BUSINESS PLAN OR SECURITIES DISCLOSURE DOCUMENT

	By John W. Cones, J.D.

	Based on numerous conversations with independent feature film producers,
	there appears to be a considerable amount of misunderstanding and/or
	misinformation in this community regarding when to use a business plan as
	opposed to a securities disclosure document if seeking to raise money from
	investors to develop, produce or distribute one or more independent feature
	films. First, we have to understand what a business plan is and how it
	differs from a securities disclosure document. We have to recognize that
	although there may be similarities (i.e., some overlap), these two documents
	are not the same things. The differences are based on both the contents of
	these two documents as well as in the appropriate uses of the documents.

	A business plan is a written statement that describes and analyzes a
	business (in this particular case, a proposed independently produced
	feature-length movie) and gives detailed projections about the future of
	that business. A business plan is not an investment vehicle. You cannot sell
	shares in a business plan. Nobody can invest in a business plan. If a
	business plan is used to actually raise money, it must be used in the proper
	circumstances and must be combined with an appropriate investment vehicle.

	Thus, a business plan, combined with an appropriate investment vehicle, can
	be used to raise money, but only in limited circumstances. What are those
	circumstances? A business plan can be used to raise money from one, two or a
	few active investors. A business plan cannot be appropriately used to
	actually raise money from a larger group of passive investors.

	So, what's the difference between an active and a passive investor? An
	active investor is someone who is regularly involved in helping you the
	filmmaker make important decisions with respect to your film. In the context
	of a film, that means helping to select the script, making changes in the
	script, selecting the director and lead actors, choosing the line producer
	and director of photography, helping to solve problems that come up during
	production, helping to make decisions with respect to critical questions
	relating to distribution and so forth. These one, two or a few active
	investors need to be capable of making valuable contributions on these
	important questions (i.e., they need to have some knowledge of and
	experience in the film industry that is relevant to what you are doing) and
	be actively involved in helping to make such decisions on a regular basis.

	That does not mean they should have veto power, although some investors who
	put in most of the money to produce a film, for example, may insist on such
	control, and in that instance, it may become a problem for a producer. In
	addition, unless an entity is created to provide limited liability, active
	investors may also not have the limited liability protection offered by an
	entity, and, of course, most people with enough money to invest a
	substantial amount in a high-risk venture like an independent film, will
	most likely prefer to enjoy limited liability protection. That's just
	another factor to consider when determining whether to use a business plan
	and seek financing from one, two or a few active investors.

	On the other hand, a passive investor is someone who is not an active
	investor (i.e., someone who is not regularly involved in helping to make
	those important decisions). This is an important distinction, because it
	represents the essence of the difference between a non-securities offering
	and a securities offering. Essentially, anytime you are seeking to raise
	money from one or more passive investors, you are selling a security, no
	matter what you call it. So, the producer's decision to raise money from
	active or passive investors has important implications and consequences.

	If you are really trying to raise money from one, two or a few active
	investors, who are both capable of being regularly involved in helping to
	make important decisions and willing to be so involved, you can use a
	business plan combined with an appropriate investment vehicle to provide
	them with the information on which to base their decision. But, if you are
	raising money from one or more passive investors, you are required by law to
	provide those investors with a properly prepared securities disclosure
	document (not a business plan) prior to their investment.

	In addition, that business plan should not suggest in any way that you are
	really seeking to raise money from passive investors. In other words, either
	leave out the discussion about the specific financial arrangements or at the
	very least, avoid references to interests in limited partnerships, or units
	of a manager-managed (passive-investor) limited liability company ("LLC").
	Further, the language in a business plan should not suggest or imply that
	the investor will not be permitted to be regularly involved in helping to
	make important decisions, since that is at the very heart of what makes him
	or her an active investor. It may be the better practice to actually state
	that the business plan is being used in conjunction one of those specific
	but appropriate investment vehicles for the purpose of raising funds from
	one, two or a few active investors. In any case, absolutely do not include
	language that you either plan to or may later create a limited partnership
	or manager-managed LLC, because that language clearly indicates that you are
	planning a securities offering. Also, do not suggest by the language in the
	business plan that you intend to raise money from more than one, two or a
	few active investors, because at some undefined point, it is no longer
	possible to keep a large number of investors "actively" involved in a
	business venture in a meaningful way.

	Now, what are those investment vehicles that can appropriately be used in
	conjunction with a business plan for seeking funds from one, two or a few
	active investors? As discussed in more detail in my book "43 Ways to Finance
	Your Feature Film", the four vehicles are: (1) the investor financing
	agreement (a copy of which appears in the book "Film Industry Contracts"--
	available at the Samuel French Bookshop in Hollywood), (2) the joint venture
	agreement (a sample of which also appears in the "Film Industry Contracts"
	book), (3) the initial incorporation (see discussion in "43 Ways to Finance
	Your Feature Film") and (4) a member-managed (active-investor) LLC (which,
	in addition to the filing with Secretary of State, must also have an LLC
	operating agreement to be properly formed).

	So, recognizing that there are some obvious disadvantages to seeking funds
	from active investors (1) they may interfere with your creative control, (2)
	the investment vehicle chosen may not offer any limited liability protection
	to your investors and (3) it may be more difficult to find prospective
	investors who are both capable of and willing to be a lead investor in a
	high-risk investment like independent film, it is also important to
	recognize that by seeking active investor financing, you are eliminating at
	least two of the advantages of a securities offering (i.e., spreading the
	risk amongst a larger group of passive investors, none of whom will
	typically be hurt too badly if they don't get their money back or make a
	profit, and, of course, passive investors don't interfere with your creative
	control.

	Now, a quick note about terminology. The securities disclosure document is a
	broad term that applies to the required written information that must be
	provided to prospective investors before they invest in all securities
	offerings. The terms "prospectus" and "offering circular" are used to
	describe the securities disclosure documents associated with various types
	of public/registered offerings. These securities offerings are usually too
	expensive, complicated and time-consuming to be of much interest to
	low-budget independent filmmakers. On the other hand, the private placement
	offering memorandum or "PPM" is the term used to describe the securities
	disclosure document associated with an exempt/private offering (most
	commonly used by low-budget indie filmmakers).

	Specific rules promulgated by the federal Securities and Exchange Commission
	and, in some instances, state securities regulatory authorities, provide
	guidance on what information must be disclosed in these securities
	disclosure documents and how that information must be presented. There are
	no such rules for business plans, and that's why there is both such a wide
	disparity in the content of business plans and why the contents of business
	plans are always different in some respects from the contents of a
	securities disclosure document, even though some elements of the two are the
	same or similar.

	If you have additional questions, about these issues, feel free to post your
	questions relating to investor financing of independent film at my question
	and answer site online at http://www.homevideo.net/coneslaw/finforum.htm or
	http://www.mecfilms.com/guide4.htm or by entering "Investor Financing of
	Independent Films" in any search engine.