If you’re considering how to get a film funded through a private offering, understanding Regulation D and the notice filing exemptions is crucial. If you are new to the topic, Regulation D and its rules, particularly Rules 504, 506(b), and 506(c), provide a pathway for you to raise capital from passive investors for your independent film without the need to undergo costly and burdensome registration with the Securities and Exchange Commission (SEC). In this guide, we’ll dive into the key aspects of Rules 504, 506(b), and 506(c) so that you are in a better position to make informed decisions about funding your film.
Rule 504 exempts from formal registration the offer and sale of up to $10,000,000 of securities in a twelve (12)-month period to both accredited and non- accredited investors. This means that issuers can offer securities to a wider range of investors irrespective of their income or net worth. However, issuers need to be wary of certain limitations within Rule 504, such as the mandatory compliance with state securities laws and regulations in all the states in which the securities are offered or sold, otherwise known as each state’s “blue sky laws” (there will be more on this in a subsequent post). Rule 504 further requires that the issuer receiving investment funds have a specific business plan and purpose that is clearly communicated to all potential investors before offering the security (i.e., producing an independent film).
This is the most frequently utilized exemption because it allows issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to thirty-five (35) sophisticated, non-accredited investors in any ninety (90) calendar-day period. Under Rule 506(b), issuers are obligated to provide certain disclosures and investment information, particularly to any non-accredited investors involved. Such disclosures include, but are not limited to, information relating to the issuing business entity’s ownership structure, the type of securities being offered by the issuer, all relevant financial statements, the underlying risks of investing, and a description of how the investment funds are to be used. Issuers may provide such requisite information to investors through a separate document known as the “private placement memorandum” (there will also be more on this in a later post). Under Rule 506(b), there is a complete prohibition on public advertising and solicitation of the offering.
However, provided that all of these requirements are followed, Rule 506(b) will, to an extent, preempt any relevant state-enacted blue sky registration laws and provide the issuer “safe harbor”, meaning compliance with any additional, and likely more stringent, state security registration law is not required.
Under Rule 506(c), an issuer may acquire investment funds only from accredited investors. With that being said, the investment amount an issuer can raise under Rule 506(c) is unlimited. Unlike Rule 506(b), an issuer filing under Rule 506(c) is required to certify that the investors are truly accredited. This means that the issuer will have to take reasonable steps in verifying and confirming accredited investor status, for instance by hiring an attorney or an accountant to examine a given investor’s tax returns and other financials so they can formally document that the investor qualifies as accredited. While an issuer may only acquire investment funds from accredited investors under Rule 506(c), they may publicly solicit and advertise the offering. Additionally, there are no specific disclosure requirements. Rule 506(c) also effectively preempts blue sky security registration laws, providing safe harbor for the issuer.
Rules 504, 506(b), and 506(c) offer distinct avenues for raising capital, each with its own respective benefits and considerations. By understanding each of these rules, you can navigate fundraising swiftly and affordably while securing the capital you need to bring your project to life. If these topics and issues seem a bit complex, don’t forget that you can always use an entertainment attorney to help save time, energy, and lots of stress. Keep an eye out for our subsequent posts so you can learn more about film financing and other production issues.
Contact entertainment attorney, Ameri Law for legal guidance for the entertainment industry, and for help with Regulation D and getting films funded through private offerings.
