Most of us don’t pay a lot of attention to what happens in D.C. Sometimes it feels like Broadway is a magical place, and what happens with governmental financial reform doesn’t affect us.
Well, tucked deep in the recently-signed-into-law, 2300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, was a change to the definition of ‘Accredited Investor’ that will have an impact on how Broadway and Off-Broadway producers raise money.
First, some background.
In 1933, in the wake of the Great Depression, congress passed the ‘Securities Act of 1933’ and for the first time offered federal regulation of the sale of securities. As you can imagine, filing with the federal government can be an onerous and expensive task for many small businesses, start-ups, and Broadway and Off-Broadway shows. So, to support the entrepreneurial American Spirit, Congress provided for a number of exemptions from federal filing in that 1933 Act. One of the most commonly used by all types of business, including shows, is the Accredited Investor exemption, which allows companies to raise money without filing, by taking money from Accredited Investors only.
What’s an Accredited Investor?
An Accredited Investor is a government-defined term that basically means, “You’ve got enough money to make your own decisions, so we don’t have to look out for you like we look out for the little guys.” Qualitatively, it means that either you have a net worth of $1,000,000 or you have made $200,000/year for the past two years (or $300,000 when combined with a spouse). (To see a complete list of the qualifiers, visit the SEC’s site here.)
I’d bet that at least 90% of all Broadway offerings to investors are made to Accredited Investors only.
Well, in the debate over the bill, there was some strong lobbying to change the Net Worth threshold to $2,000,000! Fortunately, for all of us, that change didn’t make it out of committee.
Instead, the new Consumer Protection Act redefines what counts towards that million-dollar net worth, and has specifically stated that an investor’s home cannot be used in the calculation (which, as I’m sure you can imagine, was a common way for investors to qualify for this status). The bill has also put more responsibility on the entity to ensure each investor is making a truthful claim about their status when signing those subscription documents.
Will this small change have a big effect on how we raise money for shows? Too soon to tell, since the bill just went into law. I’ll give you an update when I’m in the trenches raising money for my next show.
What do I think of this change? I can’t argue with it, honestly. I’ve always thought the definition was a bit loose, and while I don’t think any Broadway investors are blind to the risks involved with what we do, we have to remember that this law applies to all of the other businesses out there in the world who may not be as forthright in their risk disclosure as we are (the hedge fund industry comes to mind).
While I can’t complain about it, I do wish there was an easier way for the smaller investor to get into the game. As we’ve seen by the major moves in the stock market over the last couple years, it’s not like opening an e-trade account means less risk!
For more on the Reform Act, click here.