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”); or
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, that 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.
You can submit your comments on the proposed rules at: Link
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
California Lawyers for the Arts 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.
