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The newly enacted federal JOBS Act of 2012 (H.R. 3606; http://bit.ly/JfRRg2) impacts independent film financing by loosening the restrictions on companies (“issuers”) raising capital via securities offerings that are exempt from registration with the Securities Exchange Commission (SEC). One section of the JOBS Act permits “crowd funding,” which is aimed at equity or debt offerings of not more than $1 million through “funding portals,” envisioned as websites that match investors to investments. Another section permits general solicitation and advertising for offerings sold only to “accredited investors.”
The theory behind the crowd funding exemption is laudable, but the Act actually makes crowd funding a chimera because it adds so many hurdles and restrictions that it makes the crowd funding exemption worse than just relying on the current exemptions from registration. Here are just a few reasons why the crowd funding exemption is smoke and mirrors:
So what is the theoretical benefit of meeting this mass of restrictions and qualifications, compared to relying on an existing exemption for offerings up to the same $1 million? Rather meager, but here they are:
The alternative to all this lunacy for small offerings is to just rely on good ol' Rule 504 of Federal Regulation D, which exempts offerings of not more than $1 million to whomever you want, as long as you disclose all material facts, don't commit fraud, don't advertise, and file Form D with the SEC. That's it. For Rule 504 offerings, you also have to comply with state securities laws, but for most of them, all you need to do is keep the offering to under 35 investors that either have a pre-existing relationship with the promoter or that are financially sophisticated (or are represented by someone that is).
The JOBS Act also makes a significant change to offerings to “accredited investors” by permitting general solicitation and advertising, as long as the issuer takes reasonable steps to verify that the purchasers are accredited investors, as opposed to accepting a self-serving declaration, which is permitted for offerings that do not have general solicitation or advertising. An “accredited investor” is an investor that is one of the following:
In addition, the JOBS Act permits offerings to accredited investors through funding portals as long as the following requirements are met:
If these requirements are met (which are far less stringent than the requirements for funding portals under the crowd funding exemption), the funding portal may provide ancillary services, such as: a) the provision of due diligence services, so long as such services do not include, for separate compensation, investment advice or recommendations to the issuers or investors; and b) the provision of standardized documents to the issuers and investors, so long as the funding portal does not negotiate the terms of the issuance for and on behalf of third parties, and issuers are not required to use the standardized documents as a condition of using the service.
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