Wednesday, November 9, 2011

Article by Tifanie Jodeh: Legal Issues Surrounding Funding Via Private Equity

Nailing down investors is just the beginning of the story and a very integral part of the production process. You should be aware of the security laws that regulate how investors make investments into a project and how they hope for a large return but understand the risk of loss. 

Generally, Producers are required to register any offer or sale of securities unless it is exempt (as discussed below).  The registration process takes time and can be expensive. Instead, Producers sometimes operate on the practical exemptions for acquiring investment.

The most common exemption for entertainment projects is found under Rule 506.  This is called the "safe harbor" clause.  Rule 506 makes sure a production company meets the requirements that the investment request is a private offering.

Elements to Rule 506:
To qualify under Rule 506 it is important to address the following items:

1. No General Solicitation and General Advertising.

The Producer cannot engage in "general advertising" or "general solicitation".

This means that offers and sales of securities cannot be made through traditional advertising media such as radio, television and the Internet. Representatives of the production company must have a substantive pre-existing relationship with the person or entity being offered the securities. So, in other words, a friends or family type relationship.  This "pre existing" relationship is one which is present before a Producer approaches a potential investor to invest.   Even more, the producer must establish that the relationship is substantive; one where the representatives of the production company believe that the person or entity being offered the securities is sophisticated in investing. The combined effect rule (which is interpreted by Securities and Exchange Commission) can sometime conflict with how you have witnessed in the entertainment business.

2.  Purchaser Limitation. 

The sale of any security may be made to an unlimited number of "accredited" investors (meaning sophisticated, high net worth investors who can meet certain requirements as set forth in the SEC rules) and up to 35 unaccredited investors. These unaccredited investors (or their representatives) must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.  

3. Time Restriction/ Securities "Restricted"

The securities may not be resold for a certain time period and such re-sales are governed by securities laws. Producers must try to assure that an investor is purchasing the securities for investment purposes and not just to turn around and re-sell them.

4. Information Disclosure

One of the main goals of securities laws is to allow investors to make educated and informed decisions based on accurate information provided by the Producer.  If any unaccredited investors are sold securities in an offering, then specific information disclosure is required to be provided such as in a private placement memorandum. On the other hand, if the investment is being made by accredited investors then there are no specific disclosure requirements other than disclosures required to avoid the anti-fraud provisions of the securities laws. It is recommended, that the Producer provided extensive disclosure information to avoid the potential lawsuit of an unhappy investor.

5. Form D Filing

Lastly, a Form D is required to be filed within the first the 15 days of the first allocation of a security, plus filings of the form must be made in most states where sales are made to residents of that state. 

Now that you understand the rules, following the rules is very important no matter the size of your project.  Be over prepared and know how much money you need and have a detailed budget. This will show investors see you are serious and professional.   Make sure an entertainment attorney is on your team who can help you navigate the world of entertainment investment. 


Tifanie Jodeh is Partner at Entertainment Law Partners dedicated to corporate, business and entertainment affairs.  You may contact her at

Tifanie Jodeh grants column recipients permission to copy and distribute this column and distribute it free of charge, provided that copies are distributed for educational and non-profit use, no changes or revisions are made, all copies clearly attribute the article to its author and include its copyright notice.

DISCLAIMER: Readers should consult with a lawyer before solely relying on any information contained herein.