It’s been more than three years since President Barack Obama signed the JOBS Act creating Rule 506(c) of SEC Regulation D, allowing private placement issuers to use “general solicitation” to raise money from qualified investors. The SEC released final rules under Title IV June 19, 2015. These rules, commonly referred to as Reg A+ and allow for non-accredited investors to participate in private offerings. According to 2014 data by the SEC, more than $14 billion has already been raised by early adopters who have taken advantage of the opportunity to publicly advertise their offerings. The legislation has three central provisions. The first makes it easier to launch startups through the use of crowdfunding. The second allows venture-capital firms and others seeking investment to make "general solicitations"— appeals via mass media, or social media – to potential investors. The third is called the "IPO on-ramp." This provision makes it easier for a company to go public, in part by allowing its owners to make less onerous disclosures.
I refer to this as the “Poor Man’s IPO.” It allows companies to raise up to $50 million per year in a SEC registered and reviewed offering. Shares are freely trade-able upon their issuance, offer lighter financial and non-financial disclosures compared to a full-on IPO, and ongoing reporting requirements which are reduced both in terms of the quantity of information and the frequency of reports. Rule 506(c) gives you the opportunity to reach a much broader audience and potentially reduce your cost of raising capital. It also gives a whole new group of investors the chance to participate in private placements.
Rule 506(b) is familiar to most of us in this finance industry. Companies using this rule can sell securities to any number of accredited investors, and up to 35 non-accredited investors. You don’t have to verify investors’ accredited status yourself, but you must not advertise the offering publicly in what’s known as “general solicitation.” And, you must take great care to only offer your securities to buyers that you already know and believe to be accredited.
The new Rule 506(c) allows you to advertise your offering. There need not be a prior relationship with the investors who buy your securities. But, you do have to verify that anyone who actually invests is an accredited investor. When issuers advertise their offering, they can raise more money, faster, by appealing to a wider range of investors. You don’t have to rely on “friends & family” or the traditional gatekeepers to help find suitable investors. Now you can make your case directly to the market and let the strength of the offering speak for itself. From the investor’s perspective, an advertised 506(c) placement is a huge new opportunity, too. Investors can more easily search for placements that suit their needs, and they don’t have to have any kind of insider connections to uncover the best offerings. It’s much more a level playing field now.
For entertainment entrepreneurs you now have two attractive options to raise large amounts of money for your movie, television show(s) or slate of projects: Tier 1 allows issuers to raise up to $20 million, but you cannot make general solicitations to the public; Tier 2, allows you to raise up to $50 million and advertise your offering. In both Tier 1 and Tier 2 offerings issuers must submit, and have approved, an “offering circular” to the SEC. For Tier 2 offerings, the SEC included a provision that allows you to ‘test the waters’ — allowing you to validate investor demand prior to preparing a full-blown offering circular. Tier 1 offerings (up to $20 million) are not exempt from blue sky filings, which require issuers to file documentation with each state that they plan to raise capital in. While Tier 2 (up to $50 million) offerings are exempt from blue sky filings, Tier 2 issuers must make semi-annual and annual filings with the SEC that include audited financial statements for the two most recent years, along with narrative disclosures.
These new fundraising tools work best for companies with highly recognizable brands and market awareness. But the process is there for everyone to take advantage of. All you need is a good securities lawyer and experienced CFO, and you could raise up to $50 million using the Reg A+ system. For example: If you are Michael Mann and you wanted to make the sequel to Hancock - you could simply set up a production company under Tier 2 guidelines and raise up to $50 million from the public, without having to file all the onerous IPO paperwork or submit to tedious Sarbanes Oxley accounting requirements.
It should be noted that if all you need is less than $5 million, Reg D 504 and 505 offerings are still the best way to go. No blue sky provisions, no need for audited statements and no reporting requirements. All you have to do is file a Form D with the SEC and you are in business. 504 offerings can be advertised to the public, but you can only raise up to $1 million in 12 months. 505 offerings allow you to raise up to $5 million in 12 months from accredited investors and up to 35 non-accredited investors – but no general solicitations are allowed.
So, times have changed... Entertainment entrepreneurs who don’t at least consider the new Rule 506(c) are leaving valuable options on the table. And as fundraising efforts continue to shift online, becoming more transparent and efficient, entertainment fundraisers will win as they enjoy better, faster, cheaper access to the capital they need to thrive.
I refer to this as the “Poor Man’s IPO.” It allows companies to raise up to $50 million per year in a SEC registered and reviewed offering. Shares are freely trade-able upon their issuance, offer lighter financial and non-financial disclosures compared to a full-on IPO, and ongoing reporting requirements which are reduced both in terms of the quantity of information and the frequency of reports. Rule 506(c) gives you the opportunity to reach a much broader audience and potentially reduce your cost of raising capital. It also gives a whole new group of investors the chance to participate in private placements.
Rule 506(b) is familiar to most of us in this finance industry. Companies using this rule can sell securities to any number of accredited investors, and up to 35 non-accredited investors. You don’t have to verify investors’ accredited status yourself, but you must not advertise the offering publicly in what’s known as “general solicitation.” And, you must take great care to only offer your securities to buyers that you already know and believe to be accredited.
The new Rule 506(c) allows you to advertise your offering. There need not be a prior relationship with the investors who buy your securities. But, you do have to verify that anyone who actually invests is an accredited investor. When issuers advertise their offering, they can raise more money, faster, by appealing to a wider range of investors. You don’t have to rely on “friends & family” or the traditional gatekeepers to help find suitable investors. Now you can make your case directly to the market and let the strength of the offering speak for itself. From the investor’s perspective, an advertised 506(c) placement is a huge new opportunity, too. Investors can more easily search for placements that suit their needs, and they don’t have to have any kind of insider connections to uncover the best offerings. It’s much more a level playing field now.
For entertainment entrepreneurs you now have two attractive options to raise large amounts of money for your movie, television show(s) or slate of projects: Tier 1 allows issuers to raise up to $20 million, but you cannot make general solicitations to the public; Tier 2, allows you to raise up to $50 million and advertise your offering. In both Tier 1 and Tier 2 offerings issuers must submit, and have approved, an “offering circular” to the SEC. For Tier 2 offerings, the SEC included a provision that allows you to ‘test the waters’ — allowing you to validate investor demand prior to preparing a full-blown offering circular. Tier 1 offerings (up to $20 million) are not exempt from blue sky filings, which require issuers to file documentation with each state that they plan to raise capital in. While Tier 2 (up to $50 million) offerings are exempt from blue sky filings, Tier 2 issuers must make semi-annual and annual filings with the SEC that include audited financial statements for the two most recent years, along with narrative disclosures.
These new fundraising tools work best for companies with highly recognizable brands and market awareness. But the process is there for everyone to take advantage of. All you need is a good securities lawyer and experienced CFO, and you could raise up to $50 million using the Reg A+ system. For example: If you are Michael Mann and you wanted to make the sequel to Hancock - you could simply set up a production company under Tier 2 guidelines and raise up to $50 million from the public, without having to file all the onerous IPO paperwork or submit to tedious Sarbanes Oxley accounting requirements.
It should be noted that if all you need is less than $5 million, Reg D 504 and 505 offerings are still the best way to go. No blue sky provisions, no need for audited statements and no reporting requirements. All you have to do is file a Form D with the SEC and you are in business. 504 offerings can be advertised to the public, but you can only raise up to $1 million in 12 months. 505 offerings allow you to raise up to $5 million in 12 months from accredited investors and up to 35 non-accredited investors – but no general solicitations are allowed.
So, times have changed... Entertainment entrepreneurs who don’t at least consider the new Rule 506(c) are leaving valuable options on the table. And as fundraising efforts continue to shift online, becoming more transparent and efficient, entertainment fundraisers will win as they enjoy better, faster, cheaper access to the capital they need to thrive.
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