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Thursday, December 11, 2014

Investing in Film – Security Law Implications.

By: Matthew J. Moisan 

 Securities and Venture Capital 

The film industry and investors alike were put on notice recently due to the ruling of U.S. District Judge Katherine Forrest, who dismissed a major lawsuit against Paramount Pictures.  Specifically, a group of investors brought a claim for fraud against Paramount owned Viacom in connection with numerous film financings over the last decade.  Included in their claim was an accusation that Paramount had mislead investors regarding the distribution plans of the films, in order to raise capital.  The investors claimed that Paramount represented that it would sell the international distribution rights, but instead opted to self-distribute.   This distribution decision, argued the investors, deprived them of certain revenue to which they were entitled. 

In an easy day for Paramount’s counsel, Judge Forrest had decided she had heard enough after the investors’ argument to dismiss the lawsuit outright, without even requiring Paramount to present their defense.  But don’t applaud too quickly, as this decision reaffirms the importance of a security laws in film financing.   Specifically, Judge Forrest’s decision to dismiss was based upon the rationale that Paramount acted in full compliance with the relevant security laws. The judge noted that the investors were given a private placement memorandum or PPM which did not bind the Paramount to any particular distribution plan.  The PPM contained expansive disclaimers and cautionary statements, even going so far as stating that each investor had done its own due diligence and thus, was not relying on any statements on behalf of Paramount in making their investment.   Finally, the investors were  “sophisticated buyers”, as they were accredited and met various income and net worth criteria tests.  

There are important takeaways for both entertainment company looking for funding and investors.  First, with regard to entertainment companies looking for funding, make sure to consult a securities lawyer, without one Paramount would have been liable to the defendants in this suit.   With regard to investors, be on notice, the expansive disclaimers and cautionary statements contained in a PPM will be enforced. 


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