Wednesday, May 18, 2016

Entrepreneur's Guide To Regulation A+

Regulation A+
In 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act greatly expanded entrepreneurs’ access to capital by allowing them, under certain circumstances, to solicit capital investment more widely. The JOBS Act mandated two SEC rule updates and expansions – Expansion of Regulation D under Title II (which you can read more about here), and Expansion of Regulation A under Title IV. The hope is that these new rules will have a positive impact on the U.S. economy since 65% of new jobs are created by small businesses.
Reg. A is the longstanding SEC rule that allows companies to offer and sell securities to the public, but with more limited disclosure requirements than those of publicly reporting companies. While this would seem to appeal to smaller companies in early stages of development, few companies take advantage of it, mainly due to such burdensome requirements for an offering that is capped at $5 million. As a result of the JOBS Act mandate, in 2015 the SEC amended Reg. A to create a new exemption from registration called Reg. A+. Under Reg. A+ companies can raise up to $50 million. Reg. A+ has two Tiers, with requirements as follows:
Regulation A+
In many ways, Reg. A+ is middle ground between a traditional fundraising under Reg. D and an IPO; some even call a Reg. A+ offering a “mini IPO.” Similar to an IPO, Reg. A+ allows companies to raise capital from all investors and it requires a degree of regulatory review. However, fees associated with a Reg. A+ offering are expected to be much lower than a traditional IPO, and ongoing disclosure requirements are much less burdensome.
Reg. A+ issuers may also “test the waters” before committing to a financing. This allows companies to gauge the potential success of a Reg. A+ offering and decide whether or not to move forward prior to spending time and money on the SEC approval process.
Elio Motors is the first company to raise equity and go public under Reg. A+. In this deal, which closed in February 2016, the company raised over $16 million in funding. Further information on the deal can be found here.
While some companies are dipping toes in the water, several questions remain. Can small, early stage companies afford Reg. A+? Or, did the SEC simply make cheaper for middle and late stage companies to execute public offerings? So far, it looks like the latter might be true.
Bob Zeglarski can be reached at 615-933-3545 or via email at Cutwater Law provides legal services to the creative industries. Clients include small and medium-sized businesses, and entrepreneurs in tech, television, film, music, publishing, and digital media.

Thursday, May 5, 2016

Producer's Guide to SAG-AFTRA's New Media Agreement

SAG-AFTRA (“Screen Actors Guild‐American Federation of Television and Radio Artists”) is a labor union that represents over 160,000 film and television performers, actors in radio, video games, announcers (in both radio and television), newspersons, singers and recording artists (both royalty artists and background singers), performers in commercials, and actors working as stunt persons and specialty acts. It is dedicated to protecting its members’ interests and improving wages, hours and working conditions. To that end, SAG-AFTRA has designed a series of contractual agreements that apply when any of its members is engaged in a production. Therefore, if you wish to engagea SAG-AFTRA member in your production, you must become a “signatory” to the relevant SAG-AFTRA agreement and agree to its terms. To be clear, SAG-AFTRA members cannot work for you unless you are a signatory to the relevant SAG-AFTRA agreement. Unfortunately, most new media producers fail to realize that SAG-AFTRA covers all forms of media, including small budget, online productions. This article provides a quick overview of the New Media Agreement, including, when you need it, and what it requires of you as a producer. 
SAG-AFTRA’s New Media Agreement, which covers dramatic (scripted) and non-dramatic (non-scripted) entertainment productions, is intended for initial exhibition via the internet, mobile devices or any other new media platform (now known or hereinafter devised). The New Media Agreement is generally thought to be SAG-AFTRA’s answer to online content and generally covers small productions, including content like webisodes, reality television shows and motion pictures initially released online.
While SAG-AFTRA’s New Media Agreement broadly covers most productions, it excludes:
  • Motion pictures made for an initial theatrical release (including film festivals);
  • Programs made for an initial television or DVD release;
  • Video games;
  • Commercials and Public Service Announcements; and
  • Any type of production or medium otherwise covered by any other SAG-AFTRA agreement.
Unlike the other signatory agreements, the New Media Agreement does not require minimum compensation. Initial pay is completely negotiable under the SAG-AFTRA New Media Agreement for productions that do not meet the high budget threshold. While there are no minimums under the Agreement, keep in mind that local, state and federal minimum wage laws still apply. Payment is due to the performer no later than five business days from the date worked. SAG Pension and Health or AFTRA Health and Retirement contributions are due on the negotiated initial compensation, at a rate of 17%.
Subject to certain guidelines, you may hire both SAG-AFTRA actors and non-union actors. The guidelines are as follows: all principal performers and the first ten background performers, per day, must be covered under a SAG-AFTRA contract. If, within reason, you need to hire a non-union member for any covered role you must submit a Taft-Hartley report within 15 days of the first date worked, stating your reason for hiring that performer over a union performer.  
You are able to defer payment to your performers under the SAG-AFTRA New Media Agreement if your performers agree to the deferral. Pension and Health or Health and Retirement contributions will also be deferred until payment is triggered.
Residuals will be due for use in new media only if an original, made for new media program’s final total cost, as exhibited, is $25,000 or more per minute and it is exhibited on a consumer-pay-platform beyond 26 weeks. You may distribute your new media production beyond new media, after the initial new media release, without the prior consent of your performers or an upgrade in payment; however, residuals will be paid for the use of Made for New Media productions in traditional media based on the appropriate existing SAG, AFTRA or SAG-AFTRA Agreement formulas.
Becoming a signatory to the SAG-AFTRA New Media Agreement can be done through a paper application or by applying online. You can find the online application to sign SAG-AFTRA New Media Agreement here:
Bob Zeglarski can be reached at 615-933-3545 or Cutwater Law provides legal services to the creative industries. Clients include small and medium-sized businesses, and entrepreneurs in tech, television, film, music, publishing, and digital media.

Wednesday, April 20, 2016

Panama Papers Hack Demonstrates Value of Record Retention Policies

More than 11 million confidential documents spanning nearly 40 years were recently hacked from Panamanian law firm Mossack Fonseca. The cache of documents, known as the Panama Papers, contain client information that never should have been accessible to hackers.  Clearly, a well thought out record retention policy could have mitigated Mossack Fonseca's liability.  As a business owner or executive, you should learn from Mossack Fonseca's mistake and ensure that your organization has a comprehensive record retention policy.

One of the fundamental policies any business should have is an effective, functioning, and compliant record retention policy. A good record retention policy will outline all legal and compliance recordkeeping requirements applicable to your business, provide your employees direct guidance to ensure that records are kept as long as legally required, require periodic document purging in a systematic and controlled way, and ensure that employees adhere to company stated recordkeeping requirements.

While it may seem daunting, there are many benefits to having a good record retention policy:

  • It ensures that records are kept for the proper period of time and that regulatory recordkeeping requirements are being followed.
  • It demonstrates compliance with recordkeeping statues and laws to regulators.
  • It improves the ability to locate and retrieve records.
  • It identifies the roles and responsibilities of staff.
  • It mitigates costs by controlling the growth of records and reducing the amount of duplicate records.
  • It reduces litigation risks, and provides the “green light” to purge certain documents.
  • It establishes transparency and good faith.

The risks of not having a good record retention policy are obvious, especially as a business grows. The Panama Papers are only one example of the value of such a policy. We’ve all spent time looking for a document we just can’t seem to find. But what happens when the subject matter of the document is under legal investigation or is being requested by a regulator like the Securities and Exchange Commission? Failing to keep a good record retention policy in place exposes a company to unnecessary risk. Adopting a written record retention policy ensures that your staff follows consistent guidance about document destruction and that document purging becomes a regular business practice.

There are several components to developing a good record retention policy. The first is knowing the rules and regulations that apply to your business. Not every piece of paper needs to be retained. Unfortunately, however, there is no single regulation for document retention that covers every business scenario. You’ll need to spend some time digging into the rules and regulations applicable to your business, or engage the help of a professional that already understands these rules and regulations.

Second, you’ll need to convey recordkeeping time frames to your staff in a clear and concise way. Rules and regulations can be confusing, and often documents are categorized into broad categories. Marry the applicable rules to the documents your staff uses on a daily basis so they understand exactly when each document can be purged, eliminating any guesswork and inconsistency. Some firms provide their employees a list of documents with destruction dates attached. Other firms use software that will automatically purge documents upon their expiration which is based on a standard classification code.

Third, develop a purge schedule and apply it in a systematic manner. Perhaps you’ll implement an annual “spring cleaning” event, whereby all of your staff reviews their files and purges accordingly. Or you might do this quarterly or monthly. A good record retention program should be part of your corporate culture and infrastructure. Both the implementation and deployment of a purge schedule are key elements in establishing "good faith" effort and ensuring a sound records management program. Always remind employees that certain events, such as litigation or regulatory investigation, may cause the record retention program to be immediately suspended. Have a way to communicate these events quickly to your staff.

Fourth, pay proper attention to confidential information, personally identifiable information, trade secrets and/or sensitive information. Documents that are sensitive should be handled carefully. Don’t allow your staff to throw these in the trash or recycle bin. Be sure that you have a shredder on the premises. Companies like ShredIt and Iron Mountain often can be hired to shred documents on a routine basis.

Fifth, don’t forget about email. While it may not be obvious, emails and the documents contained within them are records, and, therefore, email should also be addressed in your record retention policy.

In closing, as your business grows it becomes increasingly important to have a good record retention program in place. Not only will it ensure your compliance with the recordkeeping rules and regulations relevant to your business, but it will also make your day to day operations that much more efficient. While these programs do take time to develop, in the end you’ll find the benefits worth it. Learn from Mossack Fonseca's mistake.

Bob Zeglarski can be reached at 615-933-3545 or Cutwater Law provides legal services to the creative industries. Clients include small and medium-sized businesses, and entrepreneurs in tech, television, film, music, publishing, and digital media.

Tuesday, April 12, 2016

Status Update: Crowdfunding

In 2012, in an effort to revive the job market, President Obama signed into law a bill known as the “JOBS Act” (Jumpstart Our Business Startups). He called it a “potential game changer” for entrepreneurs seeking financing to start or expand a business. Most notably, it allowed entrepreneurs to solicit investment online and allowed the average investor (not just the wealthy “accredited investor”) to make an investment, a concept known as “crowdfunding.” On the federal level, the Securities and Exchange Commission (“SEC”) was slow in drafting the necessary rule amendments that would allow crowdfunding to occur across state lines (interstate crowdfunding). But state agencies and lawmakers were eager to open up capital for their local businesses. They began passing crowdfunding laws and regulations which let local businesses raise money from local residents on an intrastate basis, some taking action even before the JOBS Act was signed into law.


Kansas and Georgia were the first states to move forward with intrastate crowdfunding regulations, with their “Invest Kansas Exemption” and “Invest Georgia Exemption,” respectively, both adopted in 2011. They did this by writing their new crowdfunding exemptions so that they worked within the parameters of an existing federal intrastate exemption. Although state crowdfunding exemptions cannot supersede the actions of the SEC, there is a longstanding federal exemption from registration for intrastate offerings under Section 3(a)(11) of the Securities Act of 1933, as amended, and SEC Rule 147, which is a “safe harbor” means of compliance with Section 3(a)(11).

Other states followed suit. In fact, by the end of 2015, only a handful of states had yet to propose or enact regulation. Tennessee’s crowdfunding exemption, Invest Tennessee Exemption, or “ITE,” went into effect on January 1, 2015 while specific rules relating to ITE took effect December 16, 2015. I was so pleased with Tennessee's leadership in crowdfunding that I wrote a letter of support for the proposed regulations. While the rules create an opportunity for issuers to raise equity capital, there are unique anti-fraud risks

State rules, regulations and/or exemptions are not without limitations, however, and there has been much written about whether they will have the desired effect. There are restrictions on the offerings that can be conducted intrastate. Most obviously, issuers can only raise money from investors in their own state. But other restrictions, which vary state to state, can also be burdensome. These include: limits on funds to be raised, limits on the amounts an investor can invest, limits on those that can be issuers, limits on transferability, increased disclosure and reporting requirements, required use of broker-dealers or crowdfunding portals, required use of internet site operators, and required use of escrow agents. In addition, in order to qualify under the state rules, regulations and/or exemptions, the offering must fall under the federal exemption from registration under Section 3(a)(11) and SEC Rule 147.

Equity Crowdfunding Tennessee]

In October 2015, the SEC finally issued 568 pages of final rules to implement the JOBS Act, which become effective May 16, 2016. These are the parameters of the crowdfunding rules:
  • Issuers can raise a maximum of $1 million in a 12-month period
  • Investors whose income or net worth are less than $100,000 are limited to $2,000 or 5% of their income, whichever is greater, in aggregate crowdfunding investments over a 12-month period
  • Investors whose income or net worth is greater than $100,000 may invest up to 10% of their income or net worth, not to exceed $100,000 in a 12-month period
  • All crowdfunding transactions must take place on an SEC-registered intermediary (either a broker-dealer or a crowdfunding portal)
  • Intermediaries must take measures to educate investors and mitigate fraud
  • Issuers must provide basic financial information (the proposed rules require audited financials for offerings greater than $500,000)

Thursday, February 4, 2016

Risk Disclosure For Investors In Film And Television

A Private Placement Memorandum (“PPM”), also known as an offering memorandum, is a legal document that outlines the objectives, risks and terms of an investment in a private placement of capital.  It provides potential investors with valuable information about the risks associated with the offering, enabling them to make an informed investment decision.  It also serves to protect those making the offering, as full and accurate disclosure can protect them from liability down the road. 

In the film and television industry, risk disclosure is paramount, as very few industries have higher risks and higher rewards.  It truly is the “ultimate alternative.”  Consider the 2002 film “My Big Fat Greek Wedding,” which cost $6 million to produce, and grossed $369 million worldwide.  The film is among the most profitable of all time, yielding a 6,150% return.[1]  At the same time, countless films have been box office bombs, many starring A list actors.  Consider the 1995 film “Cutthroat Island,” starring Geena Davis, which lost approximately $105 million - the biggest financial disaster in movie history.[2]

Trailer: Cutthroat Island (1995) 

With so little predictability in the film and television industry, one can see why it’s in the best interests of both the potential investors and those making the offering to be upfront and clear about the risks of investing.  In addition to the customary risks of investment, film and television has unique risks that can be broadly categorized as follows:

  • Having an A-list cast, producer and/or director is no guarantee of success;
  • Risk mitigation tactics (film slates, for example) can prove ineffective;
  • Audience tastes cannot be predicted;
  • Marketing plans can fail;
  • Equipment can fail and technology can become obsolete;
  • Intellectual technology infringement (piracy) is a serious threat to profitability; and 
  • The unexpected can happen: terrorism, strike, inclement weather, serious injury/death.

In an industry so rife with risk, it’s necessary to seek counsel, whether you are the investor or the one seeking investment, from an attorney who is familiar with both entertainment and securities regulation.

Thursday, October 15, 2015

Equity Crowdfunding Will Become Reality In 2016

In 2016, regular people (aka, the "crowd") will gain access to a highly sought after, often risky asset class: start-up and early stage companies. FINRA, the Financial Industry Regulatory Authority, announced the release of its rules for crowdfunding portals promulgated in connection with Title III of the Jumpstart Our Business Startups Act. This rule release suggests that the Securities and Exchange Commission will soon release its final version of “Regulation CF," paving the way for a launch of crowdfunding platforms in 2016.