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March 26th, 2015
“MY BIG FAT GREEK WEDDING”: A Securities Law Trap
We frequently see private placement memoranda, seeking to raise capital for films, which refer to independent film success stories such as "My Big Fat Greek Wedding," "Little Miss Sunshine," or other independent films which became box office hits.
The recent US Supreme Court decision in Omnicare, Inc. v. Laborers District Counsel Construction Industry Pension Fund should make all producers think twice about whether, or how, to include these success stories.
In the Omnicare case, the defendant had included in a registration statement opinions that it was legally complying with laws regarding its practice of accepting rebates from drug companies in connection with its business of providing pharmacy services for residents of nursing homes. Even though Omnicare noted in the registration statement, near its statements of belief that it was legally compliant, that state and federal enforcement actions could adversely affect its business, the Court found a potential violation of Section 11 of the 1933 Securities Act: there was an issue for trial about whether Omnicare could hold a reasonable belief that it was legally compliant in light of such federal and state enforcement actions. The Supreme Court therefore reversed a decision by the Sixth Circuit in favor of Omnicare, and sent the case back for further proceedings.
Effect of Omnicare on Private Placements in Entertainment Ventures
So, what does drug company legal compliance have to do with successful independent films?
The heart of the Supreme Court decision is in Section III of the opinion in which it quotes language from Section 11 from the '33 Act, finding potential liability if the issuer " 'omitted to state facts necessary' to make its opinion on legal compliance 'not misleading.' " In effect, the Supreme Court is getting into the murky area of what is a reasonable basis for having a belief.
Given widespread knowledge in the film industry about the number of independent films which fail to return investments to the film's investors, this case suggests that a film producer, in a private placement memo, could face securities law liability if, when discussing the success of recent independent films, the producer does not also include information about films which are less successful or a complete failure.
These discussions can take any number of different forms, depending on how the private placement memo discusses the "success" stories.
This Supreme Court decision, however, is a warning to film producers using private placement memos (or Internet-based offering documents seeking accredited investors, which are now permitted under Title II of the JOBS Act and related SEC regulations): Examples of independent film successes in a private placement memo are no longer just puffery.
If you have any questions about the Omnicare case, or about other entertainment finance issues, please contact Thomas Selz at (212) 826 5535 or email@example.com, Alan Sacks at (212) 705 4857 or firstname.lastname@example.org, or Hayden Goldblatt at (212) 705 4875 or email@example.com. For more information about the Frankfurt Kurnit IP Finance Group, please click here.
Other Entertainment Law Alerts
New Federal Budget Revives Section 181
Among the provisions of the Bipartisan Budget Act of 2018 passed by Congress and signed by the President on February 9 is a retroactive extension of Internal Revenue Code Section 181. Read more.
February 15 2018
Section 181 Revived
The new tax law, commonly referred to as the Tax Cuts and Jobs Act (the "Act"), contains some good news for producers of motion pictures, television programs and live theatrical shows (each a "Production") and their investors. Read more.
January 11 2018
Video Game Association Challenges Chicago’s Online Streaming Services Tax
One of the nation's most prominent video game associations has decided to challenge Chicago's controversial "Cloud Tax." Read more.
June 16 2017