As of September 23, 2013 the SEC passed rules for the JOBS ACT allowing filmmakers to advertise their fundraising publicly (Billboards, Twitter, LinkedIn, Websites, etc). This is causing a lot of excitement within the film community. What’s scary for filmmakers, though, is the tasks of making “reasonable efforts” to ensure that investors financing the film are “accredited investors”, not to mention the filing of “Form D” with the SEC. How is this an opportunity for CPA’s?
NEW SEC LEGISLATION
General solicitation for the financing of filmmaking has been illegal until recently. In order to comply with the JOBS ACT to create small business in America, the SEC passed Rule 506 (c) to allow general solicitation and advertising for a private placement offering. However, in a Rule 506(c) private offering all of the purchasers must be accredited investors and the issuer must take reasonable steps to determine that the purchaser is an accredited investor. The SEC amendments can be read at this link
The SEC has defined an “Accredited Investor” in 8 ways – see this link for a very clear, and easy to read, definition (there are 8 types) http://www.sec.gov/answers/accred.htm . The most interesting to me is #7: “a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year”.
HERE’S WHERE THE CPA COMES IN – “REASONABLE STEPS”
The SEC makes some suggested “reasonable steps”. Here is a quote from the amendments web page published by the SEC: “Rule 506(c) sets forth a principles-based method of verification which requires an objective determination by the issuer (or those acting on its behalf) as to whether the steps taken are “reasonable” in the context of the particular facts and circumstances of each purchaser and transaction”. You can read more about the verification methods BY CLICKING HERE. A review of the last 2 years tax returns , or a review of bank statements, investments, etc will verify that status. However, accredited Investors will not be comfortable turning over this information to filmmakers directly. This is where a CPA enters the stage.
FORM D FILING WITH THE SEC – A TASK FOR THE CPA
In addition to verifying the Accredited Investor status, the filmmaker must also file a Form D with the SEC. See http://www.sec.gov/answers/formd.htm for the details of the Form D, as well as a download of the form itself. As you can see from the form, it is a relatively simple online filing – at least for a CPA. In my experience, most filmmakers would want help with the form. Again, this is an opportunity for a CPA. There are proposals to file the Form D at least 3 times: 15 days before applying exemption under Rule 506 (c), 15 days after the first investment, 30 days after the funding has been concluded and whenever a change to the solicitation materials has been made. For more info click here.
PROPOSED NEW RULES TO ENHANCE THE SEC’S ABILITY TO EVALUATE
At the time of this writing (Oct-2013) there are a few additional proposals, which you can see here http://www.sec.gov/news/press/2013/2013-124-item3.htm . The SEC does a surprisingly good job of writing their articles – they’re very easy to read. Since we’re on the topic of opportunities for the CPA, please read the proposals with an eye towards creating new business.
FINALLY, THE “BAD ACTOR” DISQUALIFICATION
Your client, the filmmaker, is also responsible to ensure that anyone participating in the fundraising does not fall under the BAD ACTOR provisions. This includes investors, investment advisers, producers or anyone else mentioned in the fundraising documentation. BAD ACTORS are individuals that have committed a crime, fraud, etc. On July 15, 2013 Morrison Foester wrote a very short, clear article about this: to see this article click here. There are simple ways to discover this information, and I would suggest that the CPA would be able to perform this discovery for the client as well as the above services.
Cheers / John
To learn more about Film Accounting and Auditing see http://www.filmaccounting.com/filmaccounting-cpe.htm This is definitely not the same old CPE!
My next workshop is in Orlando Oct 12th and 13th, 2013. Learn more about the workshops at http://www.filmaccounting.com