Showbiz Management Advisors, LLC

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SEC EXEMPTIONS

Note from Jeffrey : Raising equity for a movie must be reviewed in conjunction with both federal and state SEC laws. Due to the high risk of failure in movie production, we suggest you read this section thoroughly and provide a copy to your potential investor. When in doubt, disclose.

Preferred Notes and Profit Participation Versus Equity

Financing for small companies is always a challenge. Among the many dilemmas faced by entrepreneurs is the prospect of allocating equity to investors. With a brand new baby business, many feel their only choice is to throw the baby with the bath water out to whomever will give them money. This often means disproportionate partnership interests being given to relatively small investors. Worse still, the entrepreneur has not planned for the future, resulting in a "crowding" out of potential future investors.

It is here that the entrepreneur must distinguish between "equity" and "profit participation." When an investor is given equity, for better or for worse, that investor has rights that only someone with an ownership stake can get. For example, they may get voting rights at one end of the spectrum, or full blown managerial rights at the other end. This can be a very difficult scenario, especially for the entrepreneur who gave multiple small investors such rights. Consider the difficulty encountered with dealing with such investors if the company needs emergency cash infusions, or worse, the company needs to fold.

Instead of giving away partnership interests which entail equity or actual ownership, an entrepreneur may consider extending preferred notes to such small investors. With a preferred note, the entrepreneur can give an investor a return on his investment in the form of interest, without making them a partner. Moreover, since the note is preferred, you can give the investor a modicum of security by agreeing to subordinate other debts to theirs. Secondly, the note purchase agreement can provide the investor with a profit participation as opposed to equity. This essentially means that if the company makes money, the investor will get some percentage of that. On the other hand, that's the extent of the investor's right--they do not get any managerial rights or percentage of any losses.

Your company's securities offering may qualify for one of several exemptions from the registration requirements. The most common exemptions are listed below. You must remember, however, that all securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. This means that you and your company will be responsible for false or misleading statements, whether oral or written. The government enforces the federal securities laws through criminal, civil and administrative proceedings. Some enforcement proceedings are brought through private law suits. Also, if all conditions of the exemptions are not met, purchasers may be able to obtain refunds of their purchase price. In addition, offerings that are exempt from provisions of the federal securities laws may still be subject to the notice and filing obligations of various state laws. Make sure you check with the appropriate state securities administrator before proceeding with your offering.

Intrastate Offering Exemption
Section 3(a)(11) of the Securities Act is generally known as the "intrastate offering exemption." This exemption facilitates the financing of local business operations. To qualify for the intrastate offering exemption, your company must:

There is no fixed limit on the size of the offering or the number of purchasers. Your company must determine the residence of each purchaser. If any of the securities are offered or sold to even one out-of-state person, the exemption may be lost. Without the exemption, the company could be in violation of the Securities Act registration requirements. If a purchaser resells any of the securities to a person who resides outside the state within a short period of time after the company's offering is complete (the usual test is nine months), the entire transaction, including the original sales, might violate the Securities Act. Since secondary markets for these securities rarely develop, companies often must sell securities in these offerings at a discount.

It will be difficult for your company to rely on the intrastate exemption unless you know the purchasers and the sale is directly negotiated with them. If your company holds some of its assets outside the state, or derives a substantial portion of its revenues outside the state where it proposes to offer its securities, it will probably have a difficult time qualifying for the exemption.

You may follow Rule 147, a "safe harbor" rule, to ensure that you meet the requirements for this exemption. It is possible, however, that transactions not meeting all requirements of Rule 147 may still qualify for the exemption.

Private Offering Exemption
Section 4(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering." To qualify for this exemption, the purchasers of the securities must:

In addition, you may not use any form of public solicitation or general advertising in connection with the offering.

The precise limits of this private offering exemption are uncertain. As the number of purchasers increases and their relationship to the company and its management becomes more remote, it is more difficult to show that the transaction qualifies for the exemption. You should know that if you offer securities to even one person who does not meet the necessary conditions, the entire offering may be in violation of the Securities Act.

Rule 506, another "safe harbor" rule, provides objective standards that you can rely on to meet the requirements of this exemption. Rule 506 is a part of Regulation D.

Regulation A
Section 3(b) of the Securities Act authorizes the SEC to exempt from registration small securities offerings. By this authority, we created Regulation A, an exemption for public offerings not exceeding $5 million in any 12-month period. If you choose to rely on this exemption, your company must file an offering statement, consisting of a notification, offering circular, and exhibits, with the SEC for review.

Regulation A offerings share many characteristics with registered offerings. For example, you must provide purchasers with an offering circular that is similar in content to a prospectus. Like registered offerings, the securities can be offered publicly and are not "restricted," meaning they are freely tradeable in the secondary market after the offering. The principal advantages of Regulation A offerings, as opposed to full registration, are:

All types of companies which do not report under the Exchange Act may use Regulation A, except "blank check" companies, those with an unspecified business, and investment companies registered or required to be registered under the Investment Company Act of 1940. In most cases, shareholders may use Regulation A to resell up to $1.5 million of securities.

If you "test the waters," you can use general solicitation and advertising prior to filing an offering statement with the SEC, giving you the advantage of determining whether there is enough market interest in your securities before you incur the full range of legal, accounting, and other costs associated with filing an offering statement. You may not, however, solicit or accept money until the SEC staff completes its review of the filed offering statement and you deliver prescribed offering materials to investors.

Regulation D
Regulation D establishes the following exemptions from Securities Act registration: