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Regarding Investor Financing of Indie Films:

What is a security?

A security is commonly thought of as an investment instrument such as a stock or a bond. In the context of raising funds for a business venture, such as an independent motion picture, any ownership interest (such as corporate stock, limited liability company or limited partnership membership interests, or even a contractual interest in a film project) designated as a “security” requires compliance with securities laws and regulations. In general, if the investment is offered to a “passive investor” (someone who will not be involved in the management of the enterprise in a meaningful way), you have a security.

What is a public offering?

A public offering is the offer and sale of an unrestricted security to investors. The investor documentation (disclosure of “material facts” about the security and the underlying business) for a public offering is filed with appropriate securities regulators, such as the federal Securities and Exchange Commission (“SEC”) or the securities administrator of a state (for example, the Department of Corporations in California). Regulator staffers review the filed materials, issue written comments and eventually, the offering is given a date for commencement. An unrestricted security means that the holder (owner) of the security can re-sell it to others at any time. A public offering can generally be made by public means of solicitation such as advertising and cold calls (subject to new laws in this area – check with your attorney on this one!)

What is an “IPO?”

IPO stands for “initial public offering” and is generally the first offering a company makes that is a public, rather than a private, offering. This term is also thought of as a process a company goes through to become a “public company,” wherein the company’s unrestricted securities can be traded by the public over the counter or through a recognized stock exchange.

What is the “secondary market?”

The secondary market involves the offer and sale of a security by holders (people or entities already owning the stock, bond, or other security) of the security. The offer and sale of an offering company’s own stock to raise money for company operations constitutes the “primary market” for that security.

What is a private placement offering?

A private placement offering is the offer and sale of restricted securities to investors. Securities laws and regulations provide that unregistered securities (where offering documentation is not filed for review with securities regulatory authorities) may be offered to prospective investors if certain rules are followed by the company or person offering the security. A restricted security cannot be freely bought and sold by holders (owners of the security). Restricted securities, generally speaking, must be offered for sale by private means of solicitation (people you know who help you get the word out without advertising or contact with strangers). The people or entities to which the security is offered (“the offerees”) must be qualified (have some degree of investment sophistication and financial resources). The offering person or entity must be sure to make legally sufficient disclosure of “material facts” about the security being offered, the offering company (the “offeror”) and the underlying business venture.

What is a “Reg. D” offering”?

The federal securities regulatory authority, the Securities and Exchange Commission, has “promulgated” (established and published) a set of regulations titled “Regulation D.” Regulation D contains the federal rules for the private placement of securities within the United States.

What is the difference between a “law” and a “regulation?”

A “law” is drafted and voted on by the legislative bodies of a state or the federal government and signed by the executive of the state (governor) or the United States (the President). A “regulation” is a rule of an administrative department of a state or federal government. Knowing and complying with securities laws and regulations is critical to any person or entity offering its securities for sale as a means of financing a project or business.

What is a “commission?”

In the offer and sale of securities, a commission is a percentage of the offering proceeds (money received from the investors for the security) paid to a person or firm for his, her or its efforts in securing a sale of the security.

Can I pay a commission on the sale of my film company investor offering?

Generally speaking, commissions may be paid only to those persons or companies that are licensed by appropriate federal and state authorities to earn commissions for the sale of securities. Conversely, in practically all cases, the payment of a commission by a securities offeror to an unlicensed person or entity is illegal.

What is a “broker-dealer?”

A broker-dealer is an entity or person that employs licensed securities salespersons. The broker-dealer itself is also licensed. The federal governing body for securities broker- dealers and salespersons is the NASD (National Association of Securities Dealers). States also regulate and license broker-dealers and securities sales persons.

What is an “investment banker?”

An investment banking firm provides certain financial services to its customers, such as financing for business ventures. Investment bankers often take a share of ownership in the venture being financed.

What is a “finder’s fee?”

A finder’s fee is a portion of the proceeds of a securities sale paid to someone who introduces the prospective investor to the offering company or person (the offeror). If/where legal; A finder’s fee may be paid to someone or an entity that is not licensed to sell securities. However, generally speaking, the “finder” cannot participate in the negotiation or sale of the security, but, rather, is usually limited to only making an introduction.

Can I advertise my film company investor offering?

Advertising is generally allowed for public offerings only. An exception to this rule is the Model Accredited Investor Exemption, adopted in over half the states, which allows for limited advertising. A similar, broader exemption is available in California. Rule 506(c) of Regulation D allows advertising to accredited investors only. Ask your attorney for more information regarding these special exemptions from securities registration!

Can I cold call potential investors?

Generally speaking, and possibly subject to new federal legislation in this area (“no call” lists), calling or contacting people you don’t know is allowed in public offering settings only.

What is an “accredited investor?

In the context of private placement offerings, investors are often categorized as “accredited” or “non-accredited.” The federal definition of accredited investors is contained in Regulation D. There are many categories of accredited investors, but the most widely applicable ones involve the net worth and income of an investor. An investor with a net worth of $1 million or more is an accredited investor. An investor reasonably expecting to earn at least $200,000 (or $300,000 jointly with spouse) in the current year and has done so the last 2 years, is an accredited investor. A non-accredited investor has a net worth and income under these thresholds. In most private placement offerings, an unlimited number of accredited investors can purchase an offeror’s security. Under federal regulations, except for Rule 504 of Regulation D, there can only be up to 35 non-accredited investors in an offering. Many state laws allow even less than 35 non-accredited investors in an offering.

What does “federal preemption of state law” mean?

In the context of private placement securities law considerations, an offeror of securities generally needs to be aware of and comply with federal and state securities laws and regulations. If the offering person or entity is attempting to deal with investors in several (or many) states, the resulting regulatory burden can become very worrisome and costly, if not downright oppressive. The National Securities Markets Improvement Act (“NSMIA”) was enacted in 1996. It provides, that under certain limited circumstances, the substantive securities laws of the states are “preempted” by federal law, meaning that state laws and regulations no longer apply to certain types of securities transactions (as long as the federal law is complied with!). Check with your attorney to see if you can use NSMIA to your advantage!

Is it true I can advertise my private placement securities offering in California?

Yes. California’s Corporations Code contains a provision in Section 25102(n) allowing for a limited form of advertising by some securities offerors as well as contact with strangers (if the person or entity contacted is “qualified” per the rule). An advance notification and fee must be paid to the Department of Corporations to avail oneself of this “exemption from securities registration.”

Can I offer my film company securities to investors outside of my state?

Yes. If you comply with the laws and regulations of the state within which you desire to offer your security, or preempt the offer and sale of your security under NSMIA, you can offer your private placement security outside of your state of residence.

Do I have to register the security offered by my film entity?

The terms “register” and “registration” are often misunderstood. These terms refer to the filing of offering documents and other materials with appropriate securities regulatory authorities for a proposed public offering. Often times, reports of sales to federal and state securities regulatory authorities are required for private placement offerings. These reports are not part of a securities “registration,” but are simply required state filings often referred to as “notifications.”

Can I sell my film offering securities outside the United States?

Sales of securities (by U.S. offerors) outside of the United States are governed under federal law. Regulation S of the SEC permits such sales, but restricts re-sales of U.S. based securities sold outside the United States. Offerors must also comply with relevant laws and procedures of the country within which it is offering its securities. Contact your attorney for information you’ll need regarding “foreign” sales of your film investment offering.

Do I have to form a company (entity) to offer and sell a security?

No. A person, as well as a company, can sell “securities.” However, it is almost always advisable for a person to form an entity before producing a motion picture (primarily to shield an individual from personal liability for the establishment and operation of a business venture). Check with your attorney for advice on your particular situation!

What is a “Form D?”

Form D is the federal securities sales reporting form. It is filed with the SEC within 15 days of your first private placement securities sale (under Reg. D of the SEC). There is no federal sales reporting filing fee. Most states require the payment of a fee for a sales report or notification. NSMIA offerings also involve sales reporting to the states.

Do I have to give a disgruntled investor’s money back?

What a loaded question! Hopefully, you won’t have investors like this to deal with. If you do, and if you’ve followed the law in the offering of your security, technically, the answer is “no,” you don’t have to refund the money However, offerors, especially in smaller offerings, often find themselves working something out with an unhappy investor rather than spending the money on an attorney that is required to defend the claim.

What is a “cease and desist order?”

A cease and desist order requires the offering person or entity to stop selling its securities within the borders of the jurisdiction (federal or state) of the governmental agency issuing the order.

Can I be put in jail if I violate securities laws?

Yes. The worst offenders, those ripping off the largest numbers of people or illegally raising the largest sums of money are the ones most likely to be prosecuted for criminal violations of the securities laws. Generally, the smaller offenders operate beneath the criminal detection radar screen and usually are most concerned about administrative or private investor civil actions for damages, attorney’s fees and interest. However, depending on the circumstances, anyone violating securities laws may be subject to criminal prosecution. Be careful, honest and fair!

What is a “PPM?”

PPM stands for “private placement memorandum.” This is the disclosure document used by offerors in private placement offerings to present necessary “material facts” concerning the investment, the offering entity and its business, to investors.

What is a “Prospectus?”

A prospectus is generally thought of the portion of the registration statement filed with regulatory authorities for a public offering that is given to prospective investors to examine.

What is a “Confidential Purchaser Questionnaire?”

A Confidential Purchaser Questionnaire is part of the offering packet used by private placement offerors to determine if a prospective investor is “qualified” to invest in the offering. It contains personal contact information, investment and educational background and financial resource queries answered by a prospective investor.

What is a “Subscription Agreement?”

A Subscription Agreement accompanies a PPM or prospectus and is the contract signed between the offeror and the investor.

What is a “Purchaser Representative?”

The law provides that an unsophisticated prospective investor can retain an investment professional or other qualified person (an attorney or accountant, as 2 prominent examples) to assist the prospective investor in evaluating the merits of a particular securities offering. This person is a Purchaser Representative. There is a form accompanying most private placement offerings for a Purchaser Representative to fill out and sign.

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