised.
I am always available to talk with independent producers regarding their investor
financing options. That's what I do. Just as with your choice of finance
options, there will always be advantages and disadvantages relating to your
choice of securities law exemptions and your choice of securities attorneys.
I'd be happy to review those options with you.
John Cones
Start Up LLC
Posted on May 13, 2006 at 07:41:26 PM by Julia
Dear John,
My partner and I formed an LLC a year ago (still no Op agreement) and we formed
it before we had funding or investors. We thought the LLC would help raise the
money. On paper, we're both managers. [Is there such a thing as a
manager/manager-managed LLC???]
Now we need start up financing for both the company and a film project. It's a
bit like being on a runaway train: the project is hot and we have a bankable
director and well-known distributor on board, but no financing yet. My partner
is struggling to pay costs off our credit cards, and I'm eating burgers in LA.
We really can't afford an att'y unless someone comes in with us.
Do we raise money using the company LLC vehicle or the film project (which has
been signed over to the LLC)? We're looking for about 3-500K to develop, attach
the director, and do R&D.
Since it's under a million, what about craigslist :-) What do you know about
capmatch.com?
But most of all, can and should our op agreement add 1-3 active investors to
the company in exchange for the money? And if so, what should our
presentation/offering be? My experience says "presentation" is key.
We're on a roll but we need to get some serious players aboard so we don't
stall a good thing.
Thanks, as ever, for this great site!
Julia
Re(1): Start Up LLC
Posted on May 14, 2006 at 08:34:03 AM by John Cones
Julia:
An LLC can help raise money in the limited sense that it can serve as an
investment vehicle. In other words, investors have to invest in something.
Producer often make the mistake of thinking that all they need to raise money
is a business plan, but investors cannot invest in business plans. They can
invest in an investment vehicle or an entity. The LLC is both.
There is no such thing as a "manager/manager-managed LLC". There is a
manager-managed LLC and a member-managed LLC. In a situation where you have two
individuals who are owners of a member-managed LLC, both of these individuals
are members and managers (i.e., they are member-managers). In the
manager-managed LLC, the investors are members and if two individuals were serving
as the managers, each such individual would be a manager. However, the LLC
would still be referred to as a manager-managed LLC. The choice of the type of
LLC is made at the time of the filing of the LLC's articles of organization.
The state form will typically have a check-the-box type question something
like: "Will the LLC be managed by all its members?" or "Will the
LLC be managed by one or more managers?"
Then the LLC operating agreement must be drafted so as to be consistent with
the type of LLC created.
It may be possible to change the type of LLC, but that would likely involve the
preparation and filing of an amendment with the Secretary of State.
If you want to bring in some limited start-up funds into a member-managed LLC,
that means you will be seeking to bring in one or two active investors, people
who in addition to investing money are also capable of and willing to be
involved in helping make the company's important decisions (i.e., they must
materially participate in management).
Theoretically, interests in a member-managed LLC, since the investors are
actively involved, would not constitute a security. Under that
characterization, it would be permissible to advertize for one or two active
investor member/managers to join the member-managed LLC. However, at least a
couple of states have taken the rather illogical position in recent years that
merely by advertising online, what is essentially a non-security becomes a
security and they can issue a cease and desist order. I disagree with that
position, but there is no guarantee that some securities regulator somewhere
will see an ad posted on Craig's list and take that position. So this area of
the law is a bit muddy at this time. The fact that you are only seeking less
than $1 million dollars is not relevant. If it's a security and it's not
registered, then it's being sold pursuant to a private placement exemption from
registration, and that generally means no advertising and no general
solicitation. Advertising on the Internet through any site would violate that
rule, again, assuming you are selling a security.
Consistent with the thinking that seeking a very small number of active
investors for a venture does not involve the sale of a security, your
"presentation" would take the form of a business plan. But, if you
are selling a security and you are not willing to register it, you would need a
private placement offering disclosure document.
Your first need is start up funds that can also cover the cost of some
competent advice from a securities attorney. You may be able to acquire that
through loans or gifts, from close friends and/or family.
Best wishes,
John Cones
Re(2): Start Up LLC
Posted on May 16, 2006 at 08:05:45 AM by Julia
Thanks for your helpful answer. I have no idea which box was checked and it's
disquieting, but I've been focusing on the creative, not the financial. I have
another question which I'll post above re the operating agreement. Then I'll
order your book!
Julia
LLC Operating Agreement
Posted on May 16, 2006 at 08:30:52 AM by Julia
So, our partnership LLC was formed in June a year ago. Again, don't know which
box was checked. We paid our att'y several thousand dollars (2-4K overall is my
guess) for the filing and some meetings alone and still have no fundable
entity, as you point out. Is it common practice for the incorporation fee to
include at least an operating agreement? And how can we draft one reasonably
before we take in our third-party Active investor, who will fund the company?
Won't they need to make key decisions re how the company will operate since
they have more business experience, as well as the money? So, basically...
What is the reasonable cost-range for the following?
(1) forming an LLC on-line (form only)
(2) A business plan
(3) An operating agreement
(4) A PPM
Is there a conflict of interest in having your attorney as a member, and how
proactive should they be in making introductions...
Thanks for now,
Julia
Re(1): LLC Operating
Agreement
Posted on May 16, 2006 at 12:55:55 PM by John Cones
Julia:
First let's deal with some terminology issues. A partnership is not the same as
an LLC so an LLC should not be referred to as a partnership. An LLC is a
limited liability company. It's an entity that is treated much the same as a
limited partnership for federal tax purposes, and there may be other
similarities, but the two entities are not the same and should not confused.
Also, forming an LLC does not involve an "incorporation". You form an
LLC but incorporate a corporation. Again, these are different entities and
using the wrong terminology may confuse anyone dealing with you.
Maybe you can check with the Secretary of State's office where the LLC's
Articles of Organization were filed and get a copy of the form originally
filed, to determine whether it was formed as a member-managed or
manager-managed LLC. The Articles of Organization need to be consistent with
the operating agreement and the actual operation of the LLC.
Maybe you could also ask the attorney who helped you with the filing, if that
was the case.
When you hire an attorney, you generally discuss and agree on exactly what the
attorney is going to do for you. Usually, those specific tasks are set forth in
an engagement letter. You may want to review your engagement letter, if you
have one, to see what the attorney indicated he or she would do for the fee
paid. If drafting the LLC operating agreement was not one of those tasks, you
may want to ask why. You may also want to get a copy of your state's LLC
statute and confirm whether an LLC must have an operating agreement.
The members of a member-managed LLC are all actively involved in helping make
the important decisions relating to the operation of the company. The
decision-making process, voting procedures, etc. should be described in the LLC
operating agreement.
You may be able to find LLC operating agreements online, and also find examples
of LLC operating agreements in the libraries of nearby law schools, but I would
not be comfortable recommending that a non-lawyer draft their own operating
agreement, because its terms must be consistent with the authorizing statute of
the state you are creating the LLC in. If you don't even look at the statute or
have the background for interpreting such laws, it is very unlikely that using
somebody else's model operating agreement as a guide, and not even knowing
which state it came from, would result in a satisfactory document.
With respect to your cost questions: (1) I don't think forming an LLC online is
a good idea for the reasons that you've already experienced; (2) decent
business plans tailored to a specific industry and business objective may range
from $2,000 to $10,000 depending on who's preparing it; (3) just the operating
agreement alone might be done for approximately $1,000, but it also depends on
whether the attorney is charging on an hourly fee basis and how much
negotiating back and forth amongst the members is involved; and (4) private
placement offering memoranda, along with the associated subscription agreement
and other associated tasks such as notice filings may be performed for a wide
range of fees from $5,000 on the low end to $30,000 and up on the high end,
again depending on whether the attorney is working on an hourly fee basis, how
much money is being raised and other factors. Here again, it is extremely
important to set out in a written engagement letter exactly what tasks are
being undertaken by the attorney for the fee paid (e.g., preparation of the PPM
including a tax discussion, subscription agreement, financial projections, tax
opinion, securities, federal and state notice filings, etc.).
You might want to check with the state bar association in your state to discuss
how to handle potential conflicts of interest involved in bringing in your
attorney as an LLC member.
John Cones
subscription agreement
Posted on May 17, 2006 at 12:49:53 PM by Merlin Gaspers
I am looking for a securities lawyer to prepare a subscription agreement for
the purpose of raising funds for an independent film. We are an LLC based in
Nevada. The investments will be Capital Contributions. Is this a service that
you or anyone you know can provide for us?
Thanks,
Merlin
Re(1): subscription
agreement
Posted on May 17, 2006 at 02:20:44 PM by John Cones
Merlin:
Contact me directly at jwc6774@adelphia.net to ask questions relating to the
actual legal services I may be able to provide. However, for purposes of
general discussion, a securities attorney would need to know whether your LLC
is a member-managed or manager-managed, how many investors you anticipate,
whether those investors will be active or passive and what are the terms of the
current LLC's operating agreement. If, for example, your current LLC is a
member-managed LLC with just a few active investor member/managers you may not
be able to raise money from a large group of passive investors using your
current structure. At some point, too many active investors makes it impossible
for all of such investors to be regularly involved in the making of the LLC's
important decisions, thus, some of the investors are obviously passive. If you
have one passive investor, you've sold a security. If that is the case, a
subscription agreement alone is not all you need. You'll also need a private
placement offering memorandum, and a subscription agreement to go with it.
If, on the other hand, you have a member-managed LLC and anticipate bringing in
just a few more active investors, a subscription agreement may suffice, so long
as its terms are consistent with the terms of the LLC's operating agreement.
John Cones
How important is Code 181
among other things!
Posted on May 18, 2006 at 07:42:18 PM by Michel Gill
Hi there,
My partner and I have written a screenplay and we are going to produce it. Our
budget is $3 million. On our inaugural fundraising trip we were able to raise
$1 mil - most from UK and Europe. We have US investors as well. We did this
without a business plan. We haven't created an LLC yet. It was just the two of
us, our script and a visual style guide.
The investors are not in the movie business. They are all, in their own right,
extremely successful and creative. Helping us make our dream come true is part
of the thrill for them. They also have a desire to participate in something
that is quite out of their ordinary.
Our focus is now on the corporate setup. We want to set up a parent company, an
LLC and all the necessary documents. We are keen to create a document that
explains the movie business clearly and dynamically to our investors, and to
educate ourselves on all the various incentives and financing options available
to both foreign and domestic investors.
We have been consulting with a law firm in NYC. They have a boutique, a sort of
one-stop shop. One section of the firm executes corporate setups at the cost of
$7500. They take care of all the documents including the ones to form the
entities and investment documents for the Production, all drafting and
negotiating of the documents necessary to commence the investment vehicle (with
regards to the negotiating and filing of organizational documents, the PPM, the
operating agreement, subscription agreement and other origination documents.
The other part of their business deals with what really interests them -
proprietary financial structures around the use of section 181 of the tax code.
They have been selling us on the idea that they have developed certain
structures to leverage private and corporate financing for films. We like their
energy but can't corroborate their claims. Their engagement agreements for the
financial structures seem to be full of all sorts of fees that we are wary of.
One of our questions is, is 181 such a big deal? Is it such a complex area that
we shouldn't be "trying this at home?" Or could we get someone to do
it for a reasonable fee and not 5% of gross after P+A. Should a corporate setup
cost $7500?
We also have a gentleman who for $3500 will write us up a tailored business
plan, with our mission, philosophy, company strategy as well as current market
and comparable film analyses. Overview of marketing and distribution and
marketing, distribution dynamics, strategies and marketing. And finally
investors' recoupment, financial model and risks.
So, we’re not sure if we should go with the “Firm!” or stick to one guy to do
the business plan, another to set up the LLC, another to deal with the
financial structures, which could be somewhat complex seeing that many of our
investors are international?
Would a business plan be redundant with a PPM. Can a PPM be as tailored and
personal as a business plan?
Anyway, many questions. Thank you for your patience. And thank you for this
forum.
We hope to hear from you, sir.
Michel
Re(1): How important is
Code 181 among other things!
Posted on May 19, 2006 at 08:03:47 AM by John Cones
Michel:
The importance of the IRS Code Section 181 (otherwise known as the film
industry provisions of the American Jobs Creation Act of 2004) will vary from
investor to investor, depending, in part on whether a particular investor has a
significant tax liability in the year in which the film production expense is
incurred and is therefore available as a deduction. In my view, it is important
to disclose in the offering document the pertinent elements of the new tax
provisions (which also are elections to be made by the individual taxpayer)
along with the alternative tax provisions that would be in effect should the
taxpayer elect not to take advantage of the Section 181 provisions. However,
under no circumstances should you go so far as to write or say anything that
might be reasonably construed as tax advice for such a prospective investor.
For that, he or she should rely on their own tax advisor. For that reason, if
you go too far in the disclosure document with respect to the impact of Section
181 on any given taxpayer, that taxpayer may come back to you at some later
date and take the position that since the IRS did not agree with your advice
you caused them to incur some extra tax liability. So, my suggestion is that
you simply stick with the basics in disclosing tax provisions and not try to go
too far in explaining to an investor how such provisions may impact a given
taxpayer in a given year. Sometimes, practitioners come up with these
interpretations of tax laws (as passed by Congress) that the IRS does not yet
understand and the interpretations end up being wrong. That could, in turn,
create a difficult situation for both you and your investors.
It sounds as if you seem to think that you have a choice as to whether to use a
business plan or a private placement offering memorandum (i.e., that one is
merely a substitute for the other). That’s not true! It depends on your
circumstances. If you are raising money from just a few active investors, it is
possible that you can use a business plan to help in that process, so long as
it is combined with an appropriate investment vehicle. In the situation you
describe, there is no mention of an investment vehicle, and the implication is
that you are raising a large amount of money from a rather large group of
investors. The number of investors suggests that they are passive. These facts
indicate that you are selling a security whether you realize it or not. Under
those circumstances, a business plan, even one “tailored” is worthless and you
should avoid the business plan consultants who try to sell you a business plan
when you actually need a PPM. Also, at this point, it sounds as if you have
actually raised money from people in foreign countries without any
consideration of how to comply with the securities laws of those countries, and
that you are thinking about raising money from U.S. investors, again without
much consideration for which investment vehicle is the most appropriate and
whether you are selling a security.
So, a business plan is not redundant with a PPM, they are used in different
circumstances. And, yes, a PPM can be as tailored and personal as a business
plan. Anyone suggesting that the nature of the documents themselves prevents
that got a bad batch.
First, you need to determine whether you are selling a security. As a general
rule, if the investors are passive (i.e., not regularly involved in helping
make the important decisions for the company or venture) you are selling a
security. By implication, if you raise money from a large group of investors,
it is impossible and impractical for some or all of them to be active. If you
are selling a security to U.S. investors, determine how to comply with the
federal and state securities laws. If you are selling a security in another
country, try to find out what you need to do in that country to comply with
their securities laws. If you are selling a security and therefore do not need
a business plan, a single securities attorney can draft the PPM, subscription
documents, create the financial structures, help with financial projections,
assist with the required notice filings and set up the LLC.
John Cones
look for finance me film
Posted on May 21, 2006 at 12:16:29 PM by al hasan al askar
We are cartoon film making and we full of hoops to show u our activity in this
time .
We produce cartoon film as the same quality of madagascar and ice age
which produced by dreamwork and that is the first film of us as company at
dubai
at this time i start up my company with apartner hwom suport me with $1000000 .
and i am going to build my animators team and prepar every thing that i need to
produce my film .
my qustion is if i fensh the storyboard and model my character and complet the
voice over and reach to the point which show the strong of the story and
directing and quality . at this time can i found finance to compleat the the
film ? can i found ivestor to complet the film with the sam quality that i
begain with it ?
Re(1): look for finance me
film
Posted on May 21, 2006 at 06:06:01 PM by John Cones
Hasan:
You can organize your contributions to a project any way you want and then
bring in investors to complete the project. The fact that it is possible to do
this does not mean that you will be able to attract investors to a particular
project.
John Cones
Funding for new business
Posted on May 30, 2006 at 08:10:53 AM by Alana
John-
We are relatively new in the movie business but have a lot of wall st.
experience. We are in the process of nailing down a bunch of new projects with
award winning directors and producers and actors. The budgets in total are
approaching 25 million.
Is there some kind of single-source funding i.e. hedgefunds, investment
banking, etc. that could provide or would be interested in taking on a bunch of
new projects at once? Do the projects have to be separate llc's? We have some
big names here and want to keep our projects and not give them away.
Thanks,
Alana
Re(1): Funding for new
business
Posted on May 30, 2006 at 01:27:17 PM by John Cones
Alana:
There may be a single financing source that could provide that kind of money
for a studio-backed slate of films, but not likely for a new independent, at
least I'm not aware of any. The projects do not have to be in separate LLCs.
John Cones
Re(2): Funding for new
business
Posted on July 24, 2006 at 04:42:31 AM by Kyle
If you have experience in Wall Street my advice would be to look around Wall
Street as they are the ones financing big studios, you may have an in.
Kyle
Protection
Posted on May 30, 2006 at 11:40:37 AM by Beth
John-
If I wanted to approach wealthy investors like Bob Yari, Mark Cuban, James
Stern or someone else of that nature with new works my production company has
received (we are fairly new) and I don't want them to "usurp" my
projects, how can I protect myself? (this note has nothing against or
accusational about these figures)
Thanks,
Beth
Re(1): Protection
Posted on May 30, 2006 at 01:24:31 PM by John Cones
Beth:
That's more of a pure entertainment law question probably relating to copyright
or other intellectual property issues, as opposed to the kind of investor
financing questions we discuss here. I'd suggest you contact an entertainment
attorney with copyright and/or intellectual property expertise and have them
help you with that question.
Best wishes,
John Cones
Selling copyright to
finance film
Posted on May 31, 2006 at 06:37:54 PM by Robert
Hi John,
Telefilm Canada invests in Canadian film productions by purchasing a per cent
ownership in the copyright of the film. They then assign all rights w/r/t the
selling/distribution of the film BACK to the Producer / prodco.
I am considering applying this structure to raise money from private investors:
selling units of copyright on a per cent basis (while retaining my own chunk)
and ensuring that I have been assigned all rights to sell the film. Investors
(owners) participate in revenues according to their per cent ownership.
Do you have any thoughts on this kind of structure? Good bad or indifferent?
Thank you,
Rob
Re(1): Selling copyright
to finance film
Posted on June 1, 2006 at 09:25:53 AM by John Cones
Rob:
Throughout the time I've been working with independent film producers on
investor financing of their films, some have tried from time to time to come up
with what they believe are new and innovative ways to raise financing. I suppose
they believe that a new method is needed because it is difficult to raise
financing for an independent film. That is a fact. On the other hand, I've yet
to see any evidence that any of such so-called "new methods" are any
better or more effective than the more traditional methods. In addition, such
"new methods" are likely to involve novel questions relating to
legality, thus are likely to cost more in legal fees. Recognizing that about 1
in 3 of the film offerings of my independent producer clients have been
successfully funded using the traditional manager-managed LLC or limited
parternship structure in which a profit participation in the revenue-stream of
the film is offered to the investors (as opposed to a share of copyright), and
knowing that the odds of getting an independent film financed using other
methods are no better or worse, an independent producer proposing a "new
method" would have to create a successful track record over time in order
to persuade me or others that the "new method" is worth
consideration, or that any "new method" is worth the extra effort, or
that there is even a need for such a "new method". I personally know
an independent filmmaker who spent his entire life's savings (in excess of
$500,000) vigorously pursuing one of these new and innovative methods of film
finance and he never got his film produced. I know another independent
filmmaker (formerly an attorney) who came to Hollywood with the dream of going
straight to making big budget films with big-time stars, and the last time I
saw him he was wandering around on the street, homeless and mumbling
incoherently. So, my experience with the novel, innovative and risky approaches
is tainted with some known tragedies. Thus, my reaction tends to be somewhere
around "not impressed".
Best wishes,
John Cones
Re(2): Selling copyright
to finance film
Posted on June 1, 2006 at 11:17:51 AM by Robert
Wow! Sounds like you've certainly seen the dark side of failed film dreams...
I hadn't thought what I was proposing was a "new method" of film
financing at all-- neither "novel, innovative," nor
"risky." Simply an alternative.
As I mentioned, this is the way that the Canadian government has participated
in film financing for years. Not to say that it's the best way-- as independent
producers we certainly have our fair share of gripes with the Canadian funding
system!
Many Canadian producers (myself included) would like to see a more
"American" style of film financing applied here, which basically
means utilizing more private money and less government loans and grants.
My thought was that there might be a way to bring the Telefilm style of film
investment to the private sector.
Either way, I'll let you know how it goes and you can add my story to your
collection...
Thanks for the feedback,
Rob
Funding for Educational
Animation Company
Posted on June 2, 2006 at 11:22:11 AM by Michael S. Thompson
John, I have started an animation company that teaches children history.
Targeted distribution channels are Television, Direct to DVD, Educational
Supply Market, and Home School. We have two program series with complete show
bibles. My questions.
1) Should we reaise money for the C Corp?
2) Shoulds we make each show an LLC and raise money on a project basis.
Re(1): Funding for
Educational Animation Company
Posted on June 3, 2006 at 04:06:05 PM by John Cones
Michael:
I cannot tell you or any other filmmaker what they should or should not do
based on the limited information that can be provided in a forum like this.
However, I can provide some general discussion of the issues you raise.
For example, a corporation is typically used as a long-term operating company.
If you use it as a fund raising vehicle, you almost always run into corporate
control issues. That's one of the main reasons why independent producers often
limit the number of investors they bring into their operating production company
and use other investment vehicles such as limited partnerships or
manager-managed LLC's as the investment vehicles for one or more projects. Note
that I said "one or more projects". There is no need to create a
single investment vehicle or entity for each project, if you don't want. You
could conduct a mini-maxi offering seeking to raise a minimum, which would be
enough to finance the production cost of a single project, up to a maximum,
which would be enough to finance the cost of additional projects. The
corporation could serve as the manager of each of the LLCs used in this way.
You could also raise a limited amount of startup funds in the organization
phase of the corporation to help finance the project financing phases to
follow.
Keep in mind also that investors don't get the same tax advantages when
investing in a corporation that they do with flow-through vehicles like LPs or
LLCs. Also, corporate income is taxed at the entity level, whereas the income
of the flow-through vehicles is not taxed by the IRS until the revenues are
credited to the accounts of the individual investors.
John Cones
United Marketing Leads
Posted on June 2, 2006 at 11:28:21 AM by Michael S. Thompson
John, I am raising money for our educational animation company. I have heard of
United Marketing, a company that works with financial firms and provides leads
of investors who are looking for investment. Question:
1) Cannot seem to find contact info for them are you familiar with them and
have any contact info for them
2) If I am raising money for the C-Corp as opposed to LLC projects is this an
efficint way to raise the funds. The deal: raising 3 million in 1st round. 1st
$1 million will be raised as convertible note.
Re(1): United Marketing
Leads
Posted on June 2, 2006 at 02:31:45 PM by John Cones
Michael:
No, I'm not familiar with any of the list purveyors and not too optimistic that
using such lists will result in funding. You are not likely to find lists
specifically tailored for film investments and most investors on such lists are
not that interested in investing in film. There are too many other competing
investments out there that are less risky.
Furthermore, if you are cold calling from a list like that, you are calling
people that you do not know. So that means you will either have to conduct the
offering as a public/registered offering (SCOR, Reg A, SB-1, SB-2 or S-1) or
the public/private hybrid (Model Accredited Investor Act). You won't be able to
conduct an offering for either corporate shares or LLC units as a private
placement if you are cold calling strangers.
John Cones
Contracts
Posted on June 5, 2006 at 08:25:23 AM by Alana
what is the strongest form of commitment an actor can give to be attached to a
project
that would lead a new executive producer to persue raising money for the
project. Is a lois enough or do I need to see a contract? Are most movies
started with or without a contract?
Re(1): Contracts
Posted on June 5, 2006 at 12:36:14 PM by John Cones
Alana:
Your questions are not really tied to investor financing situations. However,
the strongest form of commitment an actor can give is a written contract
supported by consideration. Most movies are started without such a commitment
from a recognizable name actor, but most movies does get a theatrical release.
Most movies that get a theatrical release probably do have one or more
recognizable actors in them, however, they may or may not have committed in any
form prior to the funding.
John Cones
Test the waters
Posted on June 5, 2006 at 11:03:59 AM by W.F.M.
In reading Rule 254 of Regulation "A" for offerings up to $5,000,000,
which allow small companies to publish,deliver to prospective purchasers a
written document or to make scripted or television broadcast to "test the
waters" to determine if there is any interest, before undertaking a full-blown
offering.
And understanding MAIE, which permits advertising and general solicitation for
Rule 504 of Regulation "D",not exceeding $1,000,000.
Questions:
How are these rules different in there scope of advertising, one seems broader
in scope(Rule254,RegA),but guards against waisted time and money and the other
is limited(Rule504,RegD), but with no "test the waters" scope?
Is there a similar "test the waters" provision related to Rule 504 of
Reg D, before conducting this kind of offering?
Re(1): Test the waters
Posted on June 6, 2006 at 08:16:17 AM by John Cones
WFM:
Regulation A provides that printed advertisements may be published or radio or
television broadcasts made, if they state from who a Preliminary Offering
Circular or Final Offering Circular may be obtained, and contain no more than
the following information:
(1) the name of the issuer of the security;
(2) the title of the security, the amount being offered and the per unit
offering price to the public;
(3) the general type of the issuer’s business; and
(4) a brief statement as to the general character and location of its property.
A general announcement per the MAIA may be published by written document only
if it sets forth: (1) the name of the issuer; (2) the full title of the
security; (3) the anticipated suitability standards; (4) a statement that no
money will be accepted or is being solicited; no obligation if the recipient
responds; and if a disclosure statement is required, no consideration until
five days after delivery; (5) legend as to where can one get additional
information; B. The announcement may also contain: (1) A brief description of
the business; (2) the location of the issuer and its business; (3) the price of
the security or range, and if not known, the method of arriving at the price,
and the aggregate offering price. C. No other information is allowed to be
included. D. Dissemination to non-qualified investors is allowed.
The MAIA “announcement” provision does to seem to allow radio or television
broadcasts and requires some additional disclosure while also allowing a bit
more information to be included. Reg. D’s prohibition against general
solicitation and advertising do not apply to a Rule 504 offering. However, the
anti-fraud provisions do, thus an MAIA offering conducted pursuant to Reg. D,
Rule 504 at the federal level can rely on the MAIA test the waters provision.
John Cones
Re(2): Test the waters
Posted on June 6, 2006 at 08:25:12 AM by W.F.M.
Thank You, Mr. Cones.
Financing/Tax Code
Posted on June 13, 2006 at 09:24:00 AM by Rich
Hey John!
We currently have financers for our million dollar feature. The money will be allocated
to us over a period of 5 months to cover pre, prod. and post costs.
We want to draft a "bank note" that states that our financers have
the money and will allocate it to our production. This would be used to confirm
to guilds, agency's, etc that we have our budget. Is this a solid approach?
Also, what is the best resource to retrieve information on the job creations
act of 2004 section 181 code? If you are privy to this code could you summarize
in the most layman terms as possible?
We want to keep it simple for our financers!
Thanks.
Rich
Re(1): Financing/Tax Code
Posted on July 20, 2006 at 07:39:57 AM by Evan A Spier
I am considering making passive investments in my company's movies (I am an
employee).
What type of deductions can I take under Code 181?
How will my deductions differ from non-employee investors?
Thanks John.
Re(1): Financing/Tax Code
Posted on June 14, 2006 at 07:19:15 AM by John Cones
Rich:
The bank note question is not an investor financing question, so that needs to
be researched elsewhere.
A brief summary of Section 191 of the IRS Code follows:
Pursuant to the Special Rules for Certain Film and Television at
Section 244 of the American Jobs Creation Act of 2004 (which apply to films
commencing production after October 22, 2004 and before January 1, 2009), if an
investment vehicle such as an LLC acquires the rights to produce a feature
film, an LLC member/taxpayer may elect to deduct his or her pro rata share of
100% of the direct and indirect costs of producing the film as an expense for
the taxable year in which the costs of production are first incurred, so long
as the aggregate cost of the film does not exceed $15 million and 75% of the
total compensation paid to actors, directors, producers and other relevant
production personnel working on the film is paid for services performed in the
United States. If such election is made, no other depreciation or amortization
deduction will be allowed.
Other summaries appear online at numerous sites which can be reached by
searching for "IRS Code Section 181". A summary is provided by the
DGA. You can also go to the IRS Code and look for the actual section. In
addition, the actual language appears in the American Jobs Creation Act online,
so long as you are careful to look at the bill actuall passed by both the House
and Senate and signed by the President.
John Cones
Business entity
Posted on June 30, 2006 at 11:49:38 AM by TN
Hello John,
My dba production would like to make a film w/ budget of $800k, we plan to
invest $200k, and have 4 other active investors (director, producers…) to put
out the rest.
From reading your book and the discussion here, we have an idea that a
member-managed LLC might work for us, but my concern is:
Will this lock our budget, or can we still use this member-managed LLC to raise
more money in the future if needed (eg. Sign inverstor financing contract, add
members…) or what other choices will we have in the case we need more money to
complete the film?
Thank you for sharing your expertise,
TN
Re(1): Business entity
Posted on June 30, 2006 at 02:22:23 PM by John Cones
TN:
The more investors you have the less likely they will all qualify as
"active" investors, thus, continuing to add investors may create
securities compliance problems. If you want that kind of flexibility, and
you're raising as much money as you indicate, go ahead and invest a small
amount of money in doing a manager-managed LLC offering, do a mini-maxi, and
give yourself the flexibility to raise money from a larger group of people in
varying amounts (e.g., with a $25,000 unit size you could raise $800,000 from
32 investors; you could have the flexibility to sell fractional units or
multiple units).
John Cones
Re(2): Business entity
Posted on July 8, 2006 at 11:44:31 AM by TN
Can you briefly explain the mini-maxi, and how much it would cost to create
this manager-managed LLC and the necessary offering paperwork.
If we base in CA, you can work w/ us thru mail and/or email? And what initial
information will I need to gather?
Thank you John,
TN
Development Offerings
Posted on July 1, 2006 at 03:59:50 PM by Donna
John,
You've talked about development offerings on this board, when would a
development offering be appropriate or useful?
Donna
Re(1): Development
Offerings
Posted on July 3, 2006 at 12:23:09 PM by John Cones
Donna:
When I use the phrase "development offering" I'm also using the word
"development" in its broadest sense (i.e., that phase in the life of
a motion picture including the acquisition of rights, the writing of the script
and attaching elements). This development phase, the film's production phase
and the distribution phase can all be financed separately. In other words, the
development of a film project can be a stand-alone business, offering investors
the possibility of profits. With that in mind, when a film budget is too high
to be considered a likely prospect for 100% investor financing, another
possibility is to raise the money from a group of investors for this
stand-alone development phase, then take the fully developed script and the
attached elements (the package) to the industry for production financing. It is
not possible to define with certainty where to draw the line on what is
possible for production phase investor financing. I've seen as much as $4.5
million raised this way, but more often than not, the budgets for
investor-financed films is a million dollars or less. For these reasons, if you
film's production budget is $2 million or above, you may want to consider a
development offering first, unless you are fairly confident you can
successfully raise the amount of money you need from investors.
John Cones
Question about financing
workflow
Posted on July 5, 2006 at 00:11:45 AM by Mike C
I have read all sorts of things about financing and have come to one
conclusion: If I am a good cinematographer, I am still a lame producer.
First question I assume there are people to be hired out there who can help
find the people who invest in these films. Are these all producers, or are
there other people more specialized in this feild?
Second: I know I can't get a ton of money from a bunch of strangers on a
contract I have written. Can I approach one active investor who will give
business guidence (as I clearly have very little business skill) and invest the
money I need to go out and hire these people, assuming a set budget and ownership
is decided on first?
What is the best way of approaching a financing arangement, given that I have
little money of my own to spend setting up what I assume must be an LLC
arrangement (not the single active investor, but the many passive investors)
I guess what I am asking, if I need between 500K and 1Mil to shoot my feature,
and say 50K to get someone to do the rest of the fundrasing for me and lawyers
to structer it for me, what is the best route? can I offer small cash/big back
end deal?
I am also nervous about doing fund raising money without much business skill. I
think it would be amazingly obvious to all investors, I can only speak to the
merit of the film.
Re(1): Question about
financing workflow
Posted on July 5, 2006 at 07:09:21 AM by John Cones
Mike:
Producers of independent films come from all sorts of backgrounds. It is not
uncommon for screenwriters, directors, actors, cimematographers and others to
want to take their career ambitions into their own hands and jump start a
particular aspect of their career by seeking to produce a film in a way that
allows them to perform whatever function or play whatever role they choose
(i.e., no one else is telling them what they can or cannot do). Some of these
new producers have business backgrounds or training and some don't. Certainly,
our nation's film schools do not place much emphasis at all on the business,
legal and/or financing aspects of the film business. So, that creates a
situation where we have literally thousands of technically proficient
filmmakers out there competing for limited opportunities with limited skills
and training to create their own opportunities. That's exactly why I've spent
so much time in the 18 years I've been working with independent producers
providing film finance seminars, writing books like "43 Ways to Finance
Your Feature Film" and answering questions on this website. The
information is there but you have to be willing to put in some time, buy some
books, talk to a lot of people and do your research.
In the process of putting together a private placement film LLC offering, for
example, as you talk to the securities attorney from initial consultation
forward, you begin to pick up some of the specialized vocabulary necessary to
understand such deals. As you provide information about your film to the
attorney who is preparing the PPM, you learn more about what is important for
investors to know about your film and investment opportunity. As you read
through the first draft of the PPM, you develop a much better understanding of
how the LLC works, what the relationship between the investors and the manager
is, the tax implications of an investment, the status of the film industry and
even how the film industry works because there are discussions relating to
these topics included in the PPM. As you continue to work with the securities
attorney in preparing the PPM, it is also possible that he or she may be able
to help you put together some financial projections, specifically tied to your
film project. That helps you better understand and communicate to investors
about how the film's revenue stream might flow back to the investors, based on
the reasonable assumptions regarding what might happen in the future with respect
to the project. So, all of this is a learning experience for filmmakers, for
some, more than others. In any case, after going through the process of working
with your securities attorney and asking all of the questions you want to ask,
you will feel much more comfortable going out and asking investors for money
because you will have developed a much better understanding of what all is
involved and how it works.
In the meantime, it is probably important in your situation, which again is not
all that uncommon, to figure out a way to get some startup funds so that the
legitimate offering costs can be covered. You might want to start up a
production company with one or a few active investor partners as discussed in
"43 Ways". You might contribute your script, and they might invest
some money. You may also need some of these same people to help you raise money
as they become "upper level management" of your production company
and are therefore legally permitted to help raise money for your project (per
the SEC's Issuer Sales Rule).
You may feel like you can only speak to the merits of the film now, but after
doing the above, you will very likely feel much more confident about your
ability to express what investors want to hear.
Best wishes,
Is There A Simpler,
Cheaper Way?
Posted on July 6, 2006 at 07:23:01 PM by Mark Conrad
John,
Can't a person simply write a business plan that describes the ups and downs of
investing in a project, show it to family and friends, and raise money that way
without all the filings and lawyers fees?
How is that considered "securities fraud"?
I can see if someone is advertising in the Wall Street Journal for millions,
but what about small projects just trying to raise a few thousand dollars among
friends?
I've heard of people doing this all the time without incident.
thanks
Mark
Re(1): Is There A Simpler,
Cheaper Way?
Posted on July 7, 2006 at 08:31:30 AM by John Cones
Mark:
An oversimplified description of securities fraud would include raising money
from a group of passive investors (1) without fully disclosing in writing all
material aspects of the transaction (i.e., putting in writing everything
important that an investor should know before investing); (2) omitting
information that is material and (3) stating what information is put in writing
in a way that is misleading in a material way. In other words, you are taking
money from people by committing fraudulent acts, if you do any of those three
things. So, the first question is: "Are you selling a security".
Again, the shorthand description of the sale of a security is raising money
from one or more passive investors (i.e., people who are not involved on a
regular basis in helping you make the important decisions associated with the
project). There is nothing in the securities laws at either the federal or
state level that provides an exemption for family and friends. If anybody is
suggesting that, they are misleading you. Sure, it is less likely that family
and friends will sue you or ask for their money back, but the history of
Hollywood is replete with examples of friendly and family relationships being
destroyed over financial deals gone bad. Since independent films are among the
most risky investments in the world, I cannot recommend that anyone selling a
security skirt around the securities laws. There are significant risks. What I
have done is make the cost reasonable and simplfied the process (i.e., make it
easier for film producers to comply with the law). If you really want to take
the risk of doing irreparable harm to the career that you've worked hard to
prepare for by foolishly going out into the markeplace and selling a security
without complying with the securities laws (i.e., possibly committing a felony
and giving your investors the right to demand their money back and any time),
be my guest.
Best wishes,
John Cones
Re(2): Is There A Simpler,
Cheaper Way?
Posted on July 7, 2006 at 09:28:35 PM by Mark Conrad
John,
You are quite right, the law makes no distinction between family and friends
and the public, I think it's definately a bad idea to assume family and friends
would not sue.
There's something to the old saying that you should not do business with family
or friends, for that reason.
There's also the matter of federal law you have aptly mentioned.
The last thing I would ever want to do is break ANY law, let alone commit a felony!
I want to do the right thing for not only potential investors, but for my own
future.
You do definately make some very sound points, and also I appreciate your
taking the time to give advice and help.
By making the first steps affordable to filmmakers/producers and providing an
open forum as you have, it gives me great incentive to move forward and make it
all legal.
Your prices are very reasonable.
I will be contacting you via phone this week to get the ball rolling.
Thank You!
MC
New Media Production
Finance Vehicles
Posted on July 10, 2006 at 03:26:08 AM by David
New forms of media outlets such as youtube, ipod video, cell phone media, etc
seem to be gathering some steam for commercialized content either offered on a
pay per view basis, or monetized by ad dollars.
In regards to finance and investment vehicles, what would be some of the new
considerations for starting something like a web-series, or cell phone serial?
I would assume in certain cases, the production company might also become the
distribution company; therefore certain protections or languages would have to
be included in the PPM's for such ventures.
Best,
David
Re(1): New Media
Production Finance Vehicles
Posted on July 10, 2006 at 08:58:08 AM by John Cones
David:
As new media develops for entertainment content new language describing each
medium would ordinarily be added to the PPM to disclose to the prospective
investors what each new possible medium for exploitation was available. If you
are thinking about raising money from investors for a stand-alone "web
series" or "cell phone serial" you would have to provide some
reasonable evidence that the commercial value of such content warranted an
investment. If these new media simply represented additional media for the
exploitation of your content, they would simply be added to the discussion of
possible revenue streams.
John Cones
Business entity
Posted on July 10, 2006 at 09:54:07 AM by TN
Can you briefly explain the mini-maxi, and how much it would cost to create the
manager-managed LLC and the necessary offering paperwork.
If we base in CA, you can work w/ us thru mail and/or email? How long is the
process and what initial information will I need to gather?
Thank you John,
TN
Re(1): Business entity
Posted on July 10, 2006 at 02:34:30 PM by John Cones
TN:
This is the second time today that someone has asked me the question about the
cost of creating a manager-managed LLC and the associated offering paperwork.
First, please understand that phrasing the question that way is a bit like the
tail wagging the dog. Creating the manager-managed LLC is only a small part of
the job and does not have to necessarily occur prior to the offering. Such
phrasing is somewhat dangerous because if a producer goes to an attorney and
asks about the cost of creating an LLC (preparing and filing the LLC's articles
of organization and drafting the LLC operating agreement), the producer is
likely to get one answer (let's say in the $1,000 to $5,000 range) whereas if
the same producer asked the same attorney about the costs of a private
placement LLC offering (including creation of the LLC), the cost might range
from $10,000 to $50,000. Producers must understand what legal services they are
asking for or it does no good to compare prices.
The mini-maxi is a securities offering in which the issuer is seeking to raise
a minimum offering proceeds up to a maximum offering proceeds. The mini-maxi
gives the issuer a bit of flexibility in the amount of money to be raised, so
the issuer can respond to the marketplace and pursue the approach that is
supported by investor funds. Generally, investors funds in such an offering are
not available for use until the minimum is raised and the minimum needs to be
set a level that allows the issuer to pursue some legitimate business activity
that, in turn, provides an opportunity for the investors to make money (i.e.,
share in profits). In the alternative, securities offerings are conducted on an
"all-or-none" basis, in which a specified amount of offering proceeds
are set and no investor funds can be used unless and until all of such funds
are raised.
I am able to work with independent producers around the country as well as
California under certain circumstances. From the time the producer/client first
provides that first batch of information that generally comes from the
producer, it is possible to be on the street selling LLC units in a private
placement in 2 to 3 weeks, but that really depends more on the client than the
attorney. If you want the disclosure checklist (i.e., a list of the information
that is normally provided by the producer for a private placement film
offering) request the disclosure checklist at jwc6774@adelphia.net.
John Cones
valuation
Posted on July 10, 2006 at 10:07:42 AM by Mike S.
John,
Thanks for making this information available to us.
my question is about valuation for our LLC on a second interim financing round
(beyond family and friends): One of our potential investors has suggested a
"put" entitlement for himself and his friends, if they invest. With
several projects in our roster, a "put" right of a prospective
investor's ability to exercise a sell-back of his debt-plus equity
"kicker"(in our case 1% per unit) would be based on not the profits
on hand after box office, but on the valuation.. and that could be many times
the cash on hand, no? This is a potential dealbreaker here. What to do?
Thanks for your help here.
Re(1): valuation
Posted on July 10, 2006 at 04:21:41 PM by John Cones
Mike:
I don't have any experience in this area and suggest that you talk to an
accountant and/or the securities attorney working with you.
John Cones
raising money through
brokers
Posted on July 12, 2006 at 05:55:06 AM by michael smithgall
If you were to structure your deal so that you are offering a security in the
form of a limited partnership or some other regulated entity then couldn’t that
be sold through a broker much the same as a standard public offering is made?
There are as you know many many small firms that have the contacts and the
sales force to quickly market the project. Depending on your answer would there
be a general size of the offering that would make this a practical solution. I assume
the larger the offering the more interest because of the greater commission and
fee potential.
In a related question how do brokerages get away with soliciting to cold call
lists if those are clearly not existing relationships.
Thank you in advance for your help
Re(1): raising money
through brokers
Posted on April 1, 2007 at 08:57:35 AM by Jeffrey Allen
We offer access to 21 direct capital providers via our automated finance
portal; including PPO/IPO securities offerings at
www.GlobalCrossroadsCapital.com
Jeffrey Allen
Re(1): raising money
through brokers
Posted on July 12, 2006 at 09:54:33 AM by John Cones
Michael:
If by "broker" and "brokerage" you mean NASD/SEC licensed
broker/dealer firms and their registered representatives, the answer is yes,
such firms could legitimately sell private or public offerings structured as
limited partnerships or manager-managed LLC (such units or interests being
securities). On the other hand, there has been little interest shown by such
broker/dealer firms in selling the high risk independently produced feature
film offerings whether at the national firm level, the regional firms or the
small boutique firms. They consider independent film offerings to be too exotic
for most of their investor clients. In addition, most of the bigger firms will
require that you put together your securities disclosure document, including
the appropriate language providing for broker/dealer commissions, submit it for
a due diligence review and even charge a fee for reviewing the offering
documents regardless of whether they choose to sell it or not. Most independent
filmmakers choose not to go through that risky process considering that the
history of such reviews do not result in a selling agreement.
NASD/SEC broker/dealer firms generally reach out to prospective investors with
whom they do not have a pre-existing relationship by promoting
public/registered offerings or industry studies. Once a prospective investor
responds to one of those contacts, they are registered as a "New
Account" and thus the pre-existing relationship for subsequent private
placements is established.
John Cones
Re(2): raising money
through brokers
Posted on July 12, 2006 at 11:47:44 AM by Michael Smithgall
John, thank you for the prompt and informative response. Yes I did mean
NASD/SEC broker dealers. It would seem that these brokers that push the penny
stocks and the like would not have as many qualms about the riskiness of the
investment, but I certainly see your point. You bring up a point that spawns an
idea. If the flow of the contact starts with an offer to send a research study
on the industry and then a follow up is considered a warm call and can then go
to the next stage which I assume is the prospectus of a specific investment
then couldn’t that same plan be put into action for investment in a film or
even a development company?
This sounds cliché but couldn’t I call all the dentists in my state and offer
them an industry study on Film investment (I assume this would have to be done
by a credible researcher and not just me) and then follow that up with a call
to gauge their interest. Each time weeding out the no’s from the maybe’s and
eventually end up with a face to face to close the deal or not..
I don’t have a problem with sales. I have been selling all my adult life,
however my problem with this industry is that the target is less obvious.
Simply knowing I should call people that make 250k a year or have net worth
over 1mil still seems like a shot in the dark. An executable marketing plan
such as the one described above would seem far more efficient and effective.
Re(3): raising money
through brokers
Posted on July 13, 2006 at 04:19:38 PM by John Cones
Michael:
You're right in that part of the appeal of an industry study prepared by a major
broker/dealer firm is that they presumably have people on staff that have the
expertise to be able to put together a credible study. These studies are
generally offered though mass media advertising, such as radio ads or some
other medium. They send the report to people who request them. They are not
cold calling to ask people if they are interested in such a report.
The Model Accredited Investor Exemption (MAIE) would allow an issuer to raise
up to $1,000,000 from accredited investors only.
Accredited investors have a net worth of $1,000,000 (exclusive of homes,
furnishings and auto) or net annual income of $200,000 ($300,000 with spouse).
In my book "43 Ways to Finance Your Feature Film" I discuss an
approach that initially involves the use of a generic business plan while
seeking funding from one or two active investors. Presumably, during what is
essentially a general soliciation you would not be selling a security, since
the investors you seek are active, not passive. If you find one or two active
investors, that way and you feel you can work with them, you've accomplished
what you set out to accomplish. If not, you may want to stop the general
solicitation using the generic business plan, wait some three to four weeks,
convert the appropriate information in the business plan into a PPM,
restructure the deal for a larger group of passive investors and start a
securities offering. At that point, you would presumably be able to call on all
of the people you met while conducting the general solicitation with the
generic plan, because you now have the required pre-existing relationship for
purposes of the securities offering. That's one way to expand the pool of
prospective investors. Another is to follow the SEC's issuer sales rules and
bring in other upper level management who have pre-existing relationships.
John Cones
Internet Securities
Offering
Posted on July 19, 2006 at 01:10:27 PM by Roth Scott
John,
Thank you for hosting such a wonderfully informative forum. My question is
regarding offering securities for particular films via the internet. I have
emailed the SEC directly and they have told me to procure advice from an
attorney. I would like to know if I, as the the owner of a company/studio, have
to be liscensed to sell securities in projects that my company is offering to
the general public or if we must go through a securities broker?
I also would like to know if offering via a website to passive investors is
possible and if so, can the prospectus be offered on the website similar to
other agreements that one must "accept" online for any purchase?
Thank you for your time and I appreciate any feedback that you could give me.
Sincerely,
Roth Scott
Re(1): Internet Securities
Offering
Posted on July 19, 2006 at 03:24:08 PM by John Cones
Roth:
I can't give you "advice" on a forum like this and can't answer such
a complex question in such limited space. However, I suggest you review the SEC's
Rule 3a4-1 of the '34 Act with respect to issuer sales and review the following
excerpt from my book "43 Ways to Finance Your Feature Film" for
information relating to Internet sales.
Selling Securities Over the Internet
Many independent film producers seeking financing for their feature films now
believe that the Internet is the answer. Many have sought ways to use the
Internet in raising money, some without considering the securities law
implications and others with some recognition that the securities laws do apply
in certain situations. The truth is that the sale of securities over the
Internet raises several very specific and unique problems with respect to
compliance with both the federal and state securities laws and the SEC is not
only actively monitoring the Internet, but has brought criminal charges against
issuers violating those law with Internet sales or offers.
As a general rule, the offer and sale of securities is subject to the
regulation of both federal and state jurisdictions. Both the federal government
and the various states reserve the right to regulate the offer and sale of
securities (i.e., protect their citizens from the possibility that some
unscrupulous individuals may seek to promote the sale of worthless paper). Each
state has a securities regulatory authority (state agencies with varying names)
that regulate the offer and sale of securities, and the federal government has
the SEC that regulates the offer and sale of securities at the federal level.
Both jurisdictions prohibit fraud and misleading practices in the sale of
securities. For a current listing of the state regulatory agencies go to the
NASAA.org site online and click on the “Find a Regulator” button or some
similarly named button (the specific words may change from time to time).
A state’s jurisdiction is triggered whenever an offer to sell a security occurs
in that state. Regardless of whether either the offeror or the offeree is in a
particular state, offers occur when it either originates in the state or when
it is directed by the issuer/offeror to the state and is received. Because of
the pervasive reach of the Internet, an offer to sell a security posted on the
Internet would, pursuant to that line of reasoning, trigger the jurisdiction of
every state in the U.S. as soon as the information is posted online.
As noted elsewhere in this book, securities can be offered and sold generally
(and on the Internet) if they are first registered with each of the applicable
state and federal jurisdictions (public/registered offerings).
Public/registered offerings permit the use of all forms of advertising and
general solicitations, so Internet sales and offers are allowed. The
alternatives to the initial requirement of securities registration occurs when
the offer and sale of securities complies with all of the conditions and
limitations imposed on one or more of the available exemptions from the
securities registration requirement (private placements or exempt offerings).
The private/exempt offerings generally do not allow advertising or general
solicitation, thus, except in the special circumstances discussed below,
Internet net sales are not permitted for private/exempt offerings.
The most recent regulatory wrinkles are the so-called public/private “hybrid”
offerings, but those also technically fall in the category of an exemption. The
same is true for the “covered” securities of NSMIA. If securities offered and
sold in compliance with the federal exemption (Regulation D, Rule 506), such
securities are considered “covered” pursuant to the National Securities Market
Improvement Act (i.e., state jurisdiction is preempted by the federal law). So,
the initial choice is still the same with Internet sales. Securities either
need to be registered or their offer and sale must qualify for available
exemptions from the registration requirement. Now, however, the kind of
exemptions that are available have been expanded to include some that allow a
limited form of advertising and general solicitation, including sales and
offers over the Internet.
John Cones
Re(2): Internet Securities
Offering
Posted on July 19, 2006 at 03:24:58 PM by John Cones
As noted earlier, the registration of securities is expensive, time-consuming
and complex, so that option is not commonly used to raise the financing for
independently produced feature or documentary films. If the registered/public
offering option is chosen, then the issuer must follow the written rules
applicable to either the S-1, SB-1, SB-2 or Regulation A federal filings
combined with the applicable state registration requirements, or for
public/registered offerings of $1 million or less, the state SCOR form,
combined with Regulation D, Rule 504 at the federal level (see earlier
discussions of each form of securities registration). These registered
offerings can be offered over the Internet pursuant to the specific rules
associated with each form of registration.
If the issuer/producer wants to conduct a multi-state offering and can limit
the offering to $1 million or less, the NASAA Model Accredited Investor
Exemption (a public/private “hybrid” offering) is available, a limited amount
of information can be posted in any form of advertising medium, including on
the Internet, and sales can be effected through the Internet (see the MAIE
discussion above). The California Section 25102(n) exemption, however, is of
little use in multi-state offerings, and not even that helpful for intrastate
offerings because of the limitations of the federal rules relating to
intrastate offerings.
If on the other hand, the producer/issuer needs to raise more than $1 million
from private investors, he or she may choose to comply with all of the
conditions and limitations imposed on the use of Regulation D’s Rule 506. Such securities
are considered “covered” securities pursuant to the National Securities Market
Improvement Act (NSMIA), thus state jurisdiction (other than the requirement of
a notice filing on such sales) is preempted by federal jurisdiction.
In a series of cases involving Internet sales, the SEC has ultimately
determined that Internet sales for a private placement can be permitted if,
pursuant to a Regulation D, Rule 506 offering all prospective offerees of the
securities are precertified as either accredited (see the Regulation D
definition of accredited investor), or as nonaccredited but sophisticated
(i.e., investors who either alone or together with their purchaser
representative have such knowledge and experience in financial and business
matters that they are capable of evaluating the merits and risks of the
prospective investment), through the use of a generic questionnaire posted on
the issuer’s Internet web site. A generic prospective investor questionnaire
does not refer to any specific securities transaction. It simply inquires about
the accredited status or sophisticated investor status of the investor for
purposes of qualifying them for the offering, which they have not yet seen.
Once the prospective investor has been prescreened and qualifies, then the
offering information can be made electronically available to the prospective
investor through the use of a password. In other words, the actual offering
memorandum (securities disclosure document) is posted on the producer/issuer’s
web site, but on a password protected page, so that it is not accessible to
anyone unless and until they have been prescreened to determine if they qualify
as either accredited or nonaccredited/sophisticated, and otherwise meet
additional investor suitability standards for the offering (e.g., the
investor’s investment must not exceed 10 percent of the investor’s net worth).
For additional information, see the Joseph J. Kornblum article online at
http://www.dbr.com/mdeia-html.asp?id=28 (“Offering Securities on the Internet”).
Unfortunately, the Internet does not solve the basic problem of independent
filmmakers seeking investor financing for their project (i.e., the investment
they are offering is still highly risky, they may not have any recognizable
name actors or actresses attached and they are not likely to have any
distribution in place). Even though the theory of selling on the Internet makes
some sense (i.e., the Internet can give a filmmaker who does not know a lot of
people greater access to more prospective investors), years of practical
experience suggest that the independent filmmakers who are successful at
raising money from investors have done so in face-to-face meetings with people
they and their associates knew before the start of the offering. One likely
exception to that rule based on practical experience is the film with a message
about which some people are passionate and want to see communicated through
film.
Electronic delivery of securities disclosure document. Recognizing that the
SEC’s antifraud rules require that all material aspects of the transaction be
disclosed in writing to prospective investors prior to investing, the SEC has
reasoned by drawing an analogy between electronic distribution of securities
information to the print medium, stating that it “would view information
distributed through electronic means as satisfying the delivery of transmission
requirements of the federal securities law if such distribution results in the
delivery to the intended recipients of substantially equivalent information as
these recipients would have had if the information were delivered to them in
paper form.” [SEC Release #33-7233, Section II.A, October 6, 1995].
The SEC goes on to say that electronic disclosure of information must provide
adequate and timely notice to investors, afford effective access to the
information, and give reasonable assurance that the information in fact has
been delivered. For example, merely posting a document on a web site will not
constitute adequate notice, absent evidence of actual delivery to the investor.
[SEC Release #33-7233, Section II.A, October 6, 1995]. This requirement of
“evidence of actual delivery” may be satisfied by two paper methods – letter or
postcard, but also a directed Internet message (e-mail) can satisfy such actual
delivery requirements.[SEC Release #33-7233, Section II.A, October 6, 1995].
If an investor consents to electronic delivery of the final disclosure document
for an offering by means of a web site, but does not provide an electronic mail
address, the issuer may post its final disclosure document on the site and mail
the investor a notice of the location of the disclosure document on the
Internet along with the paper confirmation of the sale. [SEC Release #33-7233,
Example 10, October 6, 1995].
It is also necessary that investors have access to required disclosure that is
“comparable” to postal mail and that the investor must have the opportunity to
retain the information or have ongoing access equivalent to personal retention.
[SEC Release #33-7233, Section II.A, Note 22, October 6, 1995].
Issuers should have reasonable assurance, akin to that found in postal mail,
that the electronic delivery of information requirement is satisfied. The
delivery requirements can be satisfied by the investor’s informed consent to
receive information through a particular electronic medium coupled with proper
notice of access. [SEC Release #33-7233, Section II.C, October 6, 1995].
Sufficient evidence of delivery can also include:
(1) an electronic mail return receipt or confirmation that a document has been
accessed, downloaded or printed;
(2) the investor’s receipt of transmission by fax;
(3) the investor’s accessing by hyperlink of a required document; and
(4) the investor’s use of forms or other material that are available only by
accessing the document. [SEC Release #33-7233, Section II.C, October 6, 1995]
A document posted on the Internet or made available through an on-line service
should remain accessible for so long as any delivery requirement under SEC
rules applies. [SEC Release #33-7233, Section II.A, Note 26, October 6, 1995].
The SEC requires issuers to make paper versions of their documents available
where there is computer incompatibility or computer system failure or where
consent to receive documents electronically is revoked by the investor.[SEC
Release #33-7233, Section II.B, October 6, 1995].
The Commission permits an offering to be limited entirely to persons that
consent to receive a disclosure document electronically, but if it is not so
limited, a paper version of the disclosure document must be given to
broker/dealers to be made available to investors (or be made available to
investors by the issuer) who do not have online access.[SEC Release #33-7233,
Section II.B, October 6, 1995].
Re(3): Internet Securities
Offering
Posted on July 23, 2006 at 02:48:01 PM by Roth Scott
John,
In your book, which is very informative, you state that a producer would not
register with an S-1 if they wanted to sell shares of a particular project.
Taking this into account, is it possible to sell securities of particular
projects and not the company? What should they register with if they do not fit
into any exemptions and want to sell securities of single films?
Thanks
Roth
Re(4): Internet Securities
Offering
Posted on July 24, 2006 at 07:24:55 AM by John Cones
Roth:
Something's getting lost in the translation. Your statement of what I wrote is
not entirely accurate. The S-1 is the highest level of securities registration.
An issuer can seek to qualify for an S-1 registration whether selling corporate
shares, limited partnership units or manager-managed LLC units. It's just that
single projects like feature film seem to be best suited for project financing
and that is most appropriate for the limited partnership or manager-managed LLC
investment vehicles as opposed to the corporate offering. With that in mind,
you don't actually sell securities in a "particular project" but in
the investment vehicles (i.e., the limited partnership or manager-managed LLC
that is being used as the investment vehicle to raise funds for a particular
project). So if you wanted to raise money to produce a single film, you would
most likely want to consider using either the limited partnership or the
manager-managed LLC as the investment vehicle and sell units in either (both of
which are securities) to raise funds to produce the film).
John Cones
Re(5): Internet Securities
Offering
Posted on July 31, 2006 at 06:07:49 PM by Roth Scott
The question for me then becomes, what if you want to raise money for another
film? You wouldn't start a new manager-managed LLC or limited partnership each
time you wanted to raise money for a new film. Would you issue more or new
securities in the "investment vehicle"? I'm sorry but securities are
so nebulous and the SEC doesn't make it easy to find information. Thanks for
all of your help.
Re(6): Internet Securities
Offering
Posted on May 4, 2007 at 05:39:05 PM by John Cones
Roth:
Nothing says you have to limit your offering of a single film. Some people go
out with mini-maxi offerings for a slate of films.
John Cones
Film Producers
Posted on July 20, 2006 at 01:52:09 PM by Glenn Varney
I am trying to find out whether a company named Clear Vision Media Production
Group, Inc exists and is legitimate because I am about to invest in a movie
called "Pet Project".
Re(1): Film Producers
Posted on July 20, 2006 at 04:18:53 PM by John Cones
Glenn:
I'd suggest you check the Secretary of State website for the state in which you
believe the corporation was incorporated to see if the corporation is in good
standing, and if the information available through the Secretary of State is
consistent with what has been provided to you in whatever form of information
has been furnished to you. Since you have not indicated, if the corporation is
selling shares in an existing corporation, such shares would be considered
securities and a securities offering including a securities disclosure document
would have to be provided to each prospective investor prior to their
investing. If the corporation is serving as the manager of an LLC offering or
the general partner of a limited partnership offering, the same is true (i.e.,
such interests are securities and the securities disclosure document must be provided).
At a minimum, the securities disclosure document needs to disclosure all
material aspects of the proposed transaction, not leave anything out that is
material and state whatever is disclosed in a manner that is not misleading.
The securities disclosure document should also state whether it is a private
placement or public/registered offering and which set of securities rules are
being complied with. If you are not getting this sort of basic information from
the seller, I'd certainly have reservations about the legitimacy of the
offering.
John Cones
Active v. Passive LLC
Member-Managers
Posted on July 25, 2006 at 09:33:24 AM by Kent W.
John,
Please beat this dead horse one more time:
If you are setting up a member-managed LLC for a film, and are willing to
disseminate control to member-managers, is there any indication from the SEC as
to what degree of activity and control by the member-managers is necessary in
order to avoid "passivity" and the triggering of securities laws? In
our instance, all of the participants have experience with in film or other
performing arts or other risky investments (eg real estate).
Thanks in advance,
Kent W.
Re(1): Active v. Passive
LLC Member-Managers
Posted on July 25, 2006 at 10:39:39 AM by John Cones
Kent:
The active/passive distinction is an over-simplification of the considerations
relating to whether a security is being offered that I've used for years in
helping to alert independent producers to the possibility that they may need to
comply with the securities laws. The SEC does not provide any guidence on this
form of the issue. However, borrowing from tax law language we can reason by
analogy that active investors are those who are both capable by reason of their
experience in business affairs and are regularly involved in helping to make
the important decisions for the business. So, if the LLC is a member-managed
LLC and all of the member-managers participate in making the important
decisions and they are all capable of making informed judgments with respect to
such matters, the presumption would be that the units in such an LLC would not
be securities. On the other hand, if there were so many such member-managers
that as a practical matter some of them were really passive, that might trigger
a need to comply with the securities laws. Unfortunately, I can't tell you how
many member-managers would be too much, so I can only encourage producers to
bring in as few of such persons as possible, to create a management structure
that allows all of them to participate in the important management decisions
and to document that participation along the way.
John Cones
Re(2): Active v. Passive
LLC Member-Managers
Posted on July 25, 2006 at 11:13:26 AM by Kent W.
John,
Thanks for your swift and helpful response. Sounds like a lawyer drafting this
operating agreement would have to be cautious with his/her verbiage.
Thanks again,
Kent W.
Investor Opportunities
Posted on July 31, 2006 at 02:04:49 PM by Tarabu Betserai
Hi John:
I read a few of your excellent articles and wanted to follow up with a specific
question. Recently my partner and I had a very successful reading of our
screenplay on many levels. An invidual representing an investment group in SF
was in attendance and has expressed very strong interest that his group wants
to invest in the project. We've had several meetings and they have asked us for
a "simple" business plan to explain the investment opportunities.
Basically our projections and what they would get for their investment. But
from reading your article it doesn't sound like a business plan is what we should
be providing them. Neww to the financing side. any suggestions.
Re(1): Investor
Opportunities
Posted on August 1, 2006 at 07:51:10 AM by John Cones
Tarabu:
A business plan may be adequate, so long as it is combined with some sort of
investment agreement and investment vehicle. If the investment group is
investing as a group (a single entity) and they and you are willing for them to
be actively involved in making the important decisions relating to the
production and distribution of the project, you could use an investor financing
agreement, a joint venture agreement, the initial incorporation scenario or the
member-managed LLC (see "43 Ways to Finance Your Feature Film" for
further discussion of these active investor options and the book "Film
Industry Contracts" for sample agreements). On the other hand, if each
individual in the group and others not in the group will be investing, you are
correct, a business plan would not be appropriate. In that case, assuming you
are conducting a private placement, you would need a private placement offering
memorandum (PPM) and the investment vehicle would either be a limited
partnership, a manager-managed LLC or you would be selling shares in an
existing corporation.
You also want to do extensive due diligence on this so-called "investment
group" because that's exactly how some of the most common film finance
scams start. They get you all excited by telling you after some exchanges of
information that you have been approved for funding, then at the right moment,
ask for some sort of fee from you, then disappear. It's hard to distinguish
between the legitimate and illegitimate film finance opportunities. Ask them
why they are interested in investing in such a high risk independent film? What
other films have they invested in? With what results? Do they want to be
actively involved? Or do they want to be passive investors? Are they investing
as a single entity or as individuals? Is the so-called investment really going
to be structured as a loan? Is it a contingent loan and therefore a security?
Are they going to ask you to pay any sort of fee at any time? Is the person you
are talking to acting as a finder? Before you go to the trouble of putting
together a business plan and budget, why not ask to see their paperwork, how
the deal would be structured, along with additional information on the
so-called investment group. Find out if the company is a limited partnership,
an LLC or a corporation, formed in what state. Check online with the Secretary
of state and see if the entity is still in good standing.
Good luck,
John Cones
print and advertising PPM
Posted on August 9, 2006 at 03:15:53 PM by linda
I am creating a PPM to use specifially for raising funds for P&A. What
elements should I include in the PPM?
Thanks!
Re(1): print and
advertising PPM
Posted on August 9, 2006 at 03:53:36 PM by John Cones
Linda:
The elements of a PPM are too numerous to list here. In addition, a list
already exists. You start by reading the SEC's Regulation D and all of the
regulations referred to in that portion of Regulation D upon which you are
relying. Be sure and pay special attention to the list of required exhibits.
Then you also should read the applicable statutes and/or regulations in each
state where you intend to raise money. These may also require certain
disclosures. In the alternative, hire a securities attorney who's experienced
with film offerings and save the time and effort.
John Cones
Re(2): print and
advertising PPM
Posted on August 9, 2006 at 04:33:30 PM by Linda
Thank you for the quick response, this confirms what I need.
Passive Investor
Posted on August 18, 2006 at 04:51:28 PM by Audra
Hello John,
Thank you for all of this wonderfully-useful information! I look forward to
consulting with you in person in the future.
I am preparing to shoot a feature and was curious about what contracts I should
use for "passive" investors. I read your response for active
investors, but I want to make sure I'm using the correct contracts for an
investor who will not be creatively involved.
Any additional information on financing in general is much appreciated.
Thanks again!
Re(1): Passive Investor
Posted on August 18, 2006 at 08:02:19 PM by John Cones
Audra:
When raising money from investors, it's not just about which contracts are
needed. More important and the bigger part of the task is preparation of the
the required securities disclosure document (private placement offering
memorandum for an exempt offering and a prospectus for a public/registered
offering). Accompanying the disclosure document will be the subscription
agreement. That's the "contract" that the investors sign. It also
tells them to whom to make the investor check should be made payable. Exhibit
"A" to the disclosure document, usually is the operating agreement
(if using a manager-managed LLC or a partnership agreement if using a limited
partnership). Also among the exhibits may be the financial projections,
counsel's securities opinion, the tax opinion, industry articles and press
releases, material contracts, chain of title documents and letters of
intent/interest.
John Cones
Active Investing
Posted on August 29, 2006 at 09:37:58 AM by Patrick
Hi John,
I'm currently attempting to produce a feature film with a budget of only $35k.
I presently have four interested investors who have collectively committed
about two-thirds of this budget. It seems likely that once the full budget is
reach, we will have less than ten investors total and it seems that a
member-managed LLC would be the ideal scenario for our business. The problem
is, of the investors committed thus far, two of them currently live and work
abroad. My question is: Is it possible to constitute active membership from
afar? The person who has pledged the most funds has an estensive film/theatre
background but will not be returning to the states anytime soon. Nonetheless,
this person is capable and would like very much to be involved with the
marketing of our project (and has already, for example, set up a meeting between
myself and a recommended web-designer, which to me seems like active
participation). So my second question is: If an investor is focused on only a
single aspect of the project (e.g. marketing), can that be considered active
management?
Thank You
Re(1): Active Investing
Posted on August 29, 2006 at 10:21:46 AM by John Cones
Patrick:
There is no clear dividing line in such a situation, but it would certainly
make me nervous to have ten investors and try to take the position that they
were all regularly involved in helping make the project's important issues. To
my thinking, that's too many people. Also, being actively engaged in a single
aspect or a single important decision is not enough. These days, with the
communications advances, I'm not as concerned about the distance. It's the
number of people and whether they all are regularly involved in helping to make
the important decisions.
John Cones
Re(2): Active Investing
Posted on August 31, 2006 at 10:43:58 AM by Patrick
Thanks for your insights, John. But if setting up an active-member business is
risky in my case, how feasible or common is it for productions with a budget as
low as mine to get into selling securities? From what I understand, the costs
of setting up a private placement memorandum could be as much as my entire
budget or at the very least more than I can afford.
Patrick
Re(3): Active Investing
Posted on August 31, 2006 at 03:09:56 PM by John Cones
Patrick:
The legal work associated with a private placement can be handled for as little
as $7,500, and only $3,500 up front for a small offering like yours. So,
suggestion number one is to keep looking for a securities attorney with film
offering experience that is willing to work for less than what you've been
quoted. Second suggestion, increase your minimum and maximum for the offering
to $50,000 to $100,000 so that the offering costs won't be quite as
unreasonable.
John Cones
SEC form SB-1
Posted on August 29, 2006 at 06:05:47 PM by Charles
I am in the planning stages of a production company that would like to raise
funds via the internet by selling securities to the general public for small
amounts. The production company would start and own companies that that are
particular film projects. I am forecasting cost projections and was hoping you
could give me a figure as to how much I might expect to pay to register using a
form SB-1 per film project company. I understand that it is contingent and
speculative but as I say, I am forecasting. Thanks for your help and your great
service.
Re(1): SEC form SB-1
Posted on August 30, 2006 at 10:08:39 AM by John Cones
Charles:
For the state registration fees, you'll probably want to go to the NASAA.org
website and click on "Find a Regulator". That will give you the
agency name that regulates the sale of securities in each state, along with
their address and phone number. They will also have links to their websites.
You may be able to find the registration fee for each state that you intend to
sell in that way or by calling them on the phone. Some are more friendly and
cooperative than others.
The SEC registration fee is currently $107 per million being offered. That's
based on the maximum offering price.
SB-1s have to be filed electronically through the SECs EDGAR system. That takes
a bit of effort to get up and running.
Attorney fees may vary wildly from $25,000 to above $100,000. You'll have to
check around and talk to several to get a feel for it. You'll also want to be
sure the attorney has specific experience with an SB-1 filing and has done it
within the recent time period in which the electronic filing is required.
Otherwise, they may be taking on more than they bargained for, since the
electronic filing imposes an entire set of new tasks on top of an already
intensive undertaking.
Of course, you probably already have some idea about how much your website will
cost.
Another area that often presents some difficulty is getting a CPA to provide
the required audited financial statements (or to provide you with an estimate
of cost for that). You'll want to take a look at the SEC requirements re
financial statements for an SB-1 offering and pass those along to the
accountant you choose.
Note also that the SEC has guidelines for the preparation of financial
projections. You'll want to review those.
Best wishes,
John Cones
Re(2): SEC form SB-1
Posted on September 5, 2006 at 02:28:07 PM by
Charlers
John,
Thank you for your insight. Just a quick follow up, Does the person selling the
securities have to be registered i.e. the producers who are selling directly to
the public? Thanks again for all of your help.
Charles
Client Film Wins Awards
Posted on September 1, 2006 at 12:10:17 PM by John Cones
Client Film Wins Awards
One of my client films (“The Keeper”) portraying the life and times of the 11th
Century Persian Poet/Mathematician/Philosopher Omar Khayyam, and investor
financed through a member-managed LLC offering, has won two awards from the
World Academy of Arts, Literature and Media. One is for Best Directing of an
Independent Film and another for Costume design. The awards will be handed out
on October 27th , 2006 in Budapest, Hungary. The film’s theatrical run ended in
movie theaters in 14 cities six months ago. The film’s Special Edition DVD will
now be available for sale through 2600 Walmart Superstores across the US
starting Tuesday, September 5th. It can also be rented after September 5th at
Hollywood Video Stores (www.hollywoodvideo.com), Blockbuster Video Stores
(www.blockbuster.com), and online at (www.Netflix.com). Additionally, the Music
Soundtrack CD is exclusively available on line through the production company’s
official website at www.keepermovie.com. The film’s producer/director is Kayvan
Mashayekh.
John Cones
Re(1): Client Film Wins
Awards
Posted on October 4, 2006 at 01:19:57 PM by Martin
Congratulations John!
IRC Section 181
Posted on September 5, 2006 at 04:20:08 PM by Marcus
John,
Is there a reason why in utilizing IRC Section 181 that I couldn't bring
together multiple people and in effect create a production equity fund? For
example if I had 4 people each contributing $5 million to create a fund of $20M
from which I make 2 $8-10 million dollar films? Would that work?
Re(1): IRC Section 181
Posted on October 4, 2006 at 08:30:33 PM by ira
be careful, the cap for section 181 is 15 million except in certain locations
its 20 million....so want to separate entities each the cap is not exceeded
Re(1): IRC Section 181
Posted on September 6, 2006 at 08:00:17 AM by John Cones
Marcus:
On the face of it, since each of your proposed films fit within the bugetary
limits imposed by Section 181, there appears to be no reason that taxpayers
would not be able to deduct 100% of their expenses in the year in which those
expenses are incurred. There is no language in the statute suggesting that
funding two qualifying films from the same offering with the same investors is
a problem. On the other hand, for purposes of answering such questions, I'd
suggest you also talk to one or more accountants and attorneys who practice
more in areas relating to tax law.
John Cones
Brokering
Posted on September 6, 2006 at 06:40:16 PM by Charles
John,
Thank you for your insight. Just a quick follow up, Does the person selling the
securities have to be registered i.e. the producers who are selling directly to
the public? Thanks again for all of your help.
Charles
Re(1): Brokering
Posted on September 7, 2006 at 08:13:35 AM by John Cones
Charles:
As a general rule the individuals selling securities either need to be
registered as SEC/NASD broker/dealers or comply with the requirements of the
SEC's so-called Issuer Sales Rule. That rule requires that persons selling on
behalf of the issuer be (1) upper level management of the issuer, (2) have
other duties besides raising money, (3) not be compensated on a
transaction-related basis (i.e., no commissions based on a percentate of sales)
and (4) not have been involved in the selling of securities in the past 12
months. This is just a summary of the rule, see the actual SEC rule for the
exact wording.
Also, if the offering is subject to state jurisdiction, some states like New
York, for example, may require that the issuer register to conduct sales in
that state.
John Cones
Negative Pickup
Posted on September 7, 2006 at 01:52:44 PM by tim gant
I'm currently packaging a film to achieve negative pickup financing.
Being that I have rights to the comic book property which the film is based on,
and i own the script, am i due any initial 'film rights' fees for my
characters, since the distribution partner will profit from my characters.
The comic book property is owned
only by me, so the distributor
has no right to profit from it for free..
Re(1): Negative Pickup
Posted on September 8, 2006 at 07:38:17 AM by John Cones
Tim:
I'd suggest you talk to one or more entertainment attorneys who regularly work
on issues relating to underlying rights and their value in negotiations leading
up to a negative pickup transactions. My work is limited to investor financing,
as is this site. The negative pickup is a form of lender financing. Investor
financing typically involves the sale of securities.
Best wishes,
John Cones
getting investors
Posted on September 8, 2006 at 09:33:11 PM by Deb
Hello, John.
I am a partner of an LLC(I will call it OUR) which is also a 33% equity partner
of the "movie project." THe funding for the moving that OUR LLC need
to raise is $4.9 mill.
OUR LLC consists groups of other groups (about 3) which I hold 1 investor
group.
For my investor group, I want to setup an "C" corporation rather than
LLC. I want to raise funds by having the investors participate in product
placements with a fee payable to my corporation. But as far as unparticipating
product placement investors (some are foreigner and US residents), how can I
raise funds with them? Do I need a license to do this?
These people will be investing from $10000 to $1 mil. What would be the best
way?
Also, as a partner of OUR llc, the surety bond will have both LLC and my
corporation so that my investor's moeny is secured. IN the movie, when does the
surety bond become effective? At the time the fund is released or when the
movie is in progress?
Raising funding in US and other country are my major focus.
Thank You,
Deb
Re(1): getting investors
Posted on September 10, 2006 at 08:25:19 AM by John Cones
Deb:
Sorry, but your description of the circustances are a bit confusing. LLCs are
made up of members or managers, not partners. So, when you say you are a
"partner" of an LLC, that is confusing. Please clarify.
Also, is that LLC a member-managed LLC or a manager-manager LLC? Has it already
been formed? If you state that you want the entity to be a "C" corp.
that suggests you are either changing the status of the LLC to a "C"
corp. or the LLC has not actually been formed. Which is it?
In my experience, it is not very useful to try to raise money through product
placements for an independently produced film. The reason is that usually these
films have no guarantee of distribution, have no guarantee of a theatrical
release, thus the producers cannot assure the product suppliers that anyone
will see the film. Under those circumstances, how can anyone arrive at a value
or price for the product's appearance in the film?
Further, if you raise money through product placements, that's not really
investor financing, since, presumably the product suppliers are providing
either the product or the product plus some compensation for the appearance.
Since that's not a form of investor financing, it's not even an appropriate
question for this site and I really have no expertise in the area.
Finally, when you talk about a "surety bond" do you mean
"completion bond"? And, if so, why would anyone take the position
that a "completion bond" secures the "investors' money"?
That's not the purpose of a completion bond. Or, on the other hand, if you are
actually purchasing a surety bond, for the purpose of securing investor funds,
is that an appropriate purpose? A surety bond is issued by one party, the
surety, guaranteeing that he will perform certain acts promised by another or
pay a stiuplated sum, up to the bond limit, in lieu of performance, should the
principal fail to perform. How does that secure investor funds?
John Cones
Re(2): getting investors
Posted on September 11, 2006 at 09:15:58 AM by DEB
Clarification:
The llc is already setup. Within this LLC I am a member and in position to
raise funds. My membership will be thru the C corporation in the LLC.
The agreement between LLC and my corp. will be drafted and executed.
The money that I raise will be deposit into Corp bank then to the LLC.
The LLC is as I have mentioned is an equity investor with 2 other companies
under the MOVIE Inc.
For example, ABC movie Inc.:
shareholders: LLC, company 1, & company 2.
LLC is supporting the funds for this movie, and also has the co-exective
producer position. LLC was definately informing me about the surety bond on the
author/producer.
And the completion bond was separate from the surety bond.
I have few larger corporation and individual investors and product placement
investors - if the surety bond is in effect, I do not have to worry about
returning these investor's money if any unfortunate event to happen. My
investor's funds are protected to receive their money.
Then what do I need in agreement to these investors? The word
"investor" does not apply to this situation at all if they are
product placement equity partner in the movie?
Or if it's individual, what do I need to raise funds (agreements, SEC,etc)?
The amount would be from $10000 to $1 mil. Your advise please.
Re(3): getting investors
Posted on September 11, 2006 at 01:26:11 PM by John Cones
Deb:
I cannot give "advice" here at this site, since no attorney/client
relationship has been established. Also, I'm still not real clear about what
you are doing, but in any case, the upper level management of an issuer of a
security can sell the securities purusuant to the SEC's Issuer Sales Rule. Some
states like New York may require that the issuer register for sales in that
state.
John Cones
LLC capital account
question
Posted on September 15, 2006 at 10:53:37 AM by Jody Cosgrove-Kao
Hi John,
Myself a first-timer in structuring a film org and in the midst of forming an
LLC amongst 6 individuals, a question was posed about capital accounts as
listed within the articles of organization. What is the definition of a capital
account? Is there a federal ruling mandating that each member of the LLC
maintain a separate capital account tied into the LLC or may there be simply a
single one? Appreciate your feedback.
Regards,
Jody
Re(1): LLC capital account
question
Posted on October 4, 2006 at 08:27:26 PM by ira
Simple overview of capital account:
you generally start at with 0
then if you put money into the partnership...that's a capital contribution and
that increases your capital account.....if you take money out of the
partnership..."a withdrawal"
that decreased your capital account..the third part is multiply your percentage
interest in the partnersip and multiply by the loss/gain...add the capital
contributions...subtract the withdrawals
add your percentage of income or subtract your percentage of loss...and there
you are.....ending capital.......which is only destined to be begginning
capital for the next year and start the whole process all over again.
Re(1): LLC capital account
question
Posted on September 16, 2006 at 07:33:37 AM by John Cones
Jody:
Set forth below for your amusement is language drawn from a manager-managed LLC
operating agreement recently reviewed and approved of by a Big 5 accounting
firm. It does appear that there are existing IRS regulations relating to the
creation and maintenance of capital accounts for direct participation programs
like LLCs. The accountant you hire to prepare the investor K1s will actually set
up and maintain these accounts (not actually bank accounts but an accounting
record). So, if you have other questions about such tax and accounting matters,
I'd suggest that you discuss it with an accountant. Keep in mind that this
language came from an operating agreement for a manager-managed LLC. Since you
have so few investors, if you are willing to allow them to be actively
involved, you may want to consider (or you may already be contemplating) a
member-managed LLC. Again, you'll need to talk to an accountant to determine if
the same rules and procedures with respect to capital accounts applies to a
member-managed LLC in the same ways that such rules and procedures apply to a
manager-managed LLC.
Best wishes,
John Cones
4.7 Capital Accounts--An individual Capital Account shall be established and
maintained in accordance with the principles set forth in Treasury Regulations
under Code Section 704 for each Member and Manager strictly in conformity with
the requirements of Treasury Regulation §1.704(b)(2)(iv). Each Member and
Manager's Capital Account will be credited with such Member and Manager's
Capital Contribution and each Member and Manager's Capital Account shall be
further credited and debited, as the case may be, to reflect such individual
Member or Manager's share of LLC distributions, income, losses and all related
tax items such as gains, losses, deductions, credits and depreciation
recapture. In the event that any Member or Manager shall at any time have a
negative balance in such Member or Manager's Capital Account, such negative
balance shall not constitute a debt owed by such Member or Manager to the other
Members or Manager or the LLC (except as provided in paragraph 4.6 for the
Manager). No interest shall be paid on Capital Accounts.
The foregoing provisions and the other provisions of this Operating Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent with such regulations. In the event the Manager shall
determine that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto are computed in order to comply with
such Regulations, the Manager may make such modification. The Manager also
shall (i) make any adjustments that are necessary or appropriate to maintain
equality between the aggregate Capital Accounts of the Members and the amount
of capital reflected on the LLC’s balance sheet, as computed for book purpose,
in accordance with regulations Section 1.704.1(b)(2)(iv)(q) and (ii) make any
appropriate modifications in the event unanticipated events might otherwise
cause this Operating Agreement not to comply with Regulations section
1.704-1(b).
“Capital Account”: With respect to any Member, the Capital Account maintained
for such Member in accordance with the following: (i) to each Member’s Capital
Account there shall be credited (A) the amount of money and the fair market
value of any property contributed to the LLC by the Member (“Invested
Capital”)...? [not a defined term...?], and (B) such Member’s distributive
share of Net Profits and any items in the nature of income or gain that are
specially allocated pursuant to Section 5.1 of this Agreement; (ii) to each Member’s
Capital Account there shall be debited (A) the amount of money and the fair
market value of any property distributed to the Member, and (B) the Member’s
distributive share of Net Losses and any items in the nature of expenses or
losses that are specially allocated pursuant to Section 5 of this Agreement.
“Adjusted Capital Account Deficit”: With respect to any Member, the deficit
balance, if any, in such Member’s Capital Account as of the end of the relevant
fiscal year, after giving effect to the following adjustments: (i) credit to
such Capital Account any amounts that such Member is deemed obligated to
restore pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the
items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and
shall be interpreted consistently therewith.
PPM
Posted on September 19, 2006 at 12:33:15 PM by KB
Is there somewhere I can find an outline or guide to creating a PPM for a film
I am trying to producer?
Thx
-K
Re(1): PPM
Posted on September 19, 2006 at 03:35:38 PM by John Cones
KB:
There's a sample PPM in my book "Film Industry Contracts". However,
it's dated in the sense that the tax discussion needs some revised language and
the "State of the Industry" section would have to be updated, as
would the box office comparables. It's also structured as a limited partnership
as opposed to a manager-managed LLC and some of the partnership agreement has
changed. Further, an independent producer cannot provide the required tax
discussion section. That section must be written by a tax attorney or
accountant. Also, the required exhibits per Regulation D include a securities
opinion and a tax opinion. Both of those have to be provided by appropriate
professionals. In my judgment, it makes more sense, if you intend to raise
money from investors anyway to bring at least one of those investors in at an
early stage with startup funds and use those funds to hire an experienced securities
attorney to prepare the PPM for you. It should be easier, quicker and safer
that way.
John Cones
Re(2): PPM
Posted on October 5, 2006 at 10:22:56 AM by Susan Shapiro, Esq.
I'm an attorney who is preparing a PPM subscription agreement for my own
prodution company. I was wonder do you have or know of an on line version of a
PPM I could look at?
Susan Shapiro
Re(3): PPM
Posted on October 5, 2006 at 12:41:46 PM by John Cones
Susan:
There was an old version of a limited partnership PPM in my book Film Industry
Contracts available through Samuel French Bookshop.
John Cones
Re(4): PPM
Posted on October 10, 2006 at 03:24:50 PM by David Fuentes
what is a PPM and how do I go about
getting one?At what stage do I get one?
Re(5): PPM
Posted on October 11, 2006 at 12:19:12 PM by John Cones
David:
A PPM is a private placement offering memorandum, the securities disclosure
document required to be prepared and provided to each prospective investor in a
securities offering (one with passive investors) before they invest. It is
accompanied by a subscription agreement and purchaser questionaire. As a
general rule, it is best to work with a securities attorney who has experience
doing film offerings, assuming that is what you are about to do. The PPM should
be prepared and distributed to prospective investors before you accept any
money from investors.
Included as an exhibit to the PPM will be the LLC operating agreement (assuming
you have chosen the manager-managed LLC as the investment vehicle), a tax
opinion, a securities opinion and possibly financial projections, letters of
intent/interest, press articles and material contracts.
John Cones
Section 181 - Tax Benefits
Posted on September 26, 2006 at 11:22:24 AM by Jeff
Hi John,
Regarding Section 181 and the tax benefits, I read in previous postings that an
LLC or other vehicle could receive the associated benefits.
If I am correct, the individual or entity must be the "owner" of the
movie, which would effect negative pickups, etc.
My question is if an LLC is to take advantage of Section 181, who must own the
copyright? Does one member of the LLC need to own it, or could the LLC, as a
whole, own the copyright?
Thank you,
Jeff
Re(1): Section 181 - Tax
Benefits
Posted on September 26, 2006 at 02:38:40 PM by John Cones
Jeff:
Generally, with respect to investor financing of a film project through a
manager-managed LLC, we have the screenwriter execute a short form copyright
assignment transfering the copyright to the script to the LLC Manager and that
is filed with the U.S. Copyright Office, then when the LLC is formed, the LLC
Manager executes a similar document to transfer copyright to the LLC. That way
the LLC owns the copyrights during its term of existence and the owners of the
LLC (its members) are considered the owners of the movie.
John Cones
Documentary Film Model
Posted on September 30, 2006 at 00:42:52 AM by Justin Frimmer
I am in the process of completing a private placement memorandum for a
documentary that has nearly completed shooting and wanted to know if the
financing models and rules are generally the same for documentaries.
Also, regarding revenue projection, do documentaries follow the same rules,
meaning are gross receipts split between the distribution company and
producers/investors or does the distribution company take all receipts when it
acquires the rights to a documentary film (such as Wordplay or Mad Hot Ballroom
or other theatrical docs of recent)?
And last question: as far as doing a regulation D offering, we are only raising
$80k so I am assuming we would exempt ourselves according to rule 504? And if
so, what advertising and soliciting can we legally do over the Internet, phone
and mailing?
Thanks in advance.
Re(1): Documentary Film
Model
Posted on September 30, 2006 at 04:44:10 PM by John Cones
Justin:
I cannot tell from your post whether you are attempting to draft a PPM by
yourself or using an experienced securities attorney, but I must caution you to
carefully review the specific disclosure guidelines associated with the
specific exemption on which you are relying, including referenced regulations,
to make sure that there is no requirement for a securities opinion (that must
be provided by an attorney) and no requirement for a tax opinion (that may be
provided by a tax attorney or an accountant). Also, an LLC manager or an LP
general partner cannot appropriately provide a tax dicussion, which also may be
a required disclosure.
In answer to your specific question, yes, the same rules generally apply to a
securities offering regardless of whether it is for a feature film or a
documentary. In all liklihood, the distributor will deduct its fees and then
the distribution expenses from its gross receipts before arriving at net
profits (aka net proceeds) and then the production company and the distributor
will share that according to the negotiated percentages in the distribution
agreement. Thus, the financial projections will be similar to those for a
feature film, although, the assumptions underlying the projections,
particularly with respect to the anticipated amount of gross receipts will be
less.
If you want to advertise or conduct a general solicitation, on the Internet or
otherwise, you cannot rely on Regulation D, Rules 504 through 506. Reg. D is a
private placement and does not allow advertising or general solicitation. Since
you are raising such a small amount of money, you may want to consider the
Model Accredited Investor Act which allows you to raise up to $1 million from
accredited investors only, and allows a certain amount of advertising.
John Cones
Re(2): Documentary Film
Model
Posted on September 30, 2006 at 09:43:08 PM by Justin Frimmer
Thanks. As far as the Model Accredited Investor Act, that would mean that
investors need to have a net worth of $1 million or $200,000 income? Not sure
if that would work for us as we are planning to break up the investment to 30
units of about $2500 and approach a broader class of investors who might not
make that.
As far as attempting to draft a PPM myself, the answer unfortunately is yes- at
least until we have enough funds to have a securities attorney to look at it
and make changes.
Unfortunately, with the current film investment climate, if I have to choose
between getting arrested and not making the film at all, I choose the prior.
I appreciate your advice though and will definitely contact you when funds come
to fruition.
Thanks again.
Re(3): Documentary Film
Model
Posted on October 1, 2006 at 09:32:08 AM by John Cones
Justin:
Actually, I said "act", but the name of the NASAA model statute is
"Model Accredited Investor Exemption" or "MAIE". If that
doesn't work for you, please note that most of the state exemptions which have
to be paired with the federal exemption you are using, do not recognize Reg. D,
Rule 504. Thus, in all liklihood, you'll have to rely on Reg. D., Rule 505. If
you choose to comply with Reg. D., Rule 506, state jurisdiction is pre-empted,
except for the required notice filings.
Also, note that most securities attorneys would prefer to start with their own
document, since some of the language in a securities disclosure document that
they have used before, particularly language that has already been approved by
SEC attorneys for a public/registered film offering is language that they do
not have to scrutinize so closely. What you are proposing is to create more and
unnecessary work for a securities attorney, which is the case whenever any
non-attorney self-prepares any legal document or proposed agreement, no matter
your good intentions. I've always thought, producers would be better off if
they would go out and make a deal with one or two family and/or friend type
investors who are very supportive of what you are doing to raise startup funds
so that you can afford to have an experienced securities attorney properly prepare
the PPM and advise you as to which exemptions to use. I've always felt that if
you can't make that preliminary deal for a small amount of startup funds, it is
not very likely that you will succeed in raising the full amount of funds
needed, thus, the entire exercise is a waste of time. It's sort of like
creating a preliminary hurdle or test to help determine whether you are able to
raise money for a film project, by taking it a step at a time. So, your choices
are not limited to being arrested or not making the film. There are other
options.
John Cones
Re(4): Documentary Film
Model
Posted on October 1, 2006 at 12:22:40 PM by Justin Frimmer
Sorry, one more question.
So states do not recognize Reg. D, Rule 504? For California then, would
exemption come through California Corporations Code section 25102(f)?
Thanks again.
Re(5): Documentary Film
Model
Posted on October 1, 2006 at 01:02:44 PM by John Cones
Yes.
Re(4): Documentary Film
Model
Posted on October 1, 2006 at 11:53:06 AM by Justin Frimmer
Thanks again.
Unfortunately, I have no family or friends with money for this type of
investment.
As far as what you said: "I've always felt that if you can't make that
preliminary deal for a small amount of startup funds, it is not very likely
that you will succeed in raising the full amount of funds needed, thus, the
entire exercise is a waste of time."
I couldn't disagree more and I think that is at the core of the disconnect
between film money and the true creatives. I have a long list of people who are
interested in coming in on this at a rough cut stage including the top sales
agent for indie films in the country. I have got great, great feedback from
everyone who has looked at it but when it comes down to being the first to put
their money down, they would much rather wait and put their money into a
project that looks like something that has already been done. That is just the
reality.
If I had waited for startup funds, I would still be waiting with nothing shot.
I'd love to make some friends who have startup funds. Does everyone else have
these friends? Perhaps we could meet for drinks....
The Seed Money Catch-22
Posted on February 4, 2008 at 08:46:46 AM by Joe
Producer
It is true, the securities laws of this country are suppressive and favor
investors' interests over the interests of entrepreneurs and talent -- as if
money were more valuable than talent and creativity. Very perverted view of
reality given that talent and labor are the SOURCE of money.
As a producer with over 30 years of experience raising money (via private
placements and public offerings), my personal observation is that
"seed" money is usually the most difficult money to raise. Investors
rarely believe in producers or entrepreneurs enough to put up such "first
money in." They want to jump on the bandwagon after it's rolling down the
hill often meaning that, after a $10,000 or $20,000 private placement
memorandum is in place -- along with all appropriate documents (subscription
agreement, questionnaire, budget/use of proceeds, financials, etc.) and often
some "name" talent in place -- they are willing to invest. Then, of
course, it's usually NEVER the entrepreneur/producer's friends or associates
that will invest. It's usually people that are friends of friends -- yet
securities laws demand that the producer have a "pre-existing
relationship" for unregistered offerings. Again these are totally
suppressive and unrealistic laws favoring the investor to the detriment of the
producer. The reasons it's usually not close friends and associates that can
help the producer are covered in recent studies relating to the behavior of
social networks.
I feel that if the securities laws were made to favor the entrepreneur for the
first $20,000 - $25,000, and then favor the investor after that, more projects
would get funded and the overall risk would be reduced because producers would
more quickly/easily be in a position to hire the necessary legal and accounting
talent for drafting the PPM and other docs. Nothing much happens until and
unless this PPM (or appropriate circular appears), and then there's at least
another $5,000 worth of expenses relating to printing, postage, phone, and
general office expenses that are necessary to promote the offering to
investors. All in all, the political class has made it almost impossible for
start ups, not only in film, but in all other industries.
Re(5): Documentary Film
Model
Posted on October 1, 2006 at 01:11:06 PM by John Cones
Very funny, but also sad. Don't wait for startup funds, go out and get them.
Best of luck to you and hope you can avoid any complications with the
securities regulatory authorities who regularly monitor this website.
John Cones
business plan
Posted on October 10, 2006 at 03:47:21 PM by Ismael David Fuentes
besides an executive summary,what
should be included in a business plan
for raising money?
Re(1): business plan
Posted on October 10, 2006 at 04:59:18 PM by John Cones
Ismael:
First, you want to make sure that the business plan is the appropriate
document, and what investment vehicle should be used with the business plan,
after all, investors cannot invest in a business plan. If you are seeking to
raise money from a group of passive investors, a business plan is not
appropriate. For that you will need a securities disclosure document, which
includes additional disclosures beyond what the business plan provides. If an
offering to passive investors is an exempt offering (i.e., private placement),
then your securities disclosure document would be a private placement offering
memorandum (PPM). If the offering to passive investors is a public/registered
offering, the securities disclosure document would be a prospectus. The SEC
provides rather extensive and specific disclosure guidelines for both.
If the business plan is being used to raise money from a few active investors,
it needs to be combined with either an investor financing agreement (see sample
in the Film Industry Contracts book, available through Samuel French Bookshop),
a joint venture agreement (also in the Film Industry Contracts book), a new
corporation or a member-managed LLC.
If the business plan is the appropriate document, as per the above, its
contents may include the following:
Executive Summary, Introduction (Setting of the Stage), Status of the
Independent Producer, Motion Picture Industry Overview, General Company
Description, Management and Organization (narrative biographies), The Proposed
Film, Film Synopsis/Treatment, Screenplay Rights,
Comparable Box Office Performances (or distributor rentals), Production of the
Picture, Budget/Use of Proceeds,
Distribution Approach, Funding of the Picture and Cofinancing and Exhibits
including: Resumés of Principals, Literary Property Option/Acquisition
Agreements, Financial Statements, Letters of Interest/Intent, Industry
Articles, Press Coverage, Financial Projections. The following are other
possible exhibits (depending on the stage at which financing is sought) that
may be included as part of the business plan: title report, copyright search
report, chain of title documents including a certificate of authorship for the
screenplay, copy of the copyright registration, copyright assignment,
distribution agreement(s), completion bond commitment letter, corporate
resolution authorizing the producer to negotiate and sign a financing
agreement, final screenplay and shooting script, cast and production credits,
synopsis of the script, biographies of key people, feature stories on lead
actors and the director, production stills, casual cast photos, agreements
relating to the film's music, the MPAA ratings certificate (if available) and
the E&O certificate of insurance.
This entire business plan outline and list of possible exhibits appears in the
book "43 Ways to Finance Your Feature Film".
John Cones
investor finance agreement
Posted on October 13, 2006 at 03:46:46 PM by felix ofosu-yeboah
Could you please explain the investor finance agreement to me ?
Re(1): investor finance
agreement
Posted on October 14, 2006 at 07:47:54 AM by John Cones
Felix:
An investor financing agreement is merely a 6 or 7 page contract between a
producer (production company) and a single active investor. The investor puts
up the money for the production (or development deal), is regularly involved in
helping make important decisions for the project and receives a profit
participation in return. There is no entity involved and no limited liability
protection for the investor. A sample of the investor financing agreement
appears in my book "Film Industry Contracts" available through Samuel
French Bookshop. As with all other forms of film finance, there are advantages
and disadvantages. It is difficult to find a single investor who is willing to
invest a significant amount of money in a single high risk independent film
project. Also, such investors tend to want limited liability protection. Others
also do not want to be activley involved. Further, the producer, in most instances,
do not want their investors actively involved in such a creative venture. So,
that's where the choice for the producer comes down to spreading the risk
amongst a larger group of passive investors and recognizing that such a
structure involves the sale of a security, thru mandating compliance with the
securities laws. But, there still may be instances in which the investor
financing agreement may be useful, thus, it must be mentioned and considered
from time to time.
John Cones
Executive Producer Credit
Posted on October 15, 2006 at 09:02:52 AM by Patrick
Hi John,
Is it common for entertainment attorneys doing legal work for a film to receive
credit as Executive Producer? In the case of our prospective LLC, the
attorney's duties will include drafting the operating agreement, drawing up
cast and crew contracts, and providing general consultation on issues of
copyright, etc. We will be paying the attorney an upfront 3% of our ultra-low
budget and an additional contingent fee of 3% of our total net profits. The
third stipulation of the pending engagement is the executive producer credit,
and I didn't know if this was anything to raise an eyebrow at.
Re(1): Executive Producer
Credit
Posted on October 15, 2006 at 07:10:12 PM by John Cones
Patrick:
No one knows "how common" such a practice is because no one has the
screen credit information for every independent film produced to match with the
services provided, and then be in a position to compare how many gave such a
credit as opposed to how many do not. All you can do is talk to as many other
entertainment attorneys you can and conduct your own survey. Since this is not
an investor financing question, nothing else need be said.
Best wishes,
John Cones
Re(2): Executive Producer
Credit
Posted on October 16, 2006 at 09:09:08 AM by Patrick
The reason I deemed this question appropriate to a discussion of investor
financing is because it seems to me that an attorney regarding his or her
services within the realm of executive producership is considering such
services an investment. While I understand that terms and agreements vary
widely from film to film, it just seemed to me a contradiction for someone
considering their services an investment to also be paid upfront for that
investment.
Documentary film financing
and production
Posted on October 15, 2006 at 09:40:50 AM by brian hammer
I have read somewhere that anyone with a (documentary) film idea and treatment
pretty much has to get his own financing, and the posts on your site seem to
confirm that. I have a 3-3+-page treatment nearly finished (pending confirmation
of information) that I think could get some serious attention if it is produced
and distributed properly since it deals with a highly controversial but
intriguing view on a scientific/medical/public health issue. My plan was only
to do a lot of the hard intellectual work and topic research as well as prepare
a treatment with hopes to get a production company interested, who in turn
would arrange the financing and produce the film under a fair contractual
agreement with me. Is this plan unrealistic, or are there steps to take along
the lines I would prefer? I had been assuming there are people out there
looking for decent treatments and documentary ideas. I have thought of
approaching documentary film production companies and have already started this
a little, but would appreciate good advice. If you know of production companies
that specialize in scientific/medical/public health issues and can recommend
where to look for them, so much the better. Thanks for your input.
Re(1): Documentary film financing
and production
Posted on October 15, 2006 at 07:12:47 PM by John Cones
Brian:
We have tried to make it clear that this site is for asking questions about
investor financing. When you get one of those let me know.
Best wishes,
John Cones
Donations for documentary
Posted on October 16, 2006 at 02:47:28 PM by Jake
John,
I'm trying to raise a small amount of money for a documentary film. I'm the
sole manager of a California based LLC production company. I want to solicit
funds via the Internet. Can I accept donations in any amount made out to my
company? If I don't provide a tax write-off to the donator and they don't
invest, what other legalities are there?
Thanks for your wonderful site.
Jake
Re(1): Donations for
documentary
Posted on October 16, 2006 at 04:03:25 PM by John Cones
Jake:
I'm not a non-profit guy, but if you want to accept donations, then it is
presumed that they will be tax-deductible donations. In order for the donations
to be tax-deductible they must be made to a non-profit entity. Thus, it appears
that your LLC will need to associate with a non-profit for purposes of
producing your film. In such a case, you would not "solicit funds" on
the Internet but seek tax deductible donations.
John Cones
LLC startup in California
Posted on October 16, 2006 at 03:15:11 PM by Jody
Hi John,
If not utilizing and paying for the services of an entertainment and tax or
securities attorney who would both advise and expedite the business and legal
setup of a member-managed LLC for a film enterprise, what is the average time
span to expect an LLC state-deemed number from the Sec. of State? I was
informed the dep't is backlogged which means 2-2and 1/2 months. I don't exactly
have 2-1/2 months to begin.
Aside from our group's (at-this-point) consistent formulation of an (because
there are no funds)operating agreement, zeroing in on a couple potential
"passive" film investors, investors package creation (PPM w/a
subscription agreement and purchaser questionaire--unless A PPM is incorrect
for a member-managed LLC), business plan (for our own purposes), marketing
tools, etc - am I at a standstill to conduct formal business until this magical
number arrives? Obviously my hands are tied in obtaining a fed id # and opening
up a bank account. Thanks in advance for your time and reply.
Jody
Re(1): LLC startup in
California
Posted on October 16, 2006 at 04:14:09 PM by John Cones
Jody:
An experienced securities attorney would be able to get LLC Articles of
Organization filed with and date stamped by the California Secretary of State
within 3 to 4 days. Drafting an operating agreement would require more time.
However, if your investors are going to be passive, you would need to create a
manager-managed LLC, not a member-managed LLC and you would need a properly
drafted PPM because you would then be selling a security (i.e., units in a
manager-managed LLC). On the other hand, if you only had a few investors and
they were going to be active (i.e., they were capable of being active and you
were willing to allow them to be actively involved in the management of a
creative venture like film), you would not need a PPM, a business plan would
suffice. One caution however, the California Department of Corporations appears
to have taken the position, in at least one instance, that advertising on the
Internet, even in the sale of a few units in a member-managed LLC somehow
magically converts that non-security into a security. Under such circumstances,
no one can tell what is permissible. Maybe you should have a chat with the duty
officer at the DOC.
John Cones
Business Plans
Posted on October 17, 2006 at 11:11:01 AM by Adam
Dear John,
I know that you have spoken in great detail about business plans vs. securities
disclosure agreements, however it seems and correct me if I am wrong - many
producers are breaking the law when it comes to private investors.
I have spoken to many producers and they have had investors finance films with
nothing more than having a business plan and a script.
I am from Canada, so I wanted to clarify if these rules also apply in my
country as I have to be honest - I have never heard a producer mention the SEC
or securities disclosure agreements.
Essentially what I am asking is - say an investor loves a script and accepts
the finacial terms of the business plan (projected gross, potential return).
Would it be illegal for him to cut you a cheque right then and there?
Lastly, what if a production company was to hire a film business professional
with a resource network of private investor contacts - could that person
legally call his contacts and pitch the film to them for financing with only a
business plan and a script?
I wish that I was able to talk to you personally about my feature film project
and the situation I am in as it help make better sense out of this post, but I
greatly appreciate your time and the kind courtesy that you provide.
In the event that I can call you, please let me know.
Thank you,
Adam
Re(1): Business Plans
Posted on October 17, 2006 at 12:36:27 PM by John Cones
Adam:
Yes, it is true that some film producers are not aware of the legal
requirements relating to raising money from passive investors and they break
the law. Film schools generally do not teach much about film finance, and even
less about selling securities. Some of the film industry seminar providers are
also quite careless about providing accurate information on this very issue.
I've actually attended seminars sponsored by FIND (formerly IFP/West where they
charge a fee for some big law firm to serve as the seminar sponsor and then
allow that firm, because they are a sponsor, to install an attorney from their
firm to moderate a discussion on film finance. When the discussion got around
to investor financing several bits of important misinformation were offered by
uninformed producers on the panel and the attorney moderator did not know any
better and said nothing. That's pitiful! Other seminar providers actually advise
filmmakers to engage in "guerrilla" filmmaking techniques including
breaking the law with regards to securities law compliance. You simply cannot
always rely on other producers to give you solid advice regarding film finance
or other law related matters. Further, as an attorney, I am simply not
interested in representing a producer who does not intend to comply with the
law.
In answer to your specific question, if you are talking about passive investors
in the U.S., yes, it would be illegal to accept a check from a passive investor
without providing that investor with a properly drafted PPM prior to accepting
the check. And, once again, a business plan is not the same as a PPM.
Some business plan consultants get a little fuzzy on this issue too, because
sometimes they can't resist selling their business plan services to naive
producers who actually need a PPM (not a business plan) because they clearly
intend to raise money from a large group of passive investors. It's disgusting,
but I've had the producers in my office complaining about being sold a business
plan that they didn't need and couldn't use.
On your second question, (again assuming you are seeking to raise money from a
group of passive investors) the business professional would have to comply with
the SEC's issuer sales rules in order for him or her to be able to raise money
on your behalf from prospective investors with whom he or she has the required
pre-existing relationship.
The risk is simple! If you are selling a security (i.e., profit participations
to passive investors) and you do not register the security with the appropriate
securities regulatory authorities, or comply with all of the conditions and
limitations imposed on the use of an available exemption from the registration
requirement, you are very likely to be guilty of selling an unregistered
security which is a felony and you can be prosecuted criminally. In addition,
any disgruntled investor could demand their money back at any time and you
would have no defense.
Some producers are being misled, others are simply unaware, and still others
think it's smart to ignore the laws. I've done as much as I can to help
independent producers to understand their compliance obligations with respect
to the federal and state securities laws. If they are not paying attention or
ignore the available information, and get into trouble, I can't be very
sympathetic.
Best wishes,
John Cones
IRC Section 181
Posted on October 17, 2006 at 01:11:53 PM by CLAY
John,
I am working on a PPM for a feature file and would like to know how 181 applies
for practical purposes (ie what are some examples of expenses that fall under
this section). If you have a table, spreadsheet, or brief section on how this
applies from an old PPM, it would be much appreciated.
Thanks,
Clay
Re(1): IRC Section 181
Posted on October 18, 2006 at 06:50:44 AM by John Cones
Clay:
The language that I have devloped for summarizing the impact of the Section 181
tax provisions are included in the PPM that I draft for my clients.
John Cones
film finance
Posted on October 22, 2006 at 11:03:06 AM by JonR
Hi John, Thanks for this excellant Q&A service. I'm new to the subject and
have just been solicited by a reputable capital management firm to invest in a
film. They claim to be acting on behalf of a major IFP who is the ultimate
guarantor of the investment. This IFP is well established with a good pipeline
of scripts and productions. My question is can this agent be operating without
at least a state license? The only regulator document offered is that of a loan
broker license in CA for the CEO of the IFP corporation. The agent does a pass
thru contract for the funds, and ,of course, the IFP signs a direct agreement
with each investor. No commission is collected from investors. It just strikes
me as odd that the agent has no oversight for the activity.
Re(1): film finance
Posted on October 23, 2006 at 07:15:48 AM by John Cones
Jon:
Sorry, but I cannot tell from your posting whether we are dealing with a loan
or an investment. Note that if the so-called investment is guaranteed by somebody,
it may not be an investment. I'm also not sure of your terminology. I haven't
seen the term "IFP" used in the film business except to describe an
organization called the Independent Film Project. Maybe you are using it to
mean independent film producer, but it would be helpful to just make that
clear. Further, I can't tell in what capacity the so-called "agent"
is acting. Talent agents are required to be licensed in California but agents
acting in that capacity otherwise, may not need to be licensed. That wouldn't
be an investor financing question either, thus not appropriate for this site.
You may try again with more clarity or if this is not really an investor
financing question, you may want to direct it to an entertainment attorney as
opposed to a securities attorney working in the entertainment field.
Best wishes,
John Cones
Money from Investors
Posted on October 25, 2006 at 03:30:42 PM by Z Williams
I have a horror script that I have recently gotten back from a production
company (option ran out). I am thinking of shooting the film myself because a
friend of mine who has made a lot of money in real estate said he would back
the film (budgeted around 250,000.00). He said to send the script and a "package"
over to him and his partners.
What exactly should I include in this package? A budget breakdown? What else?
Thanks for your help.
Re(1): Money from
Investors
Posted on October 25, 2006 at 06:37:55 PM by John Cones
Z:
It just depends on whether these investors are going to be active or passive
and how many of them there are. If there are only two to three, and you are
willing to let them be active and they are capable of being active (i.e.,
regularly involved in helping you making important decisions relating to the
project) it may be safe to provide them with a synopsis of the script (or the
complete script if they request it), although, I suppose you would want them to
sign a non-disclosure agreement before receiving such material. You could also
at minimum, include a budget topsheet and narrative biographies of the key
people attached to the project and some form of investor financing agreement.
In the alternative, you may propose that the small group of investors start up
an "S" corp or form a member-managed LLC. If you wanted to provide
them with more information, you could prepare a business plan and see the
answer to the earlier question a few days back for more detailed information.
The entire list is also in my book "43 Ways to Finance Your Feature
Film". If, on the other hand, there are more investors and you want them
to be or they want to be passive, then it will be necessary to send them a
properly drafted PPM and subscription agreement.
John Cones
Re(2): Money from
Investors
Posted on October 27, 2006 at 02:15:21 AM by Z Williams
John,
Thank you for your post. Very insightful. Some followup questions I had: I
think active investors are the way to go. I want people who are passionate and
want to be involved in the movie making process, not just put money in and hope
to double or triple it in a year or two. Plus it saves up front money (7,000?)
on creating a PPM. What are the disadvantages to active investors? And what are
the advantages or an "S" corp vs. LLC? And I guess I should go buy
the book, huh?
Thanks,
Zack
Re(3): Money from
Investors
Posted on October 28, 2006 at 12:46:57 PM by John Cones
Zack:
Of course, you should buy the book ("43 Ways to Finance Your Feature
Film"). If you are going to be a professional in any chosen field, you
should have an entire library about what has been written on the subject. If
not, you will constantly be re-inventing the wheel, a decidedly inefficient
approach to your future. In addition, that's exactly the format of the book: a
brief description of each form of film finance, followed by advantages and
disadvantages. The disadvantages of the active investor approach is that no one
knows for certain how many is too many, and if any of them turn out to be
passive, then you've sold a security whether you intended to or not. That's why
my recommendation has always been to stay conservative with the number of active
investors, and limit that to 2 to 3. Another significant disadvantage of active
investor financing is that in order to be active, they must be capable of being
active (i.e., they must be knowledgeable about the business). And, then, of
course, of most importance for a creative venture like feature film, if they
become active (i.e., regularly involved in helping make important decisions)
there are very likely to be significant conflicts with regard to some of the
many and important issues that arise concerning the development, production and
distribution of a motion picture. Finally, even though a lot of independent
producers start off thinking that they've identified one or two single
individuals who are going to put up all of the money for a feature film (talk
is cheap), it rarely happens, and sometimes that approach leads to the film
finance scams, where someone has convinced the producer that the funds are
there, but the producer has to convince the investor that they are serious
about the venture by putting in some of their own money.
The "S" corp is similar to an LP or manager-managed LLC in that it is
a flow-through tax vehicle. However, the profit participation arrangements are
not as flexible as an LP or manager-managed LLC, the number of investors is
limited, they must all be U.S. residents, you can only have one class of stock
and the corporation is more difficult and expensive to maintain. So, there are
not many advantages, and that's why most of the film offerings I see are either
limited partnerships or manager-managed LLCs. Those appear to be the most
suitable vehicles for project financing, whether its a development fund,
production of a single or multiple films, a completion fund or even a so-called
P&A fund.
John Cones
Protecting intellectual
property
Posted on November 3, 2006 at 03:42:14 PM by CJ
Hi John, great site! I've written a screenplay that I'm also attempting to
produce. Here's the situation... I've received interest from a manager of a
young actress who heard about the screenplay, believes it would be a great
vehicle for her client. I would like her to read the script but she already has
a production deal with a California based company. I do have a non
disclosure/confidentiatlity agreement. I plan on inserting something to the
effect that she will be held responsible if the production company produces a
similar movie theme with her client in it. Should I also include her client. It
seems the family is well connected and can single handedly finance a project. I
suggested they buy the rights to the script, but she wants to read it first.
Will what I want to do protect my intellectual property be enough? Thank you.
Re(1): Protecting
intellectual property
Posted on November 3, 2006 at 04:16:39 PM by John Cones
CJ:
Since this site is for answering investor financing questions, I can only
suggest that you discuss your situation with an entertainment attorney. I'm a
securities attorney working with independent producers on investor financing of
their entertainment projects, and sometimes, as in your case, you need the
services of an intellectual property/entertainment attorney before you get to
the questions relating to investor financing.
Best wishes,
John Cones
Places to look
Posted on November 9, 2006 at 05:32:11 AM by David Q
Where are some good places to look for film investors that
do not cost an arm and a leg. I have a tough time trusting the websites out
there that offer great leads for $100 and all am tired of being swarmed by
brokers and firms who want to "introduce me" to investors - it all
seems like a scam...
Steel Web Studios
Re(1): Places to look
Posted on November 9, 2006 at 07:41:55 AM by John Cones
David:
Your instincts appear to be on target. Keep in mind that people who claim to be
"brokers" are not all "brokers" in the legal sense that
they are SEC/NASD licensed broker/dealer firms or registered representatives of
such firms. In addition, legitimate broker/dealers or registered reps cannot
sell securities without the approval of the broker/dealer firm after it
conducts its own due diligence investigation of the offering. Further, if you
are selling a security (e.g., limited partnership interests or units in a
manager-managed LLC) the "lists" being offered won't help you comply
with the law unless you are conducting a public/registered offering which
allows general solicitation or an offering under $1,000,000 to accredited
investors only, pursuant to the Model Accredited Investors Exemption (MAIE).
Otherwise, you will be conducting a private placement (most likely pursuant to
Regulation D) which prohibits advertising and general solicitation. The way to
avoid a general solicitation in a private placement is to raise money from
people that you and your company's upper level management knew before the start
of the offering (i.e., the pre-existing relationship requirement). The upper
level management requirement is part of the SEC's Issuer Sales Rule.
If you are not selling a security, lists of prospective investors could
theoretically be helpful, but as a practical matter, there are very few, if
any, sophisticated investors who are seeking to invest in independent film
because it's just too risky.
Most independent producers that I'm aware of gather around them (as upper level
management) several people who know other prospective investors so that the
pool of prospective investors is expanded exponentially (since you can make
offers to all of those people with whom your upper level management had a
pre-existing relationship. An additional strategy is to spread the risk amongst
a large group of passive investors so no single individual has to take such a
great financial risk.
Otherwise, so far as I know, there are no "places to look" for
investors in independent film.
John Cones
contract
Posted on November 12, 2006 at 09:46:40 AM by Demetrius Walker
We are wondering is there a contract for investors and screenplay writers
because we have an possible investor who needes something tangible to refer to
other possible investors. thanks for any direction.
Re(1): contract
Posted on November 13, 2006 at 07:35:39 AM by John Cones
Demetrius:
Not enough information. Can't tell from the information provided whether you
are a screenwriter looking to an investor to fund the development of one or
more scripts, or whether you are a screenwriter looking to produce one or more
of your scripts (i.e., you are now functioning as a producer). If, for example,
your investor wants to be actively involved in the project and you are willing
to work with this active investor, you can structure the deal using the active
investor options outlined in "43 Ways to Finance Your Feature Film":
(1) investor financing agreement, (2) joint venture agreement, (3) initial
incorporation or (4) member-managed LLC. Each of these options involve some
form of agreement, but each is different.
John Cones
Thank you for what you do
Posted on November 14, 2006 at 11:42:16 PM by Betty
Dear John,
I had to write and thank you for what you do for those of us out here who have
so many questions regarding the film industry. I am in the process of
transforming a book I have written into a documentary (military history) and
your posts here have answered so many of those questions which I was concerned
about. Therefore, I had to write and say thank you so much for posting your
response. I will return many times over during this project in order to have
many more questions answered I am sure of it. Thanks again.
Betty
Re(1): Thank you for what
you do
Posted on November 15, 2006 at 08:59:57 AM by John Cones
Betty:
You and your fellow independent producers are welcome. As a matter of fact,
just today, the information about my new book "Hollywood Wars – How
Insiders Gained and Maintain Illegitimate Control Over the Film Industry"
– ISBN: 0-922993-32-7. It is relevant to investor financing only in the sense
that it provides a fairly detailed history of the bigger picture (i.e., the
environment) in which independent producers have to struggle to get their
vision on the screen. The book is a Hollywood expose’ exploring the thesis that
Hollywood can be best understood as an ongoing war between the Hollywood
insiders and the many outsiders who come into this industry every year. The
publisher (Marquette Books) has offered a 33% discount ($27 even for the book
and $4 for shipping and handling) to anyone who is willing to claim they know
me. So, just tell the publisher that you know me (and you can do that by e-mail
if you like). All of the ordering information is on the Web (how to order by
phone, fax, Internet or e-mail by credit card). Go to the address below for
that information:
http://www.marquettebooks.com/toorderbooks.html
You may also want to take a look at the book’s Web page at
http://www.marquettebooks.com/massmediabooks/hollywoodwars.html
Best wishes,
John Cones
Re(2): Thank you for what
you do
Posted on November 15, 2006 at 03:31:20 PM by Betty
Thanks John I apprecaite the heads up on the book. I am starting a wonderful
library of informative books already and will surely add this and your other
one to that library. I look forward to a long dialogue as this project
progresses. I do have one question for you. I have a very famous gentleman who
might be willing to finance the entire project as a donation to a local non
profit in support of this project, would I need to prepare any legal documents
for that donation, it could be close to 2 million dollars in all. I look
forward to your response. Next trip out to LA I will surely give you a shout
and buy you a drink for all you are doing for us out here... you deserve it.
S/F
Betty
deficit financing
Posted on November 15, 2006 at 11:03:19 AM by bob miller
In relation to film financing, what does it mean to make a film via
"deficit financing?"
Thank you
Bob Miller
Re(1): deficit financing
Posted on November 15, 2006 at 12:27:31 PM by John Cones
Bob:
I've only heard of "deficit financing" in relation to borrowing by
government to make up for a revenue shorfall, not with respect to film
financing.
John Cones
Re(2): deficit financing
Posted on November 15, 2006 at 02:52:23 PM by B. Miller
This is the blurb I read which I don't understand re: deficit financing:
Since 1992: Rigel Entertainment
Created company to finance, produce, and distribute worldwide television and
feature film programming. Executive produced, deficit-financed and distributed
worldwide new Action/Adventure franchise MAX HAVOC: CURSE OF THE DRAGON. Executive
produced, deficit-financed and distributed worldwide original documentary on
World Heavyweight Boxing Champion James Braddock entitled CINDERELLA MAN: THE
REAL JIM BRADDOCK STORY. Executive produced, deficit-financed and distributed
worldwide original documentary on Howard Hughes: HOWARD HUGHES: THE REAL
AVIATOR. Executive produced, deficit-financed and distributed worldwide 13 new
MARY HIGGINS CLARK MOVIES for the PAX television network. Executive produced,
deficit-financed and distributed worldwide UNIVERSAL SOLDIER II and UNIVERSAL
SOLDIER III for Showtime Entertainment. Co-Executive produced, deficit-financed
and distributed worldwide five seasons of PACIFIC BLUE (101 episodes) for USA
Network. Co-developed, packaged and distributed worldwide four ROBOCOP
television movies with Fireworks and the Sci-Fi Channel. Co-developed, packaged
and distributed worldwide ROBOCOP: THE TV SERIES for Rysher Entertainment and
Skyvision Entertainment. Co-developed, packaged and distributed worldwide the
TV series LAND'S END for Disney and Skyvision Entertainment. Established
joint-venture with Norman Jewison's Yorktown Productions and Skyvision
Entertainment to produce, finance and distribute worldwide PICTURE WINDOWS for
Showtime.
Re(3): deficit financing
Posted on November 15, 2006 at 04:22:42 PM by John Cones
Bob:
Dunno. Write them and ask what they mean.
John Cones
Re(4): deficit financing
Posted on February 15, 2007 at 04:55:56 PM by Richard
Deficit financing refers to the portion of financing a TV producer must fulfill
over the value of a broadcast license. Nets typically want to approve a
producer/co's ability to cover the deficit (shortfall)...usually 10-15% on an
MOW or series...
181 IRS follow-up ques
Posted on November 30, 2006 at 11:17:02 AM by Kristen
Hi, I have a follow-up question to this IRS 181 question. If a potential
investor I know has a huge amount of capital gains liability from a real estate
transaction, is there anything in the IRS 181 that would prevent this investor
from taking a loss on our film deal in this tax year, even if 2 years from now
when the film is in theaters we make a profit? Would he be subject to recapture
at the capital gains rate? I will not be selling our investment as a tax
solution without him getting qualified tax advice from a professional, but I am
trying to understand this in order to see if he uniquely qualifies as a good
potential partner/investor.
Re(1): 181 IRS follow-up
ques
Posted on December 2, 2006 at 07:51:15 PM by John Cones
Kristen:
Your question goes beyond my expertise on Section 181, so all I can remind you
of is that the Section 181 deduction is available to investors in the years in
which the funds are expended, not in the year in which the investor funds are
invested. Further, you want to be really careful in providing detailed
explanations of such a complex law to a prospective investor. The safer
practice is to advise them to get the advice of their own individual tax
advisor, and if you can pick up some useful information in the process that's
great.
John Cones
Independent producers -
contingent compensation
Posted on December 1, 2006 at 06:35:40 PM by dc
What do you think would be a good percentage to ask for the net profits of an
independent film.
Re(1): Independent
producers - contingent compensation
Posted on December 2, 2006 at 07:54:41 PM by John Cones
DC:
Can't tell from your question whether you are asking on behalf of a production
company negotiating with a distributor or a producer working for a production
company? Of course, if a distributor takes out its fee from the gross receipts
and then recoups all or more of its distribution expenses, it should be in
profits at that point, so theoretically, it should not insist on a substantial
participation in the film's net profits. But, that's not the way the film
industry works. The distributors have the leverage, so an independent
production company would be quite fortunate to be able to get 50% of the film's
net profits.
John Cones
Fair broker rate?
Posted on December 19, 2006 at 05:07:47 PM by Michelle
I to have a couple of friends who are both in the film industry. I'm naturally
someone who introduces people who would be able to help each other out or who
would be a benefit to each other's cause. I have introduced my
"screenwriter" friend to my "producer" friend with
financial backing. If a deal actually manifests from this, I find that I will
receive a "broker's" or "finder's" fee. What is the standard
fair rate for a broker?
Thanks!
Michelle Toni
Re(1): Fair broker rate?
Posted on December 19, 2006 at 07:31:09 PM by John Cones
Michelle:
Your question is not really an investor financing question, since you just
introduced a screenwriter to a producer. In addition, you are not a broker, in
the technical sense of the word (i.e., NASD/SEC licensed). You may be
considered a finder, and finder's get whatever they can negotiate. In the film
business, "fairness" is seldom the standard. You negotiate for
whatever you can get, and you need leverage for that. If you've already
introduced the parties you may have given away your leverage to negotiate a
higher percentage finder's fee. So, you may be relying on the goodwill of your
screenwriter friend to be "fair" with you. I'd suggest something in
the 3% to 6% range.
John Cones
Re(2): Fair broker rate?
Posted on December 19, 2006 at 09:32:59 PM by Michelle Toni
Thanks! Sorry for my ignorance, but that's why I'm here. I am a recruiter and I
joke that I am a people broker. Maybe I shouldn't ...
Fortunately the screenwriter is an exceptional person and very good friend. He
said if this deal works he will include me in any future deals with this
producer.
I understand what you are saying and if the opportunity arises again I would
handle it differently especially if I don't fully know the character of the
person's involved.
I really just said, "hey, you need to meet this guy" and although I
knew he was in production I didn't know what kind of backing he had.
That's about the range I thought it would be. I appreciate your advise and
sharing of knowledge!
FInance Question
Posted on December 19, 2006 at 05:51:34 PM by betty
I have a question for you. I have a very famous gentleman who might be willing
to finance my entire project as a donation to a local non profit in support of
my project. Would I need to prepare any legal documents for that donation
because it could be close to 2 million dollars in total? I look forward to your
response.
Re(1): FInance Question
Posted on December 19, 2006 at 07:33:27 PM by John Cones
Betty:
Your question is not an investor financing question, but it seems to me that
you should be talking to the local non-profit regarding what their requirements
are and how you can piggy back on their non-profit status.
John Cones
Re(2): FInance Question
Posted on January 4, 2007 at 10:03:01 AM by Betty
THank John thats all I need to know... the non profit will benefit from the
INDY in the long run, but I wanted to ensure that we did not do anything which
would cause them harm by having this man foot the bill for the entire project.
Thank again and Happy New Year to you and yours.
B:)
Needs funding for
Indepedent Film
Posted on December 20, 2006 at 07:23:19 AM by Vernon
I need funding for an Independent Digital Film project.Where would be the best
place to seek such funding?.
E-mail mixhypnatist@hotmail.com
Re(1): Needs funding for
Indepedent Film
Posted on December 20, 2006 at 12:50:27 PM by John Cones
Vernon:
Your question is too general for this site where we focus on investor financing
questions. You may want to take a look at "43 Ways to Finance Your Feature
Film" to get pointed in the direction that is most likely to result in
funding for your project. Also, the list of "Investor Motivation" is
posted earler in response to a question on this site.
John Cones
Christian Investors
Posted on January 5, 2007 at 08:43:16 AM by Lisa
Hi John
I relly like the site, well done.
We have developed an animation feature film based on a well known story with a
budget of $3M. Its a faith based project that Id sooner finance privatley and
maintain equity than sell it to a large studio.
I was wondering if you had any ideas where I might begin to approach some
Christian investors?
Thanks for your help
Christian Investors
Posted on January 5, 2007 at 05:13:01 PM by John Cones
Lisa:
I can only suggest churches and the several Christian organizations that
actively lobby Hollywood for more family oriented films (e.g., The Dove
Foundation and Ted Baehr's MovieGuide and Christian Film and Television
Commission). On the other hand, keep in mind that if you are seeking to raise
money from a group of passive investors, whether they are Chrisian or not, you
may still be obligated to comply with the federal and state securities laws.
That means if you choose to go the private placement route, you and your upper
level management will need to have the required pre-existing relationships with
those investors prior to the start of the securities offering.
John Cones
Re(1): Christian Investors
Posted on February 1, 2007 at 04:00:01 AM by Fred Beehler
I may have a small group...give me a call at 602-714-8464 Fred Beehler
International Inc.
Re(2): Christian Investors
Posted on March 14, 2007 at 09:23:41 AM by keith
I am looking for Christian investors as well (I have 3 picture business plan).
Is it ok to call?
keith
Re(3): Christian Investors
Posted on September 11, 2007 at 09:12:44 AM by David E.
Greetings in the name of the Lord.
Please this serves to inform you about our interest to partner with any success
minded Enterpreneurs who would join hands with us in funding some major
projects in a Country located on the west coast of Africa.
We are directly connected with the President of this nation and we can only
discuss business after you have met with the President and the other top
governmental bodies.
This is very very big and we are no jokers or scammers.
We are talking about investing about two hundred million euros and more into
this nation and you should wonder what would be our returns.
If you consider your company being capable, feel very free to make any
inquiries for we are very transparent.
May the Lord richly bless you.
Film License or Purchase?
Posted on January 16, 2007 at 09:22:07 AM by Nicoler
Hi,
In the press I constantly see reference to completed independent films (i.e.
Crash, Thank You For Smoking) as "purchased" by a studio. Are these
"purchases" technically purchases with ownership shifting to the
studio or are they licences with payments made as advances against future
royalties?
Thanks!
Re(1): Film License or
Purchase?
Posted on January 17, 2007 at 12:48:00 PM by John Cones
Nicole:
Your question is not an investor financing question. However, without being
privy to each such deal, no one is really in a position to know for sure (i.e.,
can speak for all distribution arrangements). On the other hand, if a
distributor licenses the right to distribute a film throughout the world and in
perpetuity, as is often the case, that's not much different than an outright
purchase. It is probably more common for a licensing transaction to be for a
term of years, so that the rights eventually return to the production company
and the film can be part of the production company's libarary, in those
situations where the rights are split between the domestic and international
marketplaces.
John Cones
Re(2): Film License or
Purchase?
Posted on January 17, 2007 at 01:40:25 PM by Nicoler
Thank you John.
mediamoghul.com
Posted on January 27, 2007 at 05:44:41 AM by Craig
Is http://www.mediamoghul.com/789/index.php?
breaking any fundraising rules?
ckalan1
Re(1): mediamoghul.com
Posted on January 27, 2007 at 07:45:53 AM by John Cones
Craig:
I do not have the time to look at every website people ask me to look at. If
you have a specific question that you can post on this site, I'd be happy to
discuss it.
John Cones
Creating a budget for investors
Posted on January 30, 2007 at 08:36:36 PM by MGM
are there any samples of budgets to help with business plan budget I am
creating for my investor? thanks
Re(1): Creating a budget
for investors
Posted on February 4, 2008 at 09:11:05 AM by
Associate
See the BOOK OF BUDGETS by James Jaeger at MOVIE PUBS, http://www.moviepubs.net
Re(1): Creating a budget
for investors
Posted on January 31, 2007 at 07:18:00 AM by John Cones
MGM:
Something similar to the top sheet of your film's budget will be adequate. You
also may want to segregate expenses associated with raising the money since
those are not film budget expenses. Also, if you are planning to produce the
film and then seek distribution, you'll want to include some money for
"marketing to distributors", since that activity (also not a film
production budget item) typically costs some money.
Further, you may want to be certain that the business plan is the appropriate
document for your situation. If you are seeking to raise money from one or just
a few active investors, people who are capable of and who actually are going to
be regularly involved in helping you make important decisions, then the business
plan, used in conjunction with an active investor investment vehicle may be
appropriate. Be careful however, in selecting an investor who contributes all
of the money and starts pushing his or her weight around because you can't do
this without them. Also, you want to try as best you can to determine if they
are in agreement with you with respect to your plans for the film.
In the alternative, if you are planning to or find that it is necessary to
spread the risk of this risky investment around amongst a larger group of
passive investors (i.e., people who cannot be actively involved in your
creative decisions with respect to the film project), then the business plan is
not the appropriate document, since you are very likely to be selling a security
(usually LP or manager-managed LLC units). In those cases, you don't need a
business plan, you need a properly drafted private placement offering
memorandum (PPM) including the required exhibits.
John Cones
Sponsors
Posted on February 6, 2007 at 04:25:18 PM by Cj
Hi John,
I asked you a question a couple of years ago. You mistaked me for another cj. I
assumed I had the same initials as someone that had been asking you quite a few
questions because it was the one and only time I asked a question.
Anyway, the script is in the process of being copyrighted with the Library of
Congress and registered with the writers guild association. I'm searching for
my crew as well as investors.
Here's question #1 - I haven't heard too much on sponsorship. Can you tell me
if there is a such thing as in sponsoring someone to do a film project or would
I still have to do some type of ppm? (I was told to have people sponsor the
film or me instead of investing.)
Question #2 - May I have your information again, your phone number and email
address. Its been a couple of years, I can't seem to find it.
Re(1): Sponsors
Posted on February 6, 2007 at 04:43:40 PM by John Cones
CJ:
Sponsorships sound like a reference to a corporattion sponsoring a film.
Typically, these days, that's done through product integration where a film is
made that features or revolves around some product manufactured or marketed by
the corporation and the corporation pays money to have its product featured.
Works only if the product and the script are a good fit. The director also may
lose some creative freedom in such arrangements, and the corporation is not
likely to pony up enough to cover the entire cost of producing the film. Also,
not usually available for low budget independent films without a distributor.
After all, the corporate "sponsor" wants to be assured that the film
and its product will be seen.
By the way, this is also not an investor financing question.
Best wishes,
John Cones
jwc6774@roadrunner.com
310/477-6842
Prospectus
Posted on February 8, 2007 at 07:50:47 AM by Amy
Mr. Cones,
How would I go about finding a prospectus for a movie financing deal? I'm not
looking for one in particular, I just would like to see one as an example.
Thanks,
Amy
Re(1): Prospectus
Posted on February 9, 2007 at 10:03:50 AM by John Cones
Amy:
A prospectus is the securities disclosure document associated with a
public/registered offering. Very few "film deals" are financed
through public/registered offerings. For that reason there are not too many
available for review. Those that are available may be viewed online at the
SEC's EDGAR site. Your best bet is to look at the SB-2 or SB-1 offerings at the
EDGAR site. Unfortunately, most of such offerings are for film companies not a
single or slate of films, thus, the structure may be very different. Most of such
offerings are also structured as corporate stock offerings, not limited
partnerships or manager-managed LLCs. You'll need to know which is best suited
for your circumstances.
On the other hand, most investor financed, single film offerings for independent
films are conducted as private placements (i.e., exempt offerings -- meaning
they are exempt from the registration requirement because they comply with all
of the conditions and limitations imposed on the use of specific federal and
state exemptions). And, the securities disclosure document associated with such
offerings is referred to as a private placement offering memorandum or PPM for
short. An old and dated film limited partnership PPM appears in my book
"Film Industry Contracts" available at Samuel French Bookshop. If you
are in the LA area, thinking about conducting such an offering and want to see
about 30 examples of film PPMs, you can call and come by and I'll show them to
you.
When you are looking at a securities disclosure document, however, be sure that
you are looking at the document that is the same as that required by the
specific federal and state exemptions upon which you are relying. An exempt
offering is not exempt from all rules, it just has its own set of rules and
regulations. Some people pick up someone else's memo thinking they can merely
revise it to suit their needs, without knowing whether it is a Reg. D, Rule
504, 505 or 506 offering, whether it is an MAIE offering, an offering for
accredited investors only, a SCOR offering, a NSMIA offering or what. And
that's critical since the rules are somewhat different for each. In addition,
many people fail to actually read the rules relating to disclosure (what
information is required to appear in the disclosure document, including the
exhibits such as attorneys securities opinion, the tax opinion, tax discussion,
material contracts, etc.) thus their offerings do not actually comply with the
specific rules, and thus may not even be exempt (which means they are guilty of
selling an unregistered security). In addition, some people do not understand
that all securities offerings must comply with the anti-fraud rule which
requires disclosure of all material aspects of the offering, no omission of
material facts and stating the disclosures in a manner that is not misleading.
So, be careful not to fall into that trap and go out on the street with an
improperly prepared PPM, based on your possible review of someone else's
document.
John Cones
Setting up a LP
Posted on February 20, 2007 at 05:55:49 PM by Franklin Quinten
We are in the process of setting up a LP for passive investors solely in
California for an investment under $1 million/35 investors. Would we just be
subject to California law securities exemption under 25102(f) or would we need
to still need to follow federal law exemption through Reg. D?
Is there an Investor Questionnaire available somewhere to qualify investors for
the CA exemption?
Are there any sample operating agreements and subscription agreements online?
Thanks for your time. Great site!
Re(1): Setting up a LP
Posted on February 21, 2007 at 07:20:23 AM by John Cones
Franklin:
In securities offerings, you are obligated to comply with both the federal and
state law in all states in which you are seeking to raise money, unless your
are raising $1 million or less from accredited investors only (per the Model
Accredited Investor Exemption) in which case you still have to comply with Reg.
D, Rule 504. If you are just raising money in California (from some
unaccredited investors), you will need to comply with both the section 25102(f)
and the applicable rule of Regulation D, unless you comply with the National
Securities Market Improvement Act in which case state law is pre-empted except
for the notice filing requirement. You need to talk to a securities attorney
that is experienced with film offerings to determine which best fits your
needs. In my view, it is inappropriate and quite risky for a
producer/non-attorney to attempt to copy someone else's securities disclosure
document since if you do not know for sure whether their document actually
complies with the law you run the risk of voiding any available exemption and
selling an unregistered security, which may not only be a felony but may give
your investors the opportunity to demand their money back, leaving you without
any credible defense.
You also do not need an "operating agreement" for an LP offering, but
a limited partnership agreement.
So far as I know, there are no reliable samples of either online.
If you are going to make a film, the only advise I can give you is do it right.
The same is true for a securities offering. You are obviously getting some bad
information.
Best wishes,
John Cones
LP vs. LLC
Posted on March 7, 2007 at 11:24:07 PM by Franklin Quinten
I am in the process of setting up an LP/LLC to sell investment units to passive
investors (manager-managed) and was trying to figure out the difference between
a LP and a LLC. What is the difference between the two and the pros/cons? Which
is the easier way to go?
Re(1): LP vs. LLC
Posted on March 8, 2007 at 08:05:16 AM by John Cones
Franklin:
These two investment vehicles are very similar. They are both flow-through
vehicles from a federal tax standpoint (i.e., the entities are not obligated to
pay federal income taxes on income to the vehicle; the revenue stream is not
taxed until it is allocated to the investors). Both are also formed by filing
documents (articles of organization) with the Secretary of State in the state
you choose to file in (usually the state in which you intend to operate your
business). In addition, both are based on state law, not federal law. Thus, in
order to know what the specific requirements of either is, you must first
choose a state and then read the applicable statute (re limited partnerships or
limited liability companies) for that state. These statutes are all fairly
similar but there may be differences that make a difference.
For example, when some of the states drafted their LLC statutes, they imposed a
low percentage gross receipts tax on the LLC's earnings, without going back and
imposing a similar tax on LPs. So, from that standpoint, it may be advantageous
in some states to use the LP instead of the LLC for an offering. On the other
hand, if your production company is not an entity (i.e., does not offer its
owner or owners limited liability protection) the LP does not offer limited
liability protection to general partners (GPs) not organized as an entity
(i.e., corporation or member-managed LLC). The manager-managed LLC, on the
other hand, offers limited liability protection to an individual or other
unincorporated entity serving as the manager of the LLC. Thus, one or more
individual filmmakers can serve as the manager or managers of a manager-managed
LLC and enjoy the limited liability protection afforded both the LLC members
and the manager. Or, in the alternative, the manager can be a fictitious name
company (called dba in some states) and still enjoy limited liability
protection. It is, of course, much less expensive to form a fictitious name company
(dba) than an entity such as a corporation or member-managed LLC. For that
reason, many low budget independent filmakers choose the manager-managed LLC as
their investment vehicle, because it's easier, cheaper and quicker to get
started that way. In addition, because of the poor results of the Silver Screen
Partners and Star Partners public limited partnerships offered by Disney and
MGM back in the late '80s and early '90s, many prospective investors remember
their bad experiences investing in film limited partnerships. So there is a
somewhat negative perception with respect to film LPs in some quarters.
Choosing to use a manager-managed LLC as the investment vehicle avoids the
negative perception, although not the reality that distributors often do not
provide honest accounting for their profit participant partners in any film
deal, no matter how it is structured. Until filmmakers and other profit
participants band together and fight that battle, it won't make much difference
which entity you choose, at least for purposes of getting a distributor to
treat you fairly.
Best wishes,
John Cones
Re(1): LP vs. LLC
Posted on March 8, 2007 at 00:22:19 AM by Franklin Quinten
Sorry forget to ask as well about the need to incorporate the general/managing
partner in both instances.
Re(2): LP vs. LLC
Posted on March 8, 2007 at 08:10:32 AM by John Cones
Franklin:
I actually provided some information re that issue in the first response. For
purposes of clarification, however, the producer or production comapany in an
LP would typically be called "general partner", whereas, the producer
or production company in a manager-managed LLC would be called the "manager".
It's important to get the terminology down so as not to confuse your investors
and others with whom you communicate.
As pointed out in the first response, it is not necessary to incorporate the
production company serving as the manager of a manager-managed LLC, since the
LLC provides limited liability protection to both the investors (members) and
the manager. Also, note that actions which may create liability normally don't
occur on a film until production starts (negligence on the set) or until after
the film is released (defamation), thus, it is not necessary to create the LLC
until the offering is funded.
John Cones
Re(3): LP vs. LLC
Posted on March 8, 2007 at 01:13:26 PM by Franklin Quinten
Thank you. Where can I find a sample of an operating agreement for a
manager-managed LLC for a single film in CA? Is there one in one of your books
or at a law library?
Re(4): LP vs. LLC
Posted on March 8, 2007 at 04:58:26 PM by John Cones
Franklin:
You may be able to find sample manager-managed LLC operating agreements at law
libraries, although, it is not likely that any of those will be specifically
drafted for a film offering. My book "Film Industry Contracts" has a
limited partnership agreement for a film offering, but some provisions are now
dated.
Hopefully, you also understand that the LLC operating agreement is usually just
exhibit "A" to the private placement offering memorandum (PPM) and
that drafting the PPM is the major part of the project when seeking to raise
money from passive investors using a manager-managed LLC as the investment
vehicle. In other words, drafting the LLC operating agreement is not the only,
nor the biggest part of the project.
John Cones
Re(5): LP vs. LLC
Posted on March 11, 2007 at 12:36:11 PM by Franklin Quinten
Thanks. So if I am setting up a LLC to get additional capital, meaning the
production is already in progress and a good amount of capital has already been
invested by our production company, how would this work? Meaning, if I were to
set up a Manager-managed LLC with the manager being a non-incorporated
production company, how would the financing cash flow work if both entities are
contributing capital?
Would I just keep running things through the production company and transfer
the invested capital from the LLC to the production company?
Investor Questionnaire
Posted on March 10, 2007 at 11:24:53 AM by Layla Esperanza
I am seeking an investor questionnaire to qualify unaccredited investors
specifically as specified under Reg. D, 504 and California Code 25102(f):
"All purchasers either have a preexisting personal or business
relationship with the offeror or any of its partners, officers, directors or
controlling persons, or managers (as appointed or elected by the members) if
the offeror is a limited liability company, or by reason of their business or
financial experience or the business or financial experience of their
professional advisors who are unaffiliated with and who are not compensated by
the issuer or any affiliate or selling agent of the issuer, directly or
indirectly, could be reasonably assumed to have the capacity to protect their
own interests in connection with the transaction."
(This is for raising less than $1 million from less than 35 passive investors.)
Is there something publicly available or in one of your books?
Re(1): Investor Questionnaire
Posted on March 10, 2007 at 12:42:21 PM by John Cones
Layla:
In my view, it is impossible for a non-securities attorney to take someone
else's subscription documents (including an investor questionnaire and
subscription agreement) and apply it to another offering with confidence that
all of the conditions and limitations imposed on the use of a given set of
federal and state exemptions have been met, thereby preserving the use of the
exemptions. Thus, even if I knew that some example of an investor questionaire
was "publicly available" or in any of my books (and they are not), I
could not in good conscience recommend such a course of action. Are you are
securities attorney and do you have experience with film offerings?
Best wishes,
John Cones
Re(2): Investor
Questionnaire
Posted on March 10, 2007 at 02:38:03 PM by Layla Esperanza
I am just seeking out an angel investor without the PPM before we pay an
attorney to prepare documents but most people I am approaching do not qualify
as Accredited Investors.
Are the only qualifications for investors under rule 504 is that they
acknowledge the offering is under $1 million and that the securities are
restricted?
Are there required questions for investing in securities in general?
Thanks.
Re(3): Investor
Questionnaire
Posted on March 10, 2007 at 05:34:11 PM by John Cones
Layla:
It would not be possible to list all of the conditions and limitations imposed
on a Regulation D, Rule 504 offering, along with the similar requirements for a
Section 25102(f) offering in this forum. I can only suggest two things:
(1) either go to the SEC website and download a copy of Regulation D, noting
among other things in the preface that even a Rule 504 offering must comply
with the anti-fraud rule; or
(2) seek out a securities attorney with experience with film offerings and rely
on his or her expertise in putting together such offerings which arelearly for
some of the more risky business ventures ever conceived.
On the other hand, if you are actually seeking out an angel investor, which is
something I've personally never seen happen for a film deal, you may not even
be selling a security, depending on how the deal is structured.
John Cones
Re(4): Investor
Questionnaire
Posted on March 10, 2007 at 05:54:28 PM by Layla Esperanza
I don't want to know ALL the conditions and limitations. I'm only asking if
Rule 504 is what is best used when you are seeking non-Accredited Investors.
Are there any limitations on their financial status as there are for 505/506?
Re(5): Investor
Questionnaire
Posted on March 11, 2007 at 08:01:33 AM by John Cones
Layla:
If you don't want to know "all" of the conditions and limitations
imposed on the use of a given exemption, in my view, you should not be
conducting an offering pursuant to those rules. There is no way that anyone can
make the claim that Rule 504 is "best" used when seeking
non-accredited investors. Many attorneys take that position because they
erroneously believe that no disclosure is required with a Rule 504 offering. That's
why I pointed out that the anti-fraud rule still applies. The anti-fraud rule
essentially states that in any Reg. D offering, Rules 504 through 506, you must
disclose all material aspects of the offering, you must not fail to disclose
something that is material and whatever is disclosed must be stated in a way
that is not misleading. I have yet to see an independent film producer who
could be objective enough about their film project that they could avoid the
use of flowery language, puffery, exaggeration, spin, and so forth, all of
which is inherently "misleading". Further, if you want to be safe
when dealing with the securities laws, you must fully and accurately disclose.
Almost, all of my offerings are Reg., D Rule 506 and almost all of those offering
are made to non-accredited investors. So I do not subscribe to the opinion that
Rule 504 is best for non-accredited investors. What's best for any securities
offering is to fully and accurately disclose all material aspects of the
offering. In that regard, I consider the "specific" disclosure
guidelines associated with Rule 505 and 506 offerings to be helpful, not
burdensome. On the other hand, Rule 506 offerings have the additional advantage
that they can be made in conjunction with the National Securities Market Improvement
Act (NSMIA) which preempts state jurisdiction, thus such an offering does not
have to comply with specific state requirements (only the notice filing).
States as a general rule require that the investment not exceed 10% of the
investors net worth. A few states even require 20%. That specific rule does not
apply to a NSMIA offering, even though an issuer of securities would be foolish
not to observe such a reasonable investor suitability standard anyway. In
addition, you will find that most states do not even recognize the Rule 504
offering.
I'm purposefully being difficult, because I simply do not like your approach to
complying with the federal and state securities laws. They are not laws to
"get around" and "avoid". Schemes to avoid compliance with
the securities laws are specifically prohibited. I cannot encourage such
conduct nor condone such thinking.
Best wishes,
John Cones
Financial Projections
Posted on March 11, 2007 at 09:53:43 PM by Robert Mendoza
What is the best way to create financial projections? Are there examples for
documentary films somewhere? Are there third party companies that do this? Is
there a certain format that must be adhered to and what is it?
Thanks for your time. Great site!
Re(1): Financial
Projections
Posted on March 12, 2007 at 07:37:54 AM by John Cones
Robert:
Here's an excerpt re financial projections from my book "43 Ways to
Finance Your Feature Film":
Financial projections are estimates of the future economic performance of a
proposed business or venture. Financial projections are not required for
investor offerings for film projects regardless of whether the selected
investment vehicle involves the sale of a security or not. However, investors
seem to prefer that a presentation of financial projections accompany whatever
documentation is used to approach such investors. Financial projections provide
the prospective investor and the film producer seeking investor financing with
an additional point of discussion and they serve as an excellent exercise for
the producer in helping him or her to understand how film revenues might flow
back to the financing vehicle, the producer group and the investors. In all
likelihood, a producer seeking investor financing will be subjected to
questions from investors about how they will get their money back and make a
profit, thus, it behooves the producer to do some research about this aspect of
the transaction, to understand it and to be able to explain it as clearly as
possible.
If the sale of a security is involved, the SEC has a position on financial
projections and offers some guidelines for their preparation and use. These SEC
guidelines may be helpful in the preparation of financial projections for both
non-securities and securities offerings.
Pursuant to the SEC’s Regulation S-B, Part 228 (Integrated Disclosure System
for Small Business Issuers) Section 228, Item 10(d) or Section 228.10(d) the
SEC encourages the use of management's projections of future economic
performance that have a reasonable basis and are presented in an appropriate
format.
From the SEC’s perspective, the following guidelines set forth the Commission's
views on important factors to be considered in preparing and disclosing such
projections.
Basis for projections. A film producer (i.e., management) has the option to
present its good faith assessment of a small business issuer's future
performance. Such a person or management, however, must have a reasonable basis
for such an assessment. In other words, the calculations and numbers associated
with financial projections must be based on assumptions, and those assumptions
must be reasonable in light of current circumstances in the industry. Such
assumptions cannot represent wild speculation on the part of the producer
regarding the anticipated earnings of a proposed film.
Outside review. An outside review of the film producer’s (management's)
projections may furnish additional support in this regard. If a film producer
(management) decides to include a report of such a review, it should also
disclose the qualifications of the reviewer, the extent of the review, the
relationship between the reviewer and the issuer, and other material factors
concerning the process by which any outside review was sought or obtained.
Format for projections. Traditionally, projections have been given for three
financial items generally considered to be of primary importance to investors
(revenues, net income (loss) and earnings (loss) per share or unit), however,
projection information need not necessarily be limited to these three items. On
the other hand, a producer (management) should take care to assure that the
choice of items projected is not susceptible to misleading inferences through
selective projection of only favorable items. It generally would be misleading
to present sales or revenue projections without any of the foregoing measures
of income.
Period covered. The period that appropriately may be covered by a projection
depends to a large extent on the particular circumstances of the company
involved. For certain companies in certain industries, a projection covering a
two or three year period may be entirely reasonable. Other companies may not
have a reasonable basis for projections beyond the current year. For a film
project, attempting to annualize (project expenses and revenues for each year)
may create an unnecessary quagmire of information that cannot be understood by
either the prospective investors or the producer.
Investor understanding. Disclosures accompanying the projections should
facilitate investor understanding of the basis for and limitations of
projections. The SEC believes that investor understanding would be enhanced by
disclosure of the assumptions which in management's opinion are most
significant to the projections or are the key factors upon which the financial
results of the enterprise depend and encourages disclosure of assumptions in a
manner that will provide a frame-work for analysis of the projections. In other
words, the assumptions on which the calculations and numbers are based not only
should be reasonable, based on what is currently occurring in the industry, but
they should be set forth in writing.
With the ideal of investor understanding in mind, and recognizing that it is
impossible to predict with any accuracy how any independent feature or
documentary film may perform in the marketplace, it would appear to be even
more safe to offer several calculations (e.g., using a three-column format to
show “Poor Performance”, “Good Performance” and “Excellent Performance”). That
way, it is clear to prospective investors that the film producer, or whoever
prepared the financial projections, is not attempting to predict the future
performance of the film. Instead, they are simply illustrating how the film’s
revenues may flow back to the investors and what deductions may be taken from
the revenue stream at various stages along the way, while basing the
projections on certain reasonable and written assumptions that accompany the
actual numbers and calculations.
The amount of detail. Some film producers often make the mistake of trying to
provide too much detail with respect to anticipated revenue streams when
preparing financial projections associated with investor financing of a film
project. In many such instances, neither the producer nor the prospective
investors understand such complicated projections and the money paid for them
is wasted. In any case, such elaborate projections do not come any closer to
accurately projecting the financial results of a film project than the format
recommended here. In addition, the film industry is notorious for failing to
provide useful, relevant and accurate financial information regarding the prior
performances of feature films, even more so for the markets and media beyond
the theatrical marketplace and worse yet for the independent sector. For that
reason, it may be a lost cause to attempt to find reliable information
regarding anticipated revenues from each of the individual markets and media
through which a film might generate income. Merely assuming a reasonable
overall performance level for a film (as it is exploited in all markets and
media throughout the world) and then deducting the expected (and reasonable)
fees, expenses and percentage participations from the revenue stream as it
flows back to the investor group may be a more rational approach.
John Cones
LLC and Manager
Posted on March 12, 2007 at 09:50:19 AM by Franklin Quinten
So if I am setting up a LLC to get additional capital, meaning the production
is already in progress and a good amount of capital has already been invested
by our production company, how would this work? Meaning, if I were to set up a
Manager-managed LLC with the manager being a non-incorporated production
company, how would the financing cash flow work if both entities are
contributing capital?
Would I just keep running things through the production company and transfer
the invested capital from the LLC to the production company? Or would I want to
use an LP and incorporate and do the same?
Re(1): LLC and Manager
Posted on March 12, 2007 at 12:03:12 PM by John Cones
Franklin:
Several possibilities come to mind:
(1) you raise all of the money needed through the LLC offering (note that just
setting up an LLC does not accurately express what is actually being done; it
would be more accurate, for example, to say you want to conduct a film
offering, using the manager-managed LLC as the investment vehicle and
recognizing that such an offering involves the sale of securities, that is the
LLC units) and then you have the LLC reimburse the production company for its
expenditures to date or (2) treat the production company's expenditures as a
deduction to be recouped out of the LLC's gross revenues, or(3) treat the
production company's expenditures as part of its contribution to the LLC for
which the production company gets a higher percentage participation in the
LLC's distributable cash.
Note that typically, the rights to the script will be transferred to the LLC,
once it is formed, and the LLC then technically becomes the production company
of record, while your existing production company continues to serve as the
manager of the LLC.
John Cones
Re(2): LLC and Manager
Posted on March 13, 2007 at 00:12:37 AM by Franklin Quinten
Am I liable at all as the un-incorporated production company since I've been
shooting before the LLC has gone into existence? Do I have to run everything
through the LLC after Offering goes into effect, meaning if the production
company contributes more capital to the film do I need to contribute it to the
LLC and then take it from there? Or does it matter?
LLC's as Production
Companies vs. One-offs
Posted on March 12, 2007 at 01:29:09 PM by Joe
Dear John,
My business partner and I started an LLC last year with the intention to make
it our production company. At this point, we've produced and distributed one
short film, for which we solicited investments from friends and associates.
We also had LLC start-up costs which we were keeping separate from the short
film investment totals. (but maybe they should be lumped as part of it?)
So as we move on to our next project, we're getting confused.
How do we keep our current investment separate from new projects?
Do we create one-off LLCs? (in CA, that can get expensive)
How long do we keep the LLCs open (at $800/yr) if we're recouping but not
seeing profits yet?
We don't have an attorney or accountant yet. As a fledging company, we're
struggling to pay our annual tax.
Re(1): LLC's as Production
Companies vs. One-offs
Posted on March 12, 2007 at 02:19:22 PM by John Cones
Joe:
Just telling me you started an LLC is not quite enough information. We really
need to know if your LLC is a member-managed LLC or a manager-managed LLC. It
sounds like a manager-managed LLC since you solicited investments from friends
and associates), but that really depends on how many such persons were brought
in as LLC members. If just a small number of people, and they all have
participated in the management of the LLC as per the operating agreement (if
you have one) that would sound like a member-managed LLC. If a larger number
and they were passive, that sounds like a manager-managed LLC and it would be
important to know who or what entity served as the manager and whether you
complied with the securities laws for that offering.
If I were to guess, I would speculate that you formed a member-managed LLC,
maybe even did not even draft an operating agreement, and had too many
investors for them to be active, so it got all mixed up. Is that right?
In any case, if you want to form a manager-managed LLC to raise money for
future projects, you can do that for a single film or make it a multiple film
offering. If you are raising a significant amount of money, then the $800 state
tax you are concerned about ought to be included as part of the monies raised.
The Estimated Use of Proceeds of the PPM would show that such funds are to be
used for LLC maintenance purposes or even for LLC taxes.
Generally, producers will use the manager-managed LLC as the investment vehicle
for raising money from passive investors. That involves a securities offering.
The LLC units are securities. Thus, such producers have a securities attorney
prepare the private placement offering memorandum (PPM), the subscription
agreement, help with the financial projections and the notice filings, while
also advising how to comply with the federal and state securities laws.
The manager of this manager-managed LLC could be an individual, a group of
individuals, a corporation, a general partnership, a fictitious name company or
a member-managed LLC.
On the other hand, if the $800 annual state tax is too hefty for that first
LLC, maybe it ought to be dissovled, and you can conduct your new securities
offering (selling units in a member-managed LLC to be formed upon funding so
that this LLC is not even formed until you have raised at least the minimum
offering proceeds). The manager for this new LLC can be a fictitious name
company (dba) formed by the few of you who are running the company.
If you don't have enough cash on hand to bring in an experienced securities
attorney, then raise those startup funds to cover the offering expenses by bringing
in a new investor in your member-managed LLC, or making a deal on the side for
a loan or gift.
How long to keep your current LLC open is a judgment call. If you have the
money to pay the tax and think that revenues may be earned in the future, keep
it going. If you don't have the money to pay the tax and don't think the short
film will earn anything in the future, shut it down. If you think the short
film will earn money in the future, but you do not currently have the funds to
pay the state tax, you may have to go back to your investors for some
additional help. On the other hand, if these investors are passive, you
probably didn't do that first offering right, and maybe it would be better to
shut the entity down.
It is difficult to provide meaningful responses when I have so little
information.
Best wishes,
John Cones
Re(2): LLC's as Production
Companies vs. One-offs
Posted on March 12, 2007 at 03:55:13 PM by Joe
Dear John,
Thank you for providing so much information with so little to go on. It was a
tremendous help.
If it's possible to continue this thread, here's some additional info:
We set the company up in our operating agreement as a manager-managed LLC with
2 managers. There were 10 passive investors in the short film, and you are
correct to assume that we didn't register as a security with the SEC. The
budget of the film was $40K. (Perhaps Sec. 504 would have applied?)
We would like to keep the current LLC active since it bears our production
company name and all the distribution contracts are with that entity. Also, we
expect to continue to receive revenue for the short for a few more years. (it
was just released on DVD and also overseas, so we're still recouping costs. We
are 50% there.)
Is there a way to be SEC compliant retroactively? Even our new project, a
feature, will be under $1MM.
Perhaps we should bring in that new investor for the startup funds or consider
looking for an attorney who handles start-ups before making any additional
moves.
I'll review your book as well. I have it at home.
Thanks,
Joe
Re(3): LLC's as Production
Companies vs. One-offs
Posted on March 13, 2007 at 08:13:40 AM by John Cones
Joe:
First with respect to the initial LLC. You were right to organize it as a
manager-managed LLC since you had ten passive investors. And, it would have
been ok not to have registered the LLC units as securities if you had made any
attempt to comply with all of the conditions and limitations imposed on an
exemption from registration. You might make a claim per the Model Accredited
Investor Exemption which allows an issuer of securities to raise up to $1
million from accredited investors only in those states that have adopted the
MAIE. At the federal level it is paired with Reg. D., Rule 504. In the
alternative, you may claim a Section 4(2) exemption under the 1933 Securities
Act or a Reg. D., Rule 504 exemption paired with the available state exemptions
in the states in which you sold units. Unfortunately, a securities disclosure
document meeting, at minimum, the anti-fraud requirements may have been
required, along with notice filings. So, in order to bring that offering into
compliance, you may have to find a securities attorney, who will review the
details of your offering, compare it with the requirements of these various
exemptions and to determine what, if anything, can be done. In all likelihood,
you will at least be required to offer a rescission letter to your current
investors, giving them an opportunity to ask for their money back, and, of
course, that's not a particularly good position to be in.
I couldn't suggest a new offering using this existing LLC as the manager
without first cleaning up the compliance problems for the existing LLC.
If you want to go forward with the new offering using another company (e.g., a
fictitious name company, sometimes called a "dba") as the manager,
that might be ok (while you are trying to clean up the other LLC's compliance
problems).
Unfortunately, there are too many film finance consultants (some are even
entertainment attorneys or accountants) that are advising independent
filmmakers that two of the first things to do in raising money is to draft a
business plan and start up an LLC. They fail to make the distinction between
securities offering and attempts to raise money through non-securities
transactions. My book "43 Ways to Finance Your Feature Film" tries to
make that important distinction clear. The most important question in such a
transaction is whether the producer is selling a security. If selling a
security, a business plan is not adequate, a securities disclosure is required,
and the two documents (although similar in some ways) are different in other
important ways, both in terms of their proper use and their contents (see the
article "Business Plan or Securities Disclosure Document" at
http://www.mecfilms.com/coneslaw/finforum.htm under "Articles and
Memos".
John Cones
Re(4): LLC's as Production
Companies vs. One-offs
Posted on March 13, 2007 at 05:06:22 PM by Joe
Thank you for clearing things up. I will review your book "43 Ways"
and the linked article.
After that, I will familiarize myself with the exemptions and most likely
contact a securities attorney as you suggest. We'd like to be in compliance so
we can keep our existing LLC for future investments.
Again, thanks so much!! I wish I had known about this site last year.
All the best,
Joe
Re-starting
Posted on March 17, 2007 at 07:53:07 AM by Marc
We are dissolving our 3-partner manager-managed LLC in NY because a partner had
essentially abandoned us. We are now starting up a new company as the
investment vehicle. First, we are weighing LP vs LLC. In NYC there are
additional tax forms required. We are weighing forming the entity in FLA where
there is no state tax, no residency requirement, low filing fees and quick
set-up time. Our two film will be shot in FLA (prep & prod) and many of our
investors are there. BUT - our "office" will be in NYC (and post will
be here). As I understand it we would need to publish in NY to operate the FL
LLC. Any thoughts? Would this lower our operating/set-up fees, or is it just not
worth the effort? We're now 2 partners. Also, if we just DBA for now - can we
solicit funds? The 1st film will budget $3.5m (min) to $5m (max) with $25,000
units. The LLC in NYC set-up coulkd run $10-11,000 - money we don't have right
now.
Re(1): Re-starting
Posted on March 17, 2007 at 01:51:49 PM by John Cones
Marc:
Since I am not licensed to practice in New York or Florida and the questions
you pose are based on state law, the only suggestion I can provide is that you
talk with attorneys in New York and Florida.
When I put together a PPM for a client, most of that work is based on federal
securities law, thus I can do that for clients all across the country. But,
when they are from another state other than California, I have to advise them
that they need to have a local attorney review the LLC operating agreement (or
LP partnership agreement) to make sure it is consistent with the state law in
the state in which it is being formed. The authorizing statutes are similar,
but may differ in some respects.
If New York law is similar to California law, then what you suspect may be
true, in the sense, that New York (like California) may require an out of state
entity doing business in New York to register to do business in New York and
pay New York taxes. This would make forming an out of state entity with the
home office in New York less attractive. But, again, you need to check with a
New York attorney regarding such issues.
Independent producers in California often use what's called a fictitious name
company (referred to as "doing business as" or a "dba" in
other states) to serve as the manager of a manager-managed LLC that serves as
the investment vehicle for a film offering. The underlying concept is that once
the LLC is formed, it not only offers limited liability protection to the
investor/members, but also to the manager (i.e., the dba). That is one of the
advantages of a manager-managed LLC over an LP. On the other hand, these two
entities may be taxed differently and that's something you'll want to confirm
with local counsel.
Best wishes,
John Cones
Re(2): Re-starting
Posted on March 17, 2007 at 02:50:41 PM by Marc
Jhon thanks! I'm going to order your book. As I understand: both an LLC or LP
need to operate with a PPM to avoid any SEC issues. If someone not part of the
entity refers a possible investor without the benefit of a finders fee (a
friend of a friend....) is there any problem with that?
Re(3): Re-starting
Posted on March 17, 2007 at 07:33:05 PM by John Cones
Marc:
Units in a manager-managed LLC or limited partnership are securities.
Therefore, in order to legitimately sell such units you (the issuer) must
comply with the federal and state securities law. You either have to register
the securities with the SEC at the federal level and with each state in which
you intend to sell the securities, or you must comply with all of the
conditions and limitations imposed on the use of an exemption from the
registration requirement. It is generally too expensive, time consuming and
complex to register (i.e., publicly offer) profit participation units for an
independent film, so almost all of such offerings are the exempt/private
placement variety.
But, there are several different exemption schemes available depending on a
number of different factors, including the amount of money being raised and the
nature of the investors. It is next to impossible to comply with such differing
regulations without knowing which law you intend to comply with. You cannot
rely on rumor, scuttlebut or what you hear from other non-securities attorneys,
for example. There's just too much misinformation floating around out there.
One of the typical requirements of a securities offering, whether public or
private, is that you provide prospective investors with a properly drafted
securities disclosure document before they invest. The disclosure document is
supposed to disclose in writing all material aspects of the transaction (i.e.,
cover everything that is important to a prospective investor). Some of that
information is mandated, some of it may require some judgment. Some of the
information is also required to be in a specific format or location within the
PPM. The securities disclosure document for a public offering is referred to as
a "prospectus". The securities disclosure document for a
private/exempt offering is called a "private placement offering memorandum"
or "PPM" for short. So, it is not accurate to say that "an LLC
or LP needs to operate with a PPM". It is more accurate to say that units
in these two entities are securities, and if you choose to conduct a private
offering, the required disclosure document is the PPM. All of this is imposed
by the SEC and the applicable state securities regulatory authorities, so it is
also not accurate to state that using a PPM is to "avoid any SEC
issues". These are SEC issues.
One of the major requirements of most of the private placements is that the
upper level management of the issuer have a pre-existing relationship with each
prospective investor. So a referral from a friend of a friend is not
appropriate unless it occurred prior to the start of the offering.
On the other hand, there is an exemption called the Model Accredited Investor
Exemption (MAIE)which allows general solicitation and some advertising, so long
as the amount being raised is $1 million or less and all sales are to
accredited investors only.
Please see an experienced securities attorney who has experience with film
offerings) and go over your many options. They all cannot be covered here.
John Cones
Notarizing Documents
Posted on March 20, 2007 at 07:49:11 PM by Robert Mendoza
Do documents such as the PPM, Subscription Agreement and Operating Agreement
need to be notarized?
If not, how do you make the documents the official documents of record in case
an investor tries to come back later and claim they have a different document?
Is it alright to send documents via email?
Re(1): Notarizing
Documents
Posted on March 21, 2007 at 08:14:13 AM by John Cones
Robert:
Generally, the PPM for an LLC offering includes the operating agreement and a
subbscription agreement. The only one that is notarized is the operating
agreement. In the unlikely event that an investor tries to make the rather
specious claim that your documents are not the real papers, he or she has the
burden of proof. The presumption is that the documents in the LLC's files are
the original documents. Such a claim is not likely to be upheld without
convincing evidence to the contrary.
The SEC considers electronic versions of securities disclosure documents to be
the same as hard copy versions.
John Cones
Re(2): Notarizing
Documents
Posted on March 21, 2007 at 03:18:44 PM by marc
So then it is wise to notarize the Operating Agreement - each copy? ow do you
feel about numbering the copies sent to investors - where each copy would have
a unique number assigned to it for tracking purposes.
Re(3): Notarizing
Documents
Posted on March 22, 2007 at 07:24:14 AM by John Cones
Marc:
No, only the original LLC operating agreement is notarized and with respect to
the offerings, I handle, it is typically not notarized until the offering
minimum is raised, because that it typically the way these offerings are
structured. In addition, my offerings typically have language in the
subscription agreement that the investors sign that provides a right of proxy
in the manager so that the manager's owner can sign the operating agreement on
behalf of the subscriber. That way, the investors only have to sign the
subscription agreement and provide their check. The rest is taken care of by
the manager's owner.
Each PPM has a unique number on it already, and should also have the name of
the individual to which it has been delivered.
John Cones
CA lp maximum investors
Posted on March 22, 2007 at 08:59:56 AM by Ben
Hello.
In a California Limited Partnership, how many limited partners may I solicit,
and how many can actually participate?
Also, a potential investor approached me. He wishes to invest, but also
participate as a crew member. Would this not endanger his limited liablility
even if he claimed no control over the project outside of his role, in this
case as UPM/AD?
Re(1): CA lp maximum
investors
Posted on March 22, 2007 at 04:04:50 PM by John Cones
Ben:
If you are doing a California Corporate Code section 25102(f) limited offering
in conjunction with an SEC Regulation D, Rule 505 exemption, the numerical
limitation on the number of investors is established by Reg. D. That would be
35 unaccredited investors and an unlimited number of accredited investors. See
the SEC's Regulation D for the definition of accredited investor.
If doing a Reg. D, Rule 506, state jurisdiction is preempted and the numerical
limitations are the same.
If doing a California section 25102(n) in conjunction with an SEC rule 1001,
there is no limit on the number of investors, but they all must be accredited,
or all into the other categories provided by the California law.
It is critical that you first determine with which exemption you are seeking to
comply.
If the UPM/AD did not become regularly involved in making the important
decisions relating to the film project and offering, it is not likely that he
would be considered actively involved in management.
John Cones
Re(2): CA lp maximum
investors
Posted on March 25, 2007 at 09:57:54 AM by Ben
John,
Your reply prompted me to look into Reg. D and I discovered a rule 504 as well.
It might fit my needs as my project is well under a million. I've read that the
number of investors, accredited or non-accredited, is unlimited with rule 504,
but that may not be the case in California as all of these exemptions are
subject to state law. What's the story with rule 504 in California? Is it a
good option for me?
Re(3): CA lp maximum
investors
Posted on March 25, 2007 at 01:38:11 PM by John Cones
Ben:
California's Section 25102(f)still limits sales to 35, but then allows
unlimited sales to accredited investors, even though they use slightly
differently terminology. In my view, Rule 504 is not that useful, unless it's
being paired with the Model Accredited Investor Exemption and California's
Section 25102(n). Then you can advertise and generally solicit, but can only
raise up to $1 million from accredited investors only. I generally rely on Reg.
D., Rule 506, provide a complete disclosure document and further rely on the
National Securities Marketing Act (NSMIA) to preempt state jurisdiction, except
for state notice filing purposes.
Remember that even though Rule 504 says no "specific" disclosure is
required, you still have to comply with the anti-fraud rule (see preface to
Reg. D) and that still requires disclosure of all material information.
John Cones
Your Book - 43 Ways
Posted on April 2, 2007 at 07:34:48 AM by John
Is the edition of your book currently for sale on Amazon, noted as "Upd
Sub edition (September 30, 1998," the most recent update of your book?
Re(1): Your Book - 43 Ways
Posted on April 2, 2007 at 08:18:27 AM by John Cones
John:
That's the most current published edition available. The next revised version
won't be out until December or January.
John Cones
Re(2): Your Book - 43 Ways
Posted on April 2, 2007 at 09:09:48 AM by John
Thank you, John. Your site is much appreciated.
Receiving Grants as part
of the LLC
Posted on April 2, 2007 at 03:56:51 PM by Franklin Quinten
I am in the process of applying for numerous grants and was just wondering if I
received grants under my own name for a film currently in production, would the
money awarded be considered revenue for the LLC?
Note: I am the manager for the Manager-managed LLC that was formed for purposes
of completing production on the film but the LLC was formed in mid-production
after the majority of the documentary film was shot.
Re(1): Receiving Grants as
part of the LLC
Posted on April 2, 2007 at 04:06:32 PM by John Cones
Franklin:
I don't have much experience or expertise with respect to grants, but it seems
to me that the answers to your questions may first depend on the requirements
of the various grants. The grant provider may prefer, for example, to make the
grant to an entity, although your LLC is presumably a for profit entity, and
the grant provider may be required by their own rules to make grants to other
non-profits. On the other hand, if LLC investor funds were used in obtaining
the grants, the LLC would have a legitimate claim on the grant funds for LLC
purposes. If no LLC funds were used in obtaining the grants, and the grants are
made in your name as an individual, not as the manager of the LLC, then the LLC
may want to enter into a joint venture with you as a recipient of the grants,
or whatever non-profit entity the grants are made to. I'd suggest you discuss
these issues with an attorney who has substantial expertise with respect to the
operation of non-profits and/or a non-profit consultant, or an accountant.
John Cones
Finder's Fee
Posted on April 12, 2007 at 06:56:33 PM by Robert Mendoza
I understand that if raising investment through the selling of securities via
an LLC with exemption status, you cannot pay sales agents to sell the
securities via commission but you can pay a finder's fee to someone who
connects you to an investor. Is this correct?
If so, how do you word a contract with a "finder" if their payment is
contingent upon how much money the investor actually invests?
Re(1): Finder's Fee
Posted on April 13, 2007 at 07:35:35 AM by John Cones
Robert:
No, that's not exactly a fair statement of my view of the law relating to
finders. First, the law relating to finders is a bit confusing. You must
consider both federal and state law unless you plan on conducting a Reg. D.,
Rule 506 offering in conjunction with the National Securities Market
Improvement Act (NSMIA) which preempts state jurisdiction except for notice
filing purposes. So, first determine which federal and state exemption applies.
Then look at the specific language of those exemptions. What you are likely to
find is that the federal rules appear to be more lenient with respect to
finders, but both federal and state rules basically say that an issuer of
securities cannot pay transaction-related remuneration to persons not licensed
as SEC/NASD broker/dealers. Transaction-related remuneration means
"commissions" (i.e., a percentage of the amount raised) which is how
most finders prefer to be compensated. The confusion comes from at least three
sources: (1) federal law from time to time mentions "finders" thereby
implying that it's ok to use them when that's not necessarily the case, (2) the
law is different with respect to finders in non-securities transactions (i.e.,
when the finder is helping to raise money from investors for startup
corporations, joint ventures, investor financing agreement situations or
member-managed LLCs) and (3) California case law which does appear to allow some
transaction related compensation to be paid to finders, but only to the extent
a finder merely introduces a buyer and seller. On the other hand, the
California Department of Corporations has taken the position that they believe
it is impossible for a finder to limit their activity, and that almost any
action on the part of a finder amounts to participation in the negotiations,
thus is not permitted. In additon, more recently, the California legislature
has, in effect, codified the case law relating to finders and made the
applicable provisions even more strict. Assembly Member Correa introduced AB
2167 to amend Section 1029.8 of the California Code of Civil Procedure
effective January 1, 2005, authorizing an action for rescission of the sale or
purchase of a security resulting from sales activities for which a
broker/dealer license is required. In addition, under existing California law,
an unlicensed person who causes injury as a result of engaging in specified
activities for which a license is required is liable for treble the amount of
assessed damages. Thus, utilizing the services of unlicensed persons (i.e., in
finders) in the sale of a security no longer seems to be a good idea in
California, if it ever was.
Whenever something is not certain, I can only suggest that issuers take the
more conservative position and stay away from crossing the line. In lieu of
using finders for securities sales, I'd suggest that an issuer thoroughly
investigate the issuer sales rule. Both the issuer sales rule and more detailed
information relating to finders does appear in my book "43 Ways to Finance
Your Feature Film".
Also, keep in mind, that finder's typically do not know much about the law.
They are more typically sales oriented, not compliance oriented. Another approach
would be to ask the finder to provide you with an attorney's opinion regarding
the legitimacy of their proposed activities. I doubt that such an opinion will
be forthcoming.
Good luck,
John Cones
Re(2): Finder's Fee
Posted on April 13, 2007 at 10:22:03 AM by Robert Mendoza
How does one possibly raise investment money then? Are the only individuals
that can do it the Manager or "upper-level management"? How are these
companies like Independent Filmmakers Alliance and others doing it when they
hire callers to cold call potential investors off of lists? Can you hire
someone as an independent contractor to be "upper-level management"?
Re(3): Finder's Fee
Posted on April 13, 2007 at 12:57:21 PM by John Cones
Robert:
All 38 of the offerings conducted by my independent producer clients who were
successful, and only about 1 in 3 are successful, sought to conduct their sales
in accordance with the issuer sales rules, not through finders and not through
broker/dealers. They successfully raised from $100,000 to $4.5 million. Most
such offerings were probably below a million. I don't know what the Independent
Filmmakers Alliance is doing, but if they are selling a security (i.e., units
in an LP or manager-managed LLC), they are selling such securities as a private
placement (i.e., pursuant to Reg. D, Rules 505 or 506), then cold calling is
prohibited by the federal and state securitieds laws. If they are selling
pursuant to the Model Accredited Investor Exemption (i.e., raising $1,000,000
or less and selling only to accredited investors) they can cold call if they
know or have reason to believe in advance that they are only selling to
accredited investors. The same may be true of California's Section 25102(n)
exemption, however, it is paired at the federal level with the Intra-state
exemption which imposes severe restrictions on who can purchase.
No you cannot hire someone as an independent contractor to serve as upper level
management, the issuer needs to hire them as upper level management and
otherwise handle the relationship per the rest of the issuer sales rule.
John Cones
Re(2): Finder's Fee
Posted on February 4, 2008 at 09:40:16 AM by Joe
Producer
Here again is an instance where the laws are biased in favor of the investor,
i.e., making it difficult, if not impossible, for producers to use finders to
locate investors.
Recent advancements in the understanding of social networks made possible by
studying data provided by the relatively newly-arrived World Wide Web, show
that friends and close acquaintances are usually NOT the best source of leads
for obtaining jobs and business-related connections. Therefore the practice of
relying on "pre-established relationships" -- as required by current
securities law, and especially California law -- is a liability to the
producer/entrepreneur. Accordingly, the limitation and/or over-regulation of
the use of so-called finders further suppresses producers from locating
investors because it limits access to the wider social network. See LINKED by
Albert-Laszlo Barabasi.
Pre-Existing Relationship
Posted on April 14, 2007 at 04:47:52 PM by David
John,
We have a manager-managed LLC with a soon to be formed manager-managed LLC to
be the manager of the production company (of which I will be the manager.)
We have a completed a PPM with our corporate attorney working with a local
securities attorney who had not worked on a film offering before but numerous
other industries PPM’s.
Our offering is a 506 Reg D with a minimum offering of $3M and maximum offering
of $12M. We incorporated in a state in the Midwest.
Regarding Pre-existing Relationships:
Our corporate attorney has begun to contact people he knows in his extensive
network of contacts regarding our PPO. He is on our advisory team but not a
part of our “upper management”. He bills us at an hourly rate for services
rendered. Is it necessary for one of our current “upper management” (i.e.
manager, producer, and vice president and story advisor) to have a pre-existing
relationship with the potential accredited investors that our corporate
attorney meets with and after reviewing their purchaser questionnaires and they
qualify as accredited investors and decide they want to purchase Company Units?
Re(1): Pre-Existing
Relationship
Posted on April 14, 2007 at 06:33:42 PM by John Cones
David:
Here is a quick summary of the rules relating to the pre-existing relationship
requirement for Reg. D private offerings, followed by the actual text of the
SEC's issuer sales rule. That should answer your question.
Summary of Pre-Existing Relationship Requirement – In all of its administrative
rulings, opinions and responses relating to the prohibition against a general
solicitation for non-public offerings, the SEC has taken the consistent
position that the issuer and the offeree must have a preexisting business relationship
(i.e., the SEC has never rendered a favorable opinion regarding the question of
whether a general solicitation has occurred without the existence of a
preexisting relationship). A “preexisting relationship” is defined as any
relationship consisting of personal or business contacts of a nature and
duration such as would enable a reasonably prudent purchaser to be aware of the
character, business acumen and general business and financial circumstances of
the person with whom the relationship exists. The preexisting relationship
requirement has been applied even in mailings to individuals considered
sophisticated in investment matters and to wealthy persons. On the other hand,
this preexisting relationship need not be of a formal or contractual nature. It
is enough if the relationship is sufficient to allow the issuer or someone
acting on the issuer’s behalf to know about the offeree’s financial
circumstances or level of sophistication.
The actual language of the SEC’s “Issuer Sales Rule”:
General Rules and Regulations promulgated under the Securities Exchange Act of
1934
Rule 3a4-1 -- Associated Persons of an Issuer Deemed not to be Brokers
a. An associated person of an issuer of securities shall not be deemed to be a
broker solely by reason of his participation in the sale of the securities of
such issuer if the associated person:
1. Is not subject to a statutory disqualification, as that term is defined in
section 3(a)(39) of the Act, at the time of his participation; and
2. Is not compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in securities; and
3. Is not at the time of his participation an associated person of a broker or
dealer; and
4. Meets the conditions of any one of paragraph (a)4(i), (ii), or (iii) of this
section.
i. The associated person restricts his participation to transactions involving
offers and sales of securities:
A. To a registered broker or dealer; a registered investment company (or
registered separate account); an insurance company; a bank; a savings and loan
association; a trust company or similar institution supervised by a state or
federal banking authority; or a trust for which a bank, a savings and loan association,
a trust company, or a registered investment adviser either is the trustee or is
authorized in writing to make investment decisions; or
B. That are exempted by reason of section 3(a)(7), 3(a)(9) or 3(a)(10) of the
Securities Act of 1933 from the registration provisions of that Act; or
C. That are made pursuant to a plan or agreement submitted for the vote or
consent of the security holders who will receive securities of the issuer in
connection with a reclassification of securities of the issuer, a merger or
consolidation or a similar plan of acquisition involving an exchange of
securities, or a transfer of assets of any other person to the issuer in
exchange for securities of the issuer; or
D. That are made pursuant to a bonus, profit-sharing, pension, retirement,
thrift, savings, incentive, stock purchase, stock ownership, stock
appreciation, stock option, dividend reinvestment or similar plan for employees
of an issuer or a subsidiary of the issuer;
ii. The associated person meets all of the following conditions:
A. The associated person primarily performs, or is intended primarily to
perform at the end of the offering, substantial duties for or on behalf of the
issuer otherwise than in connection with transactions in securities; and
B. The associated person was not a broker or dealer, or an associated person of
a broker or dealer, within the preceding 12 months; and
C. The associated person does not participate in selling an offering of
securities for any issuer more than once every 12 months other than in reliance
on paragraph (a)4(i) or (a)4(iii) of this section, except that for securities
issued pursuant to rule 415 under the Securities Act of 1933, the 12 months
shall begin with the last sale of any security included within one rule 415
registration.
iii. The associated person restricts his participation to any one or more of
the following activities:
A. Preparing any written communication or delivering such communication through
the mails or other means that does not involve oral solicitation by the
associated person of a potential purchaser; Provided, however, that the content
of such communication is approved by a partner, officer or director of the
issuer;
B. Responding to inquiries of a potential purchaser in a communication
initiated by the potential purchaser; Provided, however, That the content of
such responses are limited to information contained in a registration statement
filed under the Securities Act of 1933 or other offering document; or
C. Performing ministerial and clerical work involved in effecting any
transaction.
b. No presumption shall arise that an associated person of an issuer has
violated section 15(a) of the Act solely by reason of his participation in the
sale of securities of the issuer if he does not meet the conditions specified
in paragraph (a) of this section.
c. Definitions. When used in this section:
1. The term associated person of an issuer means any natural person who is a
partner, officer, director, or employee of:
i. The issuer;
ii. A corporate general partner of a limited partnership that is the issuer;
iii. A company or partnership that controls, is controlled by, or is under
common control with, the issuer; or
iv. An investment adviser registered under the Investment Advisers Act of 1940
to an investment company registered under the Investment Company Act of 1940
which is the issuer.
2. The term associated person of a broker or dealer means any partner, officer,
director, or branch manager of such broker or dealer (or any person occupying a
similar status or performing similar functions), any person directly or
indirectly controlling, controlled by, or under common control with such broker
or dealer, or any employee of such broker or dealer, except that any person
associated with a broker or dealer whose functions are solely clerical or
ministerial and any person who is required under the laws of any State to
register as a broker or dealer in that State solely because such person is an
issuer of securities or associated person of an issuer of securities shall not
be included in the meaning of such term for purposes of this section.
Best wishes,
John Cones
Pre-Exisiting Relationship
with Brokers Clients
Posted on April 14, 2007 at 05:05:54 PM by David
John,
I have found this sight to be most informitive!
We have a manager-managed LLC and have a completed a PPM. Our offering is a 506
Reg D with a minimum offering of $3M and maximum offering of $12M.
Regarding Pre-existing Relationships:
Is it necessary for one of our current “upper management” (i.e. manager,
producer, and vice president and story advisor) to have a pre-existing
relationship with the potential accredited investors that our our financial
advisor brings to us?
Our financial advisor is a registered NASD/SEC licensed broker. He is one of
our advisory team but not “upper management”. He is contacting his client base
and others in his network that are accredited investors that he feels would
have interest in our PPO.
Does one of our upper management need to have a pre-existing relationship with
the individuals or entities that our financial advisor / licensed broker brings
to us to purchase LLC Company Units?
Best regards,
David
Re(1): Pre-Exisiting
Relationship with Brokers Clients
Posted on April 15, 2007 at 07:46:37 AM by John Cones
David:
One of the problems with a site like this is that you seldom get enough of the
information about what is going on to provide complete responses. It seems to
me however, that the securities laws were set up so that securities could be
sold through registered NASD/SEC broker/dealers or through issuers. It does not
appear to me that using finders is a viable option for the sale of securities.
In any case, if you engage in broker/dealer sales, the system contemplates that
the broker/dealer firm will conduct its due diligence on the offering and
approve it for sale through all of its registered representatives on a
commission basis. The firm is also responsible for supervising their registered
representatives. Under those circumstances, and for purposes of a Reg. D
offering, the issuer is allowed to rely on the pre-existing relationships that
the broker/dealer firm has with its clients.
On the other hand, you haven't really told me if those are the circumstances.
If, in fact, you simply have a friend who happens to be a registered
representative, and he or she has agreed to pass along names of his or her
clients for your followup and you are not paying a commission to the registered
rep for such activity, there is no B/D firm supervision or due diligence, in my
view, that is not the appropriate circumstance that would allow the issuer to
make Reg. D (private placement) sales to such persons, because the requisite
re-existing relationship between the upper-level management of the issuer and
the prospective investors does not exist.
Per the specifics of the issuer sales rule, the individual who is a registered
rep (or investment advisor, as you refer to him or her, and an investment
advisor is something different than a broker/dealer or registered rep) cannot
serve as upper level managment of your production company/issuer because that
individual is currently involved in selling securities.
One other suggestion, most of the state securities regulatory authorities have
an attorney on staff call the "duty officer". You can call their
office and ask questions like this of them. The regional office of the SEC in
your area may also provide a duty officer for questions. You might also try to
contact them.
John Cones
Re(2): Pre-Exisiting
Relationship with Brokers Clients
Posted on April 23, 2007 at 03:18:53 PM by David
Thank you John for your quick response! Today I called the regional SEC office
to speak with a "duty officer". I was referred to the national office
where I was asked by voice mail to leave my question for an attorney. Hope to
hear back from them.
Your summary of the SEC issuer sales rule below leads me to another question.
Issuer Sales Rule. That rule requires that persons selling on behalf of the
issuer be (1) upper level management of the issuer, (2) have other duties
besides raising money, (3) not be compensated on a transaction-related basis
(i.e., no commissions based on a percentage of sales) and (4) not have been
involved in the selling of securities in the past 12 months. This is just a
summary of the rule, see the actual SEC rule for the exact wording.
Our financial advisor is not a licensed broker / dealer firm who sells
securities. He meets with his clients (most of whom are accredited investors)
and assists them in many areas. He is compensated by a fee-based invoice and
bills his clients by the hour. He is licensed (series 7: 6-3) to sell life
insurance, annuities, key man insurance, errors and omission policies etc. For
estate planning and investments he refers his clients to attorneys, accountants
and a broker / dealer firm for investments. He has not personally sold any
securities for the last 12 months. Could the issuer (film production LLC) make
him a part of “upper management” i.e. vice president of finance?
181 active/passive
Posted on April 21, 2007 at 07:00:14 AM by moviemaven
John - I have 7-8 high net worth friends. We are interested i financing an
existing script with an attached director. We want to be "active" in
the production - i.e. we will receive exec producer credits, help pave the way
thru the labrynth of shooting in NYC etc. Since the role of exec producer
essentially ends once filming commences, do you think both our titles and
degreee of involvement would, under 181, allow us to take an active as oppose
to passive deduction? (obviously, any other investors from who we raise capital
would be considered passive)
Re(1): 181 active/passive
Posted on April 27, 2007 at 07:45:08 AM by John Cones
The executive producer title is not the appropriate title for upper level
management of the securities issuer. Executive producer is a film credit.
Titles like vice president or director of... would be more appropriate. The
other requirement you mention is that these upper level management people have
other duties besides raising money. The SEC issuer sales rule requirement
indicates that these upper level management people and the working definition
of active investor means that these folks must be regularly involved in helping
make the important decisions relating to the project. Those important decisions
do not end upon commencement of principal photography. For example, making
plans for marketing the completed film to prospective distributors, selecting a
distributor and negotiating the terms of the distribution deal would come to
mind.
John Cones
Is a LLC contracted
Producer part of issuer "upper management"?
Posted on April 23, 2007 at 03:30:16 PM by David
Is our picture Producer who is contracted in an agreement by the film
production LLC issuer considered by the SEC to be part of the “upper
management” of the issuer?
Do we need to list in his Producer agreement that he is the vice president of
production (or some other title and responsibility) in order to be considered
“upper a management”?
Re(1): Is a LLC contracted
Producer part of issuer
Posted on April 27, 2007 at 07:52:17 AM by John Cones
David:
In my view, just contracting with a producer to produce the film, which is what
film production companies often do, is not adequate to make that producer part
of the upper level management of the issuer for purposes of relying on that
producer's pre-existing relationships on the fund raising side. You will at
least need to provide him or her with an upper level management title relating
to the production company itself, something like vice president or director,
and give him or her other duties besides raising money. Note also, that reasonable
minds may differ on this issue, which is not defined other than in the issuer
sales rule already posted. So, it may be helpful to make those calls to the
SEC's duty officer and see if you can get a second opinion on the precise
nature of this person's involvement with the issuer. The safest route is to
make that involvement as substantial as possible.
John Cones
Accredited Investor
Exemption
Posted on April 23, 2007 at 03:37:22 PM by David
John,
Accredited Investor Exemption:
Section 4(6) of the Securities Act exempts from registration offers and sales
of securities to accredited investors when the total offering price is less
than $5,000,000.
The definition of accredited investors is the same as that used under
Regulation D. Like the exemptions in Rule 505 and 506, this exemption does not
permit any public solicitation.
There are no document delivery requirements but the anti-fraud provisions do
apply.
Does the accredited investor exemption also require the Pre-Existing
relationship ofthe Issuer and offeree?
Are their any “covered securities” (exempt from Federal registration) where the
issuer (upper management) is not required to have a pre-existing relationship
with the offeree?
Re(1): Accredited Investor
Exemption
Posted on April 27, 2007 at 07:57:46 AM by John Cones
The Section 4(6) accredited investor exemption is still a private placement
(i.e., a non-public offering), and even though the pre-existing relationship is
not a specific requirement, it is one of the most important factors considered
in determining whether a prohibited general solicitation has occurred. So, yes,
the pre-existing relationship requirement still applies to 4(6) offerings. None
of the federal private placement (exempt) offerings, except Reg. D., Rule 504
do not require the pre-existing relationship, and then only in the instance
where it is combined with the states' Model Accredited Investor Exemption (MAIE)
which only allows you to raise $1,000,000.
John Cones
Investors
Posted on April 28, 2007 at 02:15:08 PM by Paul Hill
The purpose of the back-scratcher is to assist in releaving the unneccessary
itch. I have an itch. I'm hoping that you can assist me.
I need an investor who deals in film. I am a LLC with a crew.
If you assist me, you will receive 10% equity from the first film and 5% equity
from our next two films. I will be happy to draw up a contract.
Paul Hill
PEHJ Productions, LLC
www.pehjproductions.com
Re(1): Targeting passive
investors
Posted on April 27, 2007 at 08:09:05 AM by John Cones
Brian:
Reg. D., Rule 505 does not permit offerings of $20 million, not does it allow
cold calling even to accredited investors. Somebody in your shop needs to get a
written opinion from an experienced securities attorney regarding these two
questions. Further, Reg. D., Rule 505 prohibits any form of general solicitation
including setting up a website on the Internet. In addition, if you are
conducting a private placement it is not likely that you have any
"securities agreement with California". No such agreements are
required, unless California has sent you a cease and desist order and you've
negotiated some sort of agreement. Private placements do not result in
securities agreements. They simply require notice filings to both the SEC and
each state in which you sell or offer securities. You guys need to re-think
your position. Cold calling and the Internet are not appropriate for Reg. D.,
Rule 505 offerings.
If you can't get a written opinion from an experienced securities attorney with
respect to whether or not the way you are conducting your operations, then at
least call the SEC's duty officer and the duty officer of the California
Department of Corporations and all other states into which you are cold calling
and ask them the same question. If you are not willing to do those things, I'd
suggest you dissolve your relationship with this outfit, because it appears to
me that they are not, in fact, in compliance with the law.
Best wishes,
John Cones
Re(2): Targeting passive
investors
Posted on April 28, 2007 at 01:59:07 PM by Brian
What happened to my original question? Technical glitch?
Thank you very much for your timely response Mr. Cones. I must admit I'm now
very confused. I know my boss follows the law to the letter.
Another associate producer told me we have a Reg 505 D status but he might be
wrong. I'm prob. wrong about our being a "registered security" as
well, poss. we're just registered with the SEC or with the state of California
in one way or another. The only thing that I really know is that our investors
become limited partners. For their $ they get direct copyright ownership in the
film, but they do not get to activley participate in the production as far as I
know, making them "passive" investors I assume.
I am ordering a copy of your film financing book at Amazon. Perhaps all of my
questions will be answered through it, so I appreciate any advice that you give
via this post.
If one needs to raise 20 Million is there any legal way to do it privatley via
general solicitations- ie., websites, cold calls to accredited investors, print
advertisements, etc. From what I understand this way is the best way to go if
the director wants to retain complete artistic freedom, along with the
copyright. If banks or large corporate positions fund your film then my understanding
is that they then retain copyright along with getting a say in the script and
all other phases of production.
Thanks for any response.
Re(3): Targeting passive
investors
Posted on April 30, 2007 at 07:52:07 AM by John Cones
Brian:
I don't give "advice" on this q&a site. That's something
attorneys who have an attorney/client relationship as evidenced through an
engagement letter give after they are able to obtain all of the relevant
information relating to a client issue. Here we just discuss information
relating to securities compliance.
The facts are that $20 million cannot be raised in reliance on the SEC's Reg.
D., Rule 505. Rule 505 limits the amount of such an offering to $5 million.
Reg. D., Rule 506 has no ceiling on the amount of funds raised, but it too is a
private placement and thus no general solicitation or advertising is allowed.
Units in a limited partnership are clearly securities, and limited partners are
always passive.
Yes, it is true that directors will tend to have the most creative control if
they arrange for the financing of their film through a large group of passive
investors.
John Cones
Getting Investors in Film
Project
Posted on May 3, 2007 at 09:32:40 PM by Frames
I am working with two other people on a film project that I have invested
$5,000. We are in New Mexico, and we formed an LLC for the production. We have
started looking for other investors. We have tried talking to people with not
much success. Promises but no money.
We recently got a list of names and addresses to send letters to requesting
support via donations. I have been told we should not have done this and now we
may have create legal problems.
Is this true? If yes, please explain this issues. And how do we fix the
problem?
Thanks,
Re(1): Getting Investors
in Film Project
Posted on May 4, 2007 at 08:10:02 AM by John Cones
Frames:
Your question is too broad to adequately cover here; so first two suggestions:
read all of the questions and answers on this site and/or read my book "43
Ways to Finance Your Feature Film". In summary, if you are seeking to
raise money from passive investors, you are probably selling a security thus
compliance with the federal and state securities laws is required in order to
be legitimate. Assuming, you have not registered your security as a public
offering, or are conducting the offering pursuant to the Model Accredited
Investor Exemption (MAIE) you will be conducting a private placement (exempt
offering) and will need to avoid any form of general solicitation or
advertising. That's one of the main requirements of a private placement. Thus,
if you got a list of prospects and are asking them to invest in a private
placement, yes, you have created a problem, because that is tantamount to the
prohibited general solicitation. On the other hand, if you are actually asking
for "gifts" which is what a "donation" would be, then such
gifts would not be investments and the securities laws would not apply. Back to
the MAIE, if you are raising $1 million or less from accredited investors only,
then a some general solicitation and advertising is permitted.
So, first determine whether you are selling a security.
Second, determine whether you are conducting a private or public offering.
Third, assuming it's a private placement, determine exactly which exemption you
are relying on.
Fourth, actually read the law relating to that exemption and see what the rules
are. Don't rely on what others say. Go to the source.
In the alternative, find an experienced securities attorney, preferably some
with film offering experience and rely on their expertise.
To the extent that you have actually rasied money from people on the list
(i.e., people with whom the upper level management of the issuer did not know
prior to the start of the offering), and it actually was a securities offering)
you will probably have to make a rescission offer to them (i.e., offer to give
their money back and not accept the money unless and until you comply with the
securities laws).
Best wishes,
John Cones
Re(2): Getting Investors
in Film Project
Posted on May 4, 2007 at 10:25:26 AM by frames
John,
Thanks for your reply. We are shooting a short movie to enter into Sundance
this year. I have given $5,000 and we set up an LLC.
We are trying to raise money to cover the expenses of shooting the movie. I
think what has happened is that we have mixed the terms "donation"
and "investment." We wanted people that gave money to be able to use
the The American Job Creation Act that took effect on October 22, 2004.
Internal Revenue Code Section 181, added by the Act, provides tax incentives
for taxpayers to invest in film and television projects that meet certain
criteria. Section 181 allows a taxpayer to deduct 100% of his, her or their
investment in the year or years in which the investment is spent on film and
television projects that have production budgets which do not exceed $15
million.
I will read all the questions and answers. We are planning on shooting the
movie at the end of this month.
You are correct in that we have not registered as a public offering. We are not
selling a security. We are not a non-profit LLC.
It sounds like we have create a big mess. I will get your book, but it will not
arrive in time to resolve this problem. If we get any money based on the
letters that went out, I will send it right back with a letter explaining the
problem. What we wanted were donations (gifts). I will try to clean up this
mess. But I am going to order your book right away.
John, one more thing... Can we hold a fundraising party for the movie? We would
invite friends and colleagues and provide them the opportunity to donate that
night. No pressure...just donation boxes.
Help!!! and a BIG THANKS!!!
If you are ever in New Mexico...I owe you big time.
Frames
Re(3): Getting Investors
in Film Project
Posted on May 4, 2007 at 03:39:00 PM by John Cones
Frames:
Well, if its all donations (gifts), and not investments, then the securities
laws should not be involved. That would seem to indicate that a party is not a
problem, nor or the other donations, again so long as they are not investments.
You'd just have to be sure your non-profit, tax exempt status is solid. Also,
if the money is coming in as gifts, then Section 181 would not apply.
John Cones
MAIE & General
Solicitation
Posted on May 5, 2007 at 08:20:09 AM by David
John,
Where can I find info (requirements) online about the states' Model Accredited
Investor Exemption (MAIE) which only allows you to raise $1,000,000?
Do all states allow this MAIE exemption?
Thank you John!!
Re(1): MAIE & General
Solicitation
Posted on May 5, 2007 at 09:37:16 AM by John Cones
David:
Just key in the words "Model Accredited Investor Exemption" in any of
the major search engines and several sites will come up. One of those will be
the North American Association of Securities Administrators (NASAA.org). It
provides a pdf version of the model exemption. No all states have adopted the
exemption, so you'll have to check with each state for the latest information.
The state administators are also listed at the NASAA.or site. Each of the
states may have adopoted similar to the MAIE. It is designed to be paired with
the Federal Reg., D., Rule 504 offering exemption.
John Cones
Reg D 504 & MAIE
Posted on May 5, 2007 at 09:00:47 AM by David
Sir John,
Regarding a Regulation D, 504 and conducting a offering pursuant to the States’
Model Accredited Investor Exemption (MAIE).
If we are raising the Reg D in association with the states’ MAIE, and the
offering is $1 million or less from accredited investors only, (within a 12
month period) then what amount of general solicitation and advertising is
permitted?
Networking through pre-existing relationships to their friends and contacts,
cold calling prospecting, movie web site info about story, cast, crew, upper
management with a response for accredited investors to fill out a subscription
agreement to qualify investors, radio talk shows, investment seminars,
“parities” with friends of friends?
Where can I read about the specifics (online if possible) of what can and
cannot be done to comply with SEC and states?
Re(1): Reg D 504 &
MAIE
Posted on May 5, 2007 at 09:39:04 AM by John Cones
David:
See previous answer for locating a copy of the MAIE which sets out information
regarding the manner of offering.
John Cones
Stage 1 & 2 Financing
Posted on May 12, 2007 at 01:11:11 PM by David
John:
Assume: a company wants to finance a feature film for $3-12 million dollar
budget. What are your thoughts on the following financing strategy.
Stage 1 Financing: “Seed Capital” for LLC formation, legal fees, recruit and
bring on Company “Upper Management”, capital campaign, MP development.
Launch a offering of LLC Units under Regulation D, 504 along with MAIE (Model
Accredited Investor Exemption) of $1 million or less of restricted securities
from only “accredited investors” within a 12 month period.
My understanding is that under MAIE the issuer (i.e. newly formed film
production LLC) is not required to have a pre-existing relationship with
prospective investors. The Reg D 504 / MAIE does allow “general solicitation”
and advertising within certain limitations. MAIE does allow Internet designated
sites to pre-qualify investors and then through secure sites make available the
company PPM online.
During this time film production LLC “upper management” would be expanding
their network of relationships with accredited investors for a future Reg D 506
offering of $3-12 million.
Once the Reg D 504 / MAIE $1 million PPO is completed and funds are available;
then attach a director, main cast, seek studio distribution and possible studio
financing, seek other end user financing with pay television such as HBO, etc.
Stage 2 Financing: Launch a second offering; Reg D 506 $3-12 million going back
to the potential accredited investors that issuer “upper management” has a
pre-existing relationship with prior to the commencement of the Reg D 506,
private placement offering. No general solicitation or advertising would be
done at this time.
Could this Reg D 506 be offered within 30 days of the close of the Reg D 504
& MAIE without a threat of the SEC viewing this as a “integrated” or single
offering? Or would we have to wait longer?
Re(1): Stage 1 & 2
Financing
Posted on May 12, 2007 at 03:51:11 PM by John Cones
David:
The underlying assumption is that the stage 2 Reg. D, Rule 506 offering would
only be undertaken if the other possible production financing options which you
seek to access after the development offering is complete, do not come through.
On the other hand, it would appear to me that the two offerings would be
considered integrated by the SEC because they both relate to the financing of
the same film project. And even though the amount of money raised for purposes
of the Rule 506 offering would not matter since there's no limit, if the
offerings were integrated, you would exceed the ceiling on the MAIE portion,
and possibly the numerical limitation on the number of investors.
John Cones
Re(2): Stage 1 & 2
Financing
Posted on May 15, 2007 at 08:47:41 AM by David
John:
Your analysis is correct; what I was considering was the Stage 2 Reg D 506
equity financing would only be sought if other financing options (studio, end
user, co-productions etc.) were unsuccessful to reach the total production
budget. But we certainly would not want to loose our Reg D 504 & MAIE
exemption because of integration with the second Reg D 506 offering.
What if the initial LLC is a “development” company that would launch a Reg D
504 & MAIE $1 million offering (which allows general solicitation and
limited advertising) and then once the offering is completed to attach various
elements to the project (i.e. director, stars, etc.) seek distribution and
other financing options (studio, end user, co-productions etc.) if additional
financing was still needed then incorporate a “production” LLC that would make
an acquisition from the development company (say for 120% of investors equity
plus participation in the newly formed production LLC) and then the production
LLC could launch the $3-12 million Reg D 506 film production PPO?
Or would it be better to start with the active investor business plan that you
recommend and expand the network of potential accredited investors with the
film LLC “upper management”. Once this is adequate then cease that activity and
wait the three or four weeks and then launch the $3-12 million (passive
investor) Reg D 506 PPO?
Our main goal was how to expand the circle of pre-existing relationships with
accredited investors with our “upper management” and access “seed money”
(working and development capital) at the same time.
We have been considering a Reg D 506 PPO at the outset with Class A & Class
B Units where Class A Units could be accessed by the company once the
investment funds where deposited and Class B Units would be held in an escrow
segregated account until the offering was completed. The downside of this is
that we would be limited by the pre-existing relationship rule and no general
solicitation or advertising could be done.
Re(3): Stage 1 & 2
Financing
Posted on May 16, 2007 at 07:54:01 AM by John Cones
David:
Your revised scenario makes it a closer question, but in an envirnoment like
this Q&A site, I can only opine that you may still have integration
problems, particurly since you are providing an ongoing profit particaption for
that original group of investors in the 2nd offering. It's also very difficult
to know just exactly where to draw the line in such situations, thus, I
generally advocate staying away from the line, where ever it is on any given
issue and taking steps to make it clear that you are not crossing that
regulatory line. You seem to be doing the opposite.
Personally, I think I'd prefer the business plan approach linked with one or
the other of the active investor investment vehicles (e.g., a newly formed
"S" corp or a newly formed member-managed LLC) for the development
fund.
Also, I've never been partial to class A and class B securities or offerings
that propose to spend investor funds prior to reaching the offering minimum
(i.e., a minimum that is enough to engage in whatever business activity is
proposed and that can result in possible profits for the investors). If
nothing, else, such an arrangement simply makes it more difficult to raise
money from investors.
Besides, if you do the active investor development fund, there should be no
need to spend the early money from the passive investor offering.
Further, a formal "escrow" account is not required for a private
placement. An interest-bearing, segregated bank account is adequate. After all,
if you promise the investors in the PPM that you will not spend their money
until you've reached the minimum, but you do anyway, that's likely to be
securities fraud, and that possibility protects the investors as much as, if
not more than an escrow account.
John Cones
Financing in Ohio
Posted on May 13, 2007 at 10:05:12 AM by Brandon
I am working on a film and we are in the process of raising investors. All of
the production will be done in Ohio and I was wondering if there is a resource
where we might be able to find past films that have been produced or financed
out of this particular state. The desired investment is very small so we just
need leads on where to start in terms of contacting local investment
possibilities. Or are there any common places that prove successful in raising
small amounts of personal investment for a film.
Re(1): Financing in Ohio
Posted on May 13, 2007 at 07:38:39 PM by John Cones
Brandon:
I have a producer client in Ohio who is currently in the process of raising
fnancing from investors. However, as is usually the case, his investors are his
investors. I'd suggest you bring in a few other people who know people and
bring them in as upper level management, complying with the SEC's issuer sales
rule.
Also see the earlier posting of the list of reasons why people typically invest
in independent films. The issue was discussed earlier on this site.
John Cones
Hollywood Business Model
for Independent Producers
Posted on May 17, 2007 at 09:57:27 PM by David
John,
My creative company has a screenplay that has generated signifcant interest to
established producers, writers and casting director, music publisher and record
label soundtrack distributor. We believe from market testing this picture has a
strong appeal to the mass market.
After reading much of the information on your very informitive forum and other
sources this is the strategy we are considering to launch.
Hollywood Business Model for Independent Producers
Development Company: Incorporate a
newly formed· “S” Corp. or newly
formed member-managed LLC.
Draft a business plan for· the Development Company seeking “active
investors”. The SEC does not regulate companies seeking active investors in
that “active investing” is not considered a “securities”. The risk of the
Development “active investors” is not will the motion picture generate enough
income to recoup their investment and make a return but will the development
Company be able to sell the project to another Producing / Production Company
at a profit. In other words will the Producing / Production LLC
(manager-managed LLC) be able to raise industry financing and / or the minimum
private placement offering so that the Producing / Production LLC can purchase
the developed property (i.e. screenplay and attached elements such as “pay or
play” deal with main talent and hopefully secure a studio distribution deal
with a Major or Minor domestic theatrical studio / distributor.
The Producing / Production LLC “Upper
Management”· (manager-managed)
should expand their network of potential accredited investors.
The newly formed Development Company
can work on the script and attach·
various elements to the project i.e. picture director, main talent etc.
· The Producing / Production LLC upper
management can seek distribution with major / minor studios and other end user
financing such as pay television and foreign theatrical presales. If the
pre-sales are adequate seek debt financing from an entertainment bank as well
as studio financing from a major / minor studio. At this point financing may be
adequate.
If not other financing options would· be co-productions option and tax rebates.
At this point if the financing· package is not adequate then launch the PPO
for equity accredited investors with SEC Regulation D 506 offering.
(Individuals, investment bankers, hedge funds etc.)
What are we missing or not seeing that would improve this financing plan?
Re(1): Hollywood Business
Model for Independent Producers
Posted on May 18, 2007 at 08:00:00 AM by John Cones
David:
Yes, that appears to be a description of one of the combinations of film
finance options discussed in my book "43 Ways to Finance Your Feature
Film". To put it more simply:
Step 1: Bring in so-called start-up/development funds by organizing a
production/development company using one of the active investor options
discussed in the book (two of which, as you suggest are the "S" corp
and the member-managed LLC). The advantages and disadvantages of each are set
forth in the book.
Step 2. Use these early monies to acquire rights, develop scripts, attach
elements (package) and seek production financing. In order, production
financing may be sought from (a) studios offering
production-financing/distribution (PFD) deals; or(2) distributors offering
negative pickup agreements and guarantees that may be used as collateral for a
bank loan for the production funds (or any of the other lender financing
variations including worldwide negative pickups, a domestic negative pickup
paired with an international negative pickup, foreign pre-sales, gap
financing,etc.)
Step 3: In the alternative, if none of the above are successful in funding the
production costs, or as a supplement to such production funding, conduct a
private placement offering (possibly structured as a manager-managed LLC) for
some or all of the needed production funds.
Note that all forms of tax incentives are generally associated with investor
financing.
Also, keep in mind that for most forms of lender financing, a distribution
agreement and guarantee from a "credit-worthy" distributor is
required. In addition, the bank will require that your obtain a complition
bond.
Note too, that the active investors for the production/development company need
to be people who are not only capable of being actively involved in helping
make the company's important decisions, but in fact, they are actively involved
on a regular basis. Also, a few of the state securities regulatory authorities
have taken the rather odd position that if you advertise or conduct any form of
general solicitation in seeking out those active investors, those regulators
will treat the transaction as a security. I disagree with that analysis, but
I'm not the regulator. So, to be safe, it appears best to leave off any
advertising or general solicitation when seeking that small group of active
investors for the first round of financing.
John Cones
Selling Units on-line
Posted on May 22, 2007 at 03:22:22 PM by Lance
First off thank you for all the valuable information you continue to provide
for all of us dream chasers. My question. My partner and I have a film that we
would like to produce. Our budget is 400 thousand. We deceided to break the
amount up into units consisting of 800 units with a $500.00 dollar value. I
have contacted my lawyer and had a memorandium drawn up to protect us for SEC
up here in Canada. If I'm selling my units on-line do I also have to follow US
SEC rules which differ from Canadian SEC rules or am I ok with following the
guidlines set here in Canada.
Once again thank you for the time.
Lance Sutherland
Producer
Cinderella Films
www.cinderellafilms.com
Re(1): Selling Units
on-line
Posted on May 22, 2007 at 06:43:32 PM by John Cones
Lance:
If you intend on accepting investments from U.S. residents, you will need to
comply with the U.S. securities laws. If not, it would be advisable to post a
prominent statement on your website saying something to the effect that
"Only Investments from Canadian Residents Will Be Accepted". In the
U.S. any number of investors over 500 will automatically characterize the
offering as a public offering, which has to be registered with the SEC and in
each state where you intend to solicit and/or accept investments.
On the other hand, you might be able to rely on the Model Accredited Investor
Exemption (which allows you to raise up to $1,000,000 from accredited investors
only), but you'll still have to have a securities disclosure document that
satisfies the requirements of the SEC's anti-fraud rule.
John Cones
Re(1): Financing Indie
Films
Posted on May 22, 2007 at 06:37:28 PM by John Cones
Edgar:
I suppose the "fun and exciting" part is what most people see, but
the way the film industry actually works is one of those endeavors much like
passing legislation and making sausages, it's not so pretty on the inside. Your
question is obviously too broad to address here, but it has been addressed in a
number of books, some mine and some written by others. Here is a brief
selection of books to consider:
1. Entertainment Law in a Nutshell, by Sherri L. Burr, 348 pages, published
January '07.
2. The Pocket Lawyer for Filmmakers: A Legal Toolkit for Independent Producers
by Thomas A. Crowell, published March '07, $21.75.
3. Litwak, Mark, Dealmaking in the Film & Television Industry--From
Negotiations to Final Contracts, Silman-James Press, 1994.
Then there are my books:
Cones, John W., The Feature Film Distribution Deal--A Critical Analysis of the
Single Most Important Film Industry Agreement, Southern Illinois University
Press, 1996.
Cones, John W., Film Finance and Distribution--A Dictionary of Terms,
Silman-James Press, 1992.
Cones, John W., Film Industry Contracts, (self-published) 1993.
Cones, John W., Forty-Three Ways to Finance Your Feature Film, Southern
Illinois University Press, 1995.
“Three Hundred Thirty-Seven Reported Business Practices of the Major
Studio/Distributors”, John W. Cones, (self-published compilation, 1991;
subsequently incorporated into Film Finance and Distribution – A Dictionary of
Terms, also by John W. Cones, Silman-James Press, 1992).
Hollywood Wars – How Insiders Gained and Maintain Illegitimate Control Over the
Film Industry, John W. Cones, Marquette Books, 2007.
If you read these books, you'll get a fairly good idea of what's going on with
respect to the details of the transactions and the bigger picture. The most
current and extensive bibliography of books about the film industry is included
in the "Hollywood Wars" book.
Pleasant reading!
John Cones
181 deduction at risk
Posted on May 31, 2007 at 10:48:37 AM by moviemaven
John - Trying to think through how to maximize the at-risk deduction in a film
deal that incorporates leverage. Say we make a movie with negative costs of
$2mm 1. We then pre-sell foreign rights for $1 mm and consider that an asset of
the production company. 2. We borrow money (say $1mm- tho obviously it would be
a smaller loan-to-value) secured not directly by the pre-sale contract but by
the LLC interests. In other words i want the creditor to have more than
non-recourse collateral such that we are at risk for the entire amoutn (debt +
equity = $2 million)and therfore under 181 able to deduct the full amount.
Obviously we would need a tax opinion but does this sound right?
Thanks again for your helpful words- you're book is great and i recommend it to
all my friends in the biz
Re(1): 181 deduction at
risk
Posted on May 31, 2007 at 01:41:31 PM by John Cones
I can't really help you much here. Your question is outside my areas of
expertise or comfort. I'd suggest an accountant or tax attorney. Further, in
your hypothetical, you may want to make it clear that you have plans to produce
a movie with a $2 million dollar budget rather than that you have already
produced the film before you seek pre-sales. That doesn't compute. Some
clarification is needed there. Maybe reverse the order of the presentation or
just say "we plan to produce" instead of "we make".
John Cones
Development LLC &
Control
Posted on June 2, 2007 at 03:22:25 PM by David
John,
When forming a “Development LLC” with “active” investors how dose the producer
and / or production LLC keep control of the Development Company since it is not
a manager-managed LLC but member-managed LLC?
Re(1): Development LLC
& Control
Posted on June 2, 2007 at 05:47:46 PM by John Cones
David:
The concept of the active investor and the member-managed LLC is to bring in
people with whom you can work well, people who already agree with you with
respect to most, if not all of the issues that are likely to come up. You want
them to be regularly involved in helping make the important decisions, although
veto power is not required. The LLC's operating agreement needs to be carefully
drafted so that the investors are active, but if there is an impasse on an
issue, there is a mechanism for resolving the matter. Review the language of
the proposed LLC operating agreement and discuss those provisions with your
attorney.
John Cones
Re(2): Development LLC
& Control
Posted on June 9, 2007 at 11:03:25 AM by Hillary
I recently filed for my LLC - Equinox Entertainment in Central Florida. I'm
raising funds for 1 particular film project at the moment, but my long-term
goal is to turn Equinox into a full-scale motion picture studio in the area. Do
I need to have a different "production company" for the film appart
from Equinox if the goal is for Equinox to remain a viable production company
after this project is complete?
Re(3): Development LLC
& Control
Posted on June 9, 2007 at 12:57:57 PM by John Cones
Hillary:
Typically, when a filmmaker uses the manager-managed LLC as the investment
vehicle for a film project, the production company serves as the manager and
the LLC name is the name of the film plus the words "film production,
LLC" or just "LLC", something to that effect. That way, your
production company is managing the LLC and then can go forward in the future
and use another LLC to finance one or more additional films, also serving as the
manager again, or utilize any number of other film finance methods to raise
production money financing. The production company can be organized as a
member-managed LLC, a corporation, a general partnership or even a fictitous
name company (dba). Each form of doing business has its own set of advantages
and disadvantages (see "43 Ways to Finance Your Feature Film").
John Cones
Normal Fees for Drafting a
PPM
Posted on June 13, 2007 at 01:31:32 PM by Derek Edwards
John,
We are in the process of forming a manager-managed LLC and are going to be
raising funds from third party investors in the form of private placements. I
have gotten several quotes from reputable attorneys in the Washington state
area for upwards of $10,000 in order to help us put a PPM together. I wanted to
inquire if these types of rates are normal and to be expected. The budget for
our film is right around $300k.
I understand that the nature of securities laws are very complex and we want to
make sure that we do this correctly. I just hope that the fees for the
necessary legal work does not provide too much of a stumbling block.
Highest Regards,
Derek Edwards
Re(1): Normal Fees for
Drafting a PPM
Posted on June 13, 2007 at 03:22:20 PM by John Cones
Derek:
The quoted fee is not at all unreasonable, if it's a flat fee and it won't go
up if the offering takes more time and effort than expected. I've heard some
attorneys asking for fees as much as $25,000 to $35,000 for this work. Others
work on an open-ended hourly basis, which can really be expensive at times.
There are other considerations besides, fees, however.
(1) You also want to know if the attorney has ever prepared a film offering
because, if they haven't it may take a lot longer to prepare, as opposed to
someone who has prepared film offerings.
(2) If they are experienced with film offerings, ask them how many of their
film offerings have been successfully funded and what is the success rate for
those offerings.
(3) You may want to inquire as to the turnaround time on the project (i.e.,
about when can you reasonably expect to get on the street with the completed
PPM). In my own shop, I promise a first draft within 3 to 4 days of receiving
the first batch of information from the producer client, within 2 days for the
2nd draft, and if a third draft is needed, another day. Total time really
depends on the producer's ability to gather the needed information that must
come from the producer (i.e., narrative bios, script synopsis, budget topsheet,
box office comparables, etc.), and the time it takes the producer to review the
PPM drafts and provide the attorney with comments.
(4 You'll also want to know if the fee is all due up front, or if some of it is
deferred and payable out of the offering proceeds of the offering; and whether
that deferred portion is contingent upon the minimum offering proceeds being
raised.
(4) You'll also want to be clear as to what the attorney is going to do:
prepare the offering memorandum so that it complies with specific federal and
state exemptions, prepare a subscription document to accompany the PPM, help
with or prepare the offering's financial projections, provide a tax discussion,
tax opinion and/or securities opinion, provide a draft of the LLC operating
agreement or LP partnership agreement as an exhibit to the PPM, handle or help
with the required federal and state notice filings, create or help in creating
the entity which will serve as the investment vehicle (e.g., limited
partnership or manager-managed LLC), and answer questions and provide advice
all the way through the offering process until the funds are raised or the
offering is abandoned. The fees may vary depending on exactly which tasks the
attorney is undertaking. If all of the above are not handled properly, the
specific requirements of the exemptions may not have been complied with, and/or
there may be extra charges.
(5) You'll also want to be clear as to what the other offering expenses are that
are not included in the attorney's fees (e.g., state notice filing fees,
copying and binding charges for the PPM, artwork for the cover, if used,
marketing costs, expenses associated with creating the investment vehicle) and
courier or delivery expenses for shipping the PPM drafts back and forth).
Normally, these are costs borne by the producer client, but it is best to
simply clarify with the attorney regarding whether such costs are included in
the fee or not to avoid a misunderstanding (probably not).
(6) You may also want to discuss with the attorney what individual or entity
will serve as the manager for the LLC and what are the advantages and
disadvantages of the choice. Sometimes attorneys tend to encourage producers to
create more entities than are necessary for such ultra-low budget offerings
thereby costing the producer unecessary expense when the offering itself may
not be successful. The same may be true for creating the manager/entity too
soon.
John Cones
John,
Thank you very much for your timely response.
I would also like to get an idea if it is wiser to go through a larger
reputable firm, or if a smaller company (or one man show) with the right
experience may work as well. From my understanding of securities, not all
attorneys attempt to even tackle this vast field. Does a larger firm have
better resources to handle this type of request?
And if/when we do get our completed "package" put together, and
something happens where say an investor decides to sue, will the liability come
back to myself or the attorney with whom we put our faith in to draft these
contracts?
Thank you again,
Derek Edwards
Re(3): Normal Fees for
Drafting a PPM
Posted on June 14, 2007 at 07:42:07 AM by John Cones
Derek:
It is true that most attorneys avoid securities practice because it is a highly
technical, complicated and very specialized type of practice. In addition, many
securities attorneys around the country do not want to handle film offerings,
because they consider them to be highly risky. And, of course, they are risky
offerings, in the sense that no one can predict with certainty how any given
film will be received by distributors and audiences. Independent film is also a
very competitive field. In the instance of preparing a PPM and associated
documents and transactions, however, it is not necessary for a large firm,
since it only takes a single attorney with experience in these areas to handle
the matter. You could, of course, spend significantly more money using the
services of an accountant for the financial projections, a securities attorney
for the federal and state securities compliance work, a tax attorney for the
tax discussion and opinion and a corporate attorney for creating the entity, but
you would not necessarily come up with a better PPM or one that was more
attractive to investors and protected you the producer any better. Since my own
practice has focused on this single area for 18 years, it is fair to state that
I have prepared more film offerings than any other attorney in the country,
after all, that's just about all that I do. My clients have succeeded in
successfully funding about 40 offerings and produced nearly 40 films, including
features and documentaries. And, most importantly, none of the producers have
been sued. Since I work almost exclusively with independent producers, many of
whom have limited funds to pay for offering expenses, including attorney fees,
out of pocket, I've structured my fees to help in that regard. So, when you ask
the questions you are asking of me, you are not necessarily getting a purely
objective response from an individual that is far removed from such matters.
I'm right in the middle of the fray and offer a specialized service to
independent producers all across the country, and have done so for years. I've
also written several books on the subject and lectured about film finance,
specifically investor financing on more than 300 occasions.
On the other hand, I can be honest and factual in answering such questions. If
the offering is structured as a manager-managed limited liability company, and
a so-called "disgruntled investor" did sue, the LLC itself limits
liability to the entity. The manager, even an individual serving as the manager
would enjoy the protection of limited liability. It is not likely that the
attorney would also be sued, unless he or she was horribly negligent in
preparing the PPM or because he or she was actively involved in the selling of
the security. In my judgment, such potential lawsuits are generally avoided by
carefully making sure that the PPM discloses in writing all material aspects of
the transaction, does not omit anything material and states what is disclosed
in a manner that is not misleading. If a potential plantiff takes such a
carefully drafted PPM to a litigating attorney to consider as the basis of a
lawsuit, the advice will typically be: "No, it says right here in writing,
that you could lose your entire investment, and the risk factors for the
offering are fully disclosed, so there is little basis for such a suit."
On the other hand, the disclosure document is only part of the transaction. The
securities attorney must also properly inform the client/producer with respect
to his or her obligations to comply with all of the conditions and limitations
imposed on the use of the specific exemption selected for use, and of course,
the choice of exemption needs to be an informed choice based on the needs of
the specific film project.
John Cones
SCOR Registration
Posted on June 15, 2007 at 03:28:18 PM by Derek Edwards
John,
To follow up from my last post of the "Normal Fees for PPMs", I have
gotten a recommendation from an attorney here in Washington state that it may
be possible for me to draft up my own securities registration documents through
a SCOR registration. This process has not been made available yet in all states
(I don't believe that CA currently allows this process), however the Washington
state government securities department provides a walk through of how to do
this on their website. The SCOR registration has been developed to help small
businesses raise funds through securities offerings without the normal
associated fees with an attorney.
I will still plan on obtaining legal counsel to review any documents that I
draft myself. I wanted to inquire if this was a process that you have heard
anything about. I am surprised because even with the extensive research that I
have been doing on this subject matter, this is the first time that I have
stumbled across this option.
Thank you,
Derek Edwards
Re(2): SCOR Registration
Posted on June 19, 2007 at 07:43:24 PM by Derek
Edwards
John,
I do have a copy of your book "43 Ways..." on hand and have reviewed
your discussion of SCOR in chapter 25.
This is an option that we are seriously pursuing and I would like to inquire if
you may know of any further resources for us to do research on this topic. I
have found that many attorneys have not heard of this and little help online. I
have been in discussion with the Washington State Securities Division and I
would like a viewpoint from another perspective. Thank you again for any help
you may be able to provide.
Derek Edwards
Re(3): SCOR Registration
Posted on June 19, 2007 at 08:21:35 PM by John Cones
Derek:
No, unfortunately, I'm not aware that many people actually use SCOR or feel it
is that useful. To the extent that you can get helpful information from the
Washington state regulators, that's about as good as any. You may also want to
consider the Model Accredited Investor Exemption (MAIE) which allows you to
raise up to $1 million from accredited investors, and allows some limited
advertising.
John Cones
PPMs for Ultra-low budget
film
Posted on June 27, 2007 at 01:48:52 PM by Sam
Clearly involving an attorney to draft a PPM is a must for projects involving
passive investors... but it sounds like the cost of doing so is prohibatively
expensive for a project like mine, which has a total budget of under $30k
(about 20k of which is to be sollicited from investors). Are our only options
really to either collect investments illegally or nearly double our budget with
legal fees??
Re(1): PPMs for Ultra-low
budget film
Posted on June 27, 2007 at 08:23:50 PM by John Cones
Sam:
I agree that a $30,000 budget may not be economically feasible for a securities
offering, but I can't agree that hiring an attorney would have to necessiarily
"double" your budget. You have to figure that there will always be
some costs associated with raising money. So if your budget is $30,000 and you
add $5,000 on for offering costs, including the up front attorney fees, that is
entirely possible. It's still a bit out of line compared to what is desirable,
but if passive investor financing with fairly small units is your only option,
I can only advise that you comply with the law, and not be an outlaw.
The other option is to raise the money from just a few active investors and use
a member-managed (active investor) LLC as the investment vehicle. If the
investors are all truly active as member-managers, raising money in that manner
would not involve the sale of a security. On the other hand, you might not
enjoy the experience of working with active investors in a creative venture
like film, and if one turns out to be passive, you've sold a security anyway.
Best wishes,
John Cones
Limit of Qualified
Investors
Posted on June 29, 2007 at 10:43:18 AM by Marc
I'e been told that if we raise our financing through a small group of qualified
investors we do not need to use a PPM. We're talking about a total of $5
million / and maybe 10-15 passive investors. Am I misinformed - or is it safer
to avoid any SEC scrutiny by using the PPM as our offering.
Re(1): Limit of Qualified
Investors
Posted on June 29, 2007 at 08:34:37 PM by John Cones
Marc:
I strongly disagree with that suggestion, after all, the entire federal
securities regulatory scheme is based on the "informed investor". The
only safe way to have informed investors is to provide them with the information
they need in order to make an informed decision. In my opinion, the
misinformation you are getting comes from people who are misreading Regulation
D (or who've never read it at all). Note that in Reg. D., Rule 504, there is
language indicating "no specific disclosures" are required. Some
people misinterpret that to mean "no disclosure", but what the SEC is
actually saying is that the specific disclosure rules of Reg. D., Rules 505 and
506 do not apply to a Rule 504 offering. However, in the introduction to Reg.
D, there is also language that makes it absolutely clear that the anti-fraud
rule applies to all Reg. D offerings (Rules 504, 505 and 506). The anti-fraud
rule, in turn, requires that all material facts be disclosed in advance to each
prospective investor, that no material facts be omitted and that whatever
information is disclosed be set forth in a manner that is not misleading. Does
that sound like "no disclosure" to you? The PPM is, in fact, the
securities disclosure document that is used for Reg. D offerings, so either
comply with the law or run the risk of having to give all of your investors
their money back at the most inopportune time (i.e., after you've spent it). Be
careful about the information you pickup from people who are not well informed.
Further, the only reasonable way for any issuer of securities (i.e., in this
case a film producer) to protect himself or herself from a misinformed investor
who subsequently becomes a "disgruntled investor" is to put all of
the required disclosures in writing in the proper form of a PPM and then if
anyone complains after the fact that they lost all or some of their money in
your risky venture, you can point to the fact that all of the risks associated
with the investment were properly disclosed in the PPM, thus, the investor has
no claim.
John Cones
P.S. You can't rely on Reg. D., Rule 504 anyway, since it only applies to
offerings of $1 million or less. Yes, in my humble opinion you have been badly
misinformed.
Re(2): Limit of Qualified Investors
Posted on June 30, 2007 at 03:58:29 AM by marc
I thought the information was incorrect, and I also know to check with proper
legal counsel before acting on any recommendation. I have every intention of full
compliance. My long term plan includes several films and want to be sure that
my actions don't cut my plans short. In fact, I always tell my fellow
filmmakers that legal fees paid now will avoid major legal fees later. Once
again, thanks for this forum!
development
Posted on July 13, 2007 at 08:16:26 PM by Sara Broetje
Hello John,
I am an aspiring screenwriter. I am working with my lawyer preparing offers for
options on 2 books. Ideally, it would be great to have a couple of producers to
approach and pitch the projects to and develop from the get go, but I do not
have those connections at this point, and am still seeking an agent. Unless
that changes, I will spec the script and shop it around when complete. Any
ideas on financing for this endevour in either scenario? Thanks!
Sara
Re(1): development
Posted on July 14, 2007 at 07:36:13 AM by John Cones
Sara:
Since this site is limited to "investor financing" I can provide some
options in that arena. Other possibilities are covered in my book "43 Ways
to Finance Your Feature Film". Quite often screenwriters who want to see
one of their scripts on the screen stop looking for other producers to help
them and become producers themselves. As a producer and considering your
investor financing options, you can either conduct an investor-financed
development offering or an investor-financed production offering. Then you can
choose between several active investor (non-securities) alternatives or passive
investor (securities) offerings. If you go the securities route, either because
you cannot find one to a few active investors who are willing to fund your
entire project or because you don't want your investors to be actively involved
in helping you make the important creative decisions associated with the film
project, then you have to decide whether to conduct a public (registered)
offering or a private (exempt) offering. Usually, independent producers opt for
the latter for their low-budget projects. Then you have to determine which of
the available federal and state exemptions are available or most desirable for
your planned offering and set out to comply with the rules associated with
those exemptions. In the meantime, you will need to be building that pool of
prospective investors with whom you and your production company's other
"upper level management" have a pre-existing relationship, because
the SEC has always considered the factor of a pre-existing relationship between
the issuer of a security and a prospective investor to be an important part of
whether the issuer is conducting a prohibited general solicitation under the
exempt offering rules. If you don't have anyone else involved, this would be a
good time to start looking for other people to become your production company's
upper level management, so again, you have a better chance of increasing your
pool of prospective investors. And, of course, if you haven't formed a company
yet, this would be a good time to start talking to your attorney about creating
a production company. In addition to my own book "43 Ways" which
covers much of the above from a film finance perspective, another good book
that walks an independent producer through many of the legal issues involved in
producing films is Thomas Crowell's "The Pocket Lawyer for
Filmmmakers", Focal Press, 2007.
Best Wishes,
John Cones
Non-Profit Investment
Posted on July 26, 2007 at 11:21:24 AM by Reggie
My script has a strong spiritual and social action message, and I'm thinking
about approaching certain like-minded non-profits to see if they would like to
invest in the film. I have heard that non-profit organizations can invest in
films, on two conditions: 1) the non-profit uses the profits from the film in
accordance with the non-profit's mission; and 2) these profits will not benefit
any individual who donates funds to the non-profit to be invested in the film.
Is this true? Can you point me to a place where I can research this?
Thanks,
Reggie Littlejohn
Re(1): Non-Profit
Investment
Posted on July 26, 2007 at 07:20:15 PM by John Cones
Reggie:
I don't deal with non-profits and thus have little expertise in the area,
although what you describe sounds about right. The ultimate authority on such
issues will be the state law in the state where the specific non-profit is
incorporated and its on articles/bylaws. To be sure, you'd need to see the
specific language in the state statute and those documents from the non-profits
you are considering.
John Cones
Re(2): Non-Profit
Investment
Posted on July 27, 2007 at 10:25:16 PM by Reggie
Okay,thanks for getting back to me so quickly on this.
Investor Percentages
Posted on July 30, 2007 at 10:03:31 AM by Franklin Quinten
I have approached a couple Wall St.-type investors recently who are not
familiar with film investment and want a larger percentage equity in the film
because they are basing it on their finance models.
Is there a "typical" or "industry standard" film deal as
far as how much of the money investors put it and what their return and
percentage of gross revenue will be?
I thought that generally the investors put it all the money then get it back
plus a 10-20% return and then the remainder of the gross revenue is split 50/50
between investors and executive producers. Is this not correct?
Thanks again.
Re(1): Investor
Percentages
Posted on July 30, 2007 at 01:01:02 PM by John Cones
Franklin:
There is no such thing as a "standard" deal in the film industry
unless you have the leverage to offer it to someone on a take it or leave it
basis. If your investors don't like the deal you offer, either sweeten the deal
or find new investors.
John Cones
Re(2): Investor
Percentages
Posted on July 30, 2007 at 01:05:46 PM by Franklin Quinten
Thanks but I really need to have some kind of base to talk with them. If I just
tell them that there is no standard deal then they will have no idea if it is a
good deal or a bad deal even if I sweeten the deal. Isn't there some kind of
"range" of return that is generally offered to investors? Or examples
from your own experience?
Thanks again.
Re(3): Investor
Percentages
Posted on July 30, 2007 at 05:46:59 PM by John Cones
Franklin:
Part of the problem we're having here is that you have provided no information
regarding the nature of the investment vehicle, how many investors you expect,
how much money is being raised, whether the offering is to sell securities or
non-securities, etc. The terms of the deal may vary with these variables. And
also, determine whether you are trying to come up with the profit sharing
ration as between management and the investor group, or a rate of return, or
both?
John Cones
Re(4): Investor
Percentages
Posted on July 30, 2007 at 05:56:12 PM by Franklin Quinten
Ok. Manager-managed LLC. Selling securities. Raising $500,000 for theatrical
documentary. Up to 30 investors split into shares of approx. $16,667.
Trying to determine fair range of both profit sharing ration between Manager
and investors and rate of return.
Thanks again for your time.
Re(5): Investor
Percentages
Posted on July 31, 2007 at 08:14:26 AM by John Cones
Franklin:
First, you want to set the LLC unit size at some round number not $16,667.
Usually, such offerings are structured as mini-maxi offerings, let's say a
minimum of$500,000 and maximum of $700,000. Your unit size might be $20,000 for
example. That would be a minimum of 25 units and a maximum of 35 units. Both
the minimum and maximum should also be enough to cover not only the production
budget but offering expeses (i.e., LLC organizational expenses and
selling/syndication expenses), along with other non production budget items
such as marketing to distributors, LLC operations, distributor delivery items
and profit participation audit fees. None of these latter expenses are
production costs, so that do not show up and should not be included in the
production budget, but they are still costs that the offering proceeds should
cover. That means, if $500,000 is not enough to produce the film all the way
through post-production and cover these costs, the minimum may needs to be
raised.
Also, these LLC units should be referred to as "units" or
"interests" not "shares". Shares is corporate talk and
confuses investors.
Now, back to your question. The revenue-sharing ratio you originally offered is
not all that uncommon in the investor offerings I see. The investors get a
priority recoupment, meaning that a high percentage (100%, 95% 90%)of the LLC's
Distributable Cash will flow to the investor group and they share on a pro rata
basis amongst themselves. You can't determine what each investor's pro rata
share is until the offering is completed because you don't know how many
investors will buy units or how many units each will buy.
This high percentage for the investors' priority recoupment is typically paid
until they recoup and recoupment is defined by the LLC typically to be 100% of
the investors' originally invested capital, 120% or 150% depending on the deal
you feel you can sell to your investors.
After the investors have recouped, any creative deferments that the LLC (the
producer) has committed to pay are paid. Sometimes, there is a ceiling placed
on the amount of deferments. Of course, this all has to be reflected in the
LLC's operating agreement and in the PPM.
After deferments are paid, then the revenue-sharing ratio as between the LLC
manager and the investor group typically switches to 50/50 for the life of the
LLC, usually 10 to 15 years. You can offer some other split after recoupment if
you want or need to.
Now with respect to financial projections. You can't really offer or commit to
a specific rate of return. That's simply not the nature of a film investment.
You can prepare reasonable financial projections. I provide my clients with
examples of several different formats for financial projections, but the SEC
does have a policy regarding financial projections. They are not required. If
you do them and investors do like to see them, you must include a list of
narrative statements upon which your financial projections are based. These are
referred to as "assumptions". In other words, you can't just provide
a bunch of numbers and calculations. You must show in writing what assumptions
the numbers are based on. Examples of assumtions for your proposed offering
would include an assumption regarding the amount of money raised, the number of
investors, that the film is produced, that a distribution deal is obtained,
that the film gets a theatrical release, that it earns a certain amount of
money either worldwide or in various markets and media, however, you want to break
them down.Then more assumptions need to be made about the amount deducted from
the film's revenue stream for the distributor's fee and distribution expenses.
Another assumption must be made regarding the deal negotiated with the
distributor regarding the LLC's share in the film's net profits. Then, based on
the LLC's operating agreement, you would also make an assumption regarding any
deductions the LLC takes from the LLC's gross revenues, before arriving at the
LLC's distributable cash (if that is what the LLC's net is called). Then you
follow the above-stated revenue-sharing ratio as between the LLC manager and
the investor group, taking the assumptions all the way to the single unit
level. At that point, you can calculate a rate of return on the investment by
creating a fraction out of the cost of a unit and the return on that unit. Then
you create the calculation page based on these assumptions. And to be safe,
it's best to create three columns for poor performance, good performance and
excellent performance. All of your assumptions must be reasonable based on the
realities of the markeplace. But clearly you are not promising a specifc rate
of return, just showing the investors, how you believe their money may flow
back to them if the stated assumptions come true. You obviously don't want to
be overly optimistic with your assumptions because the results could be
misleading. So, it's best to show a balance among the possible results.
John Cones
Re(6): Investor
Percentages
Posted on July 31, 2007 at 10:27:52 AM by Franklin Quinten
THANKS!!
SEC Rule 1001
Posted on August 5, 2007 at 04:59:03 PM by Chris
Hi John,
first off, my thanks for this forum, it really is a fantastic service for
producers.
My main question is about intrastate exemptions, in general and specifically as
pertaining to California. That is, SEC Rule 1001 exempts offerings to
'qualified purchasers', who I understand to be basically the same as Regulation
D accredited investors. I've heard that this exemption allows for some methods
of general solicitation and I'm wondering what those methods are and are not?
Further, does existing statutory, regulatory or case law differentiate levels of
general solicitation? That is, I'm looking to approach only accredited
investors and specifically those sophisticated individuals who are experienced
venture investors, does the law see my approach to these folks as equivalent to
putting an ad in a newspaper in the truest sense of a general public
solicitation? As a finder (unpaid, no commissions or other remuneration) I have
every reason to believe that I will only be approaching accredited investors
who are quite familiar with venture capital and with investments in general.
Finally, if everyone I approach is a California resident then does this qualify
as an intrastate offering exemption under Section 3(a)(11) of the Securities
Act? I'm rather unclear as to how Rule 1001 and Section 3(a)(11) affect each
other for those of us living and doing business within California.
With kindest regards,
Chris
Re(1): SEC Rule 1001
Posted on August 5, 2007 at 06:33:38 PM by John Cones
Chris:
Unfortunately, the federal intrastate exemption [Section 3(a)(11) and its
associated Rule 147] were really created and intended to be helpful to local
businesses. That means, businesses that raise most of their money in one state,
spend most of their money in one state and earn most of their revenues in one
state. That just does not fit a feature film, even if the first two activities
occur primarily in one state. Certainly, most of the revenues generated by
selling or licencing a film for commercial viewing will not come from one
state. Thus, the pairing of the California Section 25102(n) with the the SEC's
intrastate exemption is not very helpful to filmmakers. If you want to see
exactly what advertising is permitted, under the California rule, go to the
California Secretary of State website and look for Section 25102(n) of the
California Corprations Code.
The more useful so-called private/public "hybrid" exemption is the
Model Accredited Investor Exemption, a state exemption paired with the SEC's
Reg. D, Rule 504. It allows some advertising, but is limited to $1,000,000 and
accredited investors only.
John Cones
Re(2): SEC Rule 1001
Posted on August 5, 2007 at 08:23:26 PM by Chris
Hi John,
thanks for the clarification on Section 3(a)(11) and why it doesn't fit with a
feature film. I read through all of CCC Section 21502 and although it won't
work with Section 3(a)(11) I am wondering if it will work with SEC Rule 1001 to
exempt up to $5 million? We will be working only with qualified purchasers and
otherwise abiding the conditions of 25102(n).
With kindest regards,
Chris
Chris:
Actually, the SEC's Rule 1001 is designed to be used with the 1933 Securities
Act Section 3B exemptions which includes Section 3(a)(11). So, no.
John Cones
Units
Posted on August 8, 2007 at 11:50:25 AM by Michelle
Hi John,
First, thank you so much for your very informative site. I am a bit of a newbie
producer so trying to absorb all of this info is slightly overwhelming. Here's
the short story: I have a feature film that I would like to acquire funding on
(me and everyone else, right?). I have a lawyer in NY that I will be working
with shortly (once the front/seed money arrives) However, in the meantime my
team is talking to all their "money" people to see if anyone is
interested. I guess the first question from non-entertainment type people is
"what does it mean for me" when do i get my money back and how much.
I understand that there are no standard deals. Do we just decide on the unit
size or is there a standard way to determine that? The budget is $500K Can
someone say invest 5k or is that too low? Apologies for my naivete - thanks so
much!
Re(1): Units
Posted on August 8, 2007 at 01:14:19 PM by John Cones
Michelle:
The determination of the unit size for a film offering like yours is somewhat
arbitrary, keeping in mind that you don't want to raise money from more than 35
non-accredited investors (per Regulation D). You can raise money from an
unlimited number of accredited investors. So, you need to think about your
prospective investors and what size unit you are comfortable asking for;
recognizing also that we usually draft these documents so that the sale of
fractional units is allowed. So, for example, if you did a mini-maxi offering
of $500,000 to $600,000 and your LLC unit size was $10,000, that would mean
that you are offering a minimum of 50 units and a maximum of 60 units. If each
investor bought a single unit, then you could only have 35 non-accredited
investors. The rest would need to be accredited. Of course, some investors
might purchase more than a single unit and some might want to purchase a
fractional unit.
If your unit size was $20,000, with the same mini-maxi as above, you would be
offering a minimum of 25 units and a maximum of 30 units.
You also want to keep the general investor suitability standard in mind that
each investor's investment should not exceed 10% of that investor's net worth.
So, if the unit size was $20,000 and and investor purchased a single unit, that
investor's net worth, as represented on the subscription agreement signed by
the investor, would need to be $200,000.
If your unit size was $5,000, that would mean a minimum of 100 units and a
maximum of 120 units. Thus, a lot of your investors would have to purchase
multiple units to avoid running into the 35 non-accredited investor ceiling.
The revenue flow on the backside is usually dealt with by the disclosure of a
revenue-sharing ratio as between the LLC manager and the investor group (who
share amongst themselves on a pro rata basis) and in the financial projections,
which we have discussed on this forum before.
Generally speaking, assuming the film gets distribution, the money flows back
to the distributor, the distributor deducts its distribution fee, then it
recoups its distribution expenses. Then a negotiated amount of the film's net
profits flows back to the LLC. Typically, the LLC will be authorized to deduct
some small amount to cover its ongoing operating expenses, then the revenue
stream arrives at a point called "Distributable Cash" (or net
revenues to the LLC). Distributable cash is divided between the LLC manager and
the investor group in accordance with the above-mentioned revenue-sharing ratio
which is set out in the PPM. There usually is a priority recoupment for the
investor group. Based on assumptions set forth as part of the financial
projections, it is then possible to calculate a return to a single unit holder
and then a return on investment (ROI). We usually do this in three columns. The
first column based on the assumption that the film performed poorly in the
marketplace; the 2nd column based on the assumption that the film performed "good"
and the 3rd column based on the assumption that the film performed
"excellent".
Again, most of this information is typically laid out (i.e., disclosed in the
PPM), so if you want any of your investors to get serious (or take you
seriously) and you are committed to do this, maybe it's time to start drafting
the PPM.
John Cones
S-Corporation
Posted on August 27, 2007 at 02:43:05 PM by ckalan1
Is an S-Corporation required to issue 100% of their stock?
Let's say there are 100 shares authorized to be sold.
Can the founder keep 51 and sell 19 and the treasury keep 30 to be sold at a
later date?
Re(1): S-Corporation
Posted on August 27, 2007 at 05:27:51 PM by John Cones
As a general rule, yes. But corporate rules are ultimately based on state law
in the state in which the corporation is incorporated.
John Cones
Finding a Broker
Posted on August 31, 2007 at 06:22:17 AM by Rob
I'm putting together a package for investors and have exhausted the friends and
family connections. I need to find a broker-dealer to finish my fundraising,
but I don't know where to start. How can I find a broker-dealer who will work
with a start up production company to fund a slate of films?
FYI: The total capital investment will be less than $2 million.
Re(1): Finding a Broker
Posted on August 31, 2007 at 03:14:09 PM by John Cones
Rob:
SEC/NASD broker/dealer firms are listed in the yellow pages, typically under
the heading "investment securities". However, in my 20 years
experience with investor financing of independent film, I've found very few
(actually only two B/D firms that were interested in selling units in a film
offering. The producer on the first deal could not conclude the arrangement
with the Chicago based B/D because the B/D was just being too greedy re
commissions and other forms of compensation. The 2nd, an Orange county operation,
was actually owned by a production company that was purchasing and/or
developing scripts, creating investor financing investment vehicles like LLC's,
raising money from investors on a commission basis, then selling the script at
a profit to the LLC, and hiring a contract producer to produce the film. So far
as I know, they are no longer active, although several films were produced that
way.
The vast majority of my producer clients have succeeded in raising their
investor financing through a small group of the issuer's upper level management
in compliance with the SEC's issuer sales rules.
You may draw your own conclusions from that brief summary.
John Cones
Investor Motivation -
Users, help me find the post please.
Posted on August 31, 2007 at 06:47:38 AM by Rob
Hey, I've seen John mention a previous post that listed reasons why people in
invest in independent film. I've been searching the archives and can't find
this post. Does anyone have it bookmarked?
Re(1): Investor Motivation
- Users, help me find the post please.
Posted on August 31, 2007 at 05:19:28 PM by John Cones
Rob:
I've asked that the "investor motivation" list be posted along with
other articles at my law office site at
http://www.mecfilms.com/coneslaw/index.html
It should be up in a day or so.
John Cones
Re(2): Investor Motivation
- Users, help me find the post please.
Posted on September 4, 2007 at 04:34:49 PM by John Cones
The "investor motivation" checklist is now posted at
http://www.mecfilms.com/coneslaw/index.html
John Cones
PPM and pitch
Posted on September 4, 2007 at 10:30:24 AM by Dave
Our situation is such that we have a personal friend who has found a business
associate of his that may be interested in investing $50k in our production
company or movie which is being readied for delivery to a distibutor. He wants
us to meet personally with this potential investor. Can we legally pitch to
this new guy without a PPM? FYI, the potential investor is a successful real
estate investor.
Re(1): PPM and pitch
Posted on September 4, 2007 at 01:41:42 PM by John Cones
Dave:
You are not providing me with enough information to answer your question. To
know whether he could invest in your production company, we would have to know
how the production company is formed (i.e., what type of entity) and under what
circumstances it could accept new capital. We'd also have to know more about
how the film was financed to know whether there is an opportunity to help
finance the balance of the production costs or part of the costs associated with
the delivery items.It seems to me that much of the information you seek is
already laid out in the "43 Ways to Finance Your Feature Film" book,
associated with the discussion of active investor financing. For example, you
may want to consider the investor financing agreement or the joint venture
agreement as two possibilities for your situation. Active investor financing
generally does not involve the sale of a security and therefore does not
require a securities disclosure document.
John Cones
turnaround structure in
min/max development deal
Posted on September 14, 2007 at 10:47:28 AM by Barrett Sanders
We're funding the development of our feature through our "Development
LLC" (manager-managed California LLC). We are finalizing a PPM in which we
structure a development turnaround deal: Development LLC will use Unit
Owner/Members funds based on a $900k/$3million min/max to create the film’s
Development Package (screenplay, attached players, preliminary vfx package,
etc.). The Development LLC will also initiate a "Production LLC". The
Production LLC will amass enough investor capital to purchase the Development
Package. Payout structure from the sale of the Development Package to Members
and Managers of the Development LLC follows a 94-6 until Members recoup 112%,
then shifts to 50/50.
It was recommended that we structure the offering so Development LLC Members
can either "cash out" at turnaround OR, even better, have the
opportunity to roll forward into the Production LLC at an added incentive. What
is a common incentive?
If this (roll forward scenario) is ideal for the Production LLC what is a
common roll-forward structure?
Also, in this case, how much of the Production LLC is commonly owned by the
Development LLC in a turnaround deal and how does that translate to investors
once the film is produced and distributed?
Re(1): turnaround
structure in min/max development deal
Posted on September 14, 2007 at 11:47:34 AM by John Cones
Barrett:
When you prepare a PPM, you have to be careful not to structure a deal that is
so complicated that it is difficult to describe in writing, difficult for your
management group to understand, difficult to describe to investors, difficult
for investors to understand and difficult for an accountant to implement after
it's all said and done. Such a combination makes the entire offering less
likely to be funded. For that reason, I've never attempted to tie the
development deal with the production deal and don't recommend it. I also can't
suggest what is common in such situations, because it's not common. I do
suggest, that you keep it simple and keep it clean. Don't commit the
development deal investors to merely a production offering as the only possible
source of production financing. Retain the right to seek industry financing, if
you develop a commercial script and attach a director and actors. If you
subsequently decide that a production offering will be necessary, and if one or
more of the development investors want to invest in the production deal, that's
fine, but don't bother trying to sweeten the first deal with some tie-in to the
second. Also, I hope you and/or your securities attorney are paying attention
to what the SEC regulations referred to in Regulation D (assuming that is the
federal exemption you are relying on) actually require (e.g., tax discussion,
tax opinion, securities opinion).
John Cones
Foreign Investor Group
Posted on September 23, 2007 at 04:35:41 PM by Jerry Gonzalez
Hi John-
Thanks for all the tremendous insight on this forum and in your books.
Our situation calls for a fortuitous situation in which there is a European
investors that is willing to finance multiple low budget (5-6) films with a
total working capital infusion of $15 million. As we work to secure this
promise, we would like to know what might be the best working investment
vehicle?
1. Should the foreign investors set up a US type financial account?
2. Setup an offshore financial account?
Or does the source and method of financing our films matter?
Also, we are separate producers coming together and living in Florida. We are
planning to produce these films in California and possibly other states. Should
we incorporate (new incorporation) in California or can we incorporate in
Florida and still work in California without issue?
And last, since we are vying for 5-6 full length quality films, do you think
this will this help us leverage-wise with distributors?
Thanks again for your help and insight.
Jerry Gonzalez
Re(1): Foreign Investor
Group
Posted on September 24, 2007 at 07:07:30 AM by John Cones
Jerry:
First, of course, be very careful not to send any money to such prospective
investors. Some purported film finance schemes are merely scams.
Second, I can't really help on the first two questions, since I only work with
U.S. producers seeking financing from U.S. residents or at least some U.S.
residents and involving U.S. law.
For producers coming together, you could incorporate as an "S corp"
in the state of your choosing, or use the member-managed LLC as the jointly
owned production company. You may want to consider the advantages and
disadvantages of each possibility as set out in the book "43 Ways to
Finance Your Feature Film".
The leverage with distributors probably doesn't come until you have demonstraed
through one or more successful films that your company is a continuing source
of quality films. Even then, don't get your hopes up too high expecting to be
treated fairly by distributors (see "The Feature Film Distribution
Deal").
John Cones
Re(2): Foreign Investor
Group
Posted on September 24, 2007 at 03:21:12 PM by Jerry Gonzalez
Your advice is well taken. As for the foreign investors - the principal and my
associate in our new films venture has a working history here and in the
country abroad. He just returned after a year there directing a television
series and working as a line producer for a major distributor and studio from
Hollywood.
The interest from the foreign investors is to use their studios to shoot a
feature or two there as well. The financial connection is legit and of a
personal nature between parties. They are all very well known entities.
So, for the sake of my main concerns; lets just assume the financing is secured
and is not a scam.
We are U.S. residents that will no doubt abide by U.S. laws and will be acting
as executive producers/producers for multi-genre low budget (5-6) full length
feature films that will be of quality entertainment (based on our extensive
backgrounds - working on other peoples ventures). The only foreign involvement
will be the "bank" or source of financing/funding.
Are you suggesting that the only source of financing and/or funding by the
current major studios comes strictly from U.S. institutions? Or that any
private funding/financing/investors can only be from a U.S entities even if
each film is setup appropriately as U.S., law abiding securities offering?
Again, my question (if valid) 1 & 2:
1. Should the foreign investors set up a U.S. type financial account in which
to draw/advance funding during production(s)?
2. Setup an offshore financial account?
I do own two of your books including "43 Ways to Finance Your Feature
Film" and "The Feature Film Distribution Deal" and I've read
many of your postings here and on FIRM, etc. All have helped tremendously to
cut to the chase.
As creative participants in the past, we were exempt from participating in the
behind-the-scenes deal making. Now, the shoe’s on the other foot and we need to
get it right.
Thanks for your assistance and courtesy.
Jerry
Re(3): Foreign Investor
Group
Posted on September 26, 2007 at 07:36:55 AM by John Cones
Jerry:
No, I'm not suggesting that the only source of financing and/or funding by the
current major studio/distributors comes strictly from U.S. institutions.
And, no I'm not suggesting that any private funding/financing/investors can
only be from U.S. entities.
What I am suggesting is that if you are selling a security, then you will have
to comply with the laws of the countries in which your investors reside. Those
laws are most likely to be somewhat different than U.S. law and U.S. law will
not apply to those transactions. I am an attorney with some limited expertise
relating to U.S. securities laws. I have little to know knowledge or
understanding of the securities laws of other countries. So, for the specific
answers to your two questions, I'd suggest that you consult with an
international attorney or an attorney in the country in which your prospective
investors reside.
John Cones
Re(4): Foreign Investor
Group
Posted on September 29, 2007 at 08:56:44 AM by Jerry
Thank you. Seems the tight rope is not veering into the securities realm.
Greatly appreciate your books and forum.
kick back agreements
legality
Posted on October 9, 2007 at 12:04:40 PM by Mike C
If I were selling shares in a low budget film as a security, is it legal to
promise trade agreements in exchange for investment.
Example: I approach the owner of a local B&B or hotel. I tell them I am
producing a film that will require 10 rooms for the duration of the 5 weeks
shoot. Is it legal for me to promise them that I will use their rooms at their
normal rate if they agree to invest in X amount of shares? Would it be legal to
offer that sort of deal to prospective buyers as either an enticement or an
upsell to more shares than they were previously willing to buy?
Is it legal to offer that sort of agreement as a bonus? or would that violate
securities law?
Re(1): kick back
agreements legality
Posted on October 10, 2007 at 08:08:20 AM by John Cones
Mike:
First, I would encourage you not use the term "shares" unless you are
actually offering stock (i.e., shares) in an existing corporation. If your
securities are interests or units in a limited partnership or manager-managed
LLC, then call then units or interests, not shares.
Second, I'm not certain that the hypothethical circumstances you describe rise
to the level of a kickback. The general definition of a kickback is the
practice of a seller of goods or services paying the purchasing agent of those
goods or services a portion of the purchase price in order to induce the agent
to enter into the transaction. In most commercial contexts, kickbacks are
illagal and prohibited by criminal commercial bribery statutes.
In addition, the selling of a security may not be considered a "good"
or "service". It's an investment, in which the purchaser might
actually make money.
You'll want to check the definition of the term kickback in the criminal law of
the state in which you are operating.
John Cones
Self Financing
Posted on October 23, 2007 at 11:31:23 PM by JAD
Say John, we are doing an ultralow budget project, mostly with self-financing.
However, we have one or two family members who may invest, in the low five
figures. Is there a simpler way to do this, other than some kind of full-blown
securities offering? Maybe an investment contract? Or some other way? Thanks.
Re(1): Self Financing
Posted on October 25, 2007 at 08:54:25 AM by John Cones
JAD:
If you read "43 Ways to Finance Your Feature Film" you'll find four
easier ways to finance films with active investors. It's easier in the sense
that you do not have to comply with the securities laws. On the other hand, as
pointed out in the book, the disadvantage is that you have to let those
investors be actively involved in helping you make the project's important
decisions. That can certainly be a big problem for film projects.
Further, securities compliance is not that difficult for me. I do it all the
time and part of my job is to make it easier for the producer. You provide me
with information and review each draft stage of the PPM and then you're on the
street raising money.
You can either go with one of the active investor routes and deal with the
possibility of investor interference or you can go the passive investor route
and comply with the securities laws.
John Cones
Re(2): Self Financing
Posted on October 25, 2007 at 11:28:13 AM by JAD
The problem is this family member may nnot be active. So I need securities documents
for just one small investor? Is there an easier way? What about selling stock
in my LLC? I do have your book, by the way. Thanks
Re(3): Self Financing
Posted on October 25, 2007 at 02:45:03 PM by John Cones
JAD:
You can't sell "stock" in an LLC. You sell stock in a corporation.
For an LLC you would sell units or interests.
Maybe the family member will either loan the money or make it a gift. That's
easier.
John Cones
Holland Film Investment
Posted on October 29, 2007 at 09:26:22 PM by Rich
Hello John!
I'm a US based producer and I have recently connected with a producer in
Holland. She has a pool of investors who are ready to invest in our US based production
for a sum of around 400k. There is an extremely high tax rate in Holland and
these investors are curious to how they will be taxed on any earnings from the
film. My accountant mentioned that this depends on the relationship (ie
treaties) that the US has with Holland.
Thus, my question is: How are these investors in Holland taxed on their
earnings from our US based production.
Thanks in adavance and great to see you still have the discussion board going.
My best,
Rich
Re(1): Holland Film Investment
Posted on October 30, 2007 at 10:51:25 AM by John Cones
Rich:
Darn it! I wish you guys would ask me questions for which I have some
expertise. My inclinationis that you would need to talk to an attorney in The
Netherlands. If these investors reside in Holland, then it would appear to me
that they certainly may be taxed by their home jurisdiction on any income that
they received. But best to work with an attorney in that jurisdiction.
John Cones
Re(2): Holland Film
Investment
Posted on November 7, 2007 at 06:25:12 AM by Rich
Angell
Thanks John! I am consulting with a Tax attorney specializing in international
taxation and with attorneys in Holland. Thought you might have some ideas.
Don't worry, your knowledge is most helpful to so many people.
Rich
Compensation
Posted on November 9, 2007 at 09:52:24 PM by Charles
When I raise money for a film, at what point am I allowed to pay myself, and
how much am I allowed to make?
Do I have to live on $40,000 a year, or nothing, or am I allowed to pay myself
$100,000 or $200,000 like producers make?
Thank you
Re(1): Compensation
Posted on November 10, 2007 at 09:14:05 AM by John Cones
Charles:
Assuming you are an independent producer and that for purposes of this
discussion you are seeking to raise production money from a group of passive
investors (i.e., selling a security and have chosen the manager-managed LLC as
the investment vehicle), there are several opportunities for you to be paid:
(1) if, as is usually the case, you are conducting a mini-maxi offering, you
can pay yourself a producer's salary out of the budget of the film, as soon as the
minimum offering proceeds are raised. Of course, you have to disclose the
amount to be paid to you out of the film's budget in the section of the
disclosure document called "Manager and Affiliate Compensation". In
addition, the "Estimated Use of Proceeds" section of the disclosure
document must also be consistent with these amounts in the sense that the line
item for the "Producer's Unit" shows enough money to cover your
disclosed salary. (2) Assuming also, that you are one of the owners of the LLC
Manager, the Manager may be compensated with a management fee, although in most
of the film offering's I've seen, that fee is waived by the manager. (3) Again,
assuming the producer is an owner of the Manager, the Manager also gets a
profit participation (i.e., in the LLC's Distributable Cash) and the Manager
determines the revenue-sharing ratio as between the Manager (producer group)
and the investor group. (4) If the producer is also a screenwriter, director
and/or actor on the project, there are other opportunities for compensation.
None of these can be paid, however, until the minimum is raised.
Another approach would be to conduct a no-minimum offering, adding an
additional risk factor (the offering may never reach the minimum needed to
produce the film) so that you can start spending investor money as received. I
never recommend that approach because it is so risky for investors, that they
tend not to invest, so it becomes a way of shooting yourself in the foot.
Another possibility is to first conduct a development offering for purposes of
acquiring rights, developing a script, packaging talent and marketing the
package to production financing sources. In such an offering you can disclose a
producer's salary and be paid for your development related activities. Of
course, you have to be able to sell that deal to investors, and it's certainly
not easy for first time filmmakers. Also, such offering are typically conducted
on a mini-maxi basis.
In the meantime, be careful about making generalizations that "producers
make" $100,000 to $200,000. Some do some don't. Many first time filmmakers
figure out a way to survive while making their first film and take very little
out of the film's budget in the way of compensation, relying instead primarily
on a profit participation.
John Cones
Re(2): Compensation
Posted on November 11, 2007 at 01:32:46 PM by
Charles
Thank you for your comprehensive reply. Your assumptions are correct, though I
am an experienced producer within the studios, this is the first time I'll be
raising my own money, and I'm using this time during the strike to do get
organized.
Are the minimum offering proceeds a legal requirement, or something
specifically declared in the charter of the LLC? If so, can you declare any
amount you want, from zero to the full amount of the budget?
On a personal note, do you use these questions to put together your next book,
i.e., find out where the common gaps are in people's knowledge of film finance
and then address it as a comprehensive topic for a book? Your "43
Ways" book is very thorough, but I notice there is always more and more to
know.
Thanks again.
LLCs and Issuer Sales
Posted on November 11, 2007 at 10:41:19 AM by Tod
You seem to be a fan of the manager-managed LLC as a vehicle for passive
investments?
Also, where can the primary law be found regarding issuer sales? Is there a
Federal statute? Or is it a term or art, or a word coined by you and derived
from case law? When I search for "issuer sales" on the Internet, you
are the only authority cited.
Thank you.
Re(1): LLCs and Issuer
Sales
Posted on November 12, 2007 at 06:13:50 PM by John Cones
Tod:
See -- General Rules and Regulations promulgated under the Securities Exchange
Act of 1934
Rule 3a4-1 -- Associated Persons of an Issuer Deemed not to be Brokers
a. An associated person of an issuer of securities shall not be deemed to be a
broker solely by reason of his participation in the sale of the securities of
such issuer if the associated person:
1. Is not subject to a statutory disqualification, as that term is defined in
section 3(a)(39) of the Act, at the time of his participation; and
2. Is not compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in securities; and
3. Is not at the time of his participation an associated person of a broker or
dealer; and
4. Meets the conditions of any one of paragraph (a)4(i), (ii), or (iii) of this
section.
i. The associated person restricts his participation to transactions involving
offers and sales of securities:
A. To a registered broker or dealer; a registered investment company (or registered
separate account); an insurance company; a bank; a savings and loan
association; a trust company or similar institution supervised by a state or
federal banking authority; or a trust for which a bank, a savings and loan
association, a trust company, or a registered investment adviser either is the
trustee or is authorized in writing to make investment decisions; or
B. That are exempted by reason of section 3(a)(7), 3(a)(9) or 3(a)(10) of the
Securities Act of 1933 from the registration provisions of that Act; or
C. That are made pursuant to a plan or agreement submitted for the vote or
consent of the security holders who will receive securities of the issuer in
connection with a reclassification of securities of the issuer, a merger or
consolidation or a similar plan of acquisition involving an exchange of
securities, or a transfer of assets of any other person to the issuer in
exchange for securities of the issuer; or
D. That are made pursuant to a bonus, profit-sharing, pension, retirement, thrift,
savings, incentive, stock purchase, stock ownership, stock appreciation, stock
option, dividend reinvestment or similar plan for employees of an issuer or a
subsidiary of the issuer;
ii. The associated person meets all of the following conditions:
A. The associated person primarily performs, or is intended primarily to
perform at the end of the offering, substantial duties for or on behalf of the
issuer otherwise than in connection with transactions in securities; and
B. The associated person was not a broker or dealer, or an associated person of
a broker or dealer, within the preceding 12 months; and
C. The associated person does not participate in selling an offering of
securities for any issuer more than once every 12 months other than in reliance
on paragraph (a)4(i) or (a)4(iii) of this section, except that for securities
issued pursuant to rule 415 under the Securities Act of 1933, the 12 months
shall begin with the last sale of any security included within one rule 415
registration.
iii. The associated person restricts his participation to any one or more of
the following activities:
A. Preparing any written communication or delivering such communication through
the mails or other means that does not involve oral solicitation by the
associated person of a potential purchaser; Provided, however, that the content
of such communication is approved by a partner, officer or director of the
issuer;
B. Responding to inquiries of a potential purchaser in a communication
initiated by the potential purchaser; Provided, however, That the content of
such responses are limited to information contained in a registration statement
filed under the Securities Act of 1933 or other offering document; or
C. Performing ministerial and clerical work involved in effecting any
transaction.
b. No presumption shall arise that an associated person of an issuer has
violated section 15(a) of the Act solely by reason of his participation in the
sale of securities of the issuer if he does not meet the conditions specified
in paragraph (a) of this section.
c. Definitions. When used in this section:
1. The term associated person of an issuer means any natural person who is a
partner, officer, director, or employee of:
i. The issuer;
ii. A corporate general partner of a limited partnership that is the issuer;
iii. A company or partnership that controls, is controlled by, or is under
common control with, the issuer; or
iv. An investment adviser registered under the Investment Advisers Act of 1940
to an investment company registered under the Investment Company Act of 1940
which is the issuer.
2. The term associated person of a broker or dealer means any partner, officer,
director, or branch manager of such broker or dealer (or any person occupying a
similar status or performing similar functions), any person directly or
indirectly controlling, controlled by, or under common control with such broker
or dealer, or any employee of such broker or dealer, except that any person
associated with a broker or dealer whose functions are solely clerical or
ministerial and any person who is required under the laws of any State to
register as a broker or dealer in that State solely because such person is an
issuer of securities or associated person of an issuer of securities shall not
be included in the meaning of such term for purposes of this section.
Who can legally Broker?
Posted on November 19, 2007 at 08:23:52 AM by Vernon
I'm raising money using a PPM (rule 506) for a Manager Managed LLC. I have a
friend that has tons of wealthy contacts in the business world. Can I legally
offer him a 10% commission for any sale of my LLC units resulting from his
efforts? Does he need to be a licensed broker to operate this way?
Re(1): Who can legally
Broker?
Posted on November 19, 2007 at 08:56:15 AM by John Cones
Vernon:
Yes, if you want to pay such a person transaction-related remuneration for the
sale of a security (and units in a manager-managed LLC are securities) that
individual needs to comply with the registration requirements for working as a
broker. If you want to comply with the SEC's issuer sales rule, see the just
previously posted copy of that rule.
John Cones
Re(2): Who can legally
Broker?
Posted on December 14, 2007 at 06:53:47 AM by Marc
If a person helps raise funding (ie. a finder) and accepts purely a back-end
poibts deal - is that a violation of the broker rule> The person would not
get a commission upfront.
Soliciting Investors via
Email (NOT SPAM)
Posted on November 21, 2007 at 10:18:37 AM by Franklin Quinten
I posted this yesterday but it got deleted...maybe it was identified as spam
but here it goes again....
I have a quick question regarding soliciting investors via email. We have a
manager-managed LLC exempted via Reg. D/Rule 504 and the applicable state
exemptions in CA and NY.
I would like to approach some potential investors via email who work on Wall
St. and just wanted to know how to do this in a legal way. I have emailed
potential investors in the past with an "informational" intro but
they did not work directly in the financial world so I wanted to make sure I do
it in a legal manner.
Is there a way word things or go about it so they won't just delete the email
out of legal concerns?
I am only emailing a handful of potential investors who have a common interest
in the subject matter of the film.
Thanks.
Re(1): Soliciting
Investors via Email (NOT SPAM)
Posted on November 21, 2007 at 04:47:10 PM by John Cones
Franklin:
If you drafted the offering memorandum so as to comply with the Model
Accredited Investor Exemption as opposed to other state exemptions, you can
conduct a general solicitation so long as you limit your prospective investors
to accredited investors (and presumably limit the amount of money being raised
to $1,000,000 as per Reg. D, Rule 504 at the federal level). If you're looking
for specific suggestions re language to put in the e-mail, I recommend that you
use the securities attorney who drafted the PPM. If you didn't have an attorney
draft the PPM, you're on your own. Best of luck.
John Cones
Producer compensation
Posted on November 25, 2007 at 02:44:40 PM by Mark
I'm an independent contractor "producer" for an independent film
company. No where in the paper work does it say how much or at what percentage
I will get paid. My Associate producers say it's 12% however, they give 3% out
of my 12% to so called production assistants for their work. I don't know
exactly what percentage of investors monies they have have taken out to pay
themselves and they are not willing to put in writing the amount I am to be
paid. Also, they want me to become incorporated... Do you think that is in the
event I sue them for monies owed should they not pay me? Everything seems
pretty shady. I feel if they were on the up-and-up with everyone they would not
hesitate to put it in writing, correct?
Re(1): Producer
compensation
Posted on November 25, 2007 at 03:00:22 PM by John Cones
Mark:
The time to demand that such financial arrangements be put in writing is before
you start the work. But, in this case, you may have some leverage if they
raised money from investors and failed to fully disclose all material aspects
of the investment transaction, including risk factors and their own
compensation, two of many bits of information that are required by the
securities laws to be disclosed to prospective investors before they invest.
So, first determine whether they sold a security. You may want to discuss this
with a securities attorney or litigator. If they were selling any form of
investment to passive investors (i.e., people not regularly involved in helping
to make the important decisions associated with the business endeavor) they
were probably selling a security. You may want to suggest to them that they
need to get your deal straightened out to your satisfaction and in writing, or
you may have no choice but to report their activities to the federal and state
securities regulatory authorities. Also, depending on which state the investors
reside in, this production company may be obligated to return the investor
funds, in California, three times the amount invested (under some
circumstances). They may also have committed a crime. I'd certainly discuss all
of this with one or more attorneys first.
John Cones
Re(2): Producer
compensation
Posted on November 25, 2007 at 03:17:31 PM by Mark
Thanks John,
Yes, it is a security that we are approaching investors with. By reading some
of your other answers to postings it appears this company has broken several
laws!! We are given leads to "cold-call" investors, who may or may
not be accredited. We don't know that until we have contacted them (investors)
and most don't even know what accredited is or have an annual income of
$200,000. We are also told to say we've spoken to them before, when 9/10 we
have not!!
Was it illegal for them to hire me as an independent contractor promising me a
commission based off the percentage of monies I brought in from investors? I
did make mention to my "manager" (the 2nd day I was on the job)that I
needed in WRITING how,the percentage from investment and when I would get paid,
who then relayed that to the "Associate Producer". I was told that I
would have to trust them or find somewhere else to work. This whole company
seems really shady! I'm working out of the state of CA.
Re(3): Producer
compensation
Posted on November 28, 2007 at 01:53:37 PM by John Cones
Mark:
The analysis of your independent contractor status would depend on a number of
factors that may vary from state to state, but if you are working in their
offices, following their instructions and using their equipment, it is very
likely that you should be classified as an employee and the company should be
withholding for federal income tax purposes.
From a securities point of view, if you are not a licensed securities
broker/dealer or registered rep it is very likely that the commissions being
paid to you and others are not consistent with the federal and state securities
laws. In addition, if the offering is supposed to be a private placement, the
cold calls are not legitimate.
You may want to go to the NASAA.org site, click on "Contact Your
Regulator" for the state you are in and talk to their enforcement division
about this company's practices.
Best wishes,
John Cones
Raising Funds in New York
Posted on November 25, 2007 at 04:23:03 PM by Robert Mendoza
We are interested in setting up a very basic LLC for the purpose of raising
funds for a documentary film with a budget under 1 million. We will only be
approaching investors in the state of New York and would like to avoid the
costs of going the Model Accredited Investor Exemption route.
This will be a manager-managed LLC and we will be using the Regulation D, Rule
504 exemption as it is for under $1 million, we do not want to incur the costs
of the specific disclosure documents required by the other exemptions and we
want to approach both accredited and unaccredited investors.
My question is: what are the specific exemption requirements for the state of
New York when going with this federal route?
Re(1): Raising Funds in
New York
Posted on November 26, 2007 at 07:21:08 AM by John Cones
Robert:
New York does not offer the same sort of exemptions offered by other states. In
New York, unless you are conducting a Reg. D, Rule 506 (NSMIA) offering, you
will need to file an M-11 Issuer Statement, State Notice, Further State Notice
and Consent to Service of Process forms. To print out these forms go to
nasaa.org
click on "contact your regulator"
click on New York
go to the New York website
bring up the various forms
New York fees are also substantially higher than other states.
John Cones
Re(2): Raising Funds in
New York
Posted on November 26, 2007 at 11:01:06 AM by Robert Mendoza
Thanks. I went to the NY site but it seems to offer a few different options:
the M-11 form, a Form 99 and an option to be exempt by following the Issuer
Exemption Instruction Sheet. Do we not want to follow this third option?
Here is the link:
http://www.oag.state.ny.us/investors/investor/registration_sheet.html
Re(3): Raising Funds in
New York
Posted on November 26, 2007 at 02:28:25 PM by John Cones
Robert:
If you read the various options, you'll discover that Form 99 is for a Reg. D.,
Rule 506/NSMIA offering and that's not what you have. The exemption in NY is
limited to a very small number of offerees not investors, thus not very useful.
So, it is most likely that the M-11 issuer registration statement is what you
need, but carefully read the instructions that go along with each option.
John Cones
Re(4): Raising Funds in
New York
Posted on November 26, 2007 at 04:39:03 PM by Robert
Thanks.
For the M-11 route, does this need to be submitted before any investors are
approached or can it be submitted after at least one investor commits? Also,
the State Notice documents requires to list the class of security. Would this
just be common stock?
Thanks again for all your help.
Re(5): Raising Funds in
New York
Posted on November 27, 2007 at 07:42:19 AM by John Cones
Robert:
You indicated in your first question that you had formed an LLC, thus the class
of security would be an LLC unit. Stock is sold by corporations not LLCs. As I
recall, the M-11 form must be submitted before soliciting investors in the
state of New York, which is a problem because New York imposes a higher fee
than other states. But, you need to carefully read the instructions
accompanying the form M-11 itself, and if that is not clear, then call the New
York securities regulatory authorities and ask them.
John Cones
Raising Amount of
Investment Units
Posted on November 25, 2007 at 04:37:03 PM by Marie St. Clair
Our production company formed an LLC for the purpose of getting investors for a
documentary film that was already in production and needed finishing funds. We
have already sold some of the units but our budget has since unexpectedly gone
up and wanted to know if it is possible to sell the remaining units at a higher
price with the all the other terms of the agreement remaining the same. How
would we do this? Would we have to form a new LLC or do we just have to get the
current investors to agree to it and explain to new investors the situation?
This is for an LLC that is manager-managed.
Re(1): Raising Amount of
Investment Units
Posted on November 25, 2007 at 08:12:02 PM by John Cones
Marie:
I notice you keep mentioning that you formed the LLC, but did not mention
whether you prepared and gave to each prospective investor a private placement
offering memorandum. In any case, in my judgment, you should not increase the
price of the unit, but seek to increase the maximum offering proceeds for the
offering by increasing the number of units being offered. Of course, in order
to do that, you would need to amend the PPM with the written permission of all
of your current investors. If you don't have a PPM that would be difficult to
do. Depending on the applicable state law, you may also need to offer each
current investor a right of rescission along with the request for their
approval. In other words, if an investor does not want to go along with the
plan to change a material term in the offering (raising the maximum) they
legally have a right to ask for their money back.
John Cones
Re(2): Raising Amount of
Investment Units
Posted on November 26, 2007 at 10:56:06 AM by Marie
So it is not possible to raise the price of each unit? If I just sell more
units, it's a matter of giving up more of an already slim return for us. Is
there a way at all to raise the amount as the current investors would be fine
with either situation?
Yes, we do have a PPM and all other necessary documents.
Thanks.
Re(3): Raising Amount of
Investment Units
Posted on November 26, 2007 at 02:25:42 PM by John Cones
Marie:
If you want to raise the price per unit of an offering that already has
investors, you need to go back to your current investors and obtain their
written permission to change a material term of the offering. In effect, you
would be amending the PPM.
John Cones
Active Investor Vehicles
Posted on November 27, 2007 at 01:01:56 PM by Rob
I’m trying to get a handle on how active active investors need to be. For
instance, if I have three active investors on my film do they each get a say in
casting, script approval/changes, what rental company we use etc? At what point
do these decisions become just day to day operation of the set?
Also what is the process of registering an active investor vehicle if I’m going
to use investor financing agreements?
Re(1): Active Investor
Vehicles
Posted on November 27, 2007 at 05:17:28 PM by John Cones
Rob:
About the best guidance I can provide is that these investors need to be
regularly involved in helping to make the important decisions associated with
the project. You have to decide what you think is important, and I can only
suggest that you err on the side of caution. It's not necessary to have them
involved in the decisions relating to day to day operations, but certainly the
choice of script, director, lead actors, distributor and the really important
things. If you hesitate to allow a few other people who are investors to
participate in the making of those decisions, you may want to consider one or
more of the passive investor vehicles.
John Cones
P&A Budget
Posted on November 29, 2007 at 10:36:05 AM by Marie St. Clair
Are there any resources or samples of P&A budgets for independent films
(100k-20M) that give a precise breakdown of costs and ways money way spent
(i.e. cost of an ad in NY Times, billboards, online ads, radio, etc.) We are trying
to incorporate a very precise P&A strategy/breakdown into our PPM.
Re(1): P&A Budget
Posted on January 29, 2008 at 09:59:18 PM by David
In 2005, the minor studios average P&A costs were $15.2 million; 11% for
prints and 89% for for advertising.
Advertising dollars in 2005 for the minors averaged as follows: Newspaper
15.5%, Network 21.7%, Spot TV 12.6%, Internet 2.5%%. Trailers 5.6%, Other Media
23.3%, Other Non-Media 18.8%
Although, since AMC has recently added around 2500 digital video screens I
would imagine print costs will go down in 2008 and beyond.
For more current information visit MPAA.org
Re(1): P&A Budget
Posted on November 29, 2007 at 11:06:11 AM by John Cones
Marie:
I have recently worked with a producer client on a so-called P&A offering
for a mini-maxi ($10- to $20 million) and we started with the detailed
description of what distributors actually do, found in my book "The
Feature Film Distribution Deal" published by Southern Illinois University
Press. Even though that is one of the most comprehensive descriptions of the
many specific distributors tasks performed by distributors, it does not provide
cost estimates. But it is a starting point for developing such a budget.
John Cones
Film financing
Posted on December 10, 2007 at 11:40:48 AM by Janet
You seem to get a lot of activity on your message boards and have a lot of
books and publications.
I was just wondering how many or what percentage of the people you work with or
make inquiries of you actually get funded?
I know you know what you're doing, but how many of your clients or prospective
clients actually get anywhere with their projects?
Are there better or more fruitful roads to take, or would you say doing it
yourself is the way to go?
Thank you.
Re(1): Film financing
Posted on December 10, 2007 at 02:58:29 PM by John Cones
Janet:
I have always consistently indicated in my writing and lectures for filmmakers
that there are a lot of different ways to finance feature and documentary
films. There are at least 43 ways and that's why my book is entitled "43
Ways to Finance Your Feature Film". As stated in the book, each form of
film finance has its own set of advantages and disadvantages, so the analysis
for any particular filmmaker will depend on a number of factors, as discussed
in the book.
For the people who write in here and ask questions, I have no way of knowing
how successful they are. This site is not intended to provide legal advice or
to suggest that a filmmaker should try to raise financing from investors
without the assistance of an experienced securities attorney. If some choose to
do so, they have to accept the risks associated with such a decision.
In my own private law practice, I would estimate that 1 in 3 of my
producer/client offerings are successful, in that they reach at least the
minimum offering proceeds and the film is produced. That has resulted in about
41 films to date.
John Cones
Fundraising Procedure
Posted on January 2, 2008 at 08:41:36 AM by Jean-Claude
First, thanks for this informative and essential Website -- and also your book.
I am attempting to raise 10 million for a film (passive investors). I have
formed a LLC and am just now researching the correct procedure. I found a great
software program that helps you write the PPM yourself. I'm not giving the
Website where that can be purchased out of respect for your site. But if you
want me to disclose it, respond back and I will.
Anyway, can you give me a procedural walkthrough of the steps, starting at
writing the PPM to the end, collecting funds and issuing stock certificates?
For instance, I know I must issue a PPM but is there another device needed (as
per SEC) that needs to be issued before collecting the funds?
Also, I'm told that the stock certificates will have to be issued a number from
the SEC. Do I even need certificates for a private offering of 10 million. And
if so, do I need an attorney at that point? I do plan to have all my documents
reviewed by an attorney. I just don't have the capital to have them construct
everything.
Re(1): Fundraising
Procedure
Posted on January 3, 2008 at 07:51:32 AM by John Cones
Jean-Claude:
A step by step description of all of the steps involved in a private placement
is a bit much to request on a site like this. I'd recommend that you read the
SEC's Regulation D and all other regulations referred to therein. Also read the
SEC's Issuer Sales Rule, previously posted here. You may also want to read my
book "43 Ways to Finance Your Feature Film". That summarizes a lot of
the steps involved. Also, the 1992 Loyola of Los Angeles Entertainment Law
Journal article re limited partnerships has a significant amount of detail
about marketing securities whether LLC units or limited partnership interests.
With respect to anyone offering a competent software program online that
applies specifically to a film offering or any other type of securities, I
don't think I can support you enthusiasm. Anyone using such an approach is
taking a huge risk. I could care less if the site is posted here. In my view,
most informed and reasonabe people considering such an approach are most likely
to reject it. Further, preparing the disclosure document is only part of what
is involved in complying with the federal and state securities laws.
Three additional points: if seeking to raise such a significant amount of money
from passive investors, and choosing to use the LLC as the investment vehicle,
you want to be certain that you create a manager-managed LLC as the investment
vehicle, not a member-managed LLC. Also, it is not necessary to form the LLC
before conducting the offering.
The other document that typically accompanies the PPM in such an offering is
the subscription application and agreement, which must also be properly drafted
to coordinate with the specific exemption being relied upon.
Also, when using an LLC as the investment vehicle, you are not selling stock
certificates, so somebody has already steered you wrong. You are selling units
(interests) in the LLC.
Most experienced securities attorneys do not like to review the work of someone
who is not a securities attorney. That's more diffcult that creating a PPM
starting with the document in their computer. Maybe you just haven't talked to
enough securities attorneys with experience in preparing the securities
disclosure documents for film offerings and otherwise consulting with film
producer clients on all of the marketing and other practical issues involved.
My suggestion is, after finding an experienced securities attorney who offers
reasonable fees, to find someone who will support your efforts and help fund
the legitimate offering costs, including attorney fees. That way, you are more
likely to end up with a more professional PPM that increases the chances of your
offering being taken seriously by prospective investors and you will increase
the chances that you are complying with the law. That helps to prevent
investors from coming back to you later and demanding their money back because
you did not comply with the law.
John Cones
Re(2): Fundraising
Procedure
Posted on January 4, 2008 at 07:38:25 AM by Jean-Claude
Thanks for youe answers!! And sorry, I guess I should have been clearer and
asked for "general steps" and not a step-by-steps.
Yes I have formed a manager-managed LLC. And I read your book "43 ways. .
." but I see I need to review it again.
So, what is it that represents the units/interests that an investor will
purchase? Do they get anything in hand?
Good advice about raising the funds to pay the atorney fees. I am attempting to
do just that. Writing it myself is a contingency plan.
Re(3): Fundraising
Procedure
Posted on January 4, 2008 at 07:41:50 AM by John Cones
Jean-Claude:
It is not necessary to present the purchasers of LLC units with a certificate
similar to a corporate share certificate, although there are companies that
offer LLC kits similar to corporate kits and those kits contain such LLC certificates.
If you choose not to issue such a certificate, you would want to provide each
investor with a letter confirming their acceptance as a member of the LLC. They
also, of course, get to keep a copy of the PPM which contains all of the
representations made by the issuer and manager(producer group). They may also
want to keep a copy of the subscription agreement which they have completed and
signed.
John Cones
Re(4): Fundraising
Procedure
Posted on January 4, 2008 at 08:05:07 AM by Jean-Claude
Thanks!!!!!
But I guess I'm still a little confused. Let's say the PPM says that the units
are $10K each. And if some one gives me $20K. By the fact that he gave me $20k,
is that the only thing that is requires to say he purchased two units? Or does
it have to be written somewhere else?
What percentage is the
author entitled to?
Posted on January 3, 2008 at 03:43:06 PM by Tood
B.
I am asking this question for a dear friend. He had the screenplay written by the
producer's writer, based on his
novel and now is getting ready to receive funding. My question is, what is the
most common percentage of revenue generated by the film is he entitled to as
the author? This is a indie film, and the budget is fairly large. The producer
states they'll pay 2.5% which in my opinion is not fair.
Re(1): What percentage is
the author entitled to?
Posted on January 3, 2008 at 06:05:43 PM by John Cones
Tood:
Unfortunately, this site is limited to investor financing questions, not
general entertainment law questions. I'd suggest you check Thomas A. Crowell's
book "The Pocket Lawyer for Filmmakers" (published by Focal Press).
It contains several references to percentages in such deals. In the
alternative, ask an entertainment attorney as opposed to a securities attorney
working primarily in the entertainment field. Yes, I know it's confusing.
Best wishes,
John Cones
Manager-managed
Posted on January 4, 2008 at 07:58:43 AM by
Jean-Claude
Hello again.
I have set up three LLCs to make my movie. A Development company, a Production
Company (my brand name), and a Producing company to make the movie.
I have been told that when raising funds to make the movie those funds should go
into the producing company. As a matter of fact, I'm told that as far as making
that one movie the revenue from the distributor should also go into the
producing company. This is so if someone sues me they can not touch anything
else the Production company is working on, i.e., another movie.
But in my research I came upon this written about a manager-managed LLC,
"The Members are protected against any liability beyond their investment,
such as over budget costs, loans to the production, and lawsuits. Any liability
beyond the investors capital contribution will be assumed by the Manager."
Also, I read that the Production company (the brand) can be the manager for the
producing company LLC. If this is true, and if the producing company is sued,
can the manager, in this case, the Production company (the brand) also be sued,
thus exposing asset of another movie? Should the manager be a person? And if so
are his personel assets exposed if the producing company is sued?
Re(1): Manager-managed
Posted on January 5, 2008 at 08:26:19 AM by John Cones
Jean-Claude:
Sounds like you have too many entities for a single movie. Also, as a general
rule a limited liability company offers limited liability to both the members
and the manager. Of course, anyone or entity can be sued, although in my
experience such lawsuits by investors are extremely rare. If you take care of
your securities compliance, have an experienced securities attorney prepare
your PPM and advise how to otherwise comply with the securities laws, that's
the best protection against investor lawsuits.
John Cones
Re(2): Manager-managed
Posted on January 6, 2008 at 07:12:37 PM by Jean-Claude
Thanks!
PPM or Operating Agreement
Posted on January 7, 2008 at 08:55:30 PM by Jean-Claude Lewis
Mr. Cones, thanks for this informative instrument.
On Nov 10th you posted this reply:
Assuming you are an independent producer and that for purposes of this
discussion you are seeking to raise production money from a group of passive
investors (i.e., selling a security and have chosen the manager-managed LLC as
the investment vehicle), there are several opportunities for you to be paid:
(1) if, as is usually the case, you are conducting a mini-maxi offering, you
can pay yourself a producer's salary out of the budget of the film, as soon as
the minimum offering proceeds are raised. Of course, you have to disclose the
amount to be paid to you out of the film's budget in the section of the
disclosure document called "Manager and Affiliate Compensation".
My question is, for a LLC (manager-managed), is the section, "Manager and
Affiliate Compensation" on the PPM or the operating agreement?
Thanks.
Re(1): PPM or Operating
Agreement
Posted on January 8, 2008 at 07:47:30 AM by John Cones
Jean-Claude:
It actually appears in both.
John Cones
Blue Sky dislcaimers in
PPM
Posted on January 9, 2008 at 01:42:38 PM by Marc
What if you attract an investor who is a resident of a state not mention in
your Blue Sky dislcaimers in the PPM. Can you still accept that person inot the
LLC as investor?...or are you limited solely to investors resident o fthe
states listed in the disclaimers?
Re(1): Blue Sky
dislcaimers in PPM
Posted on January 9, 2008 at 06:17:04 PM by John Cones
Marc:
You would want to check the specific exemption to be relied on in that state
and see if there are any required legends and/or purchaser representations. If
so, you could print those out on a supplemental page and effectively amend the
PPM by stapling that to the cover of the PPM presented to that investor. You
may also want to attach the legend and purchaser representation to the
subscription agreement to be signed by that investor. Of course, you would also
want to find out from the state what their notice filing requirements are. If,
on the other hand, you had done a Reg. D, Rule 506 offering, you would not have
had to include the state legends and purchaser representations at all.
John Cones
Re(2): Blue Sky
dislcaimers in PPM
Posted on January 10, 2008 at 11:36:29 AM by marc
We do plan on the Reg D Rule 506 so this is helpful. Our limits are 200 units
(max), $25k fr a total of $5 million. Many thanks for this forum!
Re(3): Blue Sky
dislcaimers in PPM
Posted on January 10, 2008 at 08:00:28 PM by John Cones
Marc:
In the Blue Sky Notices section of the PPM, instead of inserting the various
state legends and purchaser representations, state that the offering is being
conducted in compliance with Reg. D., Rule 506 and the National Securities
Market Improvement Act (NSMIA), which pre-empts state jurisdiction except for
notice filing purposes. Of course, you have to comply with all conditions and
limitations imposed on the use of Reg. D, Rule 506 and drafting a properly
prepared PPM is only part of that required compliance.
John Cones
solicitation by mail
Posted on January 13, 2008 at 06:25:15 AM by marc
I've always understood that soliciting investors via mail was against SEC
regulations. However, in today's mail I recieved a solicitation for investing
in a general film fund. I'd rather not post their name/website here - and will
email it to you if you wish. But, how are they able to search by mail for
investors?
Re(1): solicitation by
mail
Posted on January 13, 2008 at 03:31:44 PM by John Cones
Marc:
First, don't assume that the people who sent you the mail solicitation are complying
with the law. It is possible, that they are conducting a public/registered
offering which would allow a general solicitation or an offering pursuant to
the Model Accredited Investor Exemption (a state exemption used with Reg. D.,
Rule 504) for offerings up to $1 million to accredited investors only. If not
one of those, or if they are claiming that the offering is a private placement
and you have no pre-existing relationship with the issuer or any of its upper
level management, just foward the material to the enforcement division of the
regional office of the SEC.
John Cones
Re(2): solicitation by
mail
Posted on January 18, 2008 at 09:46:15 AM by Rhonda
How about sending the mailer a polite letter informing them that what they are
doing might be illegal (we don't even know that it is), and that he
should check with an attorney before continuing, and what the consequences
could be if they continue?
Why is everyone in such a hurry to lock people up these days, instead of giving
them the benefit of the doubt that they made a mistake and didn't know what
they were doing?
The government has made our lives so complicated and unmanageable by
instituting so many laws and regulations on what should be a simple proposition
for two honest parties to engage in, that being investment in something that
may make a profit for both. One guy does the work and the other guy puts in the
money. People need to take more responsibility for protecting themselves from
potential bad guys in all areas of life, and stop looking to government for
protection from everything that could ever possibly go wrong. Seeing story
after story in the news about 6-year-olds getting arrested in elementary school
for sexual harrassment and playground fist-fights (sorry, we're supposed to
call them "hate crimes" now) is a good example of this overkill.
When I was in school, a trip to the principal's office was all it took to
correct the problem, and often it didn't even require that, just a stern word
from an ordinary teacher. One little girl was arrested last month for bringing
a "weapon" to school because she had brought a steak knife to cut her
fricking steak at lunchtime. Arrested, by the police, handcuffed and
booked with a mug shot and fingerprints. All that had to be done was for a
lunch monitor or teacher to come up and say, "honey, we don't allow these
here, please don't bring it again" and take it from her until mom or dad
could pick her up from school and safely take the knife home.
And so it is in all areas of business and the law these days. Yes there are
laws that govern how a private placement should be done, but if an honest and
innocent entrepreneur makes a mistake by not knowing all the ins and outs, or
that he even needs to consult an attorney, then give him a break, give him a
heads up and help him to make things right. I didn't learn that investing in a
movie was a security until my third year of law school; this is not an area of
common knowledge.
Once he learns of the requirements, he may not be able to afford the legal and
financial professionals required to do an offering properly, and he may need to
abandon his venture, or find some better-funded person to join as a partner and
help him see his vision through.
But there is nothing in this "mailing" that indicates fraud or scam
or bad intentions of any kind. Filmmakers are dreamers, visionaries,
creative-types by nature, not number crunchers or legal eagles.
So help this guy out by telling him what he needs to be aware of. This
particular recipient is obviously not going to put his money into the offering,
so he's not going to be harmed or lose anything, so why not do some good and
assume the best instead of the worst, and give this guy some advice.
Thank you for letting me rant.
R.
Re(3): solicitation by
mail
Posted on February 4, 2008 at 01:14:33 PM by John
Kautz
Rhonda:
No rant at all, in fact you are correct. The government and its system of
excessive laws are way out of line. We have become an insane, litigious society
that hardly knows common sense any longer.
Government and its system of so-called laws needs to be reigned in. Laws
written by corporate lobbyists or their in-house counsel should be completely
ignored by the People, even if they are "passed" by Congress. Laws
that are in any way in violation of the Consitution are stillborn and should be
considered null and void.
Only when citizens reclaim their government should "the law" deserve
any respect.
Re(3): solicitation by
mail
Posted on January 19, 2008 at 10:22:42 AM by John Cones
Rhonda:
I've been working for about twenty years trying to help independent filmmakers
understand their legal obligations when they are trying to raise money from
investors. I've presented lectures and served on panel discussions hundreds of
times. I've written and published half a dozen books. I've maintained this
Q&A website. I've offerws free initial consultations. Please don't expect
me, after all of that, to be sympathetic to anyone who does not make the effort
to pick up a book, attend a lecture, ask a question on this site or come see me
for a free initial consultation regarding their legal obligations. Ignorance of
the law is never an excuse, particularly when the information is so readily
available.
John Cones
Re(4): solicitation by
mail
Posted on January 20, 2008 at 07:08:13 PM by marc
Trust me - this was no indie maker looking for a dollar. This was a slick,
high-cost campaign piece from CA mailed to me in NY. (The even bigger question
was how he got my name/address. I am no qualified investor.) I am, however,
very careful to make sure that my project offering - and my behavior - will be
Rule D 506 compliant. And I advise everyone I meet attempting to make a project
with other people's money to seek legal advice first - it's cheaper than
needing legal help later. I'm also appreciative that Mr. Cones runs this forum
where I and others can get honest quick answers.
Re(5): solicitation by
mail
Posted on February 3, 2008 at 03:01:22 PM by Reg Black Plume
Excuse me, I am a neophyte, but is is illegal to send a letter and a
"Treatment" of the screenplay to someone to see if they are
interested in collaborating? Would that be permissible if no monetary requests
were made?
Development LLC equity
share
Posted on January 29, 2008 at 09:27:51 PM by David
John,
For a development LLC, with a single active investor, a member-managed LLC:
after the investor-member receives 120% of their initial investment. Is it
possible for the distribution of "distributable cash" to be 50% to
the investor-member and 50% to the producer and other film participants such as
writers, casting director, LLC officers etc.
Re(1): Development LLC
equity share
Posted on January 30, 2008 at 07:17:36 AM by John Cones
David:
The 120% priority recoupment to the investor and then a 50/50 split between the
producer group and the investor side is more typical of the manager-managed
LLC. However, the member/managers of a member-manager LLC are free to divide
the revenues as they see fit and as stated in the member-manager LLC operating
agreement. If the operating agreement does not now state what you want, you are
free to amend that operating agreement. If the producer side then wants a
portion of its 50% to flow to others, that does not affect the investor, so there
is no problem with doing that either.
John Cones
Development LLC Operating
Agreementshare
Posted on January 29, 2008 at 09:40:40 PM by David
John,
We have read your book "43 ways to Finance Your Feature Film" very
informative!!
We are considering seeking development funds for aqusition of rights, writers
services, attaching key elements for packing the picture. We are putting
together a business plan to seek a single active investor with an investor
financing agreement.
Do you reccomend that form a member-managed LLC if we are successful to locate
a single active investor?
If so, where could we find a sample operating agreement that allows the
investor to stay active in all majors company decisions but allows the producer
to remain in creative and business control of the LLC but still make sure the
investor is indeed active in the company's creative and business decisions?
Re(1): Development LLC
Operating Agreementshare
Posted on January 30, 2008 at 07:24:55 AM by John Cones
David:
As you know from reading "43 Ways" there are at least four investment
vehicles that may be useful in bringing in money from one or several active
investors. Each has its own associated set of advantages and disadvantages. I
can't really "recommend" one over the other on this forum and no
attorney should without sitting down with you and discussing all aspects of
your situation. On the other hand, you do not need a member-managed LLC if you
use the investor financing agreement and in the alternative, you do not need
the investor financing agreement if you use the member-managed LLC. You can go
to a major law library in your area and see if they have a business forms book
with a sample member-managed LLC operating agreement. Be sure the agreement is
not for a manager-managed LLC, because its terms will be significantly
different. On the other hand, the better practice is to sit down with a
business, corporate, entertainment or securities attorney, review your needs
and discuss your options, then let the attorney draft the operating agreement,
if that ends up being your choice.
John Cones
Re(2): Development LLC
Operating Agreementshare
Posted on January 30, 2008 at 07:56:34 PM by David
Currently, I use a trade name that belongs to a S-corporation media company (ie
creative, development, production, promotion).
So, if we did an investor financing agreement between the media S-Corporation
and the single active investor could we narrow the scope of liability and
profits and losses to only the new development for the proposed film or would
other creative, development, production properties be in jerperdy if a law
suite for the film development project happened in the future?
How would the above scenerial of the S-corp & single active investor
entering into a investor-financing agreement differ from a joint venture
agreement?
Would it be safer to use a member-managed LLC for the single active investor to
limit potential liability, profit & loss for only the new film development
project and also have the pass through tax benefit?
Re(3): Development LLC
Operating Agreementshare
Posted on February 1, 2008 at 05:58:13 PM by John Cones
David:
Sorry, I'm not available to answer a series of hypothetical questions regarding
various possible alternatives. However, the member-managed LLC sounds like a
promising possiblity re your concerns. For a comparison of the advantages and
disadvantages of an investor-financing agreement versus a joint venture
agreement see "43 Ways to Finance Your Feature Film".
John Cones
Letter of Intent to Invest
Posted on February 1, 2008 at 10:45:55 AM by Joe
Can you explain the use of letters of inttent to invest? Are they useful in
film financing? What exactly is the purpose of LOI(s) and how does the SEC view
the use of these since they are legally worthless?
Re(1): Letter of Intent to
Invest
Posted on February 3, 2008 at 07:56:16 AM by John Cones
Joe:
A letter of intent is any letter expressing an intention to take (or not take)
an action, sometimes subject to other action being taken. In the context of a
film offerng it may be used to demonstrate to other investors and/or talent
that the money is available. On the other hand, the offerings I prepare usually
state that the early investor money will be placed in a segregated,
interest-bearing account and will not be spent until the offering minimum is
reached. Thus, even if the minimum is not reached and the investor money being
held is returned to the investors, they will be paid interest. In addition, in my
experience it is much better to negotiate with talent and their agents when the
money is in the bank. Many investors understand that or can be educated about
that point and are willing to undertake the risk, particularly when the risk is
spread amongst a large group of passive investors. In the 18 years that I've
worked with independent producers on investor financing of their film projects,
I've never had any reason to use or encourage the use of investor letters of
intent.
John Cones
rule 504 in California?
Posted on February 2, 2008 at 07:01:14 AM by Vernon
So… I’ve searched this forum and am still confused by this topic. Can you
clarify?
Can I use the regular, vanilla flavored rule 504 in California, WITHOUT adding
the SCOR or MAIE (which in California is actually CA exemption rule 1001), and
without submitting my documents to the California state SEC for the lengthy
review, to raise up to $500,000? Can I then privately (without advertising) approach
an unlimited number of investors to raise the money?
Maybe I just don’t understand the SEC’s rule 504.
Re(1): rule 504 in
California?
Posted on February 3, 2008 at 08:04:42 AM by John Cones
Vernon:
For purposes of clarification, Rule 1001 is an SEC rule that was promulgated to
be used in conjunction with California Section 25102(n), the state exemption
which permits sales to unlimited sophisticated investors and a limited amount
of advertising. These rules only apply to California offerings and since my
producer clients tend to want to have the freedom to raise money outside the
state of California in addition, none of my clients have ever relied on Rule
1001 and Section 25102(n).
In the alternative, Reg. D, Rule 504 can be paired with the Model Accredited
Investor Exemption (MAIE) to raise up to $1,000,000 in those many states that
have adopted to the MAIE from accredited investors only and with some
advertising and general solicitation.
In both instances, certain notice filings are required, but that is different
from the full review normally associated with a public offering.
John Cones
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