How To Violate Securities Laws In Hollywood Without Even Trying

Here is how you can violate securities laws (replete with jail time and personal liability for repayment of any investment) without even trying:

1. Fail to realize the remarkably broad scope of the definition of “securities,” which generally includes anytime someone pays money to someone and hopes to get more money back later, either by payment from that someone or by sale of the investment. Yes it is that broad. Here are some examples that most people don’t realize are securities (assume that all the funds are used to finance a film):

a. A loan from a friend that is due in over nine months, even if secured by the film;

b. Any contract providing for an investment in exchange for a share of profits, even if the investor does not get any ownership in an entity or the film. These contracts may be called “investment contract,” “Co-Production Agreement,” “Co-Financing Agreement,” or any other name;

c. The issuance of “digital coins,” “fungible tokens,” and even “utility tokens” if they are expected to be traded or redeemable for cash. The SEC has brought forty-two enforcement actions in the last two years based on this category alone; and

d. A membership interest in an LLC or shares in a corporation.

In fact, it is easier to summarize what are not a securities, and the main categories are loans from banks and investments where the investor has management and control rights (and not just minority voting rights).

2. Make a payment to any third-party “finder” to raise financing unless the finder is a licensed broker-dealer.

3. Raise more than $1 million and include even one investor other than “accredited investors,” which is limited to (a) individuals with more than $1 million of net assets (excluding their home) or more than $200,000 of annual income ($300,000 if married) and (b) entities with more than $5 million of gross assets.

4. Fail to disclose all material facts relating to the investment, such as by not preparing a private placement memorandum that includes all material risks.

5. Give the investors projections showing a profit without explaining in painful detail why the projections might not come true. Also fail to advise investors in writing that they may lose all or part of their investment.

6. Fail to recognize that liability falls on every individual “promoter,” which generally includes any individual involved in promoting the investment. The good news is that investors are not liable for any violation of the securities laws by promoters, and indeed the investors should hope such violations occur, since it gives the investors a “put” right if the investment goes south.

So if you follow these guidelines, you too may enjoy the benefit of free room and board (in jail) and the pride that comes from being personally liable to repay investors.