Legal Question in Investment Law in California

Re: Investment in Entertainment

I think the answer, or explanation, as to what is permissible goes something like this:

First, the number of investors in a venture is not, at least usually, dependent upon the type of business it is engaging in, such as entertainment production, running a railroad, or making widgets. These businesses can have one or a million investors.

There are, however, oftentimes limits on the number of investors based on the venture's tax elections or choice of fund-raising mechanism. For example, if the venture is a corporation that elects to be taxed as a partnership, i.e., an "S" corporation, it is limited to (I believe) 75 shareholders, all of whom must be individuals or certain trusts and none of whom may be nonresident aliens or other corporations.

Further, if the venture elects to raise capital from investors in reliance upon SEC Regulation D, Section 504, 505 or 506, there likely will be limits on the number of investors that can be solicited and/or the number of investors that can be signed up. The numbers 35 and 75 come to mind - I would have to look up the regs to give you details. Many entertainment productions are organized as limited partnerships and rely upon Reg. D to raise money, but corporations, LLCs and other entities can also use Reg. D to obtain exemption from registering their securities.

Finally, when a corporation invests, it is considered a single investor, irrespective of the number of shareholders it may have. I believe, however, that if the corporate entity were a sham and existed only to get around a number-of-investors limitation, a court or regulatory agency could bust the scheme. A married couple holding securities in both names is usually treated as a single investor, e.g., for counting the number of shareholders in an S corporation.