Raising Money For Your Movie from Investors

I had a request from one of my blawg readers for an article about the laws related to raising money for films and what can happen if you don’t follow them. Here it is.

(NOTE: What follows is a very brief discussion about raising money from investors. If you’re borrowing money, know that loans are not securities and are not governed by securities laws. Legally loans are simpler, but it is much harder for independent filmmakers to get someone to lend them money for a film.)

What are Securities?

First of all, you need to be aware that raising money from investors is governed by securities laws. A “security” exists when a person has invested value in a common enterprise with an expectation of profit derived from the efforts of others.

What this means is that someone not actually involved in making your film is giving you money because they expect your movie to make a profit and they will share in those profits. The upside for the filmmaker (and the reason most filmmakers like this method of fund raising) is that the investors are taking a risk with you and you don’t have to pay back the investment unless your film makes money.

In general, if you have investors, you have sold securities. Examples of securities are shares of stock in a corporation, limited partnership interests, and membership shares in a limited liability company. For a more detailed discussion of setting up a company and raising money, see Volume 1 of “What Every Filmmaker Needs to Know About the Law” (available at www.WhatEveryFilmmakerNeedsToKnowAboutTheLaw.com).

Offers and sales of securities are governed by both state and federal laws, the laws are somewhat complicated, and there are serious consequences (including civil and criminal penalties) if you don’t follow them. As you know if you read the news, people go to jail and pay hefty fines for violating securities laws.

Generally speaking, securities must be registered or exempted from registration both at the federal level (with the Securities and Exchange Commission) and with the securities department of each state in which one of your investors resides.

In addition to federal regulations, securities offering regulations vary by state and include such things as when you must register your shares, how many people you may approach for investment, and how many actual investors you may have.

The Risks of Raising Money from Investors

It would be impossible to give you a detailed description of all the securities laws, and what you need to do to comply with them, in a blog post, and an even bigger reason I wouldn’t try: You should absolutely not attempt to raise money from investors without the help of a lawyer who understands securities. Most experienced producers, and even most lawyers, wouldn’t attempt it.

When filmmakers are raising money from family and friends, they usually don’t think too much about legalities. But the fact that it is your friends and family who give you money may not protect you. Some of your relatives may think of the money they give you as a gift and never worry about seeing it again. But they may not.

Most likely, your investors will expect your film to be successful and make them a windfall profit, like the stories they’ve heard or read about in the media. Of course, the reason wildly successful movies make the news is because they are the rare exceptions. The everyday, commonplace failures are not news.

And here’s one problem with that: your family and friends may not understand the risks of the motion picture business, and may have unrealistic expectations of you. They know what a smart, talented person you are and think you’ll have one of those runaway hits that brings in hundreds of millions of dollars.

They may not take into account how limited your business skills are, or how difficult and complicated it is to achieve a successful motion picture release. So when they get back none (or only part) of their money, they may be upset and angry.

When things are going well, and they’re making money, most investors don’t care whether you’ve crossed all your “t’s” and dotted every “i” required by the law. But if things go wrong, they will get out their fine-toothed combs and look for a way to get their money back.

Unfortunately for you as the business person, if you haven’t done your paperwork exactly right, and made all the disclosures you’re supposed to make, and warned your investors about all the risks, your investors can demand all their money back.

In my practice, I help filmmakers with financing agreements and private placement memoranda (which is a formal offering to investors). If you are at that stage, or need any other help with production, please feel free to contact me through my website at www.ProductionCounsel.com.

© Keith E. Cooper. All rights reserved. You may freely link to this post, but please do not copy (in whole or in part) without permission of the copyright owner.


One Response to “Raising Money For Your Movie from Investors”

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