DOMESTIC DISTRIBUTION PART II

 The goal for many filmmakers is nothing less than to see their film shown in a theater.   Theatrical distributors typically advance all marketing and distribution costs and, for highly desirable films, may provide the producer with an advance payment or minimum guarantee ("MG"). These payments are recoupable but not refundable. That means the distributor can reimburse itself its advances from revenues before paying the filmmaker his share of revenue, but if the film bombs and there is not enough revenue for the distributor to recoup its advance and expenses, the filmmaker does not have to refund payments received. If the advance is sufficient to repay one's investors, then the filmmaker has effectively transferred all financial risk to the distributor. This is a desirable but increasingly rare occurrence. Nowadays, many distributors will only offer a small advance or no advance when seeking to acquire a title for distribution. The distributor will argue that it is advancing marketing and distribution costs and that is enough, thank you.   

If a domestic distributor is willing to take the plunge and release a film theatrically, it will almost always insist on securing ancillary rights for home video and television media. A theatrical release, even for a hit film, often generates less revenue than its costs because of the substantial expense for prints and advertising (P & A): a 35 mm print costs $1200 to $1500. Thus, a major studio releasing a film on 4,000 screens will spend $6 million dollars. Shipping heavy film canisters has cost major studios up to $450 million a year. On top of that, the price of a single full page advertisement in the New York Times can add another hundred thousand dollars.  

However, print outlays are plummeting as theaters convert to digital projection. 77% of screens in the USA now have systems that can exhibit a digital copy, which costs about $150. The savings are so enormous that the studios have been subsidizing the conversion to digital projectors by paying exhibitors "virtual print fees."  While many theaters have taken advantage of this subsidy, the studios have announced that they will soon phase out this support. Smaller theaters face a terrible dilemma. If 35 mm prints are no longer available, and they cannot afford a digital system, which can cost $150,000, they will go out of business. In a few years, it may be difficult to view a movie on celluloid. Eastman Kodak has filed for bankruptcy, and hundreds of art house cinemas are predicted to go out of business. This can only make it more difficult for independent filmmakers to secure a theatrical release. Screen Digest predicts that almost all screens will be digital by 2015.

Aside from wide releases, even a limited release to a hundred theaters can cost a million dollars or more. If a film is released digitally, the print costs are dramatically reduced, but the advertising outlays remain the same. Consequently, a distributor that bears the financial risk of a theatrical release will insist on securing the rights to home video and television media to offset any theatrical losses. These so-called ancillary media are usually more profitable than the theatrical release. A film that becomes known to the public as a result of its theatrical run does not require much more publicity for its home video release. And, television exhibition is the most profitable of all.

When a distributor licenses a film to a cable channel it does not incur any advertising expenses because the channel promotes its own programming. The seller simply negotiates the deal and delivers a copy of the film, which is often returned after the cable television window expires.  

The sequence of release windows is also changing. Traditionally, films were first exhibited in theaters, followed months later by home video (DVD's), followed by a release to television beginning with Pay TV, VOD, and eventually free television. The order of these windows was intended to maximize revenue. However, a release that generates maximum revenue for a distributor does not necessarily do the same for the exhibitor. Distributors want to capitalize on public awareness arising from the theatrical release by quickly issuing the film into the home video market. A short delay also inhibits piracy because illegal sales are more likely as long as there is no legitimate way to buy a DVD.

Some distributors have gone so far as to experiment with a simultaneous release in theaters and in home video. However, theater owners strongly object to such releases or any shortening of the gap between windows, arguing that moviegoers are less likely to buy box office tickets if they know the film will soon be available on DVD. The gap from the end of the theatrical release to the start of the home video release has been falling and now is in the range of 90 to 120 days.

In 2011, Universal Pictures attempted to release its movie "Tower Heist" on Comcast's Video-on-Demand three weeks after its theatrical debut. The Regal and AMC theater chains objected and the third largest theater chain, Cinemark, refused to book the picture at all if it was available on VOD so soon after its debut. This caused Universal to back down and cancel the VOD release. 

As mentioned earlier, exhibitors and distributors have competing interests. The exhibitor and distributor enter into a lengthy and complex agreement, which sets out how they share revenue. The agreement may require the exhibitor to give certain advances or guarantees to the distributor to secure a film. Additionally, the exhibitor may agree to play the film for a minimum number of weeks. In the past, a distributor releas­ing a major motion picture would split revenues on a sliding scale, with a 90/10 ratio for the first few weeks after the theater owner deducted its overhead costs. The distributor received 90% of the revenue and the exhibitor 10%. In subsequent weeks, the split would become more favorable for the exhibitor, shifting to 70/30, 60/40, or 50/50.

This sliding scale formula gave exhibitors an incentive to retain the picture for a long run. As the weeks pass, the exhibitor's share increases. Of course, for major studio films, revenues tend to drop sharply after the initial few weeks. Giving the exhibitor a larger share of revenue in later weeks makes sense because the distributor wants to encourage the theatre owner to exhibit the film as long as possible.

However, major studios have now adopted a new formula for sharing revenue with exhibitors. The revenues are split according to the magnitude of the overall national box office. The distributor receives 48% to 63% of box office receipts, with more receipts earning the distributor a larger percentage.  On average, a major studio receives 53% of the box office gross. For art house fare, distributors average around 45%. The exhibitor no longer has the same incentive to hold a picture, and pictures tend to be released wider and pay off faster. For major studio films, 80% of the box office revenue is often received in the first two weeks of a picture's release.  

One aspect of exhibition has not changed. The exhibitor retains 100% of all sales at the concession stand. This is a major profit center for theaters; it can be said that theater owners are really in the fast food business. The candy and popcorn they sell have huge profit margins. However, nobody goes to the theater for the food. So, theater owners have an incentive to fill the house with a lot of moviegoers, even if they only earn a relative minor portion of the ticket price. This is why they prefer major studio films designed for mass consumption rather than art house fare that appeals to a niche audience.  

Another ongoing struggle is whether movies should be released on DVD before being offered for digital download. The major studios find digital downloads quite profitable because they avoid all manufacturing and shipping costs. 20th Century Fox released Ridley Scott's sci-fi thriller "Prometheus" for HD download on Sept. 18, 2012, three weeks before its release on DVD. The film was made available through Amazon, iTunes, Vudu, Xbox, and CinemaNow. Sony and the Weinstein Company have also experimented with early digital releases.

The economics of independent films have become increasingly tricky. Due to a flood of independent films, licensing fees have declined, and many specialty distributors have disappeared. Filmmakers can no longer expect to auction their film off to the highest bidder at Sundance or Toronto. This occasionally occurs for a breakout film, but it is hardly the norm, even for films shown at top festivals. Hence, instead of an all-rights deal with one domestic distributor, many filmmakers end up opting for "split rights" deals. Rather than one deal with a domestic distributor that controls all media in North America, the filmmaker enters into a series of deals with different distributors, each of which is granted limited rights. This can benefit the filmmaker, because with several distributors, there is no cross-collateralization of expenses against revenue. So, if the home video release loses money, those losses would not be recouped by the home video distributor from TV sales controlled by a different company.

Although a theatrical release is risky, it is important for building awareness and prestige that filmmakers sometimes book their films directly into theaters. A rent-a-distributor or "service" deal is an arrangement in which the producer bears the marketing costs of releasing a film theatrically. Traditionally, distributors cover these costs, whether the title is one they produced or acquired from an independent producer. With a service deal, the producer is essentially renting the distribution apparatus and bearing all distribution costs. The distributor is willing to receive a reduced distribution fee -- perhaps half of the traditional 35% -- in return for not advancing any expenses. The producer assumes all financial risk. One of my clients recently self-released a documentary on 80 screens at a cost of $600,000. While it did not earn back its distribution costs from the theatrical release alone, the film became a best-selling documentary on Amazon and received substantial license fees from Netflix and other outlets.

For a distributor, such a deal makes sense if there is an open slot in its release schedule. Many distribution and marketing staff are full time permanent employees, and if the distributor does not have a title to release one month, the staff must nevertheless be paid. Why would a producer bear the financial risk of releasing a film theatrically? Often, it is because there is no other alternative as no distributor is willing to bear the costs to release the film in the traditional manner. It bears noting that relatively few independent films nowadays secure a theatrical release. Indeed, many indies are unable to secure distribution in any media.

Another reason a filmmaker may desire a theatrical release is because it will generate more attention than if the picture is released directly to home video and television. Many publications will not review a film unless it opens theatrically in their region. Therefore, a theatrical release, even if unprofitable by itself, can boost television and home video revenues. There have been some spectacular self-release successes including Mel Gibson's "The Passion of the Christ." This picture cost $30 million to produce, $15 million to market, and generated more than $600 million. In its first weekend, the film reportedly earned $83 million in the United States.

Another method used to get films into theaters is known as a "four wall" release. This is an arrangement between the producer and theater owner that bypasses the distributor. Here, the filmmaker rents the theater from the exhibitor and takes the financial risk that is normally borne by the distributor and exhibitor. The filmmaker, in turn, retains all the box office receipts. If a lot of tickets are sold, the filmmaker can do well. However, if ticket sales are meager, the filmmaker can suffer disastrous losses, since the filmmaker is paying for the theater, as well as bearing all print and advertising costs.

Self-distribution not only requires money, but enormous time and effort. Most successful campaigns require the filmmaker to be available for media interviews, develop a rich website, conduct research to find and reach out to their audience, and accompany the film to openings. Some filmmakers earn additional income through speaking fees, websites, and DVD screenings.

The theatrical release, while often difficult to secure and expensive, can significantly help a filmmaker advance their career. The exposure gained from one film can induce investors or a studio to finance their next project.

Emmy Win

CHILDRENS HOSPITAL

Congratulations to our client Jon Stern and his Abominable Pictures for their Emmy Award for Outstanding Special Class Live Action Entertainment.  The show is exhibited on Adult Swim which is part of the Cartoon Network in association with Warner Bros. Television. The shows stars Rob Corddry, Erinn Hayes, Ken Marino, Megan Mullally, Malin Akerman, Lake Bell, Rob Huebel  and others.

UPDATE ON SOLICITING INVESTORS

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.

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: Link

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.

Seminar Info

DOMESTIC DISTRIBUTION PART I

In my last article I discussed foreign sales agents and their role in the distribution of independent films. Now let's turn to domestic deals. "Domestic" is usually defined as North America, which is comprised of the USA and Canada, as well as their possessions, territories, commonwealths, protectorates and trusteeships. For the United States, these include the U.S. Virgin Islands, Saipan American Samoa, Guam, Wake Island and Puerto Rico. However, many domestic deals also encompass the Bahamas, Bermuda, Saba Island, St. Eustatius Island, St. Kitts Island and St. Maarten Island. These are not affiliated with either the USA or Canada. Bermuda, a British colony in the middle of the Atlantic Ocean, has never been part of Canada or the USA. St. Kitts Island's sovereignty is shared by France and the Netherlands.Why are these entities considered part of the Domestic territory? Simply because certain television channels have satellite footprints that cover these areas, and they demand these rights be included in any deal.

Consequently, producers need to be careful in defining the scope of territories granted to distributors. It is customary for independent producers to enter into separate foreign and domestic deals. If, for example, the filmmaker assigns Bermuda to an international distributor, that could prevent their domestic distributor from making a lucrative deal with HBO. Indeed, it may deter a domestic distributor from acquiring the title. Thus, to maximize revenues a producer has to make sure they don't sacrifice a beneficial deal because they thoughtlessly assigned away rights to a small territory.

The term "distributor" is so broad that it encompasses many different types of companies. The major studios such as Paramount and Sony typically distribute pictures directly to theaters, license them to television channels like Showtime, and manufacture their own packaged media (i.e. DVDs) for sale to mass merchants and video rental outlets. Many majors studios may also distribute their pictures in selected foreign territories and contract with local distributors elsewhere.

Smaller independent distributors exploit movies in a variety of different ways. Some book films into theaters and then assign television and home video rights to third parties for licensing in those media. Others are basically home video labels that manufacture and market DVD's. Some of these companies license directly to television while others use intermediaries. However, sometimes home video labels decide to release some of their films in theaters to build awareness for the picture. They may pay a third party to book the title into theaters. A filmmaker seeing such theatrical releases may perceive the company as a theatrical company when they are not. So it can be difficult to tell what kind of distributor they are dealing with.

A theatrical release, even if perfunctory, may help the distributor persuade filmmakers to make a deal even if it is unprofitable by itself. If a smaller distributor attempts to theatrically release an indie film, they face stiff competition from the majors. Because the major distributors have a steady flow of desirable movies, they have the clout to demand the best theaters and dates, often relegating independents to whatever dates and venues are left.

Complicating matters further, some home video companies deal directly with mass merchants like Wal-Mart, while the others have to go through intermediaries like Anderson Merchandisers, that ship and pack product from numerous companies for delivery to mass merchants.

All this is to say that distributors operate differently and filmmakers need to do their homework before making commitments so they understand exactly how each distributor proposes to release their film and how the revenue stream will be divvied up. If multiple companies in the chain of distribution deduct significant fees and expenses, the revenue stream that goes to the filmmaker/investors can become a trickle. So when a distributor says they distribute to theatrical, home video and television media, you should ask: "O.K. Exactly how you do that? What intermediary companies do you use, and what kind of fees and expenses do they deduct?"

One type of home video deal is known as a sub-label deal. Here two companies split the responsibilities for acquiring, marketing and distributing titles. Typically one company, such as Lionsgate, handles the physical distribution of titles and collection of revenue from its buyers. The other company, the sub-label, is responsible for acquiring titles and creating the key art and marketing materials. The two share revenue.

There is nothing inherently wrong with a sub-label deal, provided the filmmaker understands how distribution fees are collected and expenses are recouped, and the amounts are reasonable. However, I have seen many of these deals where the filmmaker thinks they are sharing in the wholesale price remitted by buyers like Blockbuster or Wal-Mart. The filmmaker is unaware that he/she is really receiving just a share of what is remitted to the sub-label from the parent company.

In these deals, "Gross Receipts" has been defined and calculated on the revenue received by the sub-label after the parent company has deducted its fees and expenses. The cumulative effect may be that little or no revenue flows down to the filmmaker. The filmmaker thinks he/she is receiving 25% of the wholesale price of each DVD sold but actually is receiving 25% of the funds remitted from the parent company to the sub-label. A well-drawn contract will carefully define "Gross Receipts" as the wholesale price which is the amount remitted from the home video buyers, and not the amount remitted to the sub-label. Filmmakers need to ask specific questions when selecting a distributor in order to avoid unpleasant surprises.

Almost all distributors nowadays try to acquire so-called ancillary and new media rights so they can license movies to such companies as iTunes, Netflix, Hulu and Amazon. Many of these new media buyers don't like to acquire individual titles and prefer to deal with aggregators who can license them bunches of films at a time.

  

Book Recommendation:

 The Reel Truth: Everything you didn't know you need to know about making an independent film. By Reed Martin 

 Filmmakers are creative artists, and the less time they have to spend on the logistics of getting their film to the market, the happier many of them are. But the logistics of the business cannot be ignored, and a recent book by Reed Martin offers filmmakers of all persuasions an impeccable, thorough, intelligent guide to navigating one's way through the film industry. The book is "The Reel Truth: Everything you didn't know you need to know about making an independent film. "  

This is a book that will save filmmakers years of research and missteps, so they can proceed full steam ahead to create their cinematic masterpieces. This is a definitive, essential guide for all filmmakers.

to purchase Reel Truth

CONTRACTS IN THE FILM AND TELEVISION INDUSTRY, 3RD EDITION 

JUST PUBLISHED

The long awaited third edition of my Contracts book has just been published. Newly expanded and updated the book now includes 80 contracts.

An invaluable collection of sample entertainment contracts along with discussions of the terms and ideas contained therein. Armed with this book, filmmakers can save thousands of dollars in legal fees.

You can also order a separate CD-R disk with copies of all the 80 contracts in word format. This is on sale now at a reduced price of $45.00.

Order Now

Table of Contents

Introduction
Basic Elements of Contract Law
Common Provisions of Entertainment Contracts

Depiction and Copyright Releases
Depiction Release, Grant with Reversion
Depiction Release, Option/Purchase Format
Depiction Release, Documentary Short Form
Guestbook Release
Crowd Release
Talk Show Appearance Agreement
Film Clip License
Still Photo Release
Artwork Release

Literary Submission and Sale
Submission Release
Non-Disclosure Agreement
Option and Literary Purchase Agreement (Long Form)
Option and Literary Purchase Agreement (Short Form)
Quitclaim Release

Artist Employment
Conversion Agreement
Actor Offer Letter
Actor Employment Agreement (Loan-out Format to Employ SAG Actor)
Actor Employment Agreement )Low-Budget, Non-Union Day Player)
Nudity Rider to Player Agreement
Rider to Day Player Agreement
Extra Agreement
Extra Release
Series Regular Actor Contract (AFTRA)
Minor Release
Parental Consent
Stunt Performer's Agreement
Television Host Agreement
Television Performer Employment Agreement
Writer Employment Agreement (Low-Budget, Non-union)
Writer Employment Agreement (Theatrical WGA Writer)
Television Writer's Contract (WGA, Loan-out)
Director Agreement (Theatrical, Loan-Out)
Director Employment Agreement (Non-Union)
Director's Television Series Employment Agreement (to Employ a DGA Director)
Consultant Agreement
Certificate of Engagement

Collaboration
Writer Collaboration Agreement
Joint Venture Agreement
Agreement to Dissolve
Co-Production Agreement

Music
Composer Agreement (Low-Budget Feature)
TV Music Rights License
Synchronization/Performing/Master Use and Mechanical License
Synchronization License TV Series
Master Use License, Television
Soundtrack Recording Agreement (Loan-Out Format)

Financing
Finder Agreement
Promissory Note
Promissory Note with Guarantee
Guarantee

Production
Production Services Agreement
Cable TV Production Agreement
Casting Director Employment Agreement (Independent Contractor)
Crew Deal Memo (Salaried On-Call)
Producer Employment Agreement
Television Series Producer Agreement
Makeup and Special Effects Agreement
Location Agreement
Studio Rental Agreement

Distribution and Exhibition
International Sales Agency Agreement (Filmmaker Friendly)
International Sales Agency Agreement (Distributor Friendly)
Certificate of Authorship
Certificate of Origin
Short Form Assignment
Definition of Gross Receipts After Break-even
Net Profit Definition
Television Distribution Agreement
International TV Distribution Agreement
Security Agreement
Short Form Security Agreement
SAG Buyer's Assumption Agreement Theatrical
Home Video Licensing Agreement
Internet Acquisition Distribution Agreement
Website Content Provider Agreement
Video on Demand Agreement
Exhibition Agreement

Merchandising
Merchandising Agreement
Product Release
Product Placement Agreement

Retainer
Attorney-Client Retainer Agreement
SAG Agency Motion Picture/Television Agency Contract
Representative Agreement

Glossary of Terms

Appendix

DISTRIBUTION 101 – Foreign Sales Agents

With the start of the Festival De Cannes and accompanying Marche Du Film, one is reminded that film is both an art form and a business. The festival will exhibit approximately 22 feature films in competition, another 20 in Un Certain Regard, 6 Out of Competition and 10 in Special Screenings. Then there are the parallel sections or sidebars that are not officially part of the festival, but exhibit at the same time.  Director’s Fortnight, which was created by the French Director’s Guild, will exhibit 19 features. International Critics' Week (la Semaine de la Critique) run by the French Union of Film Critics, will show another 10 features. Add these up and you have 87 feature films in the festival and its sidebars. Only a relative handful of these films are from filmmakers based in the USA.  On the other hand, the market (Marche Du Film) will screen 1465 feature films, and many of these are from the USA. Few of the market films are also in the festival. Many are more commercial fare that festivals often ignore.  However, they generate substantial revenue.

With that in mind, filmmakers fortunate enough to receive distribution offers for their films are often confronted with complex deals to distribute their films. These can bewilder those unfamiliar with the customs and practices of the industry.   Let’s begin with a discussion of international film sales.

International sales agents are distributors, although they usually do not own a single theater, home video label or television outlet. They are essentially distributors that license films to territory distributors ("buyers"). Territory distributors acquire rights to exhibit a film within their country although sometimes they may license rights for several different countries. They often find out about films from sales agents whom they meet at various markets held throughout the year. Sales agents and buyers typically attend the three major film markets, which are at Cannes, Berlin and Santa Monica (AFM) as well as TV markets such as Mip and MipCom. The May 2012 edition of the Cannes Market will have more than 1100 sales agents and 10,000 participants from almost one hundred different countries.

The sales agent not only licenses the films they represent, but also services their buyers by providing them with various materials and elements, including film and video masters, key art, photos and trailers. An honest and competent sales agent can be extremely helpful to a filmmaker. Most filmmakers have no clue how to go about licensing their film, for instance, to a Turkish buyer, and what terms would be acceptable. Moreover, they don’t even know who the buyers are in most territories.

According to the latest 2011 Box Office statistics, two-thirds of all film revenue now comes from abroad. International sales (those outside of North America) grew 35% from 2007 to 2011. Revenue in North America, by comparison, increased a mere 6%. So while foreign sales have been expanding quickly, domestic sales have grown modestly. Over the past four years, the number of screens in China has doubled to more than 6,200, a number that's expected to double again by 2015. Chinese box-office receipts hit a record $1.5 billion last year, according to their State Administration of Radio, Film and Television. With China and other rapidly developing countries building thousands of new theaters, this trend is expected to continue.  Indeed, for many independent filmmakers, even today, 90% or more of their revenue is derived from foreign sales. That is because the North American market is by far the toughest market to crack for a low budget indie film without stars.

It can be difficult to select a sales agent. Reputable sales agents should be willing to accept terms in their contract with filmmakers that protect their interests. Many such provisions do not cost the sales agent anything, as long as the sales agent lives up to the terms of its contract. A requirement for interest on late payments, for example, costs the sales agent nothing as long as payments are made on time. Such a clause is important because it will encourage a sales agent to live up to its commitments, and provide the filmmaker with a viable remedy in case the sales agent defaults. While a competent sales agent provides valuable services, one should always remember the importance of what the filmmaker brings to the table. Without a good film, the sales agent has nothing to sell. Most sales agents produce few if any movies themselves.

Here is a list of some of the most critical ways for filmmakers to protect their interests in contracting with sales agents. The following list should not be considered exhaustive. There are other provisions a filmmaker may want to include such as clauses dealing with advances, guarantees and reservation of rights.

NO CHANGES: The film should not be edited, nor the title changed, without the filmmaker's approval. Editing for censorship purposes, television broadcast and changes made for a foreign language release, such as adding subtitles and translating the title and dialogue, is permissible.

MINIMUM ADVERTISING SPECIFIED: The contract should specify in writing the minimum amount the sales agent will spend on advertising and promotion of the film. These expenses are often incurred at various markets. They could include advertising in the trade papers, a billboard on the Croissette or payment for a screening room for the film. The sales agent should commit to payment for the creation of a poster, one-sheet and trailer if these items do not exist.

EXPENSES LIMITED: There should be a floor and a ceiling on expenses. Market expenses (the cost to attend film and TV markets) should be limited to the first year of release and capped per market. Promotional expenses should be limited to direct out-of-pocket costs spent to promote the film, and should specifically exclude the sales agent's general overhead and staff expenses.

TERM: The term should be a reasonable length, perhaps five or even 10 years, but not in perpetuity. The filmmaker should be able to regain rights to the film if the sales agent gives up on it. Thus, it is best to have a short initial term of two or three years and a series of automatic rollovers if the sales agent returns a certain amount of revenue to the filmmaker. If the sales agent does not meet or exceed these performance milestones, all rights should revert to the filmmaker. If the sales agent is doing a good job and paying the filmmaker his share of revenue, there is little reason to switch to another sales agent. Indeed, for movies that have been out in the marketplace for a few years, it is very difficult to find a sales agent willing to take on  an older  film.

INDEMNITY: Filmmaker should be indemnified (receive reimbursement) for any losses incurred by filmmaker as a result of the sales agent's breach of the terms of the agreement, violation of third party rights, and for any unauthorized changes or additions made to the film.

POSSESSION OF NEGATIVE: The sales agent should receive a lab access letter rather than possession of the original negative and other master elements. The sales agent should not be permitted to remove masters from the laboratory.

ERRORS AND OMISSIONS (E&O) POLICY: While it is generally the filmmaker's responsibility to purchase an E & O insurance policy, sales agents sometimes may be willing to advance the cost of this insurance and recoup it from film revenues. In such an event, the filmmaker should be added as an additional named insured on the policy, which is a minor cost.

TERMINATION CLAUSE: If the sales agent defaults on its contractual obligations, the filmmaker should have the right to terminate the contract, and regain rights to license the film in unsold territories as well as obtain money damages for the default. It is only fair for the filmmaker to give the sales agent reasonable prior notice of default before exercising her right to terminate.

RIGHT TO INSPECT BOOKS AND RECORDS: The sales agent should maintain complete and detailed books and records with regard to all sales and rental of the film. Filmmakers should receive quarterly (or monthly) producer statements accompanied by any payments due the filmmaker. Filmmakers should have the right to examine the books and records of sales agent during reasonable business hours, on 10 days’ notice.

LATE PAYMENTS/LIEN: All monies due and payable to the filmmaker should be held in trust by sales agent for the filmmaker. The filmmaker should be deemed to have a lien on filmmaker's share of revenue. The sales agent should pay the filmmaker interest on any late payments.

LIMITATION ON ACTION: The filmmaker should have at least three years from receipt of any financial statement, or discovery of any accounting irregularity, whichever is later, to contest accounting errors and file a Demand for Arbitration.

ASSIGNMENT: It is best to prohibit assignment unless filmmaker consents. If assignment is permitted, the sales agent should not be relieved of its obligations under the original contract.

FILMMAKER DEFAULT: The sales agent should give the filmmaker 14 days written notice of any alleged default by filmmaker, and an additional 10 days to cure such default, before taking any action to enforce its rights.

WARRANTIES: The filmmaker's warranties, in regard to infringement of third party rights, should be to the best of the filmmaker's knowledge and belief, not absolute.

SCHEDULE OF MINIMUMS: Foreign sales agents should agree to attach, to their contract, a schedule of minimum acceptable license fees per territory. The sales agent is not permitted to license the film in any territory for less than the minimum without the prior approval of the filmmaker.

ARBITRATION CLAUSE: Every contract should contain an IFTA arbitration clause ensuring that all contractual disputes are subject to binding arbitration with the prevailing party entitled to reimbursement of legal fees and costs. The arbitration award should be final, binding and non-appealable. The IFTA personal guarantee Rider can be used to bar a company's chief executive from attending future American Film Markets if the company refuses to pay an arbitration award.

For a more detailed discussion of distribution deal terms read my article at: Article  

Mark Litwak will next be offering his Risky Business seminar in San Francisco on June 16^, 2012 through California Lawyers for the Arts.Seminar

CROWDFUNDING FOR FILMMAKERS, RAISE A MILLION DOLLARS OVER THE INTERNET

Although Republicans and Democrats rarely agree on anything these days, Congress has passed and President Obama signed on April 5, 2012 the JOBS (Jumpstart Our Business Startups) Act, a collection of laws that dramatically relaxes regulations on raising capital for startup companies. The law was backed by Republicans, as well as tech companies and their venture capital backers. While encouraging independent filmmaking was not on the mind of Congress when it passed this law, it promises to dramatically expand the ability of filmmakers to raise financing for their projects.   

In Silicon Valley, entrepreneurs often raise large amounts of capital for risky start-ups. However, the number of Initial Public Offerings is much less than it was before the dot com bubble burst. In 1996, there were 791 Initial Public Offerings (IPO) while from 2001 to 2008 the average was a mere 157 a year.  Of course, this reduced activity may be due to investors assuming a more prudent investment strategy after losing their shirts in the dot com crash, or it could be a reaction to new regulations.  Among other changes enacted, Wall Street firms are prohibited from promoting stocks with their own questionable research, an obvious conflict of interest.

The new Act relaxes some restrictions for smaller emerging growth companies. It seeks to encourage entrepreneurs because most new jobs are created by small businesses, not large ones. Consequently, this new law could be the impetus for an economic boom – at least that is the hope of its backers. No doubt, some of the “reforms” in the Act are of questionable merit and could open the door to new abuses.  However, the current laws governing the raising small amounts of capital are unduly onerous for entrepreneurs, and have been for many decades. Furthermore, these laws have clearly not kept pace with technological change and the methods we use nowadays to communicate with one another. If anyone understands the potential of the crowd, it should be President Obama. In the last presidential election, he raised nearly three-quarters of a billion dollars from Internet solicitations, mostly small donations.

Most promising for indie filmmakers, the JOBS Act contains provisions that for the first time will allow internet crowdfunding for the production of films.  Crowdfunding is a method of raising capital by obtaining small amounts of money from a large number of investors. Although existing companies like Kickstarter.com and IndieGoGo currently enable filmmakers to raise funding through donations (i.e., gifts), this new law, when it becomes effective, will allow filmmakers to raise up to one million dollars in equity investments by soliciting the general public without the prior restraints.

The prime restriction that hampered filmmakers from raising funds using the internet was the prohibition on public solicitation for what are called private placements. Public solicitation is any form of advertising or approaching strangers such as by putting leaflets on their car windows. Up until now, the law has required a “pre-existing relationship” between the filmmaker and the potential investor. It was not always clear how much of a relationship was required. There are filmmakers today who have thousands of "friends" on Facebook. Some of these connections may be fairly tenuous and the filmmaker may have never met some friends in person. Do these contacts count as a pre-existing relationship if the extent of the bond is merely accepting an invitation to connect? Fortunately, these kinds of issues don’t seem to matter much anymore with the passage of the JOBS Act.

For many businesses, a million dollars is not a lot of money, but for filmmakers it can be more than sufficient to produce a feature film.  Indeed, with the use of digital cameras and a laptop with Final Cut Pro, many films are made for less.  Moreover, about 40 states now offer production incentives, enabling producers to stretch their funding.  And by spreading the risk among a large pool of small investors through crowdfunding, no one gets burned badly if the movie flops.  

The major problem with film investments has always been their extreme risk and the expense involved in complying with the  laws that regulate investments. Filmmakers were free to go after an unlimited number of high rollers they had  relationships with, plus up to 35 middle class investors.  But most aspiring indie filmmakers don’t hang around the craps table in Vegas and don't know many wealthy individuals.  So they often relied on friends and family, or their own resources, including borrowing money against one's house, or at least in one celebrated instance, selling their blood.  Other filmmakers used various subterfuges to reach potential investors and hoped the SEC would not notice. Most of the time the authorities paid them no mind as they had bigger fish to fry. I once spoke to a federal prosecutor on behalf of a client who had been defrauded of several hundred thousand dollars in a fraudulent film investment.  The prosecutor confessed that unless at least a million dollars was at stake, the case was just too small for him to pursue. There are just too many bigger crooks out there.

Crowdfunding may hold another advantage for filmmakers unrelated to raising money. One of the major problems facing independent filmmakers is how to market and distribute their completed movies. Today it is a buyer's market and distributors have thousands of films to choose from when deciding what to acquire.  Of course, self-distribution is always an option, and anyone can put their film up on YouTube or other portals. But without effective promotion the film may just sit there undiscovered. However, if a film is financed by a crowd, one starts with a community backing the project, and each member has an incentive to spread the word about the film. As the major studios have seen, a film that receives bad word--of-mouth on opening weekend falls faster and harder than ever before, while at the same time, an unknown title can quickly catch fire and become an overnight sensation.  Moreover, funds could be used for advertising and distribution provided that use is disclosed to investors.

The potential for crowdfunding looks promising. There are many examples of enterprising filmmakers who have already funded films with crowd sourced donations. In these instances, the donors have no expectation of sharing in any financial return, but have the satisfaction of supporting a project they believe in. They could also be given t-shirts, a DVD of the completed movie, a screen credit or an invitation to the wrap party or premiere screenings. In other words, they receive benefits not considered an equity interest and therefore not subject to state and federal security laws. However, filmmakers need to cautious if they decide to fund a film through crowdfunding. They need to make sure they do not overpromise what investors may receive or they could be liable for fraud. One of the major safeguards in the legislation for investors is that offers to investors need to be made through a Broker-Dealer or a funding portal that is registered with the SEC under rules to be developed. These intermediaries will be responsible for trying to keep the fraudsters out of the system and offer some comfort to investors that they are not investing with a Nigerian con artist  who last week was soliciting you for help in transferring  millions of dollars as part of some internet scam.

The SEC has 270 days to implement additional regulations, and it is not clear at this time how restrictive or liberal these rules may be. The SEC is inviting the public to send in comments on each of the seven titles of the law including the crowdfunding provision, which is Title III.   This is an opportunity for filmmakers to express their concerns about the rules that will be adopted to enforce provisions of the JOBS act.  Filmmakers can submit comments via either email or on the SEC website.

To submit comments go to:

 SEC comments

To read comments submitted go to:  Read link

NEW LAW WILL HELP INDIE FILMMAKERS RAISE FINANCING

President Obama signed last week the JOBS (Jumpstart Our Business Startups) Act, a collection of laws that dramatically relaxes regulations on raising capital for startup companies. The Act has provisions that for the first time will allow internet crowdfunding of small businesses, such as producing indie films. Crowdfunding is a method of raising capital by obtaining small amounts of money from a large number of investors. Although existing companies like kickstarter.com enable filmmakers to raise funding through donations (i.e. gifts), this new law, when it becomes effective, will allow filmmakers to raise up to one million dollars in equity investments by soliciting the general public without complying with the onerous security regulations currently in place.   

  

Up until now, it has been difficult for filmmakers to raise financing either through a public offering or a private offering. A public offering is made to the public at large and requires SEC approval. A company selling stock on the New York Stock Exchange is an example of a public offering. Registration for a public offering is both time-consuming and expensive, costing hundreds of thousands of dollars, and not a realistic alternative for most low-budget filmmakers.

A private offering, on the other hand, is generally restricted to people the promoter already knows, or as the law states, with whom the promoter has a “pre-existing relationship.” Advertising is generally prohibited.  While a private offering is not nearly as expensive as public offering, the fees for the creation of a Private Placement Memorandum (PPM) can easily exceed $25,000, which is not an insignificant expense for a small entrepreneur. 

The new law had bi-partisan support. It passed Congress with a 73-26 Senate vote and a 380-41 House vote. It allows non-accredited investors to participate in funding rounds. Non-accredited investors are essentially everyone who is not rich. In the past there have been significant limitations on the number of non-accredited investors a filmmaker could accept in an offering, typically no more than 35.  

The SEC has 270 days to implement additional regulations, and it is not clear at this time how restrictive or liberal these rules may be. So it will be early 2013 when filmmakers will be able to actually start raising funds. Investors with a net worth under $100,000 are limited to investing the greater of $2,000 or 5% of their annual income or net worth, whichever is greater. Wealthier investors can invest 10 percent of their annual income or net worth, not to exceed a maximum aggregate amount sold of $100,000. Offers must be made through a Broker-Dealer or a "funding portal" that is registered with the SEC, pursuant to rules and regulations to be developed.  Such intermediaries will need to provide detailed disclosures to investors and make sure potential investors confirm that they are willing to risk losing their entire investment.

The company seeking funding  will need to disclose its financial condition including: a) If the target offering amount is $100,000 or less, then the most recent year's income tax returns (if any); as well as financial statements of the issuer certified by the principal executive officer of the issuer as being true and complete in all material aspects; b) If the target offering amount is over $100,000, but not more than $500,000, the issuer must provide financial statements reviewed by an independent public accountant; and, c) If the target offering amount is over $500,000, the issuer must provide audited financial statements. So crowdfunding is not going to be as simple as soliciting investors from your blog or facebook, and the costs may not be any less than what it currently costs to prepare a PPM. However, being able to use the internet to attract many small investors could make it much easier to raise funds. Investors risking $2,000 may be more willing to tolerate on the risks of filmmaking than those being asked to invest larger sums.

Besides the ability to raise funds through crowdfunding, the Act made a major change to Reg D 506 offerings, which are offerings limited to accredited investors (i.e. wealthy people) or sophisticated investors. For the first time the restrictions on public solicitations have been removed which means that the offering company could solicit investors including approaching them over the Internet. The SEC has 90 days to develop rules to implement this change.

Critics of the new law claim that these changes will open the floodgates for scammers to raise funds from unwary investors.  With that in mind, investors may want to read the article I wrote for the Vanderbilt Law Journal about protecting film investors at:    link

The new act is reprinted below: 

-H.R.3606--

H.R.3606

One Hundred Twelfth Congress

of the

United States of America

AT THE SECOND SESSION

Begun and held at the City of Washington on Tuesday,

the third day of January, two thousand and twelve

An Act

To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Jumpstart Our Business Startups Act'.

SEC. 2. TABLE OF CONTENTS.

The table of contents of this Act is as follows:

Sec. 1. Short title.

Sec. 2. Table of contents.

TITLE I--REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES

Sec. 101. Definitions.

Sec. 102. Disclosure obligations.

Sec. 103. Internal controls audit.

Sec. 104. Auditing standards.

Sec. 105. Availability of information about emerging growth companies.

Sec. 106. Other matters.

Sec. 107. Opt-in right for emerging growth companies.

Sec. 108. Review of Regulation S-K.

TITLE II--ACCESS TO CAPITAL FOR JOB CREATORS

Sec. 201. Modification of exemption.

TITLE III--CROWDFUNDING

Sec. 301. Short title.

Sec. 302. Crowdfunding exemption.

Sec. 303. Exclusion of crowdfunding investors from shareholder cap.

Sec. 304. Funding portal regulation.

Sec. 305. Relationship with State law.

TITLE IV--SMALL COMPANY CAPITAL FORMATION

Sec. 401. Authority to exempt certain securities.

Sec. 402. Study on the impact of State Blue Sky laws on Regulation A offerings.

TITLE V--PRIVATE COMPANY FLEXIBILITY AND GROWTH

Sec. 501. Threshold for registration.

Sec. 502. Employees.

Sec. 503. Commission rulemaking.

Sec. 504. Commission study of enforcement authority under Rule 12g5-1.

TITLE VI--CAPITAL EXPANSION

Sec. 601. Shareholder threshold for registration.

Sec. 602. Rulemaking.

TITLE VII--OUTREACH ON CHANGES TO THE LAW

Sec. 701. Outreach by the Commission.

TITLE I--REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES

SEC. 101. DEFINITIONS.

(a) Securities Act of 1933- Section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)) is amended by adding at the end the following:

`(19) The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of--

`(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;

`(B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under this title;

`(C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or

`(D) the date on which such issuer is deemed to be a `large accelerated filer', as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto.'.

(b) Securities Exchange Act of 1934- Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended--

(1) by redesignating paragraph (77), as added by section 941(a) of the Investor Protection and Securities Reform Act of 2010 (Public Law 111-203, 124 Stat. 1890), as paragraph (79); and

(2) by adding at the end the following:

`(80) EMERGING GROWTH COMPANY- The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of--

`(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;

`(B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933;

`(C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or

`(D) the date on which such issuer is deemed to be a `large accelerated filer', as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto.'.

(c) Other Definitions- As used in this title, the following definitions shall apply:

(1) COMMISSION- The term `Commission' means the Securities and Exchange Commission.

(2) INITIAL PUBLIC OFFERING DATE- The term `initial public offering date' means the date of the first sale of common equity securities of an issuer pursuant to an effective registration statement under the Securities Act of 1933.

(d) Effective Date- Notwithstanding section 2(a)(19) of the Securities Act of 1933 and section 3(a)(80) of the Securities Exchange Act of 1934, an issuer shall not be an emerging growth company for purposes of such Acts if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.

SEC. 102. DISCLOSURE OBLIGATIONS.

(a) Executive Compensation-

(1) EXEMPTION- Section 14A(e) of the Securities Exchange Act of 1934 (15 U.S.C. 78n-1(e)) is amended--

(A) by striking `The Commission may' and inserting the following:

`(1) IN GENERAL- The Commission may';

(B) by striking `an issuer' and inserting `any other issuer'; and

(C) by adding at the end the following:

`(2) TREATMENT OF EMERGING GROWTH COMPANIES-

`(A) IN GENERAL- An emerging growth company shall be exempt from the requirements of subsections (a) and (b).

`(B) COMPLIANCE AFTER TERMINATION OF EMERGING GROWTH COMPANY TREATMENT- An issuer that was an emerging growth company but is no longer an emerging growth company shall include the first separate resolution described under subsection (a)(1) not later than the end of--

`(i) in the case of an issuer that was an emerging growth company for less than 2 years after the date of first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933, the 3-year period beginning on such date; and

`(ii) in the case of any other issuer, the 1-year period beginning on the date the issuer is no longer an emerging growth company.'.

(2) PROXIES- Section 14(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(i)) is amended by inserting `, for any issuer other than an emerging growth company,' after `including'.

(3) COMPENSATION DISCLOSURES- Section 953(b)(1) of the Investor Protection and Securities Reform Act of 2010 (Public Law 111-203; 124 Stat. 1904) is amended by inserting `, other than an emerging growth company, as that term is defined in section 3(a) of the Securities Exchange Act of 1934,' after `require each issuer'.

(b) Financial Disclosures and Accounting Pronouncements-

(1) SECURITIES ACT OF 1933- Section 7(a) of the Securities Act of 1933 (15 U.S.C. 77g(a)) is amended--

(A) by striking `(a) The registration' and inserting the following:

`(a) Information Required in Registration Statement-

`(1) IN GENERAL- The registration'; and

(B) by adding at the end the following:

`(2) TREATMENT OF EMERGING GROWTH COMPANIES- An emerging growth company--

`(A) need not present more than 2 years of audited financial statements in order for the registration statement of such emerging growth company with respect to an initial public offering of its common equity securities to be effective, and in any other registration statement to be filed with the Commission, an emerging growth company need not present selected financial data in accordance with section 229.301 of title 17, Code of Federal Regulations, for any period prior to the earliest audited period presented in connection with its initial public offering; and

`(B) may not be required to comply with any new or revised financial accounting standard until such date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(a))) is required to comply with such new or revised accounting standard, if such standard applies to companies that are not issuers.'.

(2) SECURITIES EXCHANGE ACT OF 1934- Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) is amended by adding at the end the following: `In any registration statement, periodic report, or other reports to be filed with the Commission, an emerging growth company need not present selected financial data in accordance with section 229.301 of title 17, Code of Federal Regulations, for any period prior to the earliest audited period presented in connection with its first registration statement that became effective under this Act or the Securities Act of 1933 and, with respect to any such statement or reports, an emerging growth company may not be required to comply with any new or revised financial accounting standard until such date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(a))) is required to comply with such new or revised accounting standard, if such standard applies to companies that are not issuers.'.

(c) Other Disclosures- An emerging growth company may comply with section 229.303(a) of title 17, Code of Federal Regulations, or any successor thereto, by providing information required by such section with respect to the financial statements of the emerging growth company for each period presented pursuant to section 7(a) of the Securities Act of 1933 (15 U.S.C. 77g(a)). An emerging growth company may comply with section 229.402 of title 17, Code of Federal Regulations, or any successor thereto, by disclosing the same information as any issuer with a market value of outstanding voting and nonvoting common equity held by non-affiliates of less than $75,000,000.

SEC. 103. INTERNAL CONTROLS AUDIT.

Section 404(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262(b)) is amended by inserting `, other than an issuer that is an emerging growth company (as defined in section 3 of the Securities Exchange Act of 1934),' before `shall attest to'.

SEC. 104. AUDITING STANDARDS.

Section 103(a)(3) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7213(a)(3)) is amended by adding at the end the following:

`(C) TRANSITION PERIOD FOR EMERGING GROWTH COMPANIES- Any rules of the Board requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer (auditor discussion and analysis) shall not apply to an audit of an emerging growth company, as defined in section 3 of the Securities Exchange Act of 1934. Any additional rules adopted by the Board after the date of enactment of this subparagraph shall not apply to an audit of any emerging growth company, unless the Commission determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.'.

SEC. 105. AVAILABILITY OF INFORMATION ABOUT EMERGING GROWTH COMPANIES.

(a) Provision of Research- Section 2(a)(3) of the Securities Act of 1933 (15 U.S.C. 77b(a)(3)) is amended by adding at the end the following: `The publication or distribution by a broker or dealer of a research report about an emerging growth company that is the subject of a proposed public offering of the common equity securities of such emerging growth company pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective shall be deemed for purposes of paragraph (10) of this subsection and section 5(c) not to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering of the securities of the issuer. As used in this paragraph, the term `research report' means a written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.'.

(b) Securities Analyst Communications- Section 15D of the Securities Exchange Act of 1934 (15 U.S.C. 78o-6) is amended--

(1) by redesignating subsection (c) as subsection (d); and

(2) by inserting after subsection (b) the following:

`(c) Limitation- Notwithstanding subsection (a) or any other provision of law, neither the Commission nor any national securities association registered under section 15A may adopt or maintain any rule or regulation in connection with an initial public offering of the common equity of an emerging growth company--

`(1) restricting, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securities analyst and a potential investor; or

`(2) restricting a securities analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as a securities analyst.'.

(c) Expanding Permissible Communications- Section 5 of the Securities Act of 1933 (15 U.S.C. 77e) is amended--

(1) by redesignating subsection (d) as subsection (e); and

(2) by inserting after subsection (c) the following:

`(d) Limitation- Notwithstanding any other provision of this section, an emerging growth company or any person authorized to act on behalf of an emerging growth company may engage in oral or written communications with potential investors that are qualified institutional buyers or institutions that are accredited investors, as such terms are respectively defined in section 230.144A and section 230.501(a) of title 17, Code of Federal Regulations, or any successor thereto, to determine whether such investors might have an interest in a contemplated securities offering, either prior to or following the date of filing of a registration statement with respect to such securities with the Commission, subject to the requirement of subsection (b)(2).'.

(d) Post Offering Communications- Neither the Commission nor any national securities association registered under section 15A of the Securities Exchange Act of 1934 may adopt or maintain any rule or regulation prohibiting any broker, dealer, or member of a national securities association from publishing or distributing any research report or making a public appearance, with respect to the securities of an emerging growth company, either--

(1) within any prescribed period of time following the initial public offering date of the emerging growth company; or

(2) within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the initial public offering date.

SEC. 106. OTHER MATTERS.

(a) Draft Registration Statements- Section 6 of the Securities Act of 1933 (15 U.S.C. 77f) is amended by adding at the end the following:

`(e) Emerging Growth Companies-

`(1) IN GENERAL- Any emerging growth company, prior to its initial public offering date, may confidentially submit to the Commission a draft registration statement, for confidential nonpublic review by the staff of the Commission prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the Commission not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in section 230.433(h)(4) of title 17, Code of Federal Regulations, or any successor thereto.

`(2) CONFIDENTIALITY- Notwithstanding any other provision of this title, the Commission shall not be compelled to disclose any information provided to or obtained by the Commission pursuant to this subsection. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552. Information described in or obtained pursuant to this subsection shall be deemed to constitute confidential information for purposes of section 24(b)(2) of the Securities Exchange Act of 1934.'.

(b) Tick Size- Section 11A(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78k-1(c)) is amended by adding at the end the following new paragraph:

`(6) TICK SIZE-

`(A) STUDY AND REPORT- The Commission shall conduct a study examining the transition to trading and quoting securities in one penny increments, also known as decimalization. The study shall examine the impact that decimalization has had on the number of initial public offerings since its implementation relative to the period before its implementation. The study shall also examine the impact that this change has had on liquidity for small and middle capitalization company securities and whether there is sufficient economic incentive to support trading operations in these securities in penny increments. Not later than 90 days after the date of enactment of this paragraph, the Commission shall submit to Congress a report on the findings of the study.

`(B) DESIGNATION- If the Commission determines that the securities of emerging growth companies should be quoted and traded using a minimum increment of greater than $0.01, the Commission may, by rule not later than 180 days after the date of enactment of this paragraph, designate a minimum increment for the securities of emerging growth companies that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securities in any exchange or other execution venue.'.

SEC. 107. OPT-IN RIGHT FOR EMERGING GROWTH COMPANIES.

(a) In General- With respect to an exemption provided to emerging growth companies under this title, or an amendment made by this title, an emerging growth company may choose to forgo such exemption and instead comply with the requirements that apply to an issuer that is not an emerging growth company.

(b) Special Rule- Notwithstanding subsection (a), with respect to the extension of time to comply with new or revised financial accounting standards provided under section 7(a)(2)(B) of the Securities Act of 1933 and section 13(a) of the Securities Exchange Act of 1934, as added by section 102(b), if an emerging growth company chooses to comply with such standards to the same extent that a non-emerging growth company is required to comply with such standards, the emerging growth company--

(1) must make such choice at the time the company is first required to file a registration statement, periodic report, or other report with the Commission under section 13 of the Securities Exchange Act of 1934 and notify the Securities and Exchange Commission of such choice;

(2) may not select some standards to comply with in such manner and not others, but must comply with all such standards to the same extent that a non-emerging growth company is required to comply with such standards; and

(3) must continue to comply with such standards to the same extent that a non-emerging growth company is required to comply with such standards for as long as the company remains an emerging growth company.

SEC. 108. REVIEW OF REGULATION S-K.

(a) Review- The Securities and Exchange Commission shall conduct a review of its Regulation S-K (17 CFR 229.10 et seq.) to--

(1) comprehensively analyze the current registration requirements of such regulation; and

(2) determine how such requirements can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies.

(b) Report- Not later than 180 days after the date of enactment of this title, the Commission shall transmit to Congress a report of the review conducted under subsection (a). The report shall include the specific recommendations of the Commission on how to streamline the registration process in order to make it more efficient and less burdensome for the Commission and for prospective issuers who are emerging growth companies.

TITLE II--ACCESS TO CAPITAL FOR JOB CREATORS

SEC. 201. MODIFICATION OF EXEMPTION.

(a) Modification of Rules-

(1) Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules issued in section 230.506 of title 17, Code of Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors. Such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. Section 230.506 of title 17, Code of Federal Regulations, as revised pursuant to this section, shall continue to be treated as a regulation issued under section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)).

(2) Not later than 90 days after the date of enactment of this Act, the Securities and Exchange Commission shall revise subsection (d)(1) of section 230.144A of title 17, Code of Federal Regulations, to provide that securities sold under such revised exemption may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer.

(b) Consistency in Interpretation- Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended--

(1) by striking `The provisions of section 5' and inserting `(a) The provisions of section 5'; and

(2) by adding at the end the following:

`(b) Offers and sales exempt under section 230.506 of title 17, Code of Federal Regulations (as revised pursuant to section 201 of the Jumpstart Our Business Startups Act) shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.'.

(c) Explanation of Exemption- Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended--

(1) by striking `The provisions of section 5' and inserting `(a) The provisions of section 5'; and

(2) by adding at the end the following:

`(b)(1) With respect to securities offered and sold in compliance with Rule 506 of Regulation D under this Act, no person who meets the conditions set forth in paragraph (2) shall be subject to registration as a broker or dealer pursuant to section 15(a)(1) of this title, solely because--

`(A) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means;

`(B) that person or any person associated with that person co-invests in such securities; or

`(C) that person or any person associated with that person provides ancillary services with respect to such securities.

`(2) The exemption provided in paragraph (1) shall apply to any person described in such paragraph if--

`(A) such person and each person associated with that person receives no compensation in connection with the purchase or sale of such security;

`(B) such person and each person associated with that person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and

`(C) such person is not subject to a statutory disqualification as defined in section 3(a)(39) of this title and does not have any person associated with that person subject to such a statutory disqualification.

`(3) For the purposes of this subsection, the term `ancillary services' means--

`(A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and

`(B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.'.

TITLE III--CROWDFUNDING

SEC. 301. SHORT TITLE.

This title may be cited as the `Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012' or the `CROWDFUND Act'.

SEC. 302. CROWDFUNDING EXEMPTION.

(a) Securities Act of 1933- Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended by adding at the end the following:

`(6) transactions involving the offer or sale of securities by an issuer (including all entities controlled by or under common control with the issuer), provided that--

`(A) the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, is not more than $1,000,000;

`(B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, does not exceed--

`(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and

`(ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;

`(C) the transaction is conducted through a broker or funding portal that complies with the requirements of section 4A(a); and

`(D) the issuer complies with the requirements of section 4A(b).'.

(b) Requirements To Qualify for Crowdfunding Exemption- The Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by inserting after section 4 the following:

`SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.

`(a) Requirements on Intermediaries- A person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others pursuant to section 4(6) shall--

`(1) register with the Commission as--

`(A) a broker; or

`(B) a funding portal (as defined in section 3(a)(80) of the Securities Exchange Act of 1934);

`(2) register with any applicable self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934);

`(3) provide such disclosures, including disclosures related to risks and other investor education materials, as the Commission shall, by rule, determine appropriate;

`(4) ensure that each investor--

`(A) reviews investor-education information, in accordance with standards established by the Commission, by rule;

`(B) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and

`(C) answers questions demonstrating--

`(i) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

`(ii) an understanding of the risk of illiquidity; and

`(iii) an understanding of such other matters as the Commission determines appropriate, by rule;

`(5) take such measures to reduce the risk of fraud with respect to such transactions, as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;

`(6) not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the Commission may establish), make available to the Commission and to potential investors any information provided by the issuer pursuant to subsection (b);

`(7) ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the Commission shall, by rule, determine appropriate;

`(8) make such efforts as the Commission determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to section 4(6) that, in the aggregate, from all issuers, exceed the investment limits set forth in section 4(6)(B);

`(9) take such steps to protect the privacy of information collected from investors as the Commission shall, by rule, determine appropriate;

`(10) not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor;

`(11) prohibit its directors, officers, or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services; and

`(12) meet such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.

`(b) Requirements for Issuers- For purposes of section 4(6), an issuer who offers or sells securities shall--

`(1) file with the Commission and provide to investors and the relevant broker or funding portal, and make available to potential investors--

`(A) the name, legal status, physical address, and website address of the issuer;

`(B) the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;

`(C) a description of the business of the issuer and the anticipated business plan of the issuer;

`(D) a description of the financial condition of the issuer, including, for offerings that, together with all other offerings of the issuer under section 4(6) within the preceding 12-month period, have, in the aggregate, target offering amounts of--

`(i) $100,000 or less--

`(I) the income tax returns filed by the issuer for the most recently completed year (if any); and

`(II) financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;

`(ii) more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by the Commission, by rule, for such purpose; and

`(iii) more than $500,000 (or such other amount as the Commission may establish, by rule), audited financial statements;

`(E) a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount;

`(F) the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;

`(G) the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities;

`(H) a description of the ownership and capital structure of the issuer, including--

`(i) terms of the securities of the issuer being offered and each other class of security of the issuer, including how such terms may be modified, and a summary of the differences between such securities, including how the rights of the securities being offered may be materially limited, diluted, or qualified by the rights of any other class of security of the issuer;

`(ii) a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered;

`(iii) the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer;

`(iv) how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; and

`(v) the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties; and

`(I) such other information as the Commission may, by rule, prescribe, for the protection of investors and in the public interest;

`(2) not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker;

`(3) not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication;

`(4) not less than annually, file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer, as the Commission shall, by rule, determine appropriate, subject to such exceptions and termination dates as the Commission may establish, by rule; and

`(5) comply with such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.

`(c) Liability for Material Misstatements and Omissions-

`(1) ACTIONS AUTHORIZED-

`(A) IN GENERAL- Subject to paragraph (2), a person who purchases a security in a transaction exempted by the provisions of section 4(6) may bring an action against an issuer described in paragraph (2), either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if such person no longer owns the security.

`(B) LIABILITY- An action brought under this paragraph shall be subject to the provisions of section 12(b) and section 13, as if the liability were created under section 12(a)(2).

`(2) APPLICABILITY- An issuer shall be liable in an action under paragraph (1), if the issuer--

`(A) by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by any means of any written or oral communication, in the offering or sale of a security in a transaction exempted by the provisions of section 4(6), makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission; and

`(B) does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.

`(3) DEFINITION- As used in this subsection, the term `issuer' includes any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 4(6), and any person who offers or sells the security in such offering.

`(d) Information Available to States- The Commission shall make, or shall cause to be made by the relevant broker or funding portal, the information described in subsection (b) and such other information as the Commission, by rule, determines appropriate, available to the securities commission (or any agency or office performing like functions) of each State and territory of the United States and the District of Columbia.

`(e) Restrictions on Sales- Securities issued pursuant to a transaction described in section 4(6)--

`(1) may not be transferred by the purchaser of such securities during the 1-year period beginning on the date of purchase, unless such securities are transferred--

`(A) to the issuer of the securities;

`(B) to an accredited investor;

`(C) as part of an offering registered with the Commission; or

`(D) to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance, in the discretion of the Commission; and

`(2) shall be subject to such other limitations as the Commission shall, by rule, establish.

`(f) Applicability- Section 4(6) shall not apply to transactions involving the offer or sale of securities by any issuer that--

`(1) is not organized under and subject to the laws of a State or territory of the United States or the District of Columbia;

`(2) is subject to the requirement to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934;

`(3) is an investment company, as defined in section 3 of the Investment Company Act of 1940, or is excluded from the definition of investment company by section 3(b) or section 3(c) of that Act; or

`(4) the Commission, by rule or regulation, determines appropriate.

`(g) Rule of Construction- Nothing in this section or section 4(6) shall be construed as preventing an issuer from raising capital through methods not described under section 4(6).

`(h) Certain Calculations-

`(1) DOLLAR AMOUNTS- Dollar amounts in section 4(6) and subsection (b) of this section shall be adjusted by the Commission not less frequently than once every 5 years, by notice published in the Federal Register to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.

`(2) INCOME AND NET WORTH- The income and net worth of a natural person under section 4(6)(B) shall be calculated in accordance with any rules of the Commission under this title regarding the calculation of the income and net worth, respectively, of an accredited investor.'.

(c) Rulemaking- Not later than 270 days after the date of enactment of this Act, the Securities and Exchange Commission (in this title referred to as the `Commission') shall issue such rules as the Commission determines may be necessary or appropriate for the protection of investors to carry out sections 4(6) and section 4A of the Securities Act of 1933, as added by this title. In carrying out this section, the Commission shall consult with any securities commission (or any agency or office performing like functions) of the States, any territory of the United States, and the District of Columbia, which seeks to consult with the Commission, and with any applicable national securities association.

(d) Disqualification-

(1) IN GENERAL- Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, establish disqualification provisions under which--

(A) an issuer shall not be eligible to offer securities pursuant to section 4(6) of the Securities Act of 1933, as added by this title; and

(B) a broker or funding portal shall not be eligible to effect or participate in transactions pursuant to that section 4(6).

(2) INCLUSIONS- Disqualification provisions required by this subsection shall--

(A) be substantially similar to the provisions of section 230.262 of title 17, Code of Federal Regulations (or any successor thereto); and

(B) disqualify any offering or sale of securities by a person that--

(i) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that--

(I) bars the person from--

(aa) association with an entity regulated by such commission, authority, agency, or officer;

(bb) engaging in the business of securities, insurance, or banking; or

(cc) engaging in savings association or credit union activities; or

(II) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale; or

(ii) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.

SEC. 303. EXCLUSION OF CROWDFUNDING INVESTORS FROM SHAREHOLDER CAP.

(a) Exemption- Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is amended by adding at the end the following:

`(6) EXCLUSION FOR PERSONS HOLDING CERTAIN SECURITIES- The Commission shall, by rule, exempt, conditionally or unconditionally, securities acquired pursuant to an offering made under section 4(6) of the Securities Act of 1933 from the provisions of this subsection.'.

(b) Rulemaking- The Commission shall issue a rule to carry out section 12(g)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), as added by this section, not later than 270 days after the date of enactment of this Act.

SEC. 304. FUNDING PORTAL REGULATION.

(a) Exemption-

(1) IN GENERAL- Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c) is amended by adding at the end the following:

`(h) Limited Exemption for Funding Portals-

`(1) IN GENERAL- The Commission shall, by rule, exempt, conditionally or unconditionally, a registered funding portal from the requirement to register as a broker or dealer under section 15(a)(1), provided that such funding portal--

`(A) remains subject to the examination, enforcement, and other rulemaking authority of the Commission;

`(B) is a member of a national securities association registered under section 15A; and

`(C) is subject to such other requirements under this title as the Commission determines appropriate under such rule.

`(2) NATIONAL SECURITIES ASSOCIATION MEMBERSHIP- For purposes of sections 15(b)(8) and 15A, the term `broker or dealer' includes a funding portal and the term `registered broker or dealer' includes a registered funding portal, except to the extent that the Commission, by rule, determines otherwise, provided that a national securities association shall only examine for and enforce against a registered funding portal rules of such national securities association written specifically for registered funding portals.'.

(2) RULEMAKING- The Commission shall issue a rule to carry out section 3(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), as added by this subsection, not later than 270 days after the date of enactment of this Act.

(b) Definition- Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following:

`(80) FUNDING PORTAL- The term `funding portal' means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C. 77d(6)), that does not--

`(A) offer investment advice or recommendations;

`(B) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;

`(C) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

`(D) hold, manage, possess, or otherwise handle investor funds or securities; or

`(E) engage in such other activities as the Commission, by rule, determines appropriate.'.

SEC. 305. RELATIONSHIP WITH STATE LAW.

(a) In General- Section 18(b)(4) of the Securities Act of 1933 (15 U.S.C. 77r(b)(4)) is amended--

(1) by redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively; and

(2) by inserting after subparagraph (B) the following:

`(C) section 4(6);'.

(b) Clarification of the Preservation of State Enforcement Authority-

(1) IN GENERAL- The amendments made by subsection (a) relate solely to State registration, documentation, and offering requirements, as described under section 18(a) of Securities Act of 1933 (15 U.S.C. 77r(a)), and shall have no impact or limitation on other State authority to take enforcement action with regard to an issuer, funding portal, or any other person or entity using the exemption from registration provided by section 4(6) of that Act.

(2) CLARIFICATION OF STATE JURISDICTION OVER UNLAWFUL CONDUCT OF FUNDING PORTALS AND ISSUERS- Section 18(c)(1) of the Securities Act of 1933 (15 U.S.C. 77r(c)(1)) is amended by striking `with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions.' and inserting the following: `, in connection with securities or securities transactions

`(A) with respect to--

`(i) fraud or deceit; or

`(ii) unlawful conduct by a broker or dealer; and

`(B) in connection to a transaction described under section 4(6), with respect to--

`(i) fraud or deceit; or

`(ii) unlawful conduct by a broker, dealer, funding portal, or issuer.'.

(c) Notice Filings Permitted- Section 18(c)(2) of the Securities Act of 1933 (15 U.S.C. 77r(c)(2)) is amended by adding at the end the following:

`(F) FEES NOT PERMITTED ON CROWDFUNDED SECURITIES- Notwithstanding subparagraphs (A), (B), and (C), no filing or fee may be required with respect to any security that is a covered security pursuant to subsection (b)(4)(B), or will be such a covered security upon completion of the transaction, except for the securities commission (or any agency or office performing like functions) of the State of the principal place of business of the issuer, or any State in which purchasers of 50 percent or greater of the aggregate amount of the issue are residents, provided that for purposes of this subparagraph, the term `State' includes the District of Columbia and the territories of the United States.'.

(d) Funding Portals-

(1) STATE EXEMPTIONS AND OVERSIGHT- Section 15(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(i)) is amended--

(A) by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively; and

(B) by inserting after paragraph (1) the following:

`(2) FUNDING PORTALS-

`(A) LIMITATION ON STATE LAWS- Except as provided in subparagraph (B), no State or political subdivision thereof may enforce any law, rule, regulation, or other administrative action against a registered funding portal with respect to its business as such.

`(B) EXAMINATION AND ENFORCEMENT AUTHORITY- Subparagraph (A) does not apply with respect to the examination and enforcement of any law, rule, regulation, or administrative action of a State or political subdivision thereof in which the principal place of business of a registered funding portal is located, provided that such law, rule, regulation, or administrative action is not in addition to or different from the requirements for registered funding portals established by the Commission.

`(C) DEFINITION- For purposes of this paragraph, the term `State' includes the District of Columbia and the territories of the United States.'.

(2) STATE FRAUD AUTHORITY- Section 18(c)(1) of the Securities Act of 1933 (15 U.S.C. 77r(c)(1)) is amended by striking `or dealer' and inserting `, dealer, or funding portal'.

TITLE IV--SMALL COMPANY CAPITAL FORMATION

SEC. 401. AUTHORITY TO EXEMPT CERTAIN SECURITIES.

(a) In General- Section 3(b) of the Securities Act of 1933 (15 U.S.C. 77c(b)) is amended--

(1) by striking `(b) The Commission' and inserting the following:

`(b) Additional Exemptions-

`(1) SMALL ISSUES EXEMPTIVE AUTHORITY- The Commission'; and

(2) by adding at the end the following:

`(2) ADDITIONAL ISSUES- The Commission shall by rule or regulation add a class of securities to the securities exempted pursuant to this section in accordance with the following terms and conditions:

`(A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption added in accordance with this paragraph shall not exceed $50,000,000.

`(B) The securities may be offered and sold publicly.

`(C) The securities shall not be restricted securities within the meaning of the Federal securities laws and the regulations promulgated thereunder.

`(D) The civil liability provision in section 12(a)(2) shall apply to any person offering or selling such securities.

`(E) The issuer may solicit interest in the offering prior to filing any offering statement, on such terms and conditions as the Commission may prescribe in the public interest or for the protection of investors.

`(F) The Commission shall require the issuer to file audited financial statements with the Commission annually.

`(G) Such other terms, conditions, or requirements as the Commission may determine necessary in the public interest and for the protection of investors, which may include--

`(i) a requirement that the issuer prepare and electronically file with the Commission and distribute to prospective investors an offering statement, and any related documents, in such form and with such content as prescribed by the Commission, including audited financial statements, a description of the issuer's business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters; and

`(ii) disqualification provisions under which the exemption shall not be available to the issuer or its predecessors, affiliates, officers, directors, underwriters, or other related persons, which shall be substantially similar to the disqualification provisions contained in the regulations adopted in accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 77d note).

`(3) LIMITATION- Only the following types of securities may be exempted under a rule or regulation adopted pursuant to paragraph (2): equity securities, debt securities, and debt securities convertible or exchangeable to equity interests, including any guarantees of such securities.

`(4) PERIODIC DISCLOSURES- Upon such terms and conditions as the Commission determines necessary in the public interest and for the protection of investors, the Commission by rule or regulation may require an issuer of a class of securities exempted under paragraph (2) to make available to investors and file with the Commission periodic disclosures regarding the issuer, its business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters, and also may provide for the suspension and termination of such a requirement with respect to that issuer.

`(5) ADJUSTMENT- Not later than 2 years after the date of enactment of the Small Company Capital Formation Act of 2011 and every 2 years thereafter, the Commission shall review the offering amount limitation described in paragraph (2)(A) and shall increase such amount as the Commission determines appropriate. If the Commission determines not to increase such amount, it shall report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on its reasons for not increasing the amount.'.

(b) Treatment as Covered Securities for Purposes of NSMIA- Section 18(b)(4) of the Securities Act of 1933 (as amended by section 303) (15 U.S.C. 77r(b)(4)) is further amended by inserting after subparagraph (C) (as added by such section) the following:

`(D) a rule or regulation adopted pursuant to section 3(b)(2) and such security is--

`(i) offered or sold on a national securities exchange; or

`(ii) offered or sold to a qualified purchaser, as defined by the Commission pursuant to paragraph (3) with respect to that purchase or sale;'.

(c) Conforming Amendment- Section 4(5) of the Securities Act of 1933 is amended by striking `section 3(b)' and inserting `section 3(b)(1)'.

SEC. 402. STUDY ON THE IMPACT OF STATE BLUE SKY LAWS ON REGULATION A OFFERINGS.

The Comptroller General shall conduct a study on the impact of State laws regulating securities offerings, or `Blue Sky laws', on offerings made under Regulation A (17 CFR 230.251 et seq.). The Comptroller General shall transmit a report on the findings of the study to the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate not later than 3 months after the date of enactment of this Act.

TITLE V--PRIVATE COMPANY FLEXIBILITY AND GROWTH

SEC. 501. THRESHOLD FOR REGISTRATION.

Section 12(g)(1)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(1)(A)) is amended to read as follows:

`(A) within 120 days after the last day of its first fiscal year ended on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by either--

`(i) 2,000 persons, or

`(ii) 500 persons who are not accredited investors (as such term is defined by the Commission), and'.

SEC. 502. EMPLOYEES.

Section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(5)), as amended by section 302, is amended in subparagraph (A) by adding at the end the following: `For purposes of determining whether an issuer is required to register a security with the Commission pursuant to paragraph (1), the definition of `held of record' shall not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act of 1933.'.

SEC. 503. COMMISSION RULEMAKING.

The Securities and Exchange Commission shall revise the definition of `held of record' pursuant to section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(5)) to implement the amendment made by section 502. The Commission shall also adopt safe harbor provisions that issuers can follow when determining whether holders of their securities received the securities pursuant to an employee compensation plan in transactions that were exempt from the registration requirements of section 5 of the Securities Act of 1933.

SEC. 504. COMMISSION STUDY OF ENFORCEMENT AUTHORITY UNDER RULE 12G5-1.

The Securities and Exchange Commission shall examine its authority to enforce Rule 12g5-1 to determine if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the rule, and shall, not later than 120 days after the date of enactment of this Act transmit its recommendations to Congress.

TITLE VI--CAPITAL EXPANSION

SEC. 601. SHAREHOLDER THRESHOLD FOR REGISTRATION.

(a) Amendments to Section 12 of the Securities Exchange Act of 1934- Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is further amended--

(1) in paragraph (1), by amending subparagraph (B) to read as follows:

`(B) in the case of an issuer that is a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), not later than 120 days after the last day of its first fiscal year ended after the effective date of this subsection, on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by 2,000 or more persons,'; and

(2) in paragraph (4), by striking `three hundred' and inserting `300 persons, or, in the case of a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons'.

(b) Amendments to Section 15 of the Securities Exchange Act of 1934- Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) is amended, in the third sentence, by striking `three hundred' and inserting `300 persons, or, in the case of bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons'.

SEC. 602. RULEMAKING.

Not later than 1 year after the date of enactment of this Act, the Securities and Exchange Commission shall issue final regulations to implement this title and the amendments made by this title.

TITLE VII--OUTREACH ON CHANGES TO THE LAW

SEC. 701. OUTREACH BY THE COMMISSION.

The Securities and Exchange Commission shall provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by this Act.

Speaker of the House of Representatives.

Vice President of the United States and

President of the Senate.