Ethan Ramos: How to Finance a Film with Securities<title> <META NAME="keywords" CONTENT="film funds, film fundraising, film funding, film financing, film finance, film financiers, film investor, film investors, film investment, film security, film securities, money for film, money for films, money for filmmaking, money for filmmakers, grant for film, grants for films, grants for filmmaking, grant for filmmaker, grants for filmmakers, grant for filmmakers, grants for filmmaker, film capital, movie funds, movie fundraising, movie funding, movie financing, movie finance, movie financiers, movie investor, movie investors, movie investment, movie security, movie securities, money for movie, money for movies, money for filmmaking, money for moviemakers, grant for movie, grants for movies, grant for moviemaking, grants for moviemaking, grants for moviemakers, grant for moviemaker, grant for moviemakers, Ethan Ramos"> <META NAME="description" CONTENT="The filmmaking and media pursuits of Ethan Ramos. Includes tips on how to finance a film, how to get free or cheap legal help, plus more."> </head> <body text="000000" Link="#0000ff" vlink="#800080" bgcolor="#ff0000"> <center> <table width=587 cellspacing=0 border=3 bordercolor="000000" cellpadding=8 bgcolor="#ffff99"><tr><td> <center> <font face="comic sans ms" size=6> <b>Ethan Ramos</b></font> <br> <font face="comic sans MS" size=4> <a href="http://www.oocities.org/ethanramos/aboutme.html"> Home</a> | <a href="http://www.oocities.org/ethanramos/aboutme.htm"> About Me</a> | <a href="http://www.oocities.org/ethanramos/projects.htm"> Projects</a> | <a href="http://www.oocities.org/ethanramos/services.htm"> Money</a> | <a href="http://www.oocities.org/ethanramos/articles.htm"> Articles</a> </center> <hr size=0> <font face="comic sans ms" size=5> <br> <center><b>How to Finance a Film with Securities</b></center> </font> <br> <font face="comic sans ms" size=4> <p align="right">by Ethan Ramos </p> <br> You finally have a great screenplay, or another writing waiting to become film. Now you just need a bundle of cash to create celluloid magic. A classic way to finance a film in the U.S. is to sell investments in the project. Welcome to the world of high finance. <br><br> <b>Step One: Budgeting</b> <br> First, one needs to prepare the budget. This might seem obvious. Yet an amazing number of prospective filmmakers overlook this step. The budget is the basic blueprint. To create the budget one must understand the procedures of production and post production. If you can't make a detailed budget for your film, you're not ready to be a filmmaker. The budget is indispensable for the securities offering. <br><br> The budget serves two purposes. It gives you a detailed financial guide to how to make your film. It also helps fulfill your obligation to tell investors exactly what you will do with their hard-earned money. In this way, the budget provides fundamental details for both a filmmaker and investors. <br><br> <b>Step Two: Structuring Management</B> <br> Once the budget is ready the next step involves deciding who will be in charge. Who will make decisions? Will any investors make decisions? Most filmmakers may prefer to be enlightened dictators. But to seduce money from investors a filmmaker might think of sharing power. Whether or not investors participate in managerial decisions is a critical distinction. <br><br> Investors who participate in management are active investors while those who don't are passive investors. This distinction provides the basis for securities law: if an investor is passive, then the investment is a security. Securities are investments of passive investors. <br><br> The government highly regulates securities. The theory is that since passive investors are not actively involved in management, they are more likely to be ripped off. The law requires a business to follow extra bureaucratic procedures just to protect passive investors. <br><br> Consequently, the second step is to decide whether any investors will be passive. A business can have a few active investors plus a larger number of passive investors. Yet any investors excluded from managerial decision-making would be buying securities. Let's assume you offer securities because you want some passive investors. <br><br> <b>Step Three: Picking a Security</b> <br> The next choice is what type of securities to offer. To greatly simply the many types of securities, the more money a business seeks from its sale of securities or the more it seeks to advertise the sale, then the more regulated its securities will be. Regulation and bureaucratic paperwork can get very heavy duty. So let's assume you want the easiest securities. <br><br> Meet Rule 504 of Regulation D of the Securities and Exchange Commission (SEC). This policy enables the issuance of securities with only minimal regulation and bureaucratic paperwork. Rule 504 allows a sale of up to $1 million, without advertising, to a) active investors, b) officials of the issuer, c) super affluent entities and individuals, and d) as a generalization, up to 35 passive investors. Many states have securities laws that mirror Rule 504. These are the easiest securities. <br><br> <b>Step Four: Paperwork</b> <br> You thus arrive at the nitty gritty of preparing bureaucratic paperwork. An issuer needs documents that disclose the facts related to the business, qualify investors, structure the deal, close the deal, notify the SEC of the sale, and if required, notify any applicable state regulators. For example, I've prepared securities offerings for prospective films that average 50 pages. <br><br> The following is an anatomy of six offering documents. <ol> <li>the private placement memorandum, sometimes called the prospectus:</li> <ul>This document highlights the material facts of the business. A material fact is information that a person needs to make an informed decision about whether to invest. Material facts include a description of the project and industry, the experience of the management, projected expenses and revenues, and excruciating details about risks. This document should not be confused with a business plan. <br><br> A business plan is full of hype, marketing, and good news. In contrast, the private placement memorandum is arid, unvarnished, and discloses bad news. In particular, the pages on risks can look like a catalogue of potential disasters. But by fully disclosing material facts, a filmmaker helps prevent a lawsuit from any disgruntled investor who may claim to have been misled. Just the facts, ma'am.</ul> <br><li>the purchaser questionnaire and purchaser representative questionnaire:</li> <ul>These documents check whether a prospective investor is capable of investing. They serve also to identify any accredited investors. Accredited investors are certain entities and individuals with a lot of money who presumably are very sophisticated. It's useful to identify accredited investors because they don't count as passive investors. In practice, these documents are mostly boilerplate. </ul> <br> <li>the subscription application and agreement:</li> <ul>This document basically commits an investor to the understanding provided by the private placement memorandum. Plus the investor makes assurances of being qualified to invest. In other words, more boilerplate.</ul> <br> <li>the investor financing agreement:</li> <ul>This document is the investment contract. It provides the terms and conditions for the business dealings between the issuer of the securities and the investors. Included are the amount and procedure for investing money, profit participation, and accounting. This is one place to find the infamous definition of net profits.</ul> <br> <li> after the first sale of securities, a completed Notice of Sale of Securities on Form D for the Securities and Exchange Commission: </li> <ul> This form lets the government know what you're up to. One simply fills out pages of blanks about who, what, where, when, and how much. It's not half bad.</ul> <br> <li>any informational filings required by securities regulators of any applicable state:</li> <ul>If required, these documents basically repeat information provided to the SEC. The issuer needs to comply with the securities laws of each state where the investors live. Incidentally, that's a good reason to limit the geographic extent of the offering. Fortunately, some states don't require any filings.</ul> </ol> This package constitutes comprehensive offering documents. Naturally lawyers may concoct extra documents to increase their fees. <br><br> Speaking of lawyers, you don't need one. The preparation of business documents is not the practice of law. Besides, lawyers who prepare these documents charge an average of $1,500 to $4,000. You can do it all yourself or get help from someone like, well, me. <br><br> <b>Step Five: Selling</b> <br> Having put together your securities offering, you're final step is actual sales. Again, under Rule 504 there can be no advertising of the securities offering. In this way, Rule 504 provides for a private placement, not a public offering. This limits sales to people with whom the issuer has a pre-existing relationship. The key then is to create relationships before making a sales pitch. <br><br> People ask me how, given these constraints, does one get investors. While in college in Washington, D.C., I learned a bit about political campaigning, which provides a great model. For fundraising, a novice politician may start with his list of Christmas card recipients. He may move on to a list of likely attendants at his funeral. The point is to rely on existing relationships while campaigning for new relationships. <br><br> Like a politician, you can develop supporters before declaring your intentions. You can advertise yourself and your prospective film without mentioning securities. The goal is to first build your personal fan club in order to make your sales pitch later. <br><br> An alternative to being the salesperson yourself is to delegate sales to a producer. In one way or another, a producer is a glorified salesperson. Someone who is great at marketing could serve as a great producer. You should consider bona fide collaboration. <br><br> In sum, any filmmaker can do a basic securities offering. Every filmmaker should at least understand the process.</font> <br><br> <hr size=0> <font face="comic sans ms" size=3> Disclaimer: The lawyers want me to clarify that, as a nonlawyer, I'm merely providing commentary, not legal advice. <br><br> </font> <hr> </font> <center> <font face="comic sans MS" size=3> <a href="http://www.oocities.org/ethanramos/index.html"> Home</a> | <a href="http://www.oocities.org/ethanramos/aboutme.htm"> About Me</a> | <a href="http://www.oocities.org/ethanramos/projects.htm">Projects</a> | <a href="http://www.oocities.org/ethanramos/services.htm">Money</a> | <a href="http://www.oocities.org/ethanramos/articles.htm"> Articles</a> </center> <br> <center><a href="http://www.oocities.org/ethanramos/list.htm">Subscribe to My Newsletter</a>. <a href="mailto:ethanramos@yahoo.com">Email Me</a>. <a href="http://www.oocities.org/ethanramos/friend.htm">Tell a Friend about this Page</a>.</b></center> <hr size=0> <font face="Symbol"> ă</font> <font size=2>2002, Ethan Ramos. 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