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June 8 ,
2004 Volume II, Issue 6
Legal
Limits in Raising Funds
Raising funds for
independent films is a tricky business. Ignoring, for
the purposes of this article, the difficulties in finding
any investors for an indie project, there are other
problems with raising money that involve state and federal
regulations. It is imperative that a filmmaker understand
and follow these regulations because not following them
can have dire consequences, including fines and even,
potentially, incarceration. What follows is a brief
primer on some of these rules and regulations. Although
the editors of this publication believe this information
to be accurate, all filmmakers must work with an attorney
experienced in raising money for films to ensure compliance
with all state and federal security laws.
First off, before
raising any money, most filmmakers need to form some
sort of legal entity that shields them and investors
from liability were something to go wrong with the film.
The legal entity could be a corporation, a limited partnership
or a limited liability company, for example. An attorney
specializing in forming these entities should be retained
prior to contacting any prospective investors. These
legal entities generally cost $1,500 to $4,000 to form.
Once the legal entity
is formed, the filmmaker can begin contacting investors.
But here's the tricky part: in general, unless the legal
entity is prepared to pay tens and possibly hundreds
of thousands of dollars in legal and filing fees to
become a publicly traded company, representatives of
the legal entity are extremely limited in how many prospective
investors can be contacted and in the number of investors
that can legally invest in the entity.
In most states,
a maximum of 100 investors can be solicited, and a maximum
of 35 investors can invest. If the representatives of
the legal entity go beyond these numbers, they risk
violating SEC and State securities laws and could face
prosecution.
These numbers also
necessitate that the filmmaker ask himself some tough
questions. For example, which investors should he go
after and how small a minimum investment should he be
willing to accept? As to the first question, a filmmaker
has to choose which prospective investors to approach
carefully, because once he's turned down by 100 prospects,
he'd technically be violating the law if he approached
any others. As to the second question, if the filmmaker
is looking to raise, say, $500,000, and he accepts a
minimum investment of $10,000 from each investor, then
if every investor invests the minimum, the filmmaker
will only raise 35 times $10,000, or only $350,000.
Thus it's crucial to set a high enough minimum investment.
Another question
for a filmmaker to consider: what constitutes "soliciting"
a prospective investor? This is a gray area. Certainly,
sending out a detailed business plan to a 1,000 people
would be in violation of the law. But what about asking,
over many months, a few hundred people if they've ever
considered investing in a film without mentioning a
specific film or investment opportunity? Is that violating
the law? Probably not, but again, it's a gray area.
Asking these same people if they would consider investing
in a specific project would almost certainly be in violation
of the law.
The bottom line
is, before a filmmaker raises a dime, he has to know
the state and federal laws that impact his fund-raising
venture. And the best way to get to know these rules
is to work with an experienced attorney to form the
legal entity and to ensure that the entity complies
with all state and federal laws. THE END
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