The Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted on April 5, 2012. It allows small businesses to enter into equity-based crowdfunding for raising up to one million dollars, without the usual burdensome requirements currently in place. These rules should be in place by early 2013.
As important as the crowdfunding provisions, the JOBS Act also amended Rule 506 of Regulation D, thus permitting general solicitation or general advertising, provided that all purchasers are accredited investors. Currently, it is unlawful for a filmmaker to send out email blasts to strangers, or advertise on the internet to attract investors. To comply with the existing law you should only approach persons you have a pre-existing relationship with. This rule will change with the implementation of the JOBS Act.
People may be accredited investors based on their net worth or annual income, as follows:
1) a natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million, excluding the value of the person’s primary residence (the “net worth test”);
2) a natural person who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the “income test”).
The shorthand description of accredited investors is simply “wealthy people.” General solicitation could be described as advertising or any method for approaching people you do not currently know.
The Securities and Exchange Commission (SEC) was given 90 days to implement this rule change and missed the deadline. However, the SEC has proposed draft rules that, if adopted, will make it easier to raise capital. Essentially, the proposed rules state that if you want to advertise or approach strangers for capital you will have to: 1) take reasonable steps to verify that all of the purchasers are accredited investors; 2) reasonably believe that all of the purchasers are accredited investors; and 3) check a box on the Form D confirming that you are acting under the rules which allow general solicitation.
The SEC did not specify exactly what steps must be taken to verify that a person is an accredited investor, but states that it depends on the circumstances. Most filmmakers do not have access to detailed financial records of potential investors, and a potential investor may not want to disclose their tax returns or other documents to prove that they are accredited. The SEC gives as an example: “An issuer that solicits new investors through a website accessible to the general public or through a widely disseminated email or social media solicitation would likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party, such as a registered broker-dealer.”
In other words, if you are indiscriminately sending out solicitations through social media, merely requiring a potential investor to check a box that they are accredited, it is not likely to be deemed sufficient. Since the standard is vague, and no specific steps to determine an investor’s status are suggested, it would be wise to verify an investor’s status by having them complete a detailed questionnaire that will provide information that can be used to justify a belief that they have the assets or income they claim. If, for instance, a person claiming to be accredited, does not have any investment or bank accounts and resides in low-income housing, then either they are not as wealthy as they allege, or perhaps they are a drug dealer whose savings are stashed in a mattress.
Filmmakers relying on the new Reg D rules should maintain careful records documenting what they have done to verify that each investor is accredited. And remember, these rules have not yet been adopted. The proposed rules can be read at: http://www.sec.gov/rules/proposed/2012/33-9354.pdf
You can submit your comments on the proposed rules at: http://www.sec.gov/cgi-bin/ruling-comments?ruling=s7xxxx&rule_path=/comments/s7-07-12&file_num=S7-07-12&action=Show_Form&title=Eliminating%20the%20Prohibition%20Against%20General%20Solicitation%20and%20General%20Advertising%20in%20Rule%20506%20and%20Rule%20144a%20Offerings
Contracts for the Film and Television Industry: 3rd Edition
The long awaited third edition of my Contracts book, now including 80 contracts, has just been published. For more information, click here.
Self Defense Seminar:
Date: October 20, 2012
Location: West Los Angeles College, 9000 Overland Ave., Culver City, CA 90230 (Free parking is available in the campus parking structure.)
This seminar explains how writers and filmmakers can prevent problems from arising by properly securing underlying rights, and by encouraging the other party to live up to agreements by adding performance milestones, default penalties and arbitration clauses.