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BUSINESS PLAN ARTICLES FOLLOW
PLAN OR SECURITIES DISCLOSURE DOCUMENT
By John W. Cones, J.D.
Based on numerous conversations with independent feature film producers, there appears to be a considerable amount of misunderstanding and/or misinformation in this community regarding when to use a business plan as opposed to a securities disclosure document if seeking to raise money from investors to develop, produce or distribute one or more independent feature films. First, we have to understand what a business plan is and how it differs from a securities disclosure document. We have to recognize that although there may be similarities (i.e., some overlap), these two documents are not the same things. The differences are based on both the contents of these two documents as well as in the appropriate uses of the documents.
A business plan is a written statement that describes and analyzes a business (in this particular case, a proposed independently produced feature-length movie) and gives detailed projections about the future of that business. A business plan is not an investment vehicle. You cannot sell shares in a business plan. Nobody can invest in a business plan. If a business plan is used to actually raise money, it must be used in the proper circumstances and must be combined with an appropriate investment vehicle.
Thus, a business plan, combined with an appropriate investment vehicle, can be used to raise money, but only in limited circumstances. What are those circumstances? A business plan can be used to raise money from one, two or a few active investors. A business plan cannot be appropriately used to actually raise money from a larger group of passive investors.
So, what's the difference between an active and a passive investor? An active investor is someone who is regularly involved in helping you the filmmaker make important decisions with respect to your film. In the context of a film, that means helping to select the script, making changes in the script, selecting the director and lead actors, choosing the line producer and director of photography, helping to solve problems that come up during production, helping to make decisions with respect to critical questions relating to distribution and so forth. These one, two or a few active investors need to be capable of making valuable contributions on these important questions (i.e., they need to have some knowledge of and experience in the film industry that is relevant to what you are doing) and be actively involved in helping to make such decisions on a regular basis.
That does not mean they should have veto power, although some investors who put in most of the money to produce a film, for example, may insist on such control, and in that instance, it may become a problem for a producer. In addition, unless an entity is created to provide limited liability, active investors may also not have the limited liability protection offered by an
entity, and, of course, most people with enough money to invest a substantial amount in a high-risk venture like an independent film, will most likely prefer to enjoy limited liability protection. That's just another factor to consider when determining whether to use a business plan and seek financing from one, two or a few active investors.
On the other hand, a passive investor is someone who is not an active investor (i.e., someone who is not regularly involved in helping to make those important decisions). This is an important distinction, because it represents the essence of the difference between a non-securities offering and a securities offering. Essentially, anytime you are seeking to raise money from one or more passive investors, you are selling a security, no matter what you call it. So, the producer's decision to raise money from active or passive investors has important implications and consequences.
If you are really trying to raise money from one, two or a few active investors, who are both capable of being regularly involved in helping to make important decisions and willing to be so involved, you can use business plan combined with an appropriate investment vehicle to provide them with the information on which to base their decision. But, if you are raising money from one or more passive investors, you are required by law to provide those investors with a properly prepared securities disclosure document (not a business plan) prior to their investment.
In addition, that business plan should not suggest in any way that you are really seeking to raise money from passive investors. In other words, either leave out the discussion about the specific financial arrangements or at the very least, avoid references to interests in limited partnerships, or units of a manager-managed (passive-investor) limited liability company ("LLC"). Further, the language in a business plan should not suggest or imply that the investor will not be permitted to be regularly involved in helping to make important decisions, since that is at the very heart of what makes him or her an active investor. It may be the better practice to actually state that the business plan is being used in conjunction one of those specific but appropriate investment vehicles for the purpose of raising funds from one, two or a few active investors. In any case, absolutely do not include language that you either plan to or may later create a limited partnership or manager-managed LLC, because that language clearly indicates that you are planning a securities offering. Also, do not suggest by the language in the
business plan that you intend to raise money from more than one, two or a few active investors, because at some undefined point, it is no longer possible to keep a large number of investors "actively" involved in a business venture in a meaningful way.
Now, what are those investment vehicles that can appropriately be used in conjunction with a business plan for seeking funds from one, two or a few active investors? As discussed in more detail in my book "43 Ways to FinanceYour Feature Film", the four vehicles are: (1) the investor financing agreement (a copy of which appears in the book "Film Industry Contracts"--
available at the Samuel French Bookshop in Hollywood), (2) the joint venture agreement (a sample of which also appears in the "Film Industry Contracts" book), (3) the initial incorporation (see discussion in "43 Ways to Finance Your Feature Film") and (4) a member-managed (active-investor) LLC (which, in addition to the filing with Secretary of State, must also have an LLC operating agreement to be properly formed).
So, recognizing that there are some obvious disadvantages to seeking funds from active investors (1) they may interfere with your creative control, (2) the investment vehicle chosen may not offer any limited liability protection to your investors and (3) it may be more difficult to find prospective investors who are both capable of and willing to be a lead investor in a high-risk investment like independent film, it is also important to recognize that by seeking active investor financing, you are eliminating at least two of the advantages of a securities offering (i.e., spreading the risk amongst a larger group of passive investors, none of whom will typically be hurt too badly if they don't get their money back or make a profit, and, of course, passive investors don't interfere with your creative control.
Now, a quick note about terminology. The securities disclosure document is a broad term that applies to the required written information that must be provided to prospective investors before they invest in all securities offerings. The terms "prospectus" and "offering circular" are used to describe the securities disclosure documents associated with various types of public/registered offerings. These securities offerings are usually too expensive, complicated and time-consuming to be of much interest to low-budget independent filmmakers. On the other hand, the private placement offering memorandum or "PPM" is the term used to describe the securities disclosure document associated with an exempt/private offering (most
commonly used by low-budget indie filmmakers).
Specific rules promulgated by the federal Securities and Exchange Commission and, in some instances, state securities regulatory authorities, provide guidance on what information must be disclosed in these securities disclosure documents and how that information must be presented. There are no such rules for business plans, and that's why there is both such a wide
disparity in the content of business plans and why the contents of business plans are always different in some respects from the contents of a securities disclosure document, even though some elements of the two are the same or similar.
If you have additional questions, about these issues, feel free to post your questions relating to investor financing of independent film at my question and answer site online at http://www.homevideo.net/coneslaw/finforum.htm or
http://www.mecfilms.com/guide4.htm or by entering "Investor Financing of Independent Films" in any search engine.
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INTERNET FILM OFFERINGS, by John W. Cones, Attorney at Law
This article is written in response to the many inquiries online and elsewhere about
raising investor funds on the Internet for feature film projects. First, it is important
to understand that the Internet is nothing more than a new form of communication. The
technological creation of a new way to communicate does not in and of itself change long
established federal and state rules and regulations that apply to investor financing of
film or other entertainment projects. Thus, it is extremely important in analyzing whether
funds for the acquisition, development, production and/or distribution of a feature film
project can be accomplished on the Internet, that we understand clearly whether or not a
security is involved.
To simplify, a security is being offered or sold if the investors are going to be "passive". If, on the other hand, the investors are going to be regularly involved in helping the film's producer make important decisions, such investors may be considered "active" (i.e., non- passive), and under such circumstances, no security offering is being conducted.
Further, any communication put on the Internet for the purpose of raising money from investors will be properly be characterized as an "advertisement" or "general solicitation" by the federal and state securities regulatory authorities. As a general rule, the advertising or conduct of a general solicitation relating to a security is prohibited unless the security is registered with the Securities and Exchange Commission (SEC) at the federal level, and with the appropriate state regulatory authority in each state in which the security is being offered, prior to the start of the offering.
Low budget filmmakers may consider the use of the Regulation A public/registered offering (combined with state registration in each selected state) for amounts below $5 million. Another possibility is the SCOR offering (a state level public offering of corporate stock for up to $1 million, combined with the federal Regulation D, Rule 504 exemption from federal registration). A third possibility that is even more complex that these other two involves securities offers being made over the Internet to a pre-screened and qualified group of accredited investors (i.e., a pre-existing relationship already exists between the prospective investors and the securities issuer/film producer or the registered SEC/NASD securities broker/dealer firm conducting the sale of the offering on behalf of the producer).
Another approach involves the posting of a generic business plan (or an executive summary of such a business plan) on the Internet and designing the business plan specifically for the purpose of attracting "active" investors only. This is not a security, thus the securities rules noted above are not involved. Such business plans can be communicated to anyone (i.e., a general solicitation via the Internet is perfectly permissible with an active investor business plan).
However, a business plan, by itself is not an investment vehicle. If the response to the business plan is positive, the producer may then choose to structure the investment as an investor financing agreement, a joint venture, an initial incorporation or an active-investor limited liability company (all non-securities investment vehicles). If, on the other hand, the business plan attracts significant interest from investors, but they do not have sufficient means to finance the amount of money needed on an active-investor basis, then it is still possible to stop the use of the generic business plan seeking active investors, wait a period of time (3-4 weeks is the suggested guideline by the SEC) and start a traditional (non-Internet) securities offering (i.e., conduct a corporate stock offering, a limited partnership offering or a passive-investor limited liability company offering) making offers to these same prospective investors with whom you have now established a pre-existing relationship for purposes of this subsequent securities offering. In addition, one of the above-mentioned properly conducted public/registered offerings over the Internet could also then be used to raise the money.
Before any film producers expend a considerable amount of money creating a Web site and marketing such offerings on the Internet, however, it would be wise to determine as much as possible just how successful these offerings have been. Film offerings of any kind are considered highly risky investments for investors. Merely putting them on the Internet will not reduce the risk to investors, thus, this new form of communication, may, in effect, merely be shifting producer monies to the pockets of Internet service providers, without creating a favorable track record for success in raising funds. Use caution.
For more information see:
California Department of Corporations Release No. 100-C "Offers of Securities Made on the Internet", November 5, 1996.
"Direct Public Offerings/Raising Equity Capital via the Internet", Internet Equity Consultants, at http://www.internetequity.com/intro.html
"Financing on the Internet" by Dr. Jeffrey J. Moffie at http://www.ipoexchange.com/ipo- art2.htm.
"43 Ways to Finance Your Feature Film" by John W. Cones, Southern Illinois University Press (800/346-2680).
"Film Finance and Distribution--A Dictionary of Terms, by John W. Cones, Silman-James Press, 800/822-8669.
IPONet SEC No Action Letter re "Electronically Transmitted Indications of Interest and Posting of Notices of Private Offerings on Password-Protected Page", July 23, 1996.
"The Internet and Financial Markets", written by James E. Grand and Gary Lloyd for Upside Magazine" at http://www.ipoexchange.com/ipo-art.htm
"SCOR Registration" by Mark J. Astarita, at http://www.e-ipoet.com/scorlaw.htm SEC Release No. 33-7289 "Use of Electronic Media for Delivery Purposes", October 6, 1995.
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Excerpted in its entirety, courtesy of John W. Cones, Attorney At Law,
from his book "43 Way$ to Finance Your Feature Film".
Southern Illinois University Press, (c) 1995,
CHAPTER, 15 -- BUSINESS PLANS
Technically speaking, the business plan is not a financing vehicle or entity but can be used in conjunction with several other investor-financing techniques to raise money for film projects. For example, a business plan can be used with an investor-financing agreement to raise money from a single active investor. It can be used with a joint venture agreement to raise money from another entity also acting as an active investor/joint venture partner. It can also be used as a means of indentifying possible founding shareholders for the initial corporation, a strategy discussed elsewhere in this book (see chapter 18.)
Another important use of the business plan is helpful in establishing a preexisting relationship with prospective investors for a subsequent securities offering (see chapters 19-35). Thus, the business plan becomes a method of conducting a general solicitation while looking for active investors (see chapter 16), and if the active investor campaign does not prove successful, then the campaign can be converted into a securities offerring (seeking passive investors.) If the private placement approach is used for the subsequent securities offering, those persons contacted during the active investor general solicitation (using the business plan) may be approached as prospective investors for the private placement since the initial contact with those prospective investors is likely sufficient to establish the pre-existing relationship, which, although not technically required by the federal securities laws, still is an important element in proving that no general solicitation occurred.
The film production company business plan can be very similar to the producer's package except that it is usually bound and may be presented in a more organized fashion. The business plan is often the first step in procuring investor financing, whereas the producer's package is used for similar purposes in obtaining funding from a distributor or other industry sources. The producer's package might include, for example, a screenplay, a list of credits for key persons attached to the project and a proposed budget, whereas a business plan might include a synopsis of the screenplay, narrative biographies the key persons attached to the project and a use of proceeds section, can be as simple or as sophisticated as the producer and his or her advisers choose to make it.
Introduction (Setting of the Stage)
Status of Independent Producer
Management and Organization (narrative biographies)
The Proposed Film
Comparable Box Office Performances (or distributor rentals)
Production of the Picture
Budget/Use of Proceeds
Funding of the Picture and Cofinancing
Resumes of Principals
Literary Property Option/Acquisition Agreements
Letters of Interest/Intent
The following are other possible exhibits (depending on the stage at which financing is sought) that may be included as part of the business plan: title report, copyright search report, chain of title documents including a certificate of authorship for the screenplay, copy of copyright registration, copyright assignment, distribution agreement(s), completion bond commitment letter, corporate resolution authorizing the producer to negotiate and sign a financing agreement, final screenplay and shooting script, cast and production credits, synopsis of the script, biographies of key people, feature stories on lead actors and the director, production stills, casual cast photos, agreements relating tro the film's music, the MPAA ratings certificate (if available) and the E&O certificate of insurance.
No securities laws involved. So long as the business plan is associated with an active investor form of financing (i.e., investor-financing agreement, joint venture or initial corporation -- see chapters 16 -18), producers using a business plan may approach any prospective investor without fear of violating the securities law prohibitions relating to private placements, which in turn (as a practical matter) limit offer and sales to persons whom the producer or other upper-level management of the issuing entity have a preexisting relationship.
No formal rules. There are no formal rules promulgated by any governmental authority regulating the contents of a business plan; thus, producers have considerable freedom in drafting such a document. There still may be some liability, however, for inaccurate or misleading statements.
Relatively easy to assemble. In the context of the film business, a business plan is merely a specific adaptation of the producer's package, which in turn contatins many documents a producer would ordinarily generating in the preplanning stages of putting together a film project.
General solicitation permitted. The business plan, properly handled, allows the producer to go out into the marketplace and conduct a general solicitation for a single active investor or other possible combinations, and if not successful in raising the necessary moneys using the business plan, the producer may convert his or her offering into a securities offering and then go back and call on those same investors within the context of a securities private placement.
May be unneeded step. If the producer already knows that he or she is going to use the limited partnership as the financing vehicle, for example, and already has a sufficient pool of prospective investors available, the business plan is just another step in financing process that might be eliminated.
Inadvertant securities sales. Producers who not aware of the important distinctions between active and passive investor offerings may confuse the two in using a business plan and thus inadvertantly be guilty of selling an unregisterd security. Thus, producers beware: ignorance of law is no excuse.
The Ernst and Young Business Plan Guide. Eric S. Segal, Loren A. Schultz, Brian R. Ford, and David C. Carney. John Wiley & Sons, 1987.
Feature Films on a Low Budget. John Randall. Focal Press, 1991
Film Finance and Distribution -- A Dictionary of Terms. John W. Cones. Silman-James Press, 1992.
"Tide of H'wood Investment Rising -- Stock Offerings By Industry to the Tune of
$3.24 Billion." Robert Marich and Jeffrey Daniels. The Hollywood
Reporter, August 15, 1991.
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