Currently, the promise of the JOBS Act is in limbo even after being signed into law over a year ago (and supported by the most bi-partisanship effort in recent history) because the Federal Securities and Exchange Commission (SEC) has failed to enact it.
The JOBS Act established a deadline of Wednesday, July 4, 2012, for the SEC to promulgate rules and regulations for the implementation of TITLE II—ACCESS TO CAPITAL FOR JOB CREATORS (commonly referred to as the “general solicitation rule“). The SEC missed that deadline. The agency did publish proposed rules for TITLE II on August 29, 2012, but has not implemented them. There is no anticipated date for finalizing the rules for Title II of the JOBS Act.
The JOBS Act established a deadline of Monday, December 31, 2012 for the SEC to promulgate rules and regulations for the implementation of TITLE III—CROWDFUND (commonly referred to as “Equity Crowdfunding“). The SEC missed the deadline, and has no anticipated date for the rulemaking to implement TITLE III.
FILMMAKERS, IT’S 2013. DO YOU KNOW WHERE YOUR JOBS ACT IS?
The Internet enlarged the playing field for securities offerings, whether valid or not, and for potential investors, whether knowledgeable or not.
How do you legally and ethically access that hoarded cash and encourage its investment in your well-developed movie project so you can hire people and make your movie?
Easier access to that cash is the promise of the JOBS Act, which was the biggest bi-partisan effort of the past several years of hyper-partisanship. Support for the JOBS Act spanned both parties.
America needs good jobs, and some of those jobs need to come from the independent film industry. Joblessness and low-wage jobs have crippled the survival and prosperity of millions of Americans, and are a drag on our entire economy.
For you, the significance of the JOBS Act is not only the production of your movie, but also its potential to rebuild the infrastructure of the American independent film industry by structuring movie projects to show business as well as artistic realities.
The ability to reach out to investors means you will have to analyze the strengths and weaknesses of your movie project, plan its production and distribution, and calculate reasonable possible returns. Your stronger, compelling plans and successful investor strategy will allow you to pay better wages, attract superior cast and crew, rent and purchase proper equipment, engage legal counsel and insurance, and make stronger efforts to engage audiences and deliver your movie to them. By opening access to that hoarded cash and other cash from investors, the JOBS Act can provide filmmakers with increased production quality and increased likelihood of a return on investment, which can increase the stability of the independent film industry in America. The process can increase the potential to deliver higher-quality movies to larger audiences.
There are two parts of the JOBS Act specifically attractive to independent filmmakers. They are Title II—ACCESS TO CAPITAL FOR JOB CREATORS, commonly referred to as “the General Solicitation Rule,” and Title III—CROWDFUND. These offer the promise to improve filmmakers’ ability to raise money for development, production, marketing, and distribution of their movies.
Some filmmakers are lucky enough to raise money for their movies through family and friends, angel investors, venture capitalists, or other ways of private funding. Most filmmakers are not so fortunate.
Many filmmakers turn to crowdfunding, whether perks-based donor crowdfunding or the forthcoming Equity Crowdfunding. That’s a good path for filmmakers whose social circle is pretty normal, and you will benefit from Title III—CROWDFUND of the JOBS Act.
Are you fortunate enough to have millionaires in your social circle? The change to the fundraising process, opening it up for general solicitation, will be the benefit for you from TITLE II—ACCESS TO CAPITAL FOR JOB CREATORS of the JOBS Act.
TITLE II—ACCESS TO CAPITAL FOR JOB CREATORS
TITLE II is popularly referred to as the “General Solicitation” rule. It will change some of the exemptions from the most strenuous rules; these exemptions, which are still very strict, are commonly referred to by investment professionals as “Sec. 506, Reg. D”. The rules that allow exemptions from some of the harshest regulations still include prohibitions against you, or any person acting on your behalf, offering or selling securities through any form of “general solicitation or general advertising.”
Most of those posts long ago on Friendster and MySpace and those ads printed in magazines and newspapers by filmmakers telling people to invest in their films and promising the investors profits have always been illegal. Examples of general solicitation include advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars whose attendees have been invited by general solicitation, as well as other uses of publicly available media, such as unrestricted websites and social media.
The big news is that TITLE II is going to let you promote your movie project to everybody you can reach. The only restrictions will be, simply, that you can only sell your securities to Accredited Investors – but you can now find those Accredited Investors by publicly announcing your movie project. The JOBS Act instructs the SEC to make rules to stop the prohibition against general solicitation and to give you reasonable steps to verify that those who invest in your movie are truly Accredited Investors as defined by law.
You will not be able accept investment money from anyone who can’t prove they are Accredited Investors. The Act says you will not be subject to requirements to be a registered broker or dealer because of maintaining and advertising online or on other platforms your offer, sale, or negotiation of an investment in your movie. Under the general solicitation rules for your Sec. 506 of Reg. D offering, there might be no other reporting requirements other than, probably, the basic Form D now required by such offerings. It is likely the SEC will modify the Form D only to acknowledge that your offering is being made under TITLE II of the JOBS Act.
The JOBS Act established a deadline of Wednesday, July 4, 2012, for the SEC to promulgate rules and regulations for the implementation of TITLE II—ACCESS TO CAPITAL FOR JOB CREATORS. The SEC missed that deadline. The agency did publish proposed rules for TITLE II on August 29, 2012, but has not implemented them. Although the SEC has missed the deadline required by the Act, and used a process a little bit out of the ordinary regarding its usual schedule of receiving public comments and publishing proposals, the SEC believes they are working prudently within the complex requirements of implementing the JOBS Act. There is not yet an anticipated date for finalizing the rules for Title II of the JOBS Act. It continues to accept public comments regarding TITLE II.
Title III—CROWDFUND of the JOBS Act, twisted into an acronym of that tortured construct, “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure,” relieves filmmakers of many of the burdens of raising equity investment for movie projects. The goals of the Act appear to allow a filmmaker (or any entrepreneur) to offer securities to any American for up to a maximum of $1 million in any 12-month period for all of the entities controlled by the filmmaker using the process similar to perks-based donor crowdfunding
It appears the filmmaker’s offering of securities must be made only through a registered securities broker or through a newly-described “Funding Portal” registered with the SEC. Funding Portals are intermediaries that might be similar to the existing crowdfunding sites, and will be responsible for educating the public about investing, protecting the public from fraud, vetting the people offering the securities, distributing to the SEC and potential investors any information about the securities, and holding in escrow all proceeds prior to reaching the offering amount. Funding Portals will also protect the privacy of investors and cannot purchase from any finders or brokers any personal information about potential investors. Filmmakers will not be allowed to be officers, partners, or directors in the Funding Portal servicing their projects.
In order to offer equity shares in their project, it appears filmmakers will need to provide some form of a Business Plan and Financial Projection, which was common before the collapse of the independent film industry, that includes the purpose for the offering and the target offering amount and its deadline, as well as the description of the ownership and capital structure of the issuer. The Business Plan and Financial Projection will likely include the name, legal status, physical address, and website address of the issuer; the names of the directors and officers and anyone with more than 20 percent of the shares of the issuer. A description of the financial condition of the issuer including all other offerings of the issuer within the preceding 12-month period is also required. The filmmaker will need to make regular updates about progress meeting the target offering amount. There will be rules about describing the price, value, terms and class of the securities offered. Annual reports will be required.
WHO CAN INVEST, AND HOW MUCH?
Once the new SEC regulations are in place, you likely will be allowed to approach anyone via any method of communication, describing your well-developed movie project, as long as you only send them to the Funding Portal or broker handling your movie project. If you pay someone to bring people to your project at your broker or Funding Portal, you will be required to declare publicly that you pay the person to do so.
It appears there will be no limit to the Americans you can approach, but their participation will have limits. Expect that those potential investors whose annual income or net worth is less than $100,000 will be allowed to invest up to 5 percent of their annual income or net worth, capped at a maximum of $2,000. Anyone with an annual income or net worth of more than $100,000 will be allowed to invest up to 10 percent of their annual income or net worth, capped at a maximum of $100,000. These maximums will apply to all of the investments made by the individual to all issuers – not just you – in any 12-month period.
It is attractive to filmmakers to be able to raise up to $1 million per year in equity investment. This fits into a common timetable for making movies; the first year’s fundraising could support development, production, and post-production, and the second year’s fundraising could support marketing and distribution, effectively allowing filmmakers to raise up to $2 million for your movie.
The investment securities in your movie will be barely, if at all, liquid. Your investors will likely not be allowed to resell their securities for a period of 12 months except to people such as accredited investors and family members, or through a complex registered public offering in the unlikely case that you were to develop one.
The issue of Funding Portals has become very complex. It originally appeared that the JOBS Act would allow a proliferation of new businesses to serve as Funding Portals. However, complex and contradictory parts of the Act now appear to make it illegal for Funding Portals to earn a profit unless they are functions of registered Broker-Dealers. The possibility of non-profit organizations setting up Funding Portals has not yet been addressed by the SEC. The process of becoming a registered Broker-Dealer could take probably more than six months and cost probably more than $25,000. For the SEC’s information about the process, see here.
“You’re dealing with other people’s money, there is an obligation of financial and fiduciary duty to the investors,” says Bob Thibodeau of Crowdfund Capital Markets, a service company providing backend and clearinghouse functions for equity crowdfunding operations.
“Orderly, transparent, liquid markets are good for everybody,” continues Thibodeau. “The processes, the technology, the understanding of regulatory environments is much more conducive to orderly markets than everybody learning something all at once, which is chaos, which is where crowdfunding is right now.”
The SEC is working with The Financial Industry Regulatory Authority (FINRA), the largest independent regulator for all securities firms doing business in the United States, on rules for funding portals, and FINRA has a voluntary Interim Form for prospective Funding Portals. Once the SEC and FINRA have adopted funding portal rules, they then need to promulgate the rules that will apply to those who need to use Equity Crowdfunding to fund their businesses.
“Investors soon can expect to be inundated with crowdfunding pitches, legitimate or otherwise,” said Heath Abshure, President of North American Securities Administrators Association (NASAA), the oldest international organization devoted to investor protection.
An analysis of Internet domain names found nearly 8,800 domains with “crowdfunding” in their name at the end of the year, up from less than 900 at the beginning of the year.
Fraud concerns run high in certain circles of the professional investment community. However, the openness and transparency of the Internet, according to crowdfunding experts, serves to thwart fraud.
Slava Rubin of popular perks-based donor crowdfunding site Indiegogo, and very active in the process of crafting the Equity Crowdfunding part of the JOBS ACT, says “Indiegogo’s 5,000 campaigns are proven case studies to predict that there is no significant worry about fraud. The fraud rate in our case studies has been about 1 percent.” He notes that when e-commerce was new on the Internet, people also predicted huge increases in fraud. However, eBay and Amazon proved that online fraud risk is no greater than every other risk we face every day.
According to the report How the Crowd Detects Fraud, “This is the new crowdsourced diligence paradigm.” The crowd itself effectively polices against fraud.
PERKS-BASED DONOR CROWDFUNDING AND EQUITY CROWDFUNDING WILL CO-EXIST.
Perks-based donor crowdfunding and Equity Crowdfunding each has its own process and participants. It is likely perks-based donor crowdfunding will be more focused on funding for personal, artistic movies, while Equity Crowdfunding will be focused on movies with commercial appeal.
Kickstarter is not going to get involved in Equity Crowdfunding because its mission was never profit-oriented over artist-oriented. It launched in 2009 after an original idea in 2001 to fund creative projects that would probably not be profitable, but that were good ideas that people want to see come to life. For instance, last year Charlie Kaufman, Dan Harmon, Ira Sachs, David Fincher, Bret Easton Ellis and Paul Schrader all turned to Kickstarter to invite fans to participate in their personal creations.
Equity Crowdfunding will be a different experience, and for different backers, than perks-based donor crowdfunding.
The JOBS Act established a deadline of Monday, December 31, 2012 for the SEC to promulgate rules and regulations for the implementation of TITLE III—CROWDFUND. The SEC missed the deadline, and has no anticipated date for the rulemaking to implement TITLE III. The SEC has not published any proposed rules for TITLE III and continues to accept public comments regarding TITLE III.
When the SEC is engaged in rulemaking, they typically want to hear from the public and will say very little beyond what is proposed.
Part of the reason for delays in rulemaking may be the change in leadership at the SEC. On December 14, 2012, Chairman Mary Schapiro left the agency, and President Obama appointed Elisse Walter as her successor. See here and here.
Although the SEC has made few announcements about the JOBS Act and its rulemaking, former Chairman Schapiro spoke about it in her opening remarks at the SEC Open Meeting on August 29,2012 (see here) and current Chairman Walter gave her “Opening Remarks Regarding the Proposal of Rules Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings” at that same meeting (see here)
When it wends its way through the SEC rulemaking processes, the JOBS Act will be a powerful tool that will give filmmakers something they have desired for decades: easier access to investors for their movies.
You face the opportunity to have a significant impact on the future of America’s independent film industry.
You can immediately participate in the process to make sure the JOBS Act supports the needs of America’s independent film industry. The SEC wants to hear from you!
As a filmmaker, you can tell the SEC that it’s important to you to be able to have access to investment capital in order to make your movies and to rebuild the independent film industry.
Michael R. Barnard is a writer and filmmaker who has been researching the American JOBS Act since it was first proposed. Barnard is currently working on creating an independent feature film, A FATHER AND SON. Barnard lives in Brooklyn, New York, and is the author of the historical novel NATE AND KELLY. You can reach Barnard on Twitter at @mrbarnard1.
Note: This article is an overview and observation, not legal advice.