The independent film industry is flourishing. There are several cable channels devoted to indie films, and IndieCon (the independent film community for filmmakers, game producers, animators and creative artists) events are well-attended. One factor that has contributed to the growth of independent film production is the rising popularity of alternative financing mechanisms to fund new projects. One of the hottest methods of financing is the use of private placements to raise capital without the need to create a public company.
A private placement is a securities offering that is exempt from the registration rules of the Securities and Exchange Commission. Producers, directors and other interested parties are regular attendees to seminars held to educate the industry on how to use private placements to raise capital. Normally, to raise money from the public, a company needs to obtain SEC registration and then sponsor an initial public offering. Both aspects are time-consuming and expensive. For the producer who wants to maintain absolute control over the creative content of a project, a public company run by shareholders may not be a very attractive prospect. A private placement utilizes one of the several safe—harbor rules that allow securities to be offered privately, as long as certain restrictions are met. For instance, most (but not all) investors have to be “qualified” – wealthy and educated as to the risks involved. The placement cannot be publicly advertised. And certain disclosures have to be made to prospective investors.
Investors in private placements include wealthy individuals, endowments, hedge funds, pensions and other institutions. The shares privately placed cannot be traded freely unless they become registered. There is a mechanism in the rules whereby privately placed shares “age”: after two years, they are de facto registered and can trade openly. To do so, the share certificates must be reissued without their restrictive legends. A transfer agent is usually responsible for this task.
Not all private placement investors have to be qualified. Depending on the amount of money being raised and the “flavor” of the private placement, there can be up to 35 investors who are not considered qualified. Other flavors place no maximum number on unqualified investors. The facts surrounding a private placement are set forth in a Private Placement Memorandum (PPM) that acts much like a prospectus for a public offering. The PPM contains details about the amount of money being raised, its intended uses, the officers of the offering company, and many other important facts. The federal government has a website at which interested parties can file PPMs online. Once a PPM and its supporting documents are approved, the company seeking financing can privately approach potential investors to raise the necessary funds.