Did you enjoy last weeks post on raising money for your film using crowdfunding? I got a lot of good feedback from you all out there so I’m excited this week to bring you the second part of the this 2-part series on how to conduct a Regulation D Private Placement offering using a private placement memorandum (PPM), otherwise known as “Equity Crowdfunding”.
If you missed last weeks post you can check it out here to get all caught up.
I am showing you my six steps on how to finance your film with equity crowdfunding. Last week we went over the first three steps and this post will cover the next three steps.
To recap, the first three steps covered last week were:
- Set Up An Entity That Will Own Your Project
- Plan For Your Offering
- Choose the Correct Exemption for your Fundraising Campaign.
And now on to the next steps which will go into more detail about using Private Placement Memorandums.
STEP 4 – Draft Your PPM (Private Placement Memorandum)
A PPM is a document that outlines the terms of securities to be sold via a private placement offering. It summarizes the terms, conditions, and risk factors that a prospective investor should be aware of before making a decision to commit. (I call it a business plan on steroids!).
This document is intended to be full of information about the fundraising so that a prospective investor can fully evaluate the opportunity. It is not intended to be promotional in nature, meaning this is not a sales pitch! The following are things to consider:
- Who will write your PPM?
Are you going to do it yourself (DIY) or will you hire a professional? Very few DIY PPMs that I have seen over the years have been impressive. It is important for you to understand that film investors are going to be inundated with PPMs that are professionally drafted.
You don’t want to lose the race before you even get in the starting blocks, meaning, if an investor has 100 PPMs their first round of review is to eliminate all PPMs that do not satisfy all of the legal requirements, the PPMs that were not written or reviewed by attorneys will not likely make it to the second round.
You’re out of the running before the substantive part of your document is even read!
- What Agreements, Exhibits, and other Attachments will you need to properly conduct your Private Placement?
A PPM is not just the offering document. Depending on what type of PPM you are conducting, you may need additional documents, such as,
- Subscription Documents
- Escrow Instructions,
- Escrow Agent Agreement
- Investor Questionnaire
- Personal Representative Questionnaire
- Certified Financial Statement
- Verification of Risk Factors
The more money you want to raise, the more formal the process gets.
Private Placement Memorandum Sample
What sections should be in your PPM? Below is an example of a Table of Contents for a film PPM:
- LEGAL DISCLAIMERS
- Executive Summary of Offering
- Securities Law Overview
- Specific Offering Terms – Distribution and allocation of funds
- Use of Funds
- Description of the Project – Talent Attachments, Script, Project Description (Story Synopsis, Locations), Description of Featured/Desired/Suggested Director, Writer, Talent (you will attach letters of Intent if you have them)
- Business Description – business structure, ownership
- Past Successes – past accomplishments of the company or of individuals involved (If none, emphasize credits of your Cast and Team and how the vision of your Project relates)
- Management Team
- Business Plan Summary – Strategy and Implementation Plan, Audience projections, Strategic Keys to Success
- Marketing Strategy (promotions)
- Milestones (Tasks that need to be done with specific dates of completion, budget and person responsible)
- Background of the Industry – The Guilds
- Market Analysis
– Market Segmentation (potential audience, i.e., age, gender, artistic types, etc.)
– Target Market (Who will be your audience? Strategy to attract audience, what it likes/behaviors/trends/consistent nature of the target audience?/loyalty)
– Describe Competition (Who are your competitors (similar projects), what makes your project unique?(Cast? – Oceans series – celebrity power) What gives you a competitive edge? What is your potential market share?)
– Service Business Analysis (overview of current business participants)
– Marketing Risks (merely a fad? Demand for service? etc.)
- General Risk Factor
– Financial Statements/Balance Sheet
– Financial Projections
– Financial Assumptions
– Key Financial Indicators
– Greenlight Analysis
– General Projections – P&L Balance Sheet
– Specific Production Budget Top Sheet
– Tax Implications
- Completion Bond Letter of Intent
- Company Operating Agreement
- Exit Strategy
- Subscription (Investment) Documents
- Other Exhibits
What pitfalls need to be avoided?
Having a PPM is just as much for your protection as it is for your investors. The primary purpose of a PPM is to give producers the opportunity to present all potential risks to potential investors (such as the inability to find distribution or that it may never achieve financial success), thus making it difficult for investors to claim that they were not adequately warned.
For this reason, it is vital the contents of the PPM be accurate and complete, and meet the highest standards of full disclosure, under securities laws, to potential investors.
When drafting a PPM, be aware of the type of film that you are making. This honesty will protect you later on. If you are making a low budget independent film that will likely be taken to a sales market or film festival, your PPM should not focus on theatrical releases (their numbers and risk factors).
When using comparable films or revenue projections, be as conservative as possible. For example, your comparison chart should not only reference “outliers” (films that did exceptionally well) like Blair Witch Project and Paranormal Activity. Also, you shouldn’t use sequels or franchises in your comparisons because these will skew your numbers.
Bottom line, you don’t want to oversell your film!
STEP 5 – Follow A Process That Safeguards your Private Placement Offering
How do you get the offering started? The start date of your offering is generally the date that your offering documents are ready to go to potential investors. If you are using an online portal, it may be the date that you upload your PPM.
How does the offering actually work?
- All printed PPMs should be consecutively numbered so that there is a record as to who received one. This can be done electronically as well (i.e., if you are sending out .pdf versions). You just need to make sure that you are in full control of the distribution process so that you can account for each PPM sent. This is important if you are distributing your PPM to investors in different states because different state “blue sky” laws may be triggered. Most states don’t require filing until a defined period of time after a security is sold, but some states require filing with the state and payment of fees prior to the offer of a security in that state.
How do you make sure that a potential investor is serious?
- It is hard to know when a potential investor is serious about investing in your project. It is good practice to send out an Executive Summary and Investor Questionnaire prior to sending a full offering document to gauge interest and make sure that potential investor is qualified to invest. Also, many of the online equity crowdfunding sites vet their members.
How do you track the offering process?
- As mentioned above, you should have a distribution control sheet in place to monitor the number of the executive summaries and offering document that are distributed, and identify who on your team sent each one out. You should also track sales, incoming checks and subscription agreements, and other documents in a system or at least a spreadsheet.
What happens when you receive payment?
- First, celebrate!
- Next, make sure that all of your paperwork is in order, your control sheet is updated, and you have all of your shareholder’s information, such as shareholder name (i.e., sometimes people use trusts, LLCs, or buy shares in other people’s names), address, social security number, and number of shares/units. You should send a confirmation to the new shareholder, along with fully executed documents, and keep a copy of everything so you have a complete record of the transaction.
- You will then file Form D and the appropriate state notifications.
More on Form D and state “Blue Sky” filings
Notices, on Form D, are due within fifteen days after the first sale of securities in an offering under Regulation D. Each state may also have a filing to notify it that an investor in the state has given you money. Make sure you know whether any other forms are required to fully comply with state authorities.
**NOTE: If you are engaging in a Rule 506(c) Private Placement offering, it is worth noting that the SEC may soon require earlier submission of the Form D, and an additional amendment after closing. Also, the SEC currently accepts general solicitation materials. It does not evaluate them but if an issue arises they are on record. It is not reviewing your materials for review! The SEC does not review materials unless an issue arises. This will be part of the record for its investigation purposes.
What if we have non-accredited investors? I usually don’t recommend dealing with non-accredited investors because of the increased risk. If you do decide to open up your offering to non-accredited investors then you will need to comply with additional requirements, such as having a Purchaser Representative to vouch for the investor’s ability tot invest.
Should you set up an escrow account to hold the investment funds?
Depending on the amount that you are raising, an escrow account to hold your investor’s funds in trust for the investor may be required until the fundraising terms specified in the PPM have been met. If this is the case, when the terms of the offering are met, the money is then transferred to you. If the terms are not met then the funds are returned to the investor. This is called an “all or none” or “part or none” offering, meaning if the entire stated funds (in an “all or none”), or the partial trigger amount of funds designated in the PPM (in a “part or none”), are not raised by the close date stated in the PPM, then the investor can request his or her money back. The alternative is to conduct your fundraising on a “best efforts” basis, meaning that there is no definite termination period and the offering can continue indefinitely.
It is actually a good safeguard, whether or not you are required, to implement the escrow account and designate the type of fundraising in your PPM to help your investors feel more comfortable with the transaction. The downside is that there is a cost associated with setting up an escrow account (i.e., bank fees).
Step 6 – Properly Close Your Private Placement Offering
It is important to close your PPM offering properly.
How does the offering end?
The termination date for a private offering is dependent on the type of offering being made. An “all or none” offering contains, by its terms, a fixed or defined date for the termination of the offering. A “best efforts” offering could go on indefinitely until the full number of securities is sold. Once the fundraising effort is complete, the Private Placement offering will end. The following are the steps to wind down:
- the issuer meets with the escrow agent to discuss the official closing date.
- Prior to closing, closing documents are prepared and circulated for review and approval.
- At closing, the original executed subscription agreements and a copy of investor correspondence and the stock certificates representing the securities purchased are organized. You will mail out any outstanding subscription agreements and certificates to investors.
- At closing (and if applicable), the escrow agent will follow the escrow instructions and disperse the funds.
- Designated parties sign any closing documents.
- Following the final closing, you will prepare all final blue sky state and federal documents, and file them with the appropriate state or federal agency.
- Lastly, you should have a plan for document management and retention, updating all investors on an ongoing basis, and be aware of any ongoing filing requirements, including for tax purposes.
Of course, there are business and legal issues related to each of the steps mentioned in my posts, but this is a good guide for how to conduct a Private Placement offering.
This document is not legal advice, and is intended solely for information and educational purposes. If you are contemplating a private placement offering, or any legal transaction, you should consult a qualified attorney who can provide you with the advice that fits your specific circumstances.
I hope you enjoyed the second part of this 2 part series on equity based crowdfunding and private placement memorandums for film. I feel its some of the best free information available on this subject.
Please feel free to leave comments or share this post if you found it helpful.
If you are an independent filmmaker you will want to check out my affordable film agreement package. It has all the basic agreements filmmakers need to protect their projects.
Ill see you soon and good luck with your Independent film or entertainment project!