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Q: Update on theatrical investments

Last year I was invited to take part in a theatrical venture, investing money by buying debentures. Since then I have had no official information about my investment. Although I am sure there is no cause for concern, I was promised a quarterly update on the financial progress and any profit due to me. Should I request an update?

A: The short answer is that, of course you should request an update, as indeed should any investor in a theatrical production who is not getting regular financial reports on the state of his investment.

However, the use of the word 'debenture' in relation to theatrical investment is a real hot potato. The most common form of theatrical investment is for the investors (known as 'angels') to contribute towards the capitalisation (capital budget) of a proposed production by buying one or more units in a pooled fund which is then used to finance the cost of preparing the production up to the first public performance, on the basis that the investors will share in 60 per cent of the production profits pro rata to the amount of their respective contributions, the other 40 per cent going to the producer.

It is usually an essential characteristic of such schemes that the investors do not get their money back, let alone a profit share, unless there is a sufficient surplus of box office revenue over weekly operating expenses to enable the investment capital to be repaid in whole or in part. Investments of that kind are the subject of a very complex regulation under the Financial Services Act 1986 which it is exceptionally difficult for a producer to navigate without specialist legal advice, as to which the legal profession is sharply divided in its attitude to what has become known as 'the debenture route'.

The debenture route arises because statutory regulations have decreed that a debenture (which in the present context means no more than an acknowledgement of indebtedness) is expressly excluded from what the Act calls a collective investment scheme, with the result that certain special restrictions in relation to persons to whom and by whom an 'advertisement' for such a scheme may be issued do not apply, the word advertisement being synonymous for this purpose with invitation to invest.

Those who advocate the so-called debenture route do so on the basis that if the agreement between producer and investor contains an acknowledgement by the producer of indebtedness to the investor for the amount invested, even though that 'indebtedness' is conditional upon the essential characteristic described above, namely the production doing well enough to generate a surplus of box office revenue over running expenses, certain regulatory requirements can be avoided, including in particular the extremely important requirement that the person issuing the invitation to invest must be 'authorised' by being a registered member of IMRO (Investment Management Regulatory Organisation) and must comply with its conduct of business and other rules. Those who consider that the so-called debenture route does not work, including myself and at least one very senior Queen's Counsel from whom clients of mine have obtained a detailed written opinion, take the view that no indebtedness (and therefore no debenture) comes into being until the contingency on which such indebtedness is dependent, namely the surplus of box office revenue over operating expenses, in fact arises, so that those who follow the debenture route do so at their peril. In other words the bookmaker is not 'indebted' to the punter before the race has started, and even less so before the horse has won.

All this is very technical and very boring, but the point of it is that, if those who rely on the debenture route am wrong in law, not only are they committing a criminal offence under the Act, but they lay themselves open to claims for restitution and damages by or on behalf of a disgruntled investor who loses his money. So far, there has been no test case to settle the issue one way or the other. Yours, if it is of that nature and if you are so minded, could be the first.

I have assumed that your investment was made on the basis of the essential characteristic referred to above. It is, however, perfectly feasible though most unusual, for money to be advanced by an investor against a guarantee of repayment with or without a profit share, in which cm of course, the debenture route would work perfectly well, although if a profit share is involved, the separate rule relating to investment advertisements having to approved by a registered authorised person would still apply.

Your contract with the producer should contain provision for you to he supplied with information and accounts at regular intervals. If you do not get what you were promised, you can always complain to the Financial Services Authority (formerly known as the Securities and Investments Board) which should need little persuasion to take the matter up on your behalf. However, it may well be that the mere threat of such a complaint will he sufficient to induce the producer to provide you with what he promised. If the producer is not 'authorised' under the Act, whether he has relied on the debenture route or not, you can complain to the FSA on that ground as well, and you should seek legal advice about the possibility of obtaining restitution for any losses you may sustain, although it has to be said that the court can grant relief for certain contraventions of the Act, for example if it takes the view that the offending party did not realise he was breaking the law or if the investor was not misled and if the risks were fairly pointed out to him. That, however, should not deter the FSA from investigating any complaint you may lodge with it.

There are also complex rules governing the categories of person to whom an investment invitation may he issued, and as to 'cold calling', i.e. personal visits or oral approaches for the purpose of inviting investment, but you would need specialist legal advice as to whether or not there may have been a contravention in your particular case. If you want to explore any of the other grounds of complaint which I have mentioned and not confine your complaint to non-supply of accounts and information, you need to seek advice from a specialist lawyer, preferably one who is not wedded to the debenture route.

First published March 1998