[NEohioPAL] Limited Liability Companies for Films - Installment II

[Mary Ellen Tomazic]

II. Comparison of LLCs with other Business Entities: Financing and
Securities Laws

by Mary Ellen Tomazic

       Obtaining financing for your film is a daunting task, especially in
this rough economy. If you do find an `angel’ to invest in your film, the
type of business organization form you select will make a difference in how
you receive the funds. Partnerships are the most common business form, and
other forms, such as an LLC, with more than one member will revert to this
model if statutory requirements are not met. The classic investor model for
a Broadway production is a Limited Partnership, which allows for general
(managing) partners and limited (non-managing investor) partners. In this
form, the promoters are in charge, the limited partners are entirely
passive. Promoters hire and organize things; limited partners give in their
percentage of the funds and sit down! Of course, the tax treatment is
different from an incorporated company, with each Partner being taxed on the
individual level by his percentage of participation in the profits. The
entity itself is not taxed as is the case with a corporation. A Limited
Liability Partnership has general partners and limited partners who are
liable for partnership debts and torts, but *not* for those of the
individual partners not done in the name of the partnership or not caused by
the Limited Liability Partnership.  The Limited Liability Partnership can be
held liable for torts, injuries to persons or property caused by the
partnership, and that includes civil rights violations and copyright and
trademark infringement. Determining the type of organization you want for
your film venture will depend on what kind of association the parties
desire. A limited partnership may be suited to an investor who wishes to
avoid the greater potential liability of a general partner and is willing to
pay the price of giving up a say in
management.[1]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn1>
 A limited liability company may be best suited to a group of people who are
pooling their labor and resources to make one or more movies, but do not
want to put their individual residences and assets at risk.

        Limited Liability Companies are a good form to use for films as long
as you are diligent about your recordkeeping. Raising money for your film as
part of an LLC has some extra concerns, since selling interests or
memberships in an LLC or even in a Limited Liability Partnership most likely
are going to be “securities” within the scope of both state and federal
securities laws.[2]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn2>Any
“offer to sell” (not just a completed purchase) of LLC memberships can
put the transaction into the securities realm, which requires compliance
with state and federal laws and regulations. Even if membership in a small
member-managed LLC ought not to be seen as a security, any LLC membership
interest that is solely for the purpose of investment is classified as a
security. Ohio law explicitly mentions LLC memberships as securities in its
definition of them.[3]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn3>Although
Ohio Securities laws provide for exemptions to full compliance for
offerings of LLC memberships, some exemptions must still be claimed in a
filing with the Ohio Division of Securities, which must find by rule that
registration is not necessary or appropriate in the public interest or for
the protection of
investors.[4]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn4>The
most common reasons for exemption of an LLC membership as a security
by
issuers include a number of provisions involving smaller numbers of
investors. The first under Ohio law allows an offering to ten or fewer
purchasers[5]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn5>
.  This exemption requires that the total number of purchasers (or members,
in the case of an LLC) in this state in one year does not exceed ten. It
also requires that no advertisement, article, notice, or other communication
be published in any newspaper, magazine or similar medium or broadcast over
television or radio in connection with the sale, but the use of offering
circulars delivered by the issuer to select individuals is allowed. The
issuer must also reasonably believe after investigation that the purchaser
is purchasing for investment. The exemption also limits any commission or
other remuneration for sales, and that such commission is paid only to
registered dealers or salespersons of securities registered under state law.
[6]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn6>This
exemption does not require a filing to perfect it, but an issuer
should
memorialize reliance of the LLC on this exemption in its company
records.[7]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn7>

        Another reason for exemption refers to the federal securities law,
providing that section 5 of the Securities Act of 1933 do not apply to the
sale by reason of an exemption under section 4 (2) of that
act.[8]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn8>These
are so-called “private offerings” under O.R.C. 1707.03(X) and the
federal act, not involving a “public offering”, which thus prohibits any
advertising or general solicitation, and also requires investment intent. A
Form 3-Q must be filed with the Division within sixty days of the date of
sale for this exemption to be valid, and the Ohio Administrative Code
section 1301:6-3-03(B)(6) defines the date of sale. The offering must also
comply with the conditions of Securities and Exchange Commission Rule 506,
which among other things prohibits advertising and general solicitation, and
limits the number of purchasers to thirty five “accredited” investors, which
under SEC Rule 501, are directors, executive officers, or general partners
of the issuer, or has a very high net worth of over 1 million dollars.
Non-accredited investors, which the rule allows in unlimited numbers, are
required to be “sophisticated”, and disclosure documents must be delivered
to them. Out of state issuers have additional filing requirements under Ohio
law.[9]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn9>Private
offerings under O.R.C. 1707.03(W) have the same investor
requirements as that of section (X), and are limited to $5 million under SEC
Rule 505. A filing fee of $100.00 must be included with form 3-W and sent to
the Division of Securities within five business days prior to the first use
of an offering document or the first sale in
Ohio.[10]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn10>This
exemption also has a “Bad Boy” provision, which disqualifies any
issuer
or broker-dealer which would be prohibited from using the exemption because
of convictions for fraud or securities
violations.[11]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn11>Lastly,
under O.R.C. 1707.02(G), private offerings of commercial paper and
promissory notes that are not offered directly or indirectly to the public
are exempt from registration.  O.A.C. 1301:6-3-02 defines private offering
and details other exempt securities, including those of commercial paper and
promissory notes.[12]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftn12>You
can see from the requirements of the private offerings exemption that
the purpose of the securities laws is to safeguard smaller investors who do
not have a lot of money to lose, as an `accredited’ investor does. They are
also designed to allow an exemption for an investor who is `accredited’
because of being a director, executive officer or general partners of the
issuer, because he or she has a hand in the management of the LLC and its
assets personally.











Mary Ellen Tomazic is an attorney in Cleveland specializing in entertainment
issue such as copyright, trademarks, contracts and licenses for musical
groups and filmmakers.


------------------------------

[1]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref1>
Thomas
Swisher, Partnerships KP 8.01, Ohio Forms & Transactions (2005).

[2]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref2>O.R.C.
1707.01 -99(2007), Ohio Administrative Code 1301:6-1-01 to 03.
(2009); Securities Act of 1933, 15 U.S.C. §§77a -77aa 2010).

[3]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref3>O.R.C.
1707.01(B).

[4]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref4>O.R.C.
1707.03(V).

[5]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref5>O.R.C.
1707.03(O).

[6]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref6>
*Id.*

[7]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref7>Thomas
E. Geyer, Basics of Ohio Securities Law, September 16, 2003 (Bailey
Cavalieri LLC, Attorneys at Law pdf).

[8]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref8>O.R.C.
1707.03(Q).

[9]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref9>O.R.C.
1707.11.

[10]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref10>Geyer,
Basics of Ohio Securities Law.

[11]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref11>O.R.C.
1707.03(W) (2) (a).

[12]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Film%20-%20Installment%20II.docx#_ftnref12>O.A.C.
1301:6-3-02(D).
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