What does the JOBS Act mean for raising money for Broadway?

Good question.

There’s been a lot of buzz about the recently signed JOBS Act and just what all the jargon and legalese in its many pages means to us out here pounding the pavement looking for capital.

I’ve watched with keen interest, of course, blogging about it a few times, since what I did with Godspell is so closely related to what I’ve always believed to be the future of capital raising.  And while the bill has been signed into law, its benefits aren’t available to the public just yet.  So we still have some time to figure it out.

But what exactly are those benefits?  What are the pitfalls?

Like I said, good question.

And based on the number of emails I’ve gotten from all of you ever since I started talking about JOBS, you’ve been wondering the same thing.

So, I decided to go to a couple of experts . . . two of the guys that made Godspell happen . . . Daniel M. Wasser of Franklin, Weinrib, Rudell & Vassallo and Gary Emmanuel of Sichenzia Ross Friedman Ference LLP.  These two lawyers were with me from Day 1 of my brainstorming about how to crowdfund a Broadway musical using the current regulations.  If anyone was going to be able to explain in layman terms how the new JOBS Act works, it would be them.

The ever-generous Dan and Gary agreed to let me share an article they co-authored about JOBS and its impact on the theater and film community with you.

It’s an awesome article, which is not surprising, considering the expert sources from whom it comes.

Enjoy, and maybe you’ll even use it.  It could be a capital raising game changer.

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The Times They Are A-Changin’:

What does the JOBS Act mean for theater and film producers?

by Gary Emmanuel and Daniel M. Wasser

For years, theater and film producers who lack a network of wealthy backers and need to rely on friends and family have despaired of finding a cost-effective way to raise funds from investors without violating securities laws. Similarly, experienced producers seeking to democratize fundraising and reach beyond a small circle of wealthy backers have faced a daunting regulatory process. With the passing into law of the JOBS Act in April 2012, all that may be changing.

The JOBS Act, also known as the Jumpstart Our Business Startups Act, is designed to make it easier for business startups to raise funds, and theater and film producers will be particularly interested in three innovations. First, the JOBS Act eliminates the prohibition on general solicitation and advertising in connection with “Rule 506 offerings” if all purchasers are “accredited investors.”   Second, the JOBS Act establishes a framework in which financing can be raised privately through crowdfunding.  Third, the JOBS Act authorizes a type of simplified public offering by which producers can raise up to $50 million.

Email Blast:  “Do You Want to Invest in my Movie or Show?”

Under existing rules, an email blast of this sort to a blind list of recipients would likely be regarded as general solicitation and, therefore, would deprive the producer of the so-called Rule 506 exemption.   However, under new rules being developed as a result of the JOBS Act, such an email blast is expected to leave the Rule 506 exemption intact.  To appreciate the significance of this, some explanation of Rule 506 is required.

When raising money from investors in the United States, a company must either register its offering with the Securities and Exchange Commission (SEC) and make a public offering, or it must rely upon an exemption from registration and make a private offering.  Due to the time and costs involved in registering securities, most offerings are conducted in reliance upon Rule 506, an exemption from registration under Regulation D of the Securities Act of 1933.  To put this in perspective, the SEC estimated that in 2010 alone, approximately $820 billion was raised inprivate Rule 506 offerings compared to approximately $200 billion raised in public equity offerings.

To qualify for the Rule 506 exemption certain conditions must be met.  For example, the securities sold must be purchased for investment purposes, sales must be limited to certain high net worth investors known as “accredited investors” in order to avoid more burdensome information disclosure requirements, and no general solicitation or general advertising is allowed. Rule 506 is attractive because there is no dollar limit on the amount that can be raised, there is no limit on the number of accredited investors who can invest, disclosure requirements are streamlined, there is no review process by the federal regulators, and compliance with state securities laws is limited to simple notice filings.

Despite its advantages, the limiting factor in conducting Rule 506 offerings has always been the prohibition on general advertising and solicitation.  Not only is advertising of an offering prohibited in public forums such as newspapers, radio and the internet, but the SEC has traditionally construed the restriction on general solicitation broadly, taking the position that solicitation should be limited to persons with whom the company raising money has a pre-existing, substantive relationship.  Consequently, many producers have found it difficult to expand their pool of potential investors, and they have often sought the assistance of “finders” who have relationships with accredited investors, a practice that is fraught with risk.

Congress recognized that the existing prohibitions on general advertising and solicitation were making it harder for entrepreneurs to raise capital.  Lifting these prohibitions in connection with Rule 506 offerings now means that general advertising and solicitation for investors can take place through traditional media such as newspapers, through the internet and via social media networks such as Facebook, LinkedIn and Twitter. The rules to implement this change are supposed to go into effect in July, and the implications are staggering.

Consider the possibilities:   When the new rules go into effect, it is expected that an offering can be advertised on the producer’s website or the Facebook page promoting the producer’s new film or theater project.  Officers of the production company may be permitted to promote the offering to their friends on Facebook or to their Twitter followers.  A theater producer could put an advertisement in Playbill soliciting potential investors for a new production.  A film producer could combine a trailer with an appeal for investors and run that on YouTube.   But keep in mind that in a Rule 506 offering that takes advantage of the new rules permitting general solicitation and advertising, only accredited investors will be allowed to invest.  The SEC’s rules are expected to spell out the steps the producer must take to insure that all investors are accredited.

Crowdfunding and the Expanded Reg. A-Type Offering:  New Solutions or More Trouble Than They’re Worth?

If a producer raises money through a Rule 506 offering and engages in general solicitation and advertising, then the JOBS Act requires that all investors must be accredited investors.  Since accredited investors are estimated to make up just 8% of theUSpopulation, how does a producer reach the remaining 92%? The JOBS Act creates two possibilities.  The first is the much heralded crowdfunding approach, and the second is a form of simplified public offering that will enable a producer to raise up to $50 million without being subject to all of the reporting and other requirements to which large public companies are subject.

The concept of crowdfunding is the pooling of micro amounts of money from large numbers of people for a particular project.  Originally used to raise money for charities, crowdfunding has been used to fund music, film and other types of projects through the solicitation of donations over the internet. However, the ability to crowdfund for investment purposes has been limited due to regulatory hurdles.

Upon the adoption of rules by the SEC, the crowdfunding portion of the JOBS Act will allow a company to raise up to $1 million per year through crowdfunding.  Part of the rationale for crowdfunding is that if no one risks too much money (commensurate with their income), the risk of loss is reduced if the investment does poorly, so there are limits on how much any one investor can invest.  Disclosure documents including financial information must be filed with the SEC and made available to investors, and compliance with state securities laws is limited.  Perhaps most significantly, crowdfunding sales must be made only through intermediaries – namely, registered broker dealers or funding portals that register with the SEC.  It will be up to the SEC to specify requirements for registering funding portals, and the best guess is that a funding portal will operate in a manner similar to Kickstarter, but for investment funds rather than donations.  Those regulations, along with regulations regarding the crowdfunding filing and disclosure requirements, are expected to be issued by the SEC by the end of 2012.

The expense of complying with the SEC’s regulations will determine whether funding portals develop and companies take advantage of the JOBS Act’s crowdfunding provision.  If the regulations make crowdfunding economically viable, the JOBS Act crowdfunding provision could be of great interest to independent filmmakers who can finance a production for less than $1 million.  Producers of more expensive films might also find crowdfunding useful to finance prints and advertising (so-called P&A offerings).   Most Off-Broadway dramatic plays are financed for less than $1 million, so the potential interest in crowdfunding is obvious.  It’s also possible that crowdfunding could be used to fund established producers’ development activities, including the enhancement of regional theater productions.  Of course, given the success many arts projects are finding in securing funding through Kickstarter, Indiegogo and other, similar platforms, film and stage producers seeking limited amounts of capital will no doubt also consider the crowdfunding donation model rather than the investment model.

The current Broadway revival of Godspell attracted many small investments from unaccredited investors – dubbed the “People of Godspell” by producer Ken DavenportGodspell received lots of press coverage for its innovative use of a crowdfunding model but, in fact, the offering was an audacious return to the past.  Godspell relied on the SEC’s Regulation A, a form of simplified public offering that limits investments to $5 million.  Because Regulation A offerings undergo SEC review and also are regulated by the states, few companies have been willing to invest the time, effort and money necessary to clear a Regulation A offering, particularly given the availability of Rule 506.  With the passage of the JOBS Act, this may change.

The JOBS Act includes provisions that create a new form of offering exemption, modeled on Regulation A, that will allow a company to raise up to $50 million from the public.  However the utility of this new exemption will depend almost entirely on the approach the SEC takes in implementing the rules it is required to adopt.

What’s Next?

In July 2012, the SEC is required to issue rules regarding general solicitation and advertising in connection with Rule 506 offerings – although delays are expected.  Once issued, this should open the floodgates, particularly for media savvy producers with a well-developed internet strategy for reaching potential accredited investors.   For producers, the time to start working on that strategy is now.  By the end of December, 2012, the SEC’s rules regarding crowdfunding are expected to be published. There is no deadline for the SEC to adopt rules for the new $50 million simplified public offering.

In each case, the rules adopted by the SEC could consign these provisions of the JOBS Act to the back shelf.  Alternatively, they could free up untapped capital and help transform how film and theater producers finance their productions. The times, they are a-changin’.

This article was written by lawyers to update selected key legislative and regulatory developments affecting the film and theatrical industry. Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Ken created one of the first Broadway podcasts, recording over 250 episodes over 7 years. It features interviews with A-listers in the theater about how they “made it”, including 2 Pulitzer Prize Winners, 7 Academy Award Winners and 76 Tony Award winners. Notable guests include Pasek & Paul, Kenny Leon, Lynn Ahrens and more.