Effect of Omnicare On Private Placements in Film Ventures

The heart of the Supreme Court decision is in Section III of its opinion in which it quotes language from the 1933 Act's '11, finding potential liability if the issuer “'omitted to state facts necessary' to make its opinion on legal compliance 'not misleading.'” In effect, the Supreme Court is getting into the murky area of what is a reasonable basis for having a belief.

Given widespread industry knowledge in the film industry about the number of independent films that fail to return investments to the film's investors, this case suggests that a film producer, in a private placement memo, could face securities law liability if, when discussing the success of recent independent films, the producer does not also include information about films which are less successful or a complete failure.

These discussions can take any number of different forms, depending on how the private placement memo discusses the “success” stories. The Supreme Court's Omnicare decision, however, is a warning to film producers using private placement memos (or Internet-based offering documents seeking accredited investors, which is now permitted under Title II of the JOBS Act and related SEC regulations) that examples of independent film successes in a private placement memo are no longer just puffery.

Thomas D. Selz is a founder of the New York City law firm Frankfurt Kurnit Klein & Selz PC (www.fkks.com). His entertainment practice includes advising on film, TV, live stage productions, publishing and sound recordings.

In the entertainment industry, we frequently see private placement memoranda seeking to raise capital for films and that refer to success stories such as My Big Fat Greek Wedding , Little Miss Sunshine or other independent films that became box office hits. But the U.S. Supreme Court's March 24, 2015, decision in Omnicare Inc. v. Laborers District Counsel Construction Industry Pension Fund, 13'435, should make all producers think twice about whether, or how, to include these success stories.

In the Omnicare case, in a registration statement the defendant had included opinions that it was legally complying with laws regarding its business practices of accepting rebates from drug companies in connection with its business of providing pharmacy services for residents of nursing homes. Even though Omnicare noted in the registration statement ' near its statements of belief that it was legally compliant ' that state and federal enforcement actions could adversely affect its business, the Supreme Court found a potential violation of '11 of the 1933 Securities Act: there was an issue for trial about whether Omnicare could hold a reasonable belief that it was legally compliant in light of such federal and state enforcement actions. The Supreme Court therefore reversed a decision by the U.S. Court of Appeals for the Sixth Circuit in favor of Omnicare and sent the case back for further proceedings.

So what do drug company kickbacks have to do with successful independent films?

The heart of the Supreme Court decision is in Section III of its opinion in which it quotes language from the 1933 Act's '11, finding potential liability if the issuer “'omitted to state facts necessary' to make its opinion on legal compliance 'not misleading.'” In effect, the Supreme Court is getting into the murky area of what is a reasonable basis for having a belief.

Given widespread industry knowledge in the film industry about the number of independent films that fail to return investments to the film's investors, this case suggests that a film producer, in a private placement memo, could face securities law liability if, when discussing the success of recent independent films, the producer does not also include information about films which are less successful or a complete failure.

These discussions can take any number of different forms, depending on how the private placement memo discusses the “success” stories. The Supreme Court's Omnicare decision, however, is a warning to film producers using private placement memos (or Internet-based offering documents seeking accredited investors, which is now permitted under Title II of the JOBS Act and related SEC regulations) that examples of independent film successes in a private placement memo are no longer just puffery.

Thomas D. Selz is a founder of the New York City law firm Frankfurt Kurnit Klein & Selz PC (www.fkks.com). His entertainment practice includes advising on film, TV, live stage productions, publishing and sound recordings.