The bill is viewed by some  as a way to sabotage the American creative dream machine by slipping in a little poison” and “the death knell of American leadership in the world.”

Specifically, three provisions are of significant concern to those who rely on so-called “angel” capital.  These provisions would:

1. increase the financial thresholds for qualification as “accredited investors,” who are, generally speaking, wealthy investors whose investments are not subject to significant federal securities regulation;
2. allow the Securities and Exchange Commission (“SEC”) to make certain angel financing transactions subject to state regulation (previously, all so-called “Rule 506 offerings,” which were commonly used for angel financings, were preempted from state regulation); and
3. require that those “Rule 506 offerings” that remain preempted from state regulation nonetheless be subject to a 120 day review process with the federal SEC.

Word on Capitol Hill is that the  bill will undergo significant changes, but now is the time to contact your Senators and Representatives to voice your opposition to the above provisions.

Currently, an investor qualifies as “accredited if he or she has a net worth of $1 Million or more, or has an annual income over $200,000 ($300,000 for married couples).  Under Rule 506, sales of securities to such investors are largely unregulated.  This new bill would change that dramatically, increasing these limits, thus making it harder than ever to find qualified investors for high-risk investments like films, theatre projects or start-up ventures.

Source:  Proposed financial regulatory reform bill will adjust accredited investor thresholds (WTN News).

Hat tip to my colleague Peter Levitan for bringing this to my attention.

With an A-list star like Brad Pitt, and a well-known and respected Director, the film seemed a sure-thing to some, so this surprising decision, made by Columbia chief Amy Pascal, has had many Hollywood insiders asking “why?”

The answers may provide valuable insight  into how studios will make greenlighting decisions in the coming months and years, as the economic climate for the entertainment industry and the world as a whole, undergoes major shifts.

The stated reason for the shelving of Moneyball is the studio-chief’s receipt of a final draft screenplay that is reportedly very different from the script she’d originally supported.     Apparently, director Soderbergh’s vision of the film had departed wildly in recent weeks from the studio-head’s.

The baseball-themed script by Oscar winner Steve Zaillian was reportedly rewritten at Soderbergh’s direction to include real-people portraying themselves,  and to eliminate material that  hadn’t happened in real-life, leaving a story that studio executives felt lacked emotion and punch.

The limited turnaround gave Soderbergh a short window of time in which to set-up the project at another studio, but with a rumored budget of $56 Million, it’ll be a hard-sell, especially if Pitt’s deal is, as reported, a $20 Million pay-or-play.  The studio could also keep the picture in development, finding another director to help the project, but the delays may cost it the projects’ A-list star.

So, what lessons can producers, writers, and directors take away from this dramatic turn of events?

• If you’re making a studio picture, don’t expect their full support when you make major revisions at the eleventh-hour.
• An A-List star and a respected director do NOT guarantee  a green light.  The script still matters!
• The Golden Rule applies:  He who has the gold, makes the rules.  Experienced financiers, whether in the studios or the independent world, won’t invest in “trust me”.  They want to see all of the key elements in place, ready to go.  They don’t like surprises.
• Ego and Hubris, contrary to popular thinking, have no place in the business side of show-business.
• Knowing when to say “no” to a project is important… even if it looks like a freight train coming right at you.

More about pay-or-play clauses and turnaround deals  in a future post.

Unfortunately for these producers, their use of the internet as a tool in identifying and securing the financing for their projects may actually serve as an impediment to their efforts, making the sometimes improbable chances of raising funds virtually impossible.

Projects financed through the use of funds contributed by investors must comply with myriad laws and regulations governing the manner in which the investment opportunity is communicated and the transaction completed. First among these laws is the 1934 Securities Act, which established the Securities Exchange Commission, and gave that agency authority to regulate the offer and sale of securities.

What is a “security”?

Generally speaking, any sale of an investment in a venture where the investor’s role is “passive”, in that he or she does not share meaningfully in the right to control the day-to-day operations of the venture, and/or does not share the risk of loss with those in control, is likely to be considered a security, subject to the rules and regulations of the SEC.

The Registration Requirement

The general rule is that every offering or sale of securities must be registered with the SEC unless there is an available exemption on which the issuer relies. Registration of securities is a time-consuming and often cost-prohibitive option for low-budget filmmakers and producers of theatrical plays and musicals.

Exemptions from Registration: Advertising not permitted.

Although there are several exemptions from registration available, those that are most commonly available to producers of entertainment arise under SEC Regulation D. Unfortunately, these exemptions are intended for private, limited offerings, rather than offers made to the general public. As such, the regulations prohibit the use of advertising in the offer and sale of the securities.

Internet postings seeking investors ARE advertisements.

Lawyers are in agreement that any communication put on the internet for the purpose of raising money via sales of securities WILL be considered an advertisement, and thus, renders the Regulation D exemptions inapplicable. Therefore, by posting in an internet forum, chat room or social networking site, producers often make things much harder for themselves.

Solutions

So, how can a producer effectively use the internet in her efforts to finance her project?

One possible solution is to work outside the securities realm. By this I don’t mean to skirt the law, but rather to ensure that the offering being made does not involve securities, but instead, an opportunity to become an “active” investor and participant in the production. Typically, this is done by posting or offering prospects the chance to review the business plan for the project, and the chance to join as a partner, co-venturer or founder of an initial incorporation for the purpose of producing the project.

This drastically limits the universe of likely financing partners, since by being “active”, the partner shares in the downside (liability) as well as the possible upside from the profitable project.

Another viable approach (if executed carefully), is to use the internet as a tool for developing and building relationships with people whom you may later approach on a personal, private basis with the investment opportunity. Care should be taken, however, that this relationship building is in fact more than merely window-dressing. The common interests of those involved must go beyond the project being financed. The internet in such situation isn’t involved in making the offer, but merely in networking with like-minded individuals.

Finally, there ARE some internet based organizations that focus on attracting “accredited” investors and building a pool or network of people interested in investing in entertainment projects. By engaging the services of such an organization, (which has a pre-existing relationship with pre-qualified investors), some producers have succeeded in securing financing.

Ultimately, however, the internet should be thought of as simply another medium for communication. It cannot be used in ways that older, more traditional communication methods would be prohibited. Before starting any campaign to raise funding for a film or theatre project, producers should consult with a qualified and experienced entertainment lawyer (like the author), as the pitfalls for noncompliance with securities regulations are onerous.

NOTE: This article addresses U.S. Law only. Securities laws vary from one country to the next, and from state-to-state within the U.S. This article is not a substitute for legal advice obtained from an experienced entertainment attorney you’ve hired to counsel and represent you.

(Via Variety.com – Runaway Production.)

Meanwhile, I’ve had others tell me that investors are good to go.

What’s really going on?

I think that folks looking for money from investors are operating from fear, uncertainty and doubt, and basing their expectations on the news of the economy as a whole.  But I believe that the economic outlook for the entertainment industry is a bit less dire than that for other market segments.

Entertainment has historically performed reasonably well in weak economies.  Audiences need the escape of good entertainment, and divert their discretionary spending dollars from the big-ticket expenses like overseas travel in favor of movies, sporting events, and domestic vacationing.

Meanwhile, the kinds of risk-tolerant investors who’ve traditionally financed indie films and theatre projects  are, in many cases, STILL risk tolerant.  In fact, following the second half of 2008 in which many of us saw our  more conservative, “safe”  investments in the stock markets drop precipitously, less risk-averse investors may view entertainment as a reasonably good bet, all things considered.

Ultimately, a good project will attract the money needed… it may involve tougher negotiations or more time, but I believe the funding is there for the right material.

So… go out and find the right material…

Agree?  Disagree?  Let’s have your comments.

Under th American Jobs Creation Act of 2004, domestically made films budgeted at under fifteen million dollars were able to take advantage of several tax breaks. Under the Act, filmmakers could write-off the entire cost of a movie during the year of its production, if the budget was below the $15 million threshhold. As written, the provision excluded future participations and residuals from the $15 Million budget figure.

Now, the IRS has ruled that these P&R payouts must be included in the budget, in order to prevent producers from manipulating the productio cost figures by re-characterizing regular compensation as participation and/or residuals, in order to stay under the $15 Million mark.

Congressional staffers who worked for years on the bill in question were incensed by the ruling, which will become final in a few weeks. Now, in order to give the intended effect to the law, Congress will have to pass new legislation to restore the tax incentive.

Under th American Jobs Creation Act of 2004, domestically made films budgeted at under fifteen million dollars were able to take advantage of several tax breaks. Under the Act, filmmakers could write-off the entire cost of a movie during the year of its production, if the budget was below the $15 million threshhold. As written, the provision excluded future participations and residuals from the $15 Million budget figure.

Now, the IRS has ruled that these P&R payouts must be included in the budget, in order to prevent producers from manipulating the productio cost figures by re-characterizing regular compensation as participation and/or residuals, in order to stay under the $15 Million mark.

Congressional staffers who worked for years on the bill in question were incensed by the ruling, which will become final in a few weeks. Now, in order to give the intended effect to the law, Congress will have to pass new legislation to restore the tax incentive.