I've seen worse deals offered in prospectuses. But not often.
Having two tiers of stock with the insiders having the control shares used to be prohibited by the New York Stock Exchange. Now it's common. Google and Facebook are set up that way, so they have presidents for life. So are some lesser companies which really need to fire the CEO but can't.
Then, what you're buying into is not the operating entity. It's just a holding company. Not even the parent holding company that owns many casinos; that's BALY. It's a holding company in the middle, one whose returns are totally determined by the other parts of the stack. This is much like film investing, where you can buy an interest in "Silver Screen Partners IV" and get a share of the profits from a specific film. Except that the studio and the film producer control the accounting between related entities. Those deals are generally a lose, although you get to go to the premier and meet the cast.
And then there's the leverage. When you buy in, you're under water, and may stay there. Can't speak to the tax consequences.
This is so awful it makes meme coins look good.
(Favorite worst deals: 1) being pitched on municipal bonds backed only by revenue from future sewer charges for a development not yet built, and which never was. Junk municipal bonds are a thing. 2) a San Francisco strip club that did an IPO in the first dot-com boom and went bust. SEC CIK 931799.)
> a San Francisco strip club that did an IPO in the first dot-com boom and went bust
There was a moderately famous documentary about unionization at a San Francisco strip club just a few years before that (called Live Nude Girls Unite). I wonder if the IPO one could have made an effective documentary subject as well.
They unionized, but only one club, and that one went bust. All the other strip clubs were owned by one guy, who's dead now. The SF strippers eventually won the gig worker pay lawsuit in 2022, but the class action settlement terms are not great.[1]
1) The middle tiers aren't publicly traded companies, often single-member LLCs or small partnerships used as vehicles for funding just a handful of projects. In general, they're not easy to scrutinize.
2) I think most of the accounting magic has to do with deferring income, and attributing and allocating future earnings. The mechanics and guesswork is extremely niche; industry norms set the guardrails for what's reasonable. IOW, Hollywood gets to write the rules.
3) I suspect there's less tax cheating than people cynically expect. Mostly the game is about tax deferral, minimizing the blast radius of projects that tank, and everybody jockeying--and stabbing each other in the back--to maximize their share of the pie. I doubt the government loses much revenue. They might nominally get more revenue for a single cycle if accounting was tightened up, but then you might lose much of the dynamism and risk taking, reducing tax revenue long-term.
Note: I have zero industry insight, though I once spoke with a former LA district IRS tax lawyer who seemed much more cynical about the shenanigans than what I presented above. And I got the sense that, like with Scientology and Donald Trump, the IRS has learned the hard way they don't have the wherewithal to win any serious litigation that threatens the status quo.
> I suspect there's less tax cheating than people cynically expect.
I'm sure there's some tax cheating going on, but I always got the impression that Hollywood Accounting was to reduce royalties for people who negotiated for a % of net profit instead of a % of gross revenue.
What's actually happening is that a lot of the companies used in a Hollywood production are interrelated. The same people own most of the stock so when they’re doing the accounting, they get to set the price they charge for the movie and make their profit on the production side. It’s all legal and GAAP, it’s just the production companies owned by the people who fund the movies making the real profit.
Tyler Perry isn't a billionaire because he's made a bunch of blockbusters. He's a billionaire because he owns the entire film production chain, from studio to productions, and puts his name on all of the credits for good measure such as writer, director, producer, etc.[0].
Having two tiers of stock with the insiders having the control shares used to be prohibited by the New York Stock Exchange. Now it's common. Google and Facebook are set up that way, so they have presidents for life. So are some lesser companies which really need to fire the CEO but can't.
Then, what you're buying into is not the operating entity. It's just a holding company. Not even the parent holding company that owns many casinos; that's BALY. It's a holding company in the middle, one whose returns are totally determined by the other parts of the stack. This is much like film investing, where you can buy an interest in "Silver Screen Partners IV" and get a share of the profits from a specific film. Except that the studio and the film producer control the accounting between related entities. Those deals are generally a lose, although you get to go to the premier and meet the cast.
And then there's the leverage. When you buy in, you're under water, and may stay there. Can't speak to the tax consequences.
This is so awful it makes meme coins look good.
(Favorite worst deals: 1) being pitched on municipal bonds backed only by revenue from future sewer charges for a development not yet built, and which never was. Junk municipal bonds are a thing. 2) a San Francisco strip club that did an IPO in the first dot-com boom and went bust. SEC CIK 931799.)