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Regulation-D and Film Financing

by Jeff Steele

Regardless of whether your considering an individual, a group of dentists, your at home anesthesiologist, or alternative financing models such as crowd funding, tribe funding, “donations”, and pre-selling DVDs, etc., (i.e. any non-accredited investor) then you MUST consider Regulation-D of the Securities Act.

The following is taken from the Securities and Exchange Commission’s website:

Regulation D of the Securities Act

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read our publications on Rules 504, 505, and 506 of Regulation D.

While companies using a Reg D. exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

In February 2008, the SEC adopted amendments to Form D, requiring that electronic filing of Form D be phased in during the period September 15, 2008 to March 16, 2009. Although as amended, the electronic Form D requires much of the same information as the paper Form D, the amended Form D requires disclosure of the date of first sale in the offering. Previously, disclosure of the first date of sale was not required. The Office of Small Business Policy has posted information on its web page about the filing requirements for the new Form D.

If you are thinking about investing in a Reg D company, you should access the EDGAR database to determine whether the company has filed Form D. If you need a copy of a Form D filed as a paper filing (which will include any Form D filed before September 15, 2008) that has not been scanned into IDEA, you can request a copy using our online form. If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws

You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at +1 (202) 737-0900 or by visiting its website. You’ll also find this information in the state government section of your local phone book.

For more information about the SEC’s registration requirements and common exemptions, Q&A: Small Business & the SEC.

Please keep in mind that these are U.S. laws if you are dealing with foreign investors including Canada then you factor in their security laws as well. Which may be even more strict or incompatible with U.S. law.

There IS a way to do this legally. There always is. Knowledge of the laws will help achieve the end goal of alternative financing. The exciting part is that the model is a blank page waiting to be written.

10 Responses leave one →
  1. Cotty permalink
    April 8, 2010

    Jeff, you post an excerpt from an SEC document that requires actual reading and thinking in order to understand its applicability to any present case with no guide or interpretive text. And you wonder why there are no comments?

    Geddoudaheah.

    OK, seriously, thank you for this and for yesterday’s multi-commented and provocative piece.

    There’s a lot of pretending securities law isn’t applicable to raising money if it’s for an independent film. I’m still amazed those two women in New York who got such press last summer for throwing a party half-way through their raise didn’t get busted.

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    • Richard permalink
      April 8, 2010

      @Cotty do you have a link to that article, I hate to admit it but I like reading about dumb people.

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  2. Martin permalink
    April 8, 2010

    @Cotty,

    I couldn’t agree more. However, I think it is really telling how easy the SEC lends itself to anyone in the filmmaking world to be able to claim ignorance. It is so difficult to understand. Perhaps, this is also why it is so important as a filmmaker or producer who wants to focus on movie making to leave this important stuff to the experts and shell out the extra cash to prevent a major problem.

    How many of us have time or even want to read and understand regulation d? Even though we know it is good for us.

    It’s like exercising. We are told that’s what we need to do, but most of us ignore and do what we want and sit in front of the TV eating dorritos regardless.

    I think even if Jeff did break it down for us with interpretive text most of us would still cover our ears and go “lalalalalalala”.

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  3. April 11, 2010

    Jeff, you imply that people who are “crowd funding, tribe funding, “donations”, and pre-selling DVDs, etc.” need to think about Regulation D but wouldn’t that only be if they were offering a security of some sort? Pre-selling a DVD isn’t a security, is it? If it were wouldn’t Apple have just done a massive securities offering by making available iPads for pre-sale (for example)? Also, most crowd funding and the like is done without offering any financial interest in the film and there’s no negotiable instrument. A contribution is a contribution. When PBS offers you a tote bag if you give them $100 that certainly isn’t a security, is it?

    I’m curious as to how straight donations through sites like Kickstarter or Indiegogo would subject a company to Regulation D registration requirements.

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  4. April 12, 2010

    Jeff’s post raises an incredibly important point and I’m glad Noah asked the questions he did. While actual, straight donations would not be securities (and therefore wouldn’t require compliance with Reg D or other securities laws), it is often difficult (whether due to ignorance or otherwise) for filmmakers to understand when they are or are not selling securities and what are actual “donations” (as Jeff used the term in quotes above) or not.

    For instance, how many times on Craigslist, Linkedin or otherwise do you see producers looking for an investment in their film? And did you realize that the California Corportions law now SPECIFICALLY lists an interest in an LLC as one of the items in a litany of financial instruments presumed to be a security?

    While Reg D is (even for us lawyers) rather confusing, the idea of this posting is extremely important. All it takes is one disguntled investor in a project that you have coordinated the financing for and not throroughly investigated whether or not you needed to complywith securities laws (both state and federal). And while figuring out what constitutes a security generally is fairly straight-forward (typically a investment will constitute a “security” if the investor is investing passively and relying exclusively (or nearly so) on the management/work of others to generate a return on that investement), it is much more difficult to apply to a particular sitution and each structure needs to be examined on a case-by-case basis.

    I don’t think the question should be whether you have the time to read Reg D (or otherwise gain an understanding of the securities laws and their applicability to your project) but whether you (as a producer) can afford NOT to. And there is really no need to actually fully read the text of Reg D. But you should hire an attorney who is competent in this area or at least otherwise educate yourself.

    A great place to start is the book “43 Ways to Finance Your Feature Film” by John Cones…a reference that even other entertainment lawyers keep on their desk.

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  5. April 20, 2010

    Jeff you realize Its coming to the end the for the avg. Film malker to iuse REG D for film funding. Dodd inserted in the health care bill back on page 1208 to kill the REG D expection because he does not like the hedge funds that raided folks in his district. I was there wittness this statement before the SEC. The cilmate has changed you should see the effects later this year. mj

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