Much has been made in recent weeks of the demise of the Broadway production of “Rebecca,” which was to open at the Broadhurst Theater on November 18, 2012. The fascination with “Rebecca” is primarily attributable to the bizarre events surrounding its collapse. A Long Island business man, Mark Hotton, allegedly received $60,000 in consulting fees from producers in exchange for introducing them to investors representing $4.5 million of the show’s capitalization. When the money came due, it became evident that those four investors were in fact fabricated (one had previously been said to have died from malaria); Hotton was arrested on charges of wire fraud and the production unraveled.
Aside from the unique criminal aspect of these events, which are well-documented in the press (see, for example, Playbill.com’s article), the “Rebecca” debacle stems from a larger problem endemic to the high-risk world of Broadway: the difficulty in financing productions, where producing costs have ballooned in recent years. “Rebecca,” for example, was reportedly capitalized at $12-$14 million.
Where does the money come from? It is increasingly common for corporations—film studios and the like—to provide significant theatrical financing. Many productions, however, still rely on individual investors, with producers often raising capital pursuant to one of the exemptions to the Securities Act promulgated by Rule 506 of Regulation D (“Reg D”). Financing under Reg D turns, in large part, on limiting the financial offering primarily to “accredited investors,” or, in layman’s terms, high net-worth individuals or entities with at least $5 million in assets. High net-worth individuals are increasingly hard to come by in a sluggish economy and the number of non-accredited investors from which a producer may raise funds is capped at thirty-five under Reg D.
Complicating matters is the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Bill”), signed into law by President Obama on July 21, 2010. The Bill revises one of the definitions of an “accredited investor” under the Securities Act of 1933 (the “Securities Act”) and ultimately affects which individuals might qualify as investors for producers hoping to raise capital pursuant to Reg D. Specifically, in determining if a natural person is an “accredited investor” because he or she has a net worth of at least $1 million, the value of such person’s primary residence can no longer be included. Previously, a natural person’s primary residence (net of any mortgage) was included in calculating a natural person’s net worth. The other definitions of “accredited investor” under the Securities Act were unaffected. Accordingly, both current and potential theatrical investors who might have qualified as “accredited investors” in the past solely because of the net-worth test will not be deemed “accredited investors” for future productions. Ultimately, such investors may be prevented from investing altogether if the producers elect not to accept non-accredited investors for a particular production or if the number of non-accredited investors investing in such production has surpassed the applicable threshold as permitted by Reg D. Absent further clarification from the Securities and Exchange Commission, it is likely that the new definition of “accredited investor” will only apply to new investments or existing investors who make additional capital contributions to an entity.