Investor Finance Forum Archives
12 August 2002 - 24 August 2003
ASK A QUESTION

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Question
Posted on August 23, 2002 at 07:24:57 PM by Ben Kaas

I would like to know,how can I get funding for my film, Is it
possible for me to do a favor for a production company and then
make my film?

Sincerely,
Ben

Re(1): Question
Posted on August 23, 2002 at 07:25:58 PM by John Cones

Ben:

In my opinion, there is no "favor" that you could do for a
production company that would result in getting your film made.
If you want to be more realistic, set about to spend some time
and effort researching the subject of "film finance".

John Cones

 

Art as collateral
Posted on August 25, 2002 at 08:39:26 PM by Bob Dean Stanford



I have an investor with $80,000,000+ in museum quality art. The art has been appraised by a noted certified art appraiser.

I am developing a new collateral program to loan this art to producers securing financing, as primary or additional collateral. I've purchased several of your books but haven't found anyone doing this. I don't bekieve it's been done yet for film financing.

Have any of your clients utilized art in this manner and does this sound like a viable collateral alternative to you?

I very much enjoyed your books, especially the 43 ways to finance a feature film. I've read many of the current books on the subject and yours is by far the best.

Transworld Trade Center

Development Financing
Posted on August 27, 2002 at 10:32:59 PM by Lawrence Williams

I sort of have two related questions John, if that's okay. What's the most common way independents raise development money for low budget features? Are there any guidelines as to what participation the producer should allocate to the investors, the writer, principal talent, producer unit, etc., in consideration for such development money?

Thanks,

Lawrence

Re(1): Development Financing
Posted on August 28, 2002 at 08:03:01 AM by John Cones

Lawrence:

Unfortunately, you've asked a couple of questions for which no authoritative answers exist. After all, in order to answer the first, someone would have to conduct a survey of a large number of development financing deals, and in order to do that, they would have to have access to the facts relating to those deals. No one has conducted such a survey, nor had access to the facts. Thus, we are left to speculate amongst the available options. Aside from the various alternative methods of film financing that apply to the development stage that are discussed in my book "43 Ways to Finance Your Feature Film", I can tell you that some of my own clients from time to time do utilize investor financing techniques to raise the initial funds they need for acqusition, development and/or packaging costs.

Similarly, with respect to the typical percentage participations, no authoritative answer can be provided. It is a matter for negotiation. To some extent it depends, among other factors, on how badly the producer wants to make the film and how much the producer is willing to give away. One caution, if using investor financing techniques, be careful about offering "points" since the term refers to net profits of a film and the producer in such situations may have little control over the percentage of net profits that are paid by the distributor to the producing entity, certainly at the time the deals with cast and crew are being made. Plus, you want to be careful not to put the cast and crew participations ahead of the investors in the revenue stream unless that is made clear to investors in advance.

Reg D Offerings?
Posted on August 29, 2002 at 12:47:50 AM by Edward Neasy

Can you explain what a Reg D offering is and how this relates to sophisticated investors?

Re(1): Reg D Offerings?
Posted on August 30, 2002 at 01:50:15 PM by John Cones

Edward:

Regulation D is an SEC exemption from the securties registration requirement. It provides a different set of conditions and limitations, compliance with allows someone to sell securities (e.g., corporate shares, LP interests or LLC units) without conducting a public offering. It is a federal private placement exemption. Personally, I've never paid much attention to the rules relating to sophistication. Reg. D, Rules 505 and 506 provide a numerical limitation on the number of investors: 35 non-accredited and unlimited accredited. Reg. also provides a definition of "accredited". Those are the rules that are most useful. You can go to the SEC online site and find and read a copy of Regulation D if you like.

John Cones

SEC Questions
Posted on September 1, 2002 at 03:08:47 PM by J. R. Hooper

Mr. Cones,
We are going into production of an independent feature in August, 2003. We would like to try to solicit funding via the internet, however we are not sure how the laws work in regards to this as the internet is not based in one single state. To solicit funding, do we have to register in all fifty states? Or is there some exemption available to alleviate this as we are only seeking an amount somehwere in the neighborhood of 50,000.

Re(1): SEC Questions
Posted on September 2, 2002 at 07:32:40 AM by John Cones

J.R.

In order to raise money from passive investors on the Internet it is necessary to register the offering with the SEC and in each state in which you intend to solicit funds. You would want to consider the requirements of either a Regulation A offering or a SCOR offering. On the other hand, if you're only raising $50,000 it probably does not make sense to spend money on such an offering to raise so little. It would make more sense to do a private placement, raise the money from people you and other upper level management of your production company know and avoid soliciting on the Internet.

John Cones

EIN
Posted on September 6, 2002 at 12:30:07 AM by WFM

Hello Mr. Cones,

Depending on the structure of the L.L.C., how many EIN numbers are needed
for federal and state tax filings?

I base this question from a earlier discussion about "dba's", doing business as.
It was mentioned that a "dba" could be used as a production entity, depending on the state
the L.L.C. is registered so that the structured L.L.C.
maintains accounting for one L.L.C. as oppose to more then one L.L.C.

If, this is a strategy used by the L.L.C., does this
mean only one EIN number is needed for the L.L.C.
or a EIN number for each L.L.C. within the structure,
if not using a dba.

WFM

Contract questions
Posted on September 6, 2002 at 07:27:15 PM by Mike

Hello 2 questions, one on contracts for our indie feature film, can our cast work as interns with deffered payment if the film makes a certain ammount? Our does only work for a non profit set up?

Second on insurance for a indie low budget film, can we get away with none. Thank you in advance.

Re(1): Contract questions
Posted on September 7, 2002 at 11:10:04 AM by John Cones

Mike:

Your questions do not relate directly to the topic for this site: "Investor Financing of Independent Film"? However, many of my clients who raise their funds from investors do plan on deferred arrangements for some or all of the cast and crew, at least for the minimum offering proceeds. The answer to your second question is fairly obvious. Yes, it is possible to shoot a film without insurance. Then, in effect, you are self insured. The production entity will be responsible for losses otherwise covered by insurance. It's more risky that way, but I'm sure that a lot of ultra-low budget filmmakers assume that risk.

John Cones

Geting Started
Posted on September 28, 2002 at 09:19:03 AM by Oleg

Dear John,
I have strong ties with the business communitie out side of Hollywood, I have been asked to particapate in raising financing for independent movie producer,
I can approach my investors, but they had never been involved in investing in the movies, niether did I,
I need to devlop realistic security instrument, which will clearly identify their up side potentials, time in which they are getting thier investment back,and a safety net on how to minimize their fianancial exposure.
How do I get started.
Thanks.

Granting Corporate Stock
Posted on September 8, 2002 at 09:58:58 AM by Karen Adams

John, under what circumstances can one grant stock in a corporation in exchange for services rendered? Are there any limitations to this at the state level which are different at the federal level?

Re(1): Granting Corporate Stock
Posted on September 9, 2002 at 08:36:44 AM by John Cones

Karen:

State law applies to this situation, not federal. So, you'll have to check the language of the state statute in the state in which you intend to incorporate as to whether stock may be issued for services, and whether the state law makes a distinction between services rendered in the past or services to be provided in the future. There also may be rules about how such services may be valued.

John Cones

partnership
Posted on September 8, 2002 at 12:56:58 AM by mike

OK I am wondering how to go about such with a partnership with a friend of mine, we want to co produce a very low budget film together. Even steven between us both all the way. What do we need to do regarding this investment? thanks in advance.

Re(1): partnership
Posted on September 9, 2002 at 08:39:30 AM by John Cones

Mike:

You're not providing me with enough information to respond to. Are you considering a general partnership just between you and your friend, in which case you'll want to negotiate and draft a general partnership agreement. Or, are you talking about raising money from a group of other investors beyond the two of you, in which case you may want to create a limited partnership, using the production company owned by the two of you as the general partner?

John Cones

Re(2): partnership
Posted on January 13, 2003 at 11:59:13 PM by kris

general partnership between a friend and myself

Re(2): partnership
Posted on September 9, 2002 at 08:06:47 PM by MIKE

Hi Yes between me and a friend so to speak, so a general partnership agreement, where can I find such for a template? Much appreciated, Mike

Re(3): partnership
Posted on September 10, 2002 at 07:48:46 AM by John Cones

Mike:

Any nearby law school library or county law library would probably have a form book containing a sample general partnership agreement. One also appears in my book "Film Industry Contracts" available through Rivas Canyon Press at 310/477-6842.

John Cones

Choosing a bank
Posted on September 10, 2002 at 06:23:36 PM by Ace Underhill

Hello,
I am trying to choose a bank for our next film project. I would prefer if it was in Arizona, since that is where we are located, but if it is in California that would probably be fine. I am looking specifically for a bank that is familiar with film projects. This project has many investors, with a budget of $5 Million. The reason I am asking is because on an earlier project (much smaller budget) our bank freaked out and closed the account because of such a high cash flow. (FYI, the account was a standard business checking account opened with a corporation, Federal TIN, and a single individual's SSN as the signer.) We cannot afford to have this happen again. Any suggestions of appropriate banks and/or contact names would be greatly appreciated.
Thank you,

-Ace Underhill-
Brilliant Screen Entertainment

Re(1): Choosing a bank
Posted on December 13, 2002 at 08:21:42 PM by Antonio

Did you end up fixing your banking problems and did you make your film???

Re(1): Choosing a bank
Posted on September 11, 2002 at 08:08:37 AM by John Cones

Ace:

I don't think I can really help you with that request. I've never heard of a bank closing an account because of too much cash flow. All of my clients either bring their own banking relationships to the table or go out and develop a banking relationship. They've used a lot of different banks, many, I'm sure without specific film experience. Typically, we establish a segregated, interest-bearing account in the name of the manager of the LLC for purposes of holding investor funds until minimal funding, then upon creation of the LLC for a production account in the name of the newly created entity, transfer investor funds to this new account and start writing checks.

John Cones

Re(2): Choosing a bank
Posted on September 11, 2002 at 11:54:51 AM by Ace Underhill

Yes, they closed our account (without prior written notification which violated their own charter), and bounced all our outstanding checks, even though there was plenty of cash in the account to cover them. This made us look like fools to our vendors, suppliers, and employees. They said they were "uncomfortable" with us and did not want a banking relationship.

I guess they deemed it too absurd for young people to be handling so much money. Geez, I hate age discrimination; nobody takes you serious if you're young. If I had time I would sue them for something. Predatory business practices, irreparable harm, and discrimination just off the top of my head. The least they could do was honor the outstanding checks with OUR money that THEY were holding, but they said it could be a "possible liability" for them, although I cannot in my wildest imagination see how it could be.

I am just hoping to find a bank that is familiar with the nature of this business so as not to experience the same kind of abuse.

S corp, C corp, or LLC?
Posted on September 11, 2002 at 10:50:10 AM by Daniel

John,

We are two filmmakers planning to personally finance and produce an independent film. We would like to leave open the possibility for investors down the line. We also want to protect our project from our personal creditors, what is the standard way to set up the partnership, S corp, C corp, LLC, LLP?

Thank you,

Daniel

Re(1): S corp, C corp, or LLC?
Posted on September 12, 2002 at 07:44:00 AM by John Cones

Daniel:

Gee, you questions covers at least four chapters in my book "43 Ways to Finance Your Feature Film". You should read that first then ask a more specific question. Second point, forget about what is "standard". There is no such thing. Third point -- an "LLP" is a professional partnership authorized by state law for attorneys and accountants to use in organizing their firms. For your purposes, you are talking about an "LP", a regular limited partnership. Again, before asking such a broad question on this site, do a minimal amount of research on your own, please.

John Cones

Thanks
Posted on September 12, 2002 at 03:16:05 PM by WFM

Hello Mr. Cones,

I just want to say thank you! This discussion
site, my research, passion and brightness is helping me tremendously in understanding
all areas of the film industry. I will be seeing you soon:)

WFM

co-production
Posted on September 13, 2002 at 02:52:11 PM by Beatriz G.

Dear Mr. John W. Cones,

We acquired your book "Film Finance & Distribution". Congratulations! It’s clear, complete and helpful, mainly for us, independent producers.
Unfortunately, when we bought it, we already had assigned the "death sentence" for our feature film, in a "deal memo" with a major.
We wouldn’t like to repeat this kind of mistake in our present project.
Please, see the resume bellow, if you can:

1) We are a Brazilian Film Production Company, settled in the South of Brazil since 1989;
2) Our new project is to produce a TV series and a feature, at the same time, the same theme, and to launch these products at different markets and time;
3) The scripts for the feature and for the TV series are ready (the TV series still needs a new treatment);
4) We have US$ 1,000,000 in Brazil, to produce the film;
5) An American major is interested in co-producing the film, and is evaluating the project. We asked them to put US$ 1,000,000 more, and to distribute the film internationally;
6) In this meantime, an Italian producer, mainly interested in the TV series, assigned with us a "letter of intention", registered in the Brazilian Embassy of Rome, and he is ready to put from 1 to 4 million in the production, if we granted a "pre-sale" agreement to the project.
7) The production incentives of filming in Brazil today are at their highest value ever. Cast, crew, vendors, and labor costs are minimal and the State Government is committed to facilitating the entire infrastructure in transportation and lodging. It’s absolutely possible to complete the project and to make very beautiful products, dramatic and technically speaking, with 2 or 3 million dollars in Brazil today. But it’s quite impossible to recover this investment only in the Brazilian market.
8) If we could be in contact, altogether, the Brazilian Company (us), the Italian Producer and the American major, maybe we had everything to make the best agreement for everyone.
9) It’s a sophisticated business operation that we can’t do by ourselves. Do you think you could help us anyway?
Thank you for your attention.
We are looking forward to hearing from you.

Yours faithfully,
Beatriz G.

Re(1): co-production
Posted on September 14, 2002 at 08:31:00 AM by Anonymous

Beatriz:

About the only thing I could do is refer you to several entertainment attorneys who may be able to help you. I limit my work these days to investor financing of entertainment projects.

John Cones

Re(2): co-production
Posted on September 17, 2002 at 09:09:34 AM by Beatriz G.

Dear Mr. John Cones,
Hope you are well.
I understood, in your last replay, that you could refer us to entertainment attorneys.
We would be very happy to send you material related to our new project and to our last feature, for you to have an idea of our work.
If you think it's necessary, please tell us where to send the material.
Thank you again for your attention.
Best regards,
Beatriz G.

Re(2): co-production
Posted on September 14, 2002 at 01:44:14 PM by Beatriz G.

Thank you. I would like to contact someone that could help us.
Best regards,
Beatriz G.

p.s.: The agreement with the Italian wouldn't be "investor financing"?

no subject)
Posted on September 13, 2002 at 05:52:22 PM by Mark

John as an ENT att I ASK a simple question to you, if a person joins a cast or crew job via contract do they need a copy of such or does the producer keep the contracts, just wondering for a low budget film project we are fiddling with? Also any interesting ways to get an investors for a low budget film, thanks, Mark

Re(1): (no subject)
Posted on September 14, 2002 at 08:33:25 AM by Anonymous

Mark:

As a general rule, anybody who is asked to sign a contract of any sort ought to be provided with a copy of that contract.

Most of my clients bring in other people who know prospective investors to help them raise the money for their films. They do this in accordance with the so-called "issuer sales" rules of the SEC.

John Cones

(no subject)
Posted on September 18, 2002 at 02:11:06 PM by Michael


HI John,

Read some of your thoughts. And want to
ask you a question. What percentage on top of the initial investment is a
standard to offer to an investor(s).
Also that percentage come from producers
share or the net gross of the box office
Any thoughts on that. Thank you
Also, please advice me on your fees
I have a 2 project and talking to some
potential investors.

Re(1): (no subject)
Posted on September 19, 2002 at 08:53:19 AM by John Cones

Michael:

I try to discourage producers from looking for what's "standard" in the industry. First, there is no standard. In addition, it depends on what level of the industry you are working in. The deals commonly seen at the major studio level are certainly different from what we typically see in the independent arena, and, of course, we see a lot more variety with independent films. Further, none of us have access to a large enough percentage of the deals in independent film to authoritatively state what is "standard" or even typical for that matter.

I can share with you, however, what I commonly see with the many investor financing transactions that I work on with independent producers. For example, we generally offer the investors a so-called priority recoupment. That means a high percentage (100%, 95%, 90%, etc.) of the available revenue will be paid to the investors until they achieve 100%, 120%, 150%, 200%, etc. of their originally invested capital. If you define "recoupment" to be more than 100%, then you are offering the investors a return of their investment plus a return on their investment.

Usually then, after recoupment and in those instances where it is appropriate, we state that deferments are to be paid. Sometimes that is limited to a stated ceiling.

Then we typically change the revenue-sharing ratio as between the producer/management group and the investor group to 50/50 for the life of the investment vehicle (generally an LLC or LP). Sometimes, however, the producers will do something different from this.

What really matters is what you can sell. Nothing will guide you better on this question than the opinions of some of your prospective investors. Show them what you have in mind and get their feedback before you settle on the deal. Also, discuss this deal with your securities attorney before committing to your investors.

In addition, understand that investors' share will not be a part of the "net gross of the box office". Distributors receive a percentage of box office and that's called distributor's gross receipts. From that, they deduct their fees and expenses, leaving net profits or net proceeds of the film. A negotiated percentage of that stage of the film's revenues is paid to the investment vehicle (the LLC or LP) after which certain authorized deductions are taken for maintenance of the entity itself. Then we arrive at what is commonly called "distributable cash" or something akin to the net proceeds of the investment vehicle. That is divided as between the producer/management group and the investor group as described above.

To request my fees for preparing the securities offering memorandum and advising how to comply with the federal and state securities laws send your FAX number to jcones@gte.net and I'll FAX that and other useful information.

John Cones

Profit Participation
Posted on September 18, 2002 at 05:16:37 PM by Marat

Dear John,
I am European producer who tries to research and study the system of US film financing. First of all, thank you very much for your time and efforts to share the invaluable knowledge and experience of yours with all film community.

Could I ask for your opinion, regarding some of my thoughts about a revenue sharing between film producers and investors?
As far as I know, traditionally Investors are generally offered a percentage participation in "Distributable Cash", which refers to a net level of revenue received from a feature film distribution. I am wondering if there is a legitimate way to make a deal when investors receive not a percentage participation in "Distributable Cash" but instead a percentage of initially invested amounts (for example 100%, 150% or 200% of initially invested amounts)? In this case, the deal may direct all the 100% of a net revenues to the investors group until the aforementioned amount is fully covered. After this all of the net revenues go to the producers.

For example, the invested amount is 5 millions and the deal says that investors group will receive the net profit up to 150% of initial investment. It means that investor group receives maximum of 7.5 millions of the net profit. In this case, if the net profit is bigger then 15 millions it becomes not advantageous for the investor. But if the net profit is 7.5 millions and smaller, it is much profitable for the investors then even 70/30% split of the "Distributable Cash". I think that such a deal is much more safety for the investors, but it is only good for a producer who is absolutely confident in a big financial success of his film.

What could be possible financial vehicle for this kind of a deal?

Thank you very much in advance.

Marat

Re(1): Profit Participation
Posted on September 19, 2002 at 09:00:32 AM by John Cones

Marat:

I can only discuss what is permissible in the U.S., but sure, a scheme similar to what you described can be used with limited partnersip and limited liability company offerings. The key is that the deal is stated in writing and the investors agree to it.

As an example, I've seen deals like this:

Investors receive 100% of the LLC's distributable cash until they are paid 100% of their originally invested capital. Then the investors and producers split the LLC's distributable cash 80/20 in favor of the investors until the investors have cumulatively received 200% of their originally invested capital. Then, the investors and producers split the LLC's distributable cash 70/30 until the investors have cumulatively received 300% of their originally invested capital. That system can be taken further, but at some point, the deals states that once the investors receive a stated percentage of their investment, then they are out.

John Cones

Re(2): Potential Problem
Posted on September 19, 2002 at 04:34:40 PM by Anonymous

John:

Thank you very much for the reply. Yes, I am talking about the U.S. financial system.

I thought about such a scheme as a protection from a potential problem a film producer could’ve have.
I am talking about situation when a producer has successfully raised the 100% of the required investments and has an agreement about the pro rata split of a "distributable cash". But at some point, he receives an offer from another investor (major studio). It is the offer of additional financing, which will significantly improve the movie quality.

For example, the total film production budget is 5 millions. This amount includes visual effects budget, which is 1.5 millions. Later, the major studio sees the big potential of the film and offers additional 20 millions for visual effects production, which is the only dubious point in the whole project from its point of view. But … the established investor group already has the financial structure, which oriented on the pro rata profit split from the previously invested 5 millions. In case of accepting the studio offer, it will make the total investor group participation equal to 20% of the net profit (I mean 20% of the investor group part). It might seem to investors not acceptable even the additional investment will definitely improve the picture. The producer will be tied up by his previous agreement and won’t be able accept the studio offer. Is it correct?

From what I see, in the case of a financial structure where the pro rata split of a "distributable cash" has substituted on the percentage from an initially invested amount, it will not be problematic for a producer to accept any investments all the way. The investor group will be also interested in any additional money stream towards the project. Am I right?

Could you please suggest me any other approaches to the aforementioned situation?

I really appreciate your time and attention. Thank you very much.

Marat

Re(3): Potential Problem
Posted on September 20, 2002 at 02:21:38 PM by John Cones

Marat:

The question as to whether you are authorized to accept additional financing from industry sources depends on the original drafting of your agreement with your investors. If that situation was not anticipated and provided for in the original agreement, then you will need to re-negotiate an agreement that accomodates the proposed industry financing.

John Cones

co-production
Posted on September 23, 2002 at 02:35:45 PM by Beatriz G.

Dear Mr. Cones,

Hope you are well.
I'm Beatriz G. and wrote in the Forum as you can see bellow:

co-production - By Beatriz G. September 13, 2002 at 02:52:11 PM
Re(1): co-production - By Anonymous September 14, 2002 at 08:31:00 AM
Re(2): co-production - By Beatriz G. September 17, 2002 at 09:09:34 AM
Re(2): co-production - By Beatriz G. September 14, 2002 at 01:44:14 PM

As you didn't answer anymore, I guess you didn't see my replies.

Please, could you read them and tell me if you can help us?

Thank you for your attention.
Best regards,

Beatriz G.

Re(1): co-production
Posted on September 23, 2002 at 09:58:52 PM by John Cones

Beatriz:

This Q&A site is for producers seeking answers to questions relating to investor financing of entertainment projects, not for studio financing or lender financing. Best of luck.

John Cones

Getting Started
Posted on September 29, 2002 at 01:25:20 PM by Oleg

Dear John,

I have strong ties to the business community outside of Hollywood. I've been asked to participate in rasing finance for an independent movie producer. I can approach my investors but they've been involved in investing in movies and neither have I.
I need to develop realistic security instument(s) which will clearly identify their upside potential time in which they are getting their money back and a safety net on how to minimise their risk or potential exposure.
Would you please give me your thoughts on how or where to get started. Thank you very much.
Re(1): Getting Started
Posted on September 30, 2002 at 09:21:29 AM by John Cones

Oleg:

Assuming you intend to raise money from a group of passive investors, I'd suggest that you try to identify several securities attorneys with experience with film offerings and discuss this project with them. Be sure and talk to several though, because their experience level varies and their fees will vary even more. You may also want to review the section on Investor Financing in my book "43 Ways to Finance Your Feature Film".

John Cones

Oleg

Raised $50k so far
Posted on September 30, 2002 at 01:19:50 PM by Alex

I'm producing an ultra-low budget feature ($150k budget) and I have $50k of my own money to invest. Is there a way I can leverage this to make it easier to raise the additional $100k? I'm a novice at locating investors. Where should I start? And what's the best approach considering I have $50k of my own capital to commit?

Re(1): Raised $50k so far
Posted on October 1, 2002 at 08:44:02 AM by John Cones

Alex:

I would suggest that you keep your investment of your own money to a minimum (e.g., to cover the costs associated with an investor offering which can be reimbursed to you from investors once the money is raised) and find one or more people (who come aboard as upper level managers of your production company) to help you raise the money you need to produce the film. Producing an ultra-low budget feature film is one of the riskiest investments ever created, thus it is extremely important that the risk of loss be spread around amongst as large a group of investors as possible. If you put most or all of your $50,000 into this risky deal, it will likely be one of the biggest mistakes you'll ever make. That's my humble opinion.

John Cones

Re(2): Raised $50k so far
Posted on October 2, 2002 at 11:16:12 AM by Alex

Thanks for your response. As far as an investment offering, I think a limited partnership would work best. Maybe an LLC. Not quite sure. How should I structure my package? What should it look like? Where can I see samples of both?

Re(3): Raised $50k so far
Posted on December 13, 2002 at 08:15:17 PM by Antonio

50K is a good start. Investors will appreciate that you are putting your money where your mouth is. I will show you how to leverage your money in co-op and production deals to maximize and leverage your investment so that you get three fold the value. YOU can make your 150k movie for 50K if you plan it right. I know. I've done it. Good job and good luck with your movie.

pre-sale financing
Posted on October 2, 2002 at 03:12:08 PM by Gene Massey

Dear John,
As one of Hollywood's foremost experts on film financing, could you please define "pre-sale" financing of motion pictures?
thanks very much,
gene massey
CinemaShares.com

Re(1): pre-sale financing
Posted on October 2, 2002 at 03:22:12 PM by Anonymous

Gene:

The term "pre-sale" as traditionally used in the field of film finance refers to a form of lender financing --a transaction in which a producer presents a film package to one or more territorial distributors (prior to production) and seeks to get one or more distribution agreements and guarantees, which are then taken by the producer to an entertainment lender that loans the production funds pursuant to a weekly schedule, assuming the distributor is "credit-worthy" in the view of the bank. Funds are typically not advanced by such distributors prior to production of the film. Once the film is produced and delivered to the one or more distributors as per the terms of the distribution agreement(s), the distributor(s) are then obligated to pay the agreed upon amount(s), which have been assigned (as part of the transaction between the lender and the producer) to the bank.

John Cones

moving in the right direction?
Posted on October 3, 2002 at 01:09:26 PM by vince


hello, i wanted to know more about legal contracts for a feature film.
a friend of mine and myself are about to meet a potential investor in a couple weeks.. it looks good..and i want to be prepared... with contracts.. mainly but not limited to addressing. that we the film makers have final and all artistic say and in no way does your investing have any bearing on creative power. as well as how much he and myself will take percentage wise should the film get picked up.... just questions like these.... the only dumb question is the one not asked...and i am new so i have alot.even if i don't know what they all are yet.
thank you again

Re(1): moving in the right direction?
Posted on October 6, 2002 at 09:05:57 PM by John Cones

Vince:

It is difficult to prepare a contract for a meeting with a single prospective investor, after all, if you only raise money from a single investors, that investor will have a great deal to say about, at least what goes into the contract. If you believe that investor will be an active investor, then you may consider the investor financing agreement, the joint venture agreement, the initial incorporation scenario or the active investor LLC. These options are discussed in my book "43 Ways To Finance Your Feature Film". Samples of the first two appear in my book "Film Industry Contracts".

If you want your investor to be passive, then you will need to consider various securities offerings, and may want to consider expanding the offering to include other investors.

John Cones

Re(2): moving in the right direction?
Posted on October 7, 2002 at 01:27:02 AM by vince


what is a investor financial agreement?..and how to do you go about setting one up?. well from what i have been told... the investor is interested and wants this just for experinece to say he has but money up for a film and may want to write it off.... i just want to have my bases crossed..with out too many assumptions until we meet... but i have a week or two to prepare... plus these kinds of questions are important too ask... thanks again

Re(3): moving in the right direction?
Posted on October 7, 2002 at 08:08:28 AM by John Cones

Vince:

An investor financing agreement is merely a contract between an active investor and a producer or production company, whereby the investor agrees to invest a specified amount of money and in return is promised a specified percentage of a defined stage of the film's revenue. A sample copy of such an agreement appears in my book "Film Industry Contract" available at 310/477-6842. As noted earlier, this kind of agreement is also discussed briefly in my book "43 Ways to Finance Your Feature Film" (available through book stores).

John Cones

 

 

 

 

 

pay or play
Posted on October 20, 2002 at 05:15:37 PM by Michael

Hi John,

I did recive your fax. Thank you
I have a question on pay or play deal.
When I am ready to make an offer, what should I include, 10% of the offer price
And under the pay or play deal, do I risk only 10%, if the project won't get fully financed in time or more? And what about an actor, if he/she says yes I will do, are they must? Or can they back out and keep the 10% or what is the deal? You know how agenst are. Please explain if possible. And do you represent producers in negotiating this type of deals?

Thank you

Michael

Re(1): pay or play
Posted on October 21, 2002 at 03:53:54 PM by John Cones

Michael:

You will want to address this sort of question to an entertainment attorney who works with producers on packaging projects and employment agreements. Also, you may want to talk to casting directors to get their input. I do not work in this area, but have merely passed along a method for attaching elements to a project without committing a full pay or play amount, rather, a non-refundable percentage which is subject to negotiation. I also do not work as a producer's rep, but limit my work to helping independent producers to meet their federal and state securities law compliance obligations when seeking investor financing.

John Cones

Independent Producer
Posted on November 2, 2002 at 02:57:00 PM by Ben Stovall

How does one become an independent producer? What resources are there which provide direction in starting your own company?

Re(1): Independent Producer
Posted on November 3, 2002 at 09:13:43 AM by John Cones

Ben:

In the most liberal sense, anyone who has an idea for a movie and takes some action toward getting it produced is a producer, so, in fact, anyone can be a producer. However, there lots of steps along the way, from idea, concept, synopsis, outline, treatment, script, polish, packaging, various levels of financing, pre-production, principal photography, post-production, marketing to distributors (if distribution is not already arranged), negotiating the distribution deal, self-distribution, and so forth, and most, if not all of these steps in the life of a movie typically involve the producer. If you do not understand what each of these steps involves, you should go online and find the Samuel French Bookshop site and explore the many books about filmmaking that are avaialable. One of my books "Film Finance and Distribution, a Dictionary of Terms" will help you understand the terminology. Your choice of entity of form of doing business may depend on how much money you want to invest at various stages, but for a production company you can choose from fictitious name company (dba), general partnership, active investor LLC, corporation and so forth. Again, some research in the available literature will help you determine which form of doing business works best for you at any given time. Again, one of my books "43 Ways to Finance Your Feature Film" helps to answer some of those questions.

PPM/Limited Partnership Agreement
Posted on November 6, 2002 at 08:14:04 AM by Jason

Dear John,

My partner and I are producing an indie that will be filmed internationally, but distributed primarily in the U.S.
We have had talks with prospective U.S. investors and and an int'l investor who are interested in our project. All we have shown them is our business plan, and were wondering what else we will need to go forward and formalize everything. Would a PPM accompanied with a business plan be sufficient for us to raise the money? Also, what is the difference between a PPM and a Limited Partnership Agreement (LPA)? Which one should we use in order to tie the financing internationally and locally?

Re(1): PPM/Limited Partnership Agreement
Posted on November 7, 2002 at 08:22:56 AM by John Cones

Jason:

Before you accept money from any passive investors here in the U.S. you need to provide them with a properly drafted private placement offering memorandum (assuming you are relying on available exemptions from the securities registration requirement). The business plan itself is of no legal significance, although some of the information that appears in your business plan will also be incorporated into the PPM. The PPM is the legally required securities disclosure document that must be provided in advance to each prospective investor. It is accompanied by a subscription agreement that must be signed by the investor and sent back with their check. The LP agreement is part of the process of creating the limited partnership and is included as an exhibit to the PPM. The U.S. securities laws don't apply to foreign residents, so you may need to consider the securities laws of the country of residence. Foreign resident investors in a U.S. offering do not count agains the numerical limitations on investors per Regulation D.

John Cones

private investors
Posted on November 6, 2002 at 09:30:39 AM by Indy Producer

Hi John,
I am producing a feature film and seeking private investments. Our target start date for principal photography is Sept. 2003. How do I obtain committments from investors without tying up their money for 10 months?

Re(1): private investors
Posted on November 7, 2002 at 08:30:04 AM by John Cones

Indie Prod:

It is difficult if not impossible to get firm commitments from investors regarding the payment of money in the future, and it may well take you ten months or more to raise the money you need. So, I'd suggest you offer them interest on their money as it sits in your segregated account, and if you reach the offering minimum, send them a check for the interest, and if you don't reach the minimum, refund their money with interest. In any case, start the offering right away. In point of fact, it is much more important to have the money in hand, than to set a firm start date, since it is more difficult to raise money from investors than coordinate everybody's schedule months ahead of time. This is one of the ways that investor financing differs from studio or other forms of industry financing.

John Cones

Sec offerings?
Posted on November 7, 2002 at 05:21:30 PM by Michael

Hi John,

Question for you please. How many investors can I solicit funds from
in the state of California? And is there a cap to how much I can solicit
from each individual?

Thank you

Michael

Re(1): Sec offerings?
Posted on November 8, 2002 at 07:23:12 AM by John Cones

Michael:

If you are conducting a private placement relying on California's section 25102(f), the numerical limitation on investors is similar to that of the SEC's Regulation D: 35 unaccredited investors and unlimited accredited investors. If you are conducting a public/registered offering, however, there is no limit on the number of investors.

John Cones

Re(2): Sec offerings?
Posted on November 8, 2002 at 05:05:12 PM by Michael

what makes one a credited investor or an unaccredited investor?

Re(3): Sec offerings?
Posted on November 12, 2002 at 07:28:26 AM by John Cones

Michael:

The term "accredited investor" is defined in the SEC's Regulation D. There are eight different types of accredited investors listed there, so I can't cover them all. In general they are wealthy investors. The two most common from an individual standpoint are those who have a net worth of $1 million, excluding house, car and furnishings or those with an annual income of $200,000 ($300,000 with spouse). For additional details see the SEC's Regulation D, which can be downloaded at the SEC's site. You may also want to take a look at my book "43 Ways to Finance Your Feature Film". It discusses these kinds of issues.

John Cones

Finder's fee??
Posted on November 12, 2002 at 02:07:49 PM by james Stone

Question on "finder's fee"

I just completed my film (doc) a few months ago (paid for). Now I'm looking for distributor reps or producer's rep in the U.S.

I know there's no standard finder's fee but what is a good ball park figure or a close average? looking for someone to connect me with video and tv distributors.

Re(1): Finder's fee??
Posted on November 13, 2002 at 08:13:03 AM by John Cones

James:

Sorry, but I'm not sure what you are asking. Are you asking what kind of finder's fee can or should be paid to a producer's rep for helping you find a distributor? In which case, your question does not relate to "investor financing" which is the topic for this site. In addition, the term "finder's fee" is most commonly used to refer to compensation paid to someone who helps find an active investor, not find a distributor. Also, as a general rule, no transaction-related compensation (i.e., commissions) may be paid to finders (persons not licensed as SEC/NASD broker/dealers or registered reps) in the sale of securities.

John Cones

private placement offering memorandum
Posted on November 13, 2002 at 07:02:12 PM by Sara

Can you still raise funds with out a private placement offering memorandum and place the monies into an escrow acount with gaining interest until all funds are aquired, then form the LP or LLC bring all investors together giving them the private placement offering memorandum as well as giving them the chance to get out if they choose to.

Re(1): private placement offering memorandum
Posted on November 14, 2002 at 07:27:54 AM by John Cones

Sara:

No, the securities require that each prospective investor be provided with the disclosure document before they invest (i.e., before they give you their money). The disclosure document is supposed to be providing all of the written information about the investment that any investor would ordinarily want to consider. So, it really doesn't make any sense to want to take money from an investor before they are fully informed.

John Cones

What's next?
Posted on November 13, 2002 at 09:29:44 PM by Marie Strane

Once I have the scripts, top sheet and budget stuff, what comes next? Commitment letters from potential actors/actress and or distributors? Do I need letters to show distributors about interested investors before they can commit? You advise is appreciated. I will be in touch!!!

Re(1): What's next?
Posted on November 14, 2002 at 07:44:58 AM by John Cones

Marie:

It sounds as if you are mixing your methods. You don't necessarily need letters of interest/intent from actors and actresses for investor financing, although such letters might be helpful. On the other hand, it is not likely that you would get any sort of distributor commitment without firm attachments of recognizable name talent. You are not likely to be able to get firm commitments from recognizable name talent before raising any money, because such commitments usually require putting some money at risk. Further, if you actually get a distributor commitment (from a credit-worthy distributor) then it doesn't really make sense to go after investor financing of the production costs, because then you are in a position to seek lender financing of the production costs using the distribution agreement or agreements as effective collateral for the production loan. It seems to me that these financing decicions start with the projected budget. If you are seeking to raise an amount in the $20 million plus neighborhood, that sounds more like a studio financing situation. So, you have to focus on how to get a production-financing/distribution (p-f/d) deal. That takes a package including recognizable name talent. If you're seeking something in the $10 to $15 million neighborhood, then this sounds more like a lender financing prospect. You still need a package, but you are approaching credit-worthy distributors for a distribution commitment, that you will then take to an entertainment lender for a production-money loan. If you are seeking to raise an amount in the $2-$3 million or less area, that may be a prospect for investor financing for which you do not necessarily need a distribution commmitment or a package, although the more tentative commitments the better. Furthermore, in seeking the p-f/d deal or lender financing as briefly described above, it may be necessary to seek preliminary monies (to cover acqusition, development and/or packaging expenses) from investors before you approach the studios and or distributors. So, as you can see, there is not a single route to financing a film and you have to decide which route you are going to take. Again, the budget level seems to be the most important consideration in making that determination.

John Cones

Co-production?
Posted on November 26, 2002 at 04:58:54 AM by Victoria

Hi John,

We are in development of a British feature film in London, UK. As it is a very commercial type of movie we are looking for the possibility of a co-production with an American company. we have been given 'attachment conditional' interest (based on the script) from two of the major International distributors, but still lack the attachment necessary. What is the best to go about this? and are there any standard procedures?

Re(1): Co-production?
Posted on November 26, 2002 at 09:05:55 AM by John Cones

Victoria:

This is a site for answering questions about investor financing of independent film. How to go about attaching elements is not an investor financing question. Good luck!

John Cones

perpertual participation
Posted on December 5, 2002 at 10:20:03 AM by WFM

Hello Mr. Cones,

Could you explain the process or term of "perpetual participation" in a films revenue stream?

Re(1): perpertual participation
Posted on December 6, 2002 at 08:12:02 AM by John Cones

WFM:

I've not seen this term used in film industry deals before, but on its face it means receiving a percentage of a film's revenue forever. Generally speaking, such an arrangement is not practical in the kind of multiple-investor offerings I typically do because at some point there is so little revenue being generated by the film that it does not make economic sense to pay an accountant to prepare the K-1s to send to investors. For that reason we generally limit the LLC's or LP's used as the investment vehicle for such offerings to a life of 10 or 15 years. Generally, that's long enough for a film to be exploited, and after that we allow the remaining rights to be retained by the LLC manager or the LP's general partner, so that the film can be part of a film library. If you have an important early investor, however, that wants to participate in the success of your production company for many years to come, I think it would be better to let them invest in your production company, not in a specific film (forever).

John Cones

investor financing package
Posted on December 11, 2002 at 03:36:45 PM by alex

hi,
how do i set-up an investor financing package for an ultra low-budget film? it's going to be an lp and i have a targeted group of potential investors. i want to find the best way to approach them.

is there somewhere or someone (attorney?) who can help me put the package together and make it attractive?

what works??

Re(1): investor financing package
Posted on December 12, 2002 at 08:35:21 AM by John Cones

Alex:

If you plan to raise money from a group of passive investors, that involves the sale of securities, thus you will need a private placement offering memorandum as your "investor package". Also, of course, interests in a limited partnership are considered securities. In addition, there are a number of other federal and state securities laws with which you will need to comply to keep your offering legitimate (numberical limitations on the number of investor, investor suitability, notice filings and so forth). Check around in your area for a securities attorney with experience with film offerings. In the alternative, I can help with such an offering, even if not based in Califorina, so long as the LP agreement is reviewed and the LP filing is handled by your local attorney. The rest is based principally on federal law, not your state law. Let me know what happens with your discussions with local securities attorneys. I can be reached at jcones@gte.net.

John Cones

Using a series of LLC's
Posted on December 16, 2002 at 07:27:13 PM by Jim

John,
Could you elaborate on using a series
of LLC's to raise funds??Can several LLC's raise funds up to the allowable regulation limits for the same project??? Can they make their offerings
under different regulations i.e reg D, reg A etc. How would this be structured
as individuals entities investing in the same project?? thanks Jim

Re(1): Using a series of LLC's
Posted on December 17, 2002 at 08:11:23 AM by Anonymous

Jim:

No, in securities law we have a concept referred to as "integration" which basically prohibits combining two separate offerings for financing the same project, if combining the two would exceed the numerical limitations on the number of investors, ceilings on the amount of money to be raised or other limitations.

John Cones

Re(2): Using a series of LLC's
Posted on December 17, 2002 at 10:38:46 AM by Jim

John,
Thanks for your answer. Yes, I have seen the term "integration" before
as regards securities in private placements but let me ask you this
question with a slightly different
spin on it. Let's say two separate
production companies formed as LLCs
wanted to raise funds and had a joint
venture or co-production agreement in
place. Each has it own active investor/
management groups and each has its own set of passive investors. How would that relate to the securities regs and integration??
And taking this a step further let's say
initially a single individual were to form up both LLCs and then put a management team in place in the second one and then quit his membership in the
second one. The problem I'm trying to solve is raising more capital then one
entity is allowed per the regs and having more choice as far as which regs
to raise the funds under and also the timing of the offerings(as I understand there is a 12 month waiting period between different offerings for the same entity) as in raising funds in three segments for 1. development money 2. production money
3. some marketing dollars. Am I in the world of reality here or am I skating on thin ice??

Re(3): Using a series of LLC's
Posted on December 20, 2002 at 08:08:11 AM by John Cones

Jim:

Sounds to me like you are spending too much time on the wrong issue. In addition, I think what you propose would be perceived by securities regulators as a scheme devised to avoid compliance with the securities laws, something that is prohibited. If you are considering a private placement offering, Regulation D's, Rule 506 imposes no ceiling on the amount of money you can raise, so why not comply with that regulation? You need to sit down with a securities attorney and review all of the possibilities.

John Cones

acquasition/development packaging
Posted on December 28, 2002 at 05:08:29 AM by ted King

John, would you provide a definition of what an Acquisition and Development package consists of.

Re(1): acquasition/development packaging
Posted on December 28, 2002 at 05:55:04 PM by John Cones

Ted:

I've not heard that exact combination of words used in reference to the film industry. But, two of the preliminary activities and costs involved in the production of a film involve the acquisition of rights associated with the underlying literary rights, in some circumstances and the further development of the script (e.g., hiring a writer, etc.) If a producer was seeking investor financing of these two activities, you might refer to the documentation associated with such an offering (a so-called acquisition/development offering) as an acqusition/development investor package. Or, someone may be saying that they are creating an investor package to fund the acquisition, development and packaging costs, knowing that after acquisition of rights and development of a script, it sometimes helps to add value to a film package, to attach elements to the script (i.e., to negotiate firm commitments with recognizable talent). Then, with such a package (a fully developed script and attached elements), it is sometimes possible to seek studio p-f/d financing or third party lender financing (e.g., negative pickups, foreign pre-sales, gap financing and so forth).

John Cones

Establishing pre-existing relationship and not crossing the line
Posted on January 14, 2003 at 09:15:35 PM by Liz

Dear John,
I guess I am a bit confused about the whole matter regarding the establishment of a pre-existing relationship with potential investors.

I haven't prepared a PPM yet, but should I now be establishing these "pre-existing relationships"?

Through whom and under what circumstances would finding investors be permissible?

What is the protocol here?

For instance, I know of one potential investor. He doesn't know of my project yet. Do I begin talking with him now?

I guess my confusion lies in the fact that seeking investors without proper documentation would be in violation of securities laws. At the same time, if I were to approach somebody with a PPM without a pre-existing relationship, I'm also not following the rules.

Could you please help me wipe away the cobwebs?

Many thanks,
Liz

Re(1): Establishing pre-existing relationship and not crossing the line
Posted on January 15, 2003 at 07:31:05 AM by John Cones

Liz:

The required pre-existing relationships for a securities private placement (exempt offering) need to be created prior to the start of the offering. As a practical matter that means prior to the date set forth at the bottom of the cover page of the offering disclosure document (i.e., the private placement offering memorandum).

And that pre-existing relationship does not have to be much in terms of quality. You just need to have met them or talked to them on the phone. For purposes of proof, if the question ever came up, after the fact, it would be best if you kept some sort of written record of such meeting or conversation. That's what the broker/dealer firms do.

Thus, to the extent that you do not know some of your prospective investors prior to the start of the offering, you can go out and meet those prospective investors prior to the start of the offering, in any manner you wish. You should limit the information provided in such a meeting or conversation to introducing yourself, talking about your background and talking about the film industry generally. You can even talk about your specific project, so long as you don't ask for an investment, or talk about your specific plans for structuring the investment deal. In other words, don't talk about a limited partnership or passive-investor LLC offering because those are definitely securities offerings. At this stage, keep your financing plans open, in the sense that if you run across a wealthy investor who could finance the entire project, you would be open to working with an active investor partner, thus no security would be involved (and the pre-existing relationship rule does not apply). But, after you have met all these prospective investors, and have determined that you cannot finance the film with one or two active investors, then you can stop this activity, wait three or four weeks, and start your private placement. At that point, you can go back to these recently met prospective investors and solicit them for investing in your private placement, since you now have a pre-existing relationship with them. You can also expand your pool of prospective investors by seeking investment from the pre-existing relationships of other members of your company's upper level management, so long as they have other duties besides raising money, are not paid on a transaction-related basis and have not been involved in the sale of securities in the past 12 months (issuer sales).

John Cones

Distributors
Posted on January 28, 2003 at 11:15:00 AM by marc

Hi John-

I was wondering if distribution companies have to be filed with the SEC in order to distribute videos which they license. If they are strictly distributing, and NOT financing, do they have to file? I am seeking info. on what they have to have on file in order to tell if they are legal and legit.

Thanks!

Re(1): Distributors
Posted on February 1, 2003 at 07:43:59 AM by John Cones

Marc:

There is no specific requirement that distributors file with the SEC, but all publicly-held corporations do have to file certain information with the SEC periodically. Since all of the major studio/distributors are publicly-held corporations they will be filing such reports with the SEC and some of those may be available at the SEC site online.

John Cones

SLATE VS. SOLO
Posted on February 3, 2003 at 11:17:50 AM by Gregg

I was corresponding with an author/consultant who's written a couple of books about indie film funding and business planes. We discussed the prospect of attempting to secure partial financing from indie investors for a slate of films (3-5) on which I control the rights to the screenplays, which run the gamut from action comedy to domestic drama to historical fiction, since I have some contacts for distribution. She suggested that it was probably better to attempt securing full funding for one film.

I've seen your posts about spreading the risk with a variety of projects, and that makes sense to me. My approach was to secure partial conditional investment, and piggyback on that with my distribution contacts. The goal was to position my company to be able to make legitimate, non-"pay-or-play" offers to talent. I would think that spreading the risk would be more attractive to investors if a) their funds were not at risk unless the project moved forward, b) the scripts were in commercially viable genres and were available for review, rather than being a development proposition, a c) the risk was spread over a number of films, not a single opus.

Any thoughts?

Re(1): SLATE VS. SOLO
Posted on February 4, 2003 at 08:36:33 AM by John Cones

Gregg:

I've always felt that investors would generally be more attracted to investing in a multiple-film slate also, since for purposes of that investment, the results of the slate would be cross-collateralized. You would also probably want to go out into the marketplace with a so-called mini-maxi offering: a minimum amount large enough to produce your lowest budgeted film and a maximum for producing all of the films in the package. It may turn out, however, that you are only able to raise enough money for the first film, in which case, the supposed benefits of the multiple-film slate would be lost. In addition, in reality, it may be that producing several indie films is more like flipping a coin, the results of one have no effect on the results of the others, and all are high-risk investments. Then again, one of the principles of effective negotiating film distrubtion deals is that you are likely to receive more favorable terms on your first film, if you are perceived as a continuing source of quality product. In order to be so perceived, you must have other films in the pipeline.


John Cones

Options for Canadian Producer
Posted on February 17, 2003 at 06:43:12 PM by Mike S. Cecotka

Hi,
What are the options for Canadian producer to rise money in California.
I bought 100 names for direct mail test.
I want to use my first movie as a free gift and give them CD-ROM with info for new feature.
I want to ask for donation or investment.
What vehicle would be the best and legal in both countries?

Re(1): Options for Canadian Producer
Posted on February 17, 2003 at 09:24:02 PM by John Cones

Mike:

For a fairly comprehensive review of the financing options for a producer seeking to raise money in California (or elsewhere in the U.S.) see my book "43 Ways to Finance Your Feature Film". You question is too general to answer here. However, if you have to use a direct mail list of names, that would be a public/registered offering here in the U.S., since the other alternative (i.e., the private placement/exempt offering) requires that you only approach and raise money from people with whom you and your company's upper level management had a relationship prior to the start of the offering. The direct mail list could only be used in a public/registered offering (S-1, SB-1, SB-2, Reg. A or SCOR). I can't advise you with respect to "donations". My work is limited to "investments". Investments from a group of passive investors would be considered a security here in the U.S. (and probably so in Canada, although I have no expertise on Canadian law). Thus, if raising money from passive investors here in the U.S., compliance with the federal and state securities laws would be required. The choice of vehicle also involves many factors that cannot be covered in this brief space (again, see "43 Ways"). I can tell you that most of my independent producer clients use the limited liability company (LLC) as the investment vehicle.

John Cones

Outcome on movie investments
Posted on March 1, 2003 at 11:43:42 PM by Marat

Dear John:

I am an independent producer who currently works on funding an independent feature film production. I am planning on raising about 5 million from numerous sources including private investors.

In order to show to potential investors how we expect the revenues to flow back to the Partnership (our investment vehicle), I am trying to build the reasonable assumptions based on comparative projects examples.

However, I found that if the movie makes less then $100,000,000 of total gross, my investors will not get any profit on their investment. The reason why it’s happening is in calculation of Exhibitor’s fees, Distribution fees and P & A – expenses.

Am I right making these assumptions?

Doing my calculations, I considered the P&A equal to 20 million, 50% Distributor’s fee (off the top) and the most unfavourable Gross Distribution Deal with fee equal to 33% of Gross Film Receipts.

If I’m right, it looks to me pointless to make movie with 5 million dollar budget. It’s more reasonable to make 1-3 million dollar movie and look for a complete buy-out.

I would really appreciate if you tell me your opinion about things I wrote. Thank you very much!

Marat

Re(1): Outcome on movie investments
Posted on March 2, 2003 at 08:43:54 AM by John Cones

Marat:

It is possible to create financial projections that make it appear impossible for any film production to return monies to investors or vice versa. Assumptions, by their very nature are mostly false. They merely represent reasonable speculation about what may happen in the future. In the offerings I do for my clients, we generally tend to leave the distribution options open, so that if it appears to be more profitable for the investors to sell a film outright, as opposed to licensing or selling for an ongoing profit participation, the producers can choose either option. We don't try to make the financial projections predict the future income of a project, but simply offer them as a discussion tool for helping investors understand how the money flows in the motion picture industry. With that in mind, we like to offer poor, good and excellent projected scenarios for returns. That can be done by adjusting certain of the assumptions upon which your numbers are based. I don't think it is fair to eliminate an entire spectrum of movies, solely based on their production budget. Too many factors are involved. It may be even more important to consider how difficult it is to raise $5 million from investors, and that a $1 to $3 million investor offering is more likely to be successful in comparison. On the other hand, it is more difficult to attach recognizable name talent at the $1 to $3 million level, and that can be one of the most important factors in obtaining distribution. Without that recognizable name talent, you are hoping that a well-written script, and great performances by a combination of relative unkowns will result in an appealing picture that will attract distributor interest. Either way, the producer has to make some difficult choices. For the higher budget option, the producer may want to go out with a preliminary offering (to cover acquisition, development and packaging expenses), then approach industry production-money sources for production funds. For the lower budget option, you may want to expand your alternatives by including a lower minimum for the offering designed to put you in position to co-produce the project.

John Cones

Re(2): Outcome on movie investments
Posted on March 2, 2003 at 08:52:15 PM by Marat

Dear John:

Thank you for the reply. Also thank you very much for the amazing books: "43 Ways to Finance Your Feature Film" and "The Feature Film Distribution Deal". I have deeply learned through both of them and I found them the most practical and useful from all the books I’ve seen on Film Finance.

John, I totally agree with everything you wrote. Thinking about possible future profits of my project, I am still facing some serious concerns.

If I make the movie with a budget between $200,000 - $3,000,000 I have a chance to sell it for up to 5-6 million. This can be a good immediate return. However, I think it’s pretty unlikely to get a buy-out deal for the film with $5,000,000 budget. This deal will have to start from at least $10,000,000 and I doubt that anybody will pay such an amount right away.

It’s more probable to sell the distribution rights for the project. In this case all of the deductions and aforementioned fees will take place. It will be definitely profitable for an exhibitors and distributors, but at our end it can be a total lost.

To cover all markets we need at least 30 million of P&A expenses, so here it comes… If movie makes 100 million, which an excellent result for an independent feature, we have only 60 million from an exhibitor. It comes to 40 million after distribution fee and to 10 million after covering the P&A expenses.

So my net profit will be about $5,000,000, which gives an investors $2,500,000. But all this is the BEST CASE SCENARIO. Being realistic, if the movie will make below $80,000,000 of the total gross, I will not be able even to fully return the production expenses.

As far as I know even such movies as "Forest Gump" and "Coming to America" became a loss due to the Hollywood accounting. I understand that we can fight for a better distribution deal, but … still we need to gross more then 80 million.

John, what could be your comments on all this? May be my projections are wrong? Are there other possibilities if we go the distribution route?

Thank you for your attention.

Marat

Re(3): Outcome on movie investments
Posted on March 13, 2003 at 00:51:20 AM by Steve @ Sharp Angle

It is also important to keep in mind that at every level, the P&A budget varies. You will never have an initial $20Mil P&A spend against a $5Mil negative cost budget. (While P&A may eventually rise to $20Mil, it will only do so based on box office success.) Developing a model of distribution revenues is possible, but it requires a complex evaluation of the way the film will be released. The release pattern (# of screens, type of marketing plan, dating, etc.) all must be forecasted and factored in. For example, some studios have output deals for television. If the release hits certain box office thresholds, then minimum-guarantee license fees can be obtained. On smaller pictures that can qualify under the terms of a studio output deal, those deals can make the difference between profit/no-profit for the filmmakers. John's point is an excellent one: you cannot predict the future of a film with certainty. However, you can create a set of realistic scenarios and indicate what might happen if those assumptions come true. You can also identify the key factors that will shape the outcome of those variables. Is any of this easy? No! But, given the economic times, I think it is an extra step that helps investors better understand the potential risks and rewards.

Re(3): Outcome on movie investments
Posted on March 3, 2003 at 07:55:08 AM by John Cones

Marat:

I do not disagree with your economic analysis. However, the deal between the exhibitor and distributor may vary considerably, as widely as 65% to 25% may come back to the distributor as gross receipts. In addition, keep in mind that this past year, for the first time, DVD revenues exceeded theatrical revenues for the first time in history. Also, accurately predicting how a movie may be received by the public is impossible.

John Cones

Re(4): Thank you John
Posted on March 4, 2003 at 02:53:24 AM by Anonymous

Thank you John. I appreciate your help.

Marat

Expanding Pool
Posted on March 6, 2003 at 02:17:43 PM by WFM

Hello Mr. Cones,

During prospecting for "accredited investors", is a registered licensed broker and/or dealer a way to expand the pool of "accredited investors", while raising capitol for a "mini-maxi" offering?

And how are broker dealers a benefit during various stages of raising equity financing for development, acquisition, distribution, etc, for a film company or film project(s)?

Re(1): Expanding Pool
Posted on March 7, 2003 at 08:42:02 AM by John Cones

WFM:

If conducting a private placement pursuant to the SEC's Regulation D, you can rely on the pre-existing relationships of licensed NASD/SEC broker/dealers for expanding your pool of prospective investors, both accredited and non-accredited. However, as a practical matter, very few such broker/dealer firms are interested in selling interests in such a high risk investment as independent film. If you could get a broker/dealer firm to help raise money for any stage of the film, however, they would generally be most helpful, after all, raising money is their business. They do it on a day to day basis and have relationships with many prospective investors. Of course, you pay for that expertise and service. Generally, private placement commissions paid to licensed broker/dealer firms may be in the 12% to 13% neighborhood. B/D commissions for public/registered offerings are limited to 10%, plus .05% for due diligence. Most states limit overall offering expenses, including commissions to 15%.

John Cones

PPM
Posted on March 7, 2003 at 09:27:00 AM by wisenheimer

Where can I find a sample PPM?

Re(1): PPM
Posted on March 8, 2003 at 08:52:45 AM by John Cones

Wisenheimer:

There is a sample private placement offering memorandum in my book "Film Industry Contracts". But, it is somewhat dated (i.e., the statistics cited in the "State of the Industry" and "Box Office Comparables" sections are out of date since that changes each year) and it is for a limited partnership, not an LLC. It also has a full-length tax discussion, whereas the securities regulators will now accept a shorter version. On the other hand, many securities regulators take the position that a tax discussion and tax opinion are material aspects of such a transaction, and are therefore required. Further, they take the position that issuers of securities (e.g., LP or LLC interests) cannot provide such a tax discussion and/or opinion themselves, unless they are CPAs or attorneys. In addition, that sample offering contains the required legends and purchaser representations for a specific but limited number of states, so if you are planning an offering in other states, someone will have to look up the requirements of each of those new states, and include the legends and purchaser representations in the body of the offering memorandum, along with the subscription agreement. One of the main requirements in drafting such a securities disclosure document is that it disclose all material aspects of the transction, not omit anything material and disclose whatever is stated in a manner that is not misleading. One of the consistent problems of issuer prepared PPMs is that the language gets a bit flowery. The producer is just not able to view the project objectively and remove all the "fluff", the subjective promotional language that invariably seeps into such a document, particularly the business plans often seen floating around. Keep in mind also, that drafting the PPM is only part of the project. You also have to create the entity (LLC or LP) by filing articles with the Secretary of State, drafting the partnership agreement (for LPs) or the operating agreement for (LLCs) and those documents must be consistent with the state law on which they are based. If you are not aware of what that state law is, it is not likely that your agreement will conform. Further, you must be aware of the notice filing requirements of the SEC and of each state in which you intend to offer or sell the securities. So, there is a lot to be considered and just copying or revising someone else's security disclosure document is just the starting point, an approach fraught with danger. You can also see more current copies of such documents if you are seriously thinking about conducting such an offering by making an appointment with me to discuss such an offering and I'll show you about 20 or 30 of them, some successful, some not. Otherwise, you may want to go online and see if you can print out something from the SEC. They may have some public/registered offerings available online, but very few film offerings, and, of course, a public/registered offering is drafted using different rules from those of a private placement. Another possibility, is to ask as many producers as possible until you find one that has conducted such an offering. On the other hand, they may not want to give you something they paid for, and even if they do, they may not be doing you a favor, depending on how you use the example provided and on its quality (something you may not know about). And, you could call up securities broker/dealers pretending to be an investor and see if they have an offering of interest to you, then request a copy of the PPM. Unfortunately, very few broker/dealers handle film offerings these days. My advice, if you are thinking about doing such an offering, is to quit thinking about doing it yourself, and just like any other highly technical area of filmmaking, hire someone with bonafide expertise to handle this for you. In my opinion, it is easier for a producer to get his or her best investor to advance some monies to cover the up front costs associated with doing such an offering right (including attorney fees) than it is for a non-attorney and a producer not experienced with such offerings to properly mount such an offering themselves. There are, after all, serious consequences for not doing it right, both in the civil and criminal arena.

Good luck and good judgment,

John Cones

Early Production Stages
Posted on March 9, 2003 at 06:35:53 PM by Mark

Hello. For the past year my crew and i have been in production for a feature film that we arfe planning on shooting summer of 2004. We shot a 3 minute trailer as well as a scene development reel which will give te investors and idea of how the film flows, acting, set design, editing etc...During this time, we received donations from family and friends and all other production costs were taken care of by my company and all incoming monies were reported on my taxes and dutifully noted on our 2003 return. I am now getting ready to begin looking for a producer to help take us through the proper stages of establishing our LLC, organize our research material for our business plan and prospectus as well as assist us in fundraising. I was wondering if there are any red flags i should be concerned about with how i have approached this project thus far? I am taking great care into learning about E&O insurance, distribution outlets and much more before the first frame of film passes through the gate...I want to make sure everything is done correctly...I appreciate any feedback you may have. Thank you.

Re(1): Early Production Stages
Posted on March 10, 2003 at 08:56:29 AM by John Cones

Mark:

Your questions are broader than investor financing, but in keeping with the intent of this site, I'll restrict my response to that topic. Assuming, as you say, the money you've raised so far are "donations", then you should not have a problem with securities law compliance for that. But, if at some point you decide to offer those sources of funding a participation in the proposed LLC, then your offering may relate back and convert those "donations" into investments. So, I'd try to avoid that. Keep in mind, that creating an LLC is only a small part of what constitutes a securities offering. First, units in an LLC are only securities, when they are being sold to passive investors. If, for example, you raised the money you need from just a few active investors, and the LLC was, therefore, a so-called "member-managed LLC", that would not likely involve the sale of a security. But, depending on how much money you are going to raise (recoginizing that it is difficult to raise much money from investors without raising it from a larger group) then those investors are clearly going to be "passive" since it would be impossible to regularly involve a large group in making important decisions (part of the distinction between active and passive investors). So, that latter type offering would clearly involve a security (i.e., units in a passive-investor LLC or what is referred to in legal terms as a "manager-managed LLC". For such purpose, a busines plan is inadequate for disclosing material information to prospective investors, so quit using the term "business plan" if you hope to raise money from a group of passive investors. In addition, you will not be preparing a "prospectus" unless you plan a public/registered offering. If you plan to engage in a private/exempt offering, then you will be preparing a private placement offering memorandum. Those are just a few points that needed to be made in specific response to your question, which revealed these slight misunderstandings. For a more detailed analysis of what is required for a securities offering (i.e., for the sale of units in a passive-investor LLC) see my book "43 Ways to Finance Your Feature Film" and/or talk to one or more experienced securities attorneys, because conducting such an offering is much too complicated to outline in the limited space available here.

John Cones

Operating Agreement
Posted on March 11, 2003 at 08:51:59 AM by WFM

Hello Mr. Cones,

What is the "best" way, besides yourself, in having a L.L.C.'s operating agreement clearly defined and governed by Arizona State law and possible other states?

Also, do you prepare PPMs for television shows?

Re(1): Operating Agreement
Posted on March 12, 2003 at 07:42:49 AM by John Cones

WFM:

The state statutes of Arizona contain a Limited Liability Company Act. Get a copy of that statute (probably available online) and make sure that all provisions and/or language required by the Act are included in your LLC operating agreement. Often, these statutes state that unless otherwise provided by the LLC operating agreement, a particular issue should be handled in a specific way, but you are often free to depart from the statute so long as your arrangements on the issue is set out in the LLC operating agreement. There are entire books written, however, on drafting LLC operating agreements, so there are many issues to consider. And, yes, in my practice, I prepare private placement offering disclosure documents for television shows and pilots, music projects, feature film development and production, informercials, live stage plays and other projects to be financed partly or wholly by investors.

John Cones
jwc6774@cox.net

ROI
Posted on March 13, 2003 at 05:14:57 PM by Madison

When do investors usually begin to get their money back? Months, years? If an investor has invested money into the development of a film (say he's invested $5 million), when can that investor expect to get his money back? When do foreign sales agents make their money?

Re(1): ROI
Posted on March 14, 2003 at 08:21:34 AM by Anonymous

Madison:

Since independent film is "independent" no one has the ability to determine a "usual" pattern with regard to the timing of a return of or on investment. However, it is probably safe to say that investors would normally not expect returns for years on a production money deal (as opposed to months). After all, it may take a year or more to get the film produced and to complete post production, then additional time to find a distributor (if one is not waiting in the wings). Further, since theatrical distribution (typically the first window of distribution) rarely results in a profit (theatrical distribution is often quite expensive), a film investment generally relies on other media for profit, if at all. On the other hand, it is possible that an early stage investment (to cover the costs of acquisition, development and packaging) with the result that a completed film script and package is successfully marketed to an industry financing/production source could result in earlier returns to investors, if the production financing source buys the project outright. We have no information about how often this occurs. Of course, it is also possible to approach a studio with a completed script and package (i.e., recognizable name director/actors attached) and negotiate a production-financing/distribution deal (P-F/D deal) with an advance that may put the early investors into profits. Again, we do not know how often that occurs in the real world, if ever.

With respect to foreign sale agents, they typically take a film package to foreign territorial distributors (which may have been financed by investors) and arrange for distribution agreements for the film before it is produced. Those agreements are taken to an entertainment lender who provides the production money. Once the film is produced and delivered to these distributors, that is when the distributors pay the agreed upon sums, assuming the film meets the objective standards set out in the distribution agreement. Normally, that's when the foreign sales agent extracts his or her percentage. However, some foreign sales agents are also becoming producers and/or executive producers, in which case they may invest their own money for a portion of the production cost, use the foreign sales contracts to supplement or back up their investment, and either wait for the film to make profits, in which case, they could expect a higher upside, or even take an executive producer fee out of the film's budget. Again, we don't know how often any of these arrangements are being made. This is not an industry that produces that kind of information.

John Cones

Re(2): ROI
Posted on March 14, 2003 at 05:58:30 PM by Madison

Thanks John... Your answer makes perfect sense. One more question, though. As an investor, how much of my return could I expect to get back from the selling of a film's domestic rights? How much money is usually made from the selling of these rights? Thanks for your insight.
-Madison

Re(3): ROI
Posted on March 15, 2003 at 08:01:25 AM by John Cones

Madison:

Over the years, the value of a film's domestic rights in relation to foreign rights has been diminished. Depending on the film, the value of domestic rights today may range from an estimated 25% to 45%. DVD is now more valuable than theatrical, but, of course, that applies to films that got a theatrical release along with the marketing push that goes with it.

John Cones

LLC versus S Corporation
Posted on March 18, 2003 at 01:37:42 PM by Craig

Hi John

Could you please describe the advantages of opening LLC versus S Corporation for financing a movie in LA?

Thanks.

Re(1): LLC versus S Corporation
Posted on March 18, 2003 at 03:43:52 PM by John Cones

Craig:

The LLC offers greater flexibility in structuring the deal for investors. With a corporation, the board of directors has the discretion to declare dividends (if the money is available), but those dividends are paid strictly in accordance with the percentage ownership of the shares. With an LLC, you can offer a so-called "priority recoupment" to the investor group (e.g., the investors will be paid 95% of the LLC's distributable cash until they receive an amount equal to 150% of their original invested capital, then the manager and investor will share in such distributable cash on a 50/50 basis for the balance of the life of the entity). Which brings up another point. Corporations are generally created for the operation of a long term business, whereas LLC's are more suitable for "project financing", that is a business activity which lasts for a limited number of years. The financing of a single film (or even a small slate of films) with a specific group of investors seems more suited to this form of project financing. In addition, with corporations, you are always having to struggle with the "control" issue, as more and more money and investors are brought in. Although there are all sorts of sophisticated ways to handle such issues with the corporate structure, it seems that the LLC offers a much cleaner deal that is easier for the investors to understand, and the LLC makes it clear that management is exclusively in the hands of the LLC manager.

John Cones

Search for investors
Posted on April 12, 2003 at 04:30:07 AM by Derek

Hi John:

I have recently finished a development of my movie project. Now, I have all elements in place except the main star.

Also, I've finished all work required to comply with securities legislation (including preparing of an offering memorandum).

Now I am ready to start looking for private investors but… I don't have any idea of how to do it. Unfortunately, I don't have any useful contacts or wealthy friends.

Could you advise me any approaches I can use to find potentially interested private investors?

Thank you in advance!

Derek

Re(1): Search for investors
Posted on April 12, 2003 at 09:00:08 AM by John Cones

Derek:

Most of my clients who have successfully raised money from investors through a private placement have focused first on bringing in several people (executive producers) who do know people with money and took the necessary steps to make those few people qualify for issuer sales. Issuer sales require that (1) such persons be upper level management of the issuing entity, (2) that they have other duties besides raising money, (3) that they not be paid on a transaction-related basis (i.e., no percentage of the amount raised) and (4) that they not have been involved in the sale of other securities in the past 12 months. Assuming they meet these criteria, you can rely on the pre-existing relationships of these executive producers for purposes of the private placement.

John Cones

investors for scripts
Posted on April 15, 2003 at 06:11:55 AM by Jeff DeLong

I am a screenwriter that lives outside Hollywood. My idea was to raise $100,000 through investors so that I could take two years off of working a day job and focus on selling three spec scripts that I have written. All the money I make off selling the scripts would be split 50-50 between myself and the investors (after their initial investment was returned of course). Is this something that would work? Would setting up a LLC be okay for this? Would I have to pay business taxes because of the LLC and personal taxes since this will be my source of income? Any advice would be very helpful.

Re(1): investors for scripts
Posted on April 15, 2003 at 09:08:44 AM by John Cones

Jeff:

Developing, polishing and selling scripts is a legitimate business purpose that could be the focus of an investor-financed LLC. Assuming that your investors are passive, that is, not regularly and actively involved in helping to make important management decisions, the LLC interests (units) would be considered securities and you would have to comply with the federal and state securities laws, including the creation of a disclosure document (private placement offering memorandum for an offering that is exempt from the registration requirement). You'll want to talk to an accountant regarding your tax questions.

John Cones

Re(2): investors for scripts
Posted on April 15, 2003 at 10:27:26 AM by Jeff

Thanks John. One more question, when I am preparing the private placement offering do I have to define which scripts are included in the offering, or could I just set a time limit, such as any script I sell in the next five years would be included?

Publicist fee
Posted on April 16, 2003 at 05:07:32 PM by Diane

Dear John:
I'm the publicist to a personality who is negotiating selling his life story. The producer only became aware of my clients great story after reading and seeing two major media features that I placed. I believe this is going to be a partnership. Aren't I also entitled to share in some part of the profits? Should I ask for "points?" What would be a reasonable figure to begin with? I obviously don't usually pitch movies.
Thank you for your time.

Re(1): Publicist fee
Posted on April 17, 2003 at 08:51:20 AM by John Cones

Diane:

This site is for asking questions about investor financing of entertainment projects. You need to talk to an entertainment attorney, not a securities attorney who work with entertainment projects.

Best wishes,

John Cones

If money doesn't grow on trees, then where?
Posted on April 21, 2003 at 05:51:57 PM by nicholas Gossert

My name is Nicholas Gossert and i have recently finished my first feature film.
This was financed with personal money combined with small investments [one thousand at the most] from friends; a total of nine-grand. I did this simply to prove that i can make a film cheap and fast and to prove to myself that i'm worth investing in. I had minor aid from a friend's company that helped out with contracts and waivers.
Looking ahead with a new script in hand, i now need to find investors outside of my circle of friends to finance this project...which leads me to my question: I sadly am not certain what the first step to take would be.
I have no ties to business' here in the denver area. Is this the sort of thing i should take to an entertainment lawyer, or should i persue such chances as the companies listed at indiefilms.com? If so, what is the proper way to introduce myself and state my purpose to them?
Thank you for your patience and your help.

Nicholas Gossert

Re(1): If money doesn't grow on trees, then where?
Posted on April 22, 2003 at 08:34:00 AM by John Cones

Nicholas:

If you are looking to raise funding for your next film from investors, I suggest you read the archives of this discussion forum, because your question has been asked and answered several times before. Also, you need to familiarize yourself with the fundamental distinctions between raising money from one or two active investors, as opposed to raising money from a larger group of passive investors.

John Cones

Registering a Private Placement with States
Posted on April 30, 2003 at 10:38:08 PM by Rick

Hello, John. And thank you for the time and expertise you contribute to this forum.

Could you please tell me about registering a private placement offering? I have heard it needs to be done in any state where a prospective investor resides. What is the procedure? Cost? How long does it take? And what does "Blue sky" mean?

Thank you for your help.

Rick

Re(1): Registering a Private Placement with States
Posted on May 1, 2003 at 08:47:40 AM by John Cones

Rick:

The term "Blue Sky" comes from an old case in which the judge stated something to the effect that the state has to protect its citizens from promoters of "blue sky", (i.e., promoters of worthless investments). Thus, "blue sky" has come to be synonymous with "state law".

Now, private placements are not registered. They are exempt from registration. So, "registration" is not the right term to associate with a private placement.

You are probably hearing about the notice filing requirement, which requires that a seller of a security relying on the available exemptions from registration fill out a form, sign it and send it in at a specified time, to each state in which sales are being made. Go to the NASAA (North American Securities Administrators Association) website and click on "Find a Regulator". Then go to each state in which you anticipate sales and look up their securities laws and regulations. Then find the exemption that is appropriate for your offering and look for their notice filing requirements. You will need to know what form is acceptable, where to get the form, whether a fee is required, how much that fee is, to whom should the check be made payable, where to file the form and when. Also, a Consent to Service of Process form is usually required. And, the SEC requires that a Form D be filed with that agency. In the alternative, hire a knowledgeable securities attorney to do these things for you, or to help guide you through the process. Get one or more of your best prospective investors to advance enough money to you to cover your offering costs including legal costs and that could eliminate a lot of tedious legal-related work for you and you can spend more of your time working on your film.

John Cones

Active Investors
Posted on May 5, 2003 at 10:10:08 PM by Liz

Hello John,
I have given my business plan to a handful of potential active investors. I'm now playing the waiting game, but tonight, I'm thinking, I didn't really make the active investor active. I'm basically asking for one or two people to invest, while I manage the project. Is that not making the investors passive then?

My questions (which are many): Am I doing this the wrong way? How would I make the active investor "active" without jeopardizing the project, particularly if I do not trust them to have the knowledge necessary to manage the project?

Who would I speak with to discuss the different possibilities of structuring a working relationship -- i.e. LLC, LP or joint venture? Would I speak with an accountant or an attorney, and if an attorney, what kind of attorney?

What should I have needed to have done -- or what should I be doing right now?

Should I worry about the investor financing agreement now? Or should I worry about it when investors come to the negotiating table?

(I just don't want to pay for more lawyer fees than I have to.)

Am I in trouble?

And if so, how do I make the corrections?

Thanks John,
Liz

Re(1): Active Investors
Posted on May 6, 2003 at 08:49:33 AM by John Cones

Liz:

If you manage the project and the investors are not regularly involved in helping you make important decisions, they are passive and you've sold a security. Of course, one of the disadvantages to active investors is that they may get too involved and mess up the creative venture. That's one of the choices you have to make before deciding to seek money from active investors, or try to decide after you met some prospective active investors. The active investors also have to decide whether they want to accept the liability in such an arrangement. As noted in "43 Ways to Finance Your Feature Film" one of the advantages of a passive investor vehicle like an LLC or LP is that these vehicles offer limited liability protection to investors, and they are passive, so they are restricted from inserting their will in creative matters. But, raising money from passive investors involves the sale of a security and you just have to make up your mind to become somewhat knowledgeable about what is required to comply with the federal and state securities regulations.

In point of fact, if your investors have no experience in the industry and do not have the knowledge necessary to help manage the project in a meaningful way, they are by definition not capable of being active investors. In other words, in order to avoid selling a security, you active investors must not only be regularly involved in helping to make important decisions, but they also must be capable of making these contributions.

When you want to discuss the different possibilities of structing an investment deal, that's really legal advice and you go to an attorney for legal advice. You can talk to your accountant about the financial and tax implications of the deal, but you should not rely on an accountant to advise you with respect to which investment vehicle is the best choice for a specific set of overall circumstances. Typically, you would want to tak to an attorney with experience in business transactions, corporate securities or securities.

Normally, I include a copy of the proposed investor financing agreement as an exhibit to the business plan being used to raise money from one or two active investors. After all, a business plan is not an investment vehicle, and if you have not agreement for the investors to sign, it signals to them that you are not ready to accept their money.

I don't blame anyone for not wanting to pay more for attorney fees than necessary, but on the other hand, it is quite unusual to go into any kind of business without spending some money, either on "doing your homework" or in getting professional advice. Filmmaking is no different.

John Cones

active and passive investors
Posted on May 18, 2003 at 10:00:43 AM by Dave Stock

Where can I find the definition of what makes an active investor active and a passive investor passive?

D.S.

Re(1): active and passive investors
Posted on May 18, 2003 at 10:13:35 AM by John Cones

David:

The securities laws do not provide such a definition, so by analogy we rely on tax law which provides that an active investor is one who is regularly involved in helping to make important decisions. From a securities standpoint, such persons also should have sufficient business experience and sophistication to be able to participate in such decision-making in a meaningful way.

John Cones

private placement
Posted on May 23, 2003 at 12:47:39 AM by mary

I am a producer on a project that is currently seeking funding. We are planning to approach private investors and seek monies through a private placement(looking for 1.5mil). My question is, are there tax benefits for investors regarding private placements? Also is there a limit to the number of investors one can have for a PP(I'd heard thirty five was a limit). Thanks for your help.

Re(1): private placement
Posted on May 25, 2003 at 09:39:55 AM by John Cones

Mary:

The tax benefits associated with a film offering are not due to the "private placement" status of the offering, but more closely associated with the type of investment vehicle used. Limited liability company offerings or limited partnership offerings involve investment vehicles that are so-called "pass-through" vehicles. In other words, these investment vehicles are not taxed at the entity level, like a regular "C" corporation. Thus, the revenue stream generated by the activity of these investment vehicles is only taxed once, when received by the investors. That's one tax advantage of these two investment vehicles. Also, most of the money in a film production offering will be deductible on a pro rata basis among investors as an ordinary and necessary business expense, assuming the project meets the other requirements of a "for profit" business. Unfortunately, those deductions are not available until the product (the film) is placed in commerce, so these deductions are not likely to become available to investors until years two or three following the start of the offering. There are also small deductions available for organizational expenses in creating the investment vehicle, but those must be amortized over a 5 year period. No tax deductions are available for syndication (selling) costs. Other deductions may be available for advertising expense in the year incurred, but most advertising is paid for by the distributor, so in most film production offerings, this is not a significant deduction.

For private placement offerings conducted in compliance with the SEC's Regulation D (at the federal level) and compatible state exemptions from the state registration requirement for securities, the numerical limitation on investors is 35 unaccredited, unlimited accredited and unlimited foreign. Go to the SEC site online and read Rules 505 and/or 506 of Regulation D, plus the definitions of accredited investors for additional information. Or see this information in my book "43 Ways to Finance Your Feature Film".

John Cones

Reserving disproportionate equity for seed investors
Posted on May 23, 2003 at 04:35:08 PM by Rick

Dear John:

You've been a great help in guiding my conceptual thinking with regard to film financing. It's clear that an expert is needed to draft the right PPM.

I'll pose a hypothetical "deal" for your advice, and perhaps to stimulate similar questions from among your forum devotees:

I am thinking to raise seed money in loans, so as to pay for offering costs and development, etc. I'd like to promise potential lenders that I repay them upon funding (reimbursements from film budget) plus I reserve a profit position in the film for them equal to their loan amount. That would mean they are NOT putting money into the actual production, but they are getting a share of its profits. Furthermore, I want to offer potential lenders a conversion option whereby, in lieu of repayment, their loans are rolled over into an equity investment, entitling them to profits equal to TWICE the loan amount. In this case, money DOES go toward production, but the same amount of "gratis" equity is tacked on.

Once the PPM is drafted, I'll be circulating it to film investors. My question is, do you think it will be acceptable to film investors if this "gratis" equity (forgive me if this is unscientific terminology) is reserved for seed lenders only when the investors may be putting up ALL the money to produce the film?

Rick

Re(1): Reserving disproportionate equity for seed investors
Posted on May 25, 2003 at 09:50:47 AM by John Cones

Rick:

I'm afraid if you make these so-called "loans" payable out of "funding" they are not really loans, because they're repayment is contingent on something that may or may not happen. Thus, your loans are actually investments. See the discussion of "loans" and "securities" in "Film Finance and Distribution -- A Dictionary of Terms".

Most producers are not in a financial position to actually obtain start-up funds (or first level financing) in the form of loans, since loans require a time-certain for repayment, not contingent on uncertain events. If these early investors are going to be active, you can avoid having to conduct a securities offering for their money, and it may be obtained through (1) an investor financing agreement, (2) an initial incorporation, (3) a joint venture agreement or (4) a member-managed (active investor) LLC. For additional discussion of each of these options see Active Investor (Non-Securities) Vehicles in "43 Ways to Finance Your Feature Film".

John Cones

Re(2): Reserving disproportionate equity for seed investors
Posted on May 26, 2003 at 04:33:16 PM by Rick

John:

I do intend to approach lenders with a promissory note that specifies a set term (i.e. 24 months)and interest rate which technically is owed to them whether or not the film is funded. I'm merely holding forth that repayment will occur either upon funding of the film or the 24-month term, whichever comes first.

And my question about the film investors' perspective still stands: Do you think holding aside some equity for lenders -- as a "bonus" for their early-stage capital risk -- will be a sticking point for film investors whose money will go toward recouping those lenders prior to production? Or is it par for the course? What do you think?

Rick

Re(3): Reserving disproportionate equity for seed investors
Posted on May 27, 2003 at 08:59:53 AM by John W. Cones

Rick:

Your second-stage investors may ask the reasonable question: "What was the risk for your lenders if you signed a promisory note for them to be repaid with interest at Mini v.s Television
Posted on June 9, 2003 at 04:09:55 PM by WFM

Hello Mr. Cones,

I understand that you practice "equity" financing of entertainment projects.

Are there any vast statistical and revenue differences in the preparation and discussion of a "Mini-maxi" film Private Placement Offering and a Private Placement Offering for a thirty minute television program?

time certain?" The answer may be, "Not much, assuming you could repay the loans." But if you couldn't repay the loans and the contingent repayment arrangement is actually there because of this risk, then the loans, once again, are not loans, but investments. If those early fund contributors were investors and they actually put their early money at risk, then a bonus would be more appropriate and the later investors would have less reason to complain.

John Cones

Re(1): Mini v.s Television
Posted on June 10, 2003 at 09:02:30 AM by John Cones

WFM:

An offering for a thirty minute television program could also be a mini-maxi offering assuming there were alternative ways to produce the show with different levels of costs.

With respect to the offering memorandum, the following major sections of the offering memorandum would be substantially different:

risk factors
state of the industry
story synopsis
underlying rights
production strategy and schedule
marketing
industry overview
portions of the tax discussion
financial projections

John Cones

Budget/Schedule before Memo?
Posted on July 24, 2003 at 08:46:42 PM by Rick Gerald

Dear John:

Is it necessary to have a full budget and schedule done before drafting a private placement memo? Or is a budget "top sheet" sufficient?

Rick Gerald

Re(1): Budget/Schedule before Memo?
Posted on July 25, 2003 at 08:34:40 AM by John Cones

Rick:

The information that appears in the private placement offering memorandum is more similar to the top sheet of a budget, plus offering expenses, investment entity maintenance cost (i.e. for LLC or LP) and often a line item for "marketing to distributors". I'm sure, however, that a line producer would take the position that you cannot produce a top sheet that is anywhere close to being accurate without the underlying full budget, after all a top sheet is a summary of the budget. But, for purposes of preparing the PPM, the full budget does not need to be disclosed to investors, and the numbers in the minimum and maximum columns of the estimated use of proceeds merely represent your best estimates as of the time of the preparation of the disclosure document. Thus, is some room for change, so long as such changes stay within the minimum and maximum amounts. Otherwise, you'd have to get the written permission of your investors for making material changes to the PPM.

John Cones

Public Offering
Posted on July 25, 2003 at 08:26:23 AM by Bob

I'm looking to raise a small amount of money from one or two investors. What are the steps for making a public offereing?

Re(1): Public Offering
Posted on July 25, 2003 at 08:42:34 AM by John Cones

Bob:

If you plan to raise the money you need from one or two active investors, they are knowlegeable in the field, and you and they are willing to be actively involved in the production of of the project, it is probably not worthwhile to conduct a public/registered offering. If you are raising money from one or two active investors as described above, that generally does not involve the sale of a security, thus a public/registered offering would not be required. If on the other hand, these investors are passive, and/or simply do not know enough about the film industry to be helpful, then what you are selling (e.g., corporate stock, LLC units, interests in an LP or profit participations) are very likely to be considered securities and you are required to either register the security with the SEC at the federal level and in each state in which you anticipate offers or sales, or in the alternative to qualify for available exemptions from the securities registration requirement. At the federal level, you would choose between the S-1, SB-1, SB-2 or Reg. A offering rules (see SEC site). In each state, you would have to determine which state registration form is compatible with the form of federal registration chosen.

John Cones

Re(2): Public Offering
Posted on July 25, 2003 at 10:01:58 AM by Bob

So if I'm raising the money from one or two active investors who are going to be an active part of the productions team what kind of offering am I making and what are the steps I have to take to make sure everything is legal?

Re(3): Public Offering
Posted on July 25, 2003 at 05:17:19 PM by John Cones

Bob:

If the offering is not of a security, then you use a business plan, as opposed to an offering memorandum or prospectus. You use the business plan to disclose information about the prospective investment and combine with either an investor financing agreement, joint venture agreement, the initial incorporation or active investor (member-managed) LLC (for additional information and sample copies of the agreements see my books ("43 Ways to Finance Your Feature Film" and "Film Industry Contracts").

John Cones

company legal form for development financing
Posted on July 28, 2003 at 00:46:38 AM by Alex Gardner

Hi John,

I'm new to the board but I've been a loyal reader. Thanks for making all of the information and advice available to all!

I would like to get your advice on a question that has troubled me lately. I'm developing a feature film for the first time. So far I've found a distributor that's willing to put up a guarantee based on the treatment. One of my wealthy friends is also willing to put in the money to hire a write to develop the script.

My question is - should I form a LLC and use it both to sign the distribution deal and to develop the script? Or should I keep these two activities to separate legal entities? Also, how could I possibly structure the profit participation for my investor friend? He's putting in a lot less money for development than the later equity investor for production, but his risk is higher even though we have a guarantee deal on the table.

Any advice you could provide will be most appreciated.

Best regards,

Alex

Re(1): company legal form for development financing
Posted on July 28, 2003 at 08:51:02 AM by John Cones

Alex:

Actually, I do not provide "advice" at this forum, but merely discuss issues and questions relating to investor financing of entertainment projects. Based on the limited information you have provided, it appears that you will most likely have to decide whether to create a company that will own the rights to the treatment before making a deal with the distributor. If so, you will have to consider whether that company will be a fictitious name company ("dba" in some states), an active investor LLC or a corporation. And, you will have to arrange to transfer the rights to the treatment to this newly-formed company. You then may want to consider whether the distributor's agreement is sufficient to support a bank loan for both development and production costs. If not, you may want to consider creating an active-investor LLC (member managed) for the development of the script. Your wealthy investor could be a member of that LLC and participate with you in making important decisions with respect to the development of the script. In the alternative, you could consider the investor financing agreement, a joint venture agreement or an initial incorporation for this development stage with a single active investor (see discussion of each option in "43 Ways to Finance Your Feature Film"). In any case, once the script is developed, the question of whether another entity is needed, may depend on how many investors are involved in providing production financing, or whether a bank is providing a production loan. If a group of passive investors are providing production financing, you will probably want to use one of the investment vehicles such as a passive-investor (manager-managed) LLC, a corporation or a limited partnership for that stage, again making arrangements for transferring rights to the newly-created entity. There are so many issues involved here that you really should bring a attorney on board right away, to help you through the process.

John Cones

Financing a social message film
Posted on August 3, 2003 at 01:50:47 AM by Ryan

John,
Thanks for all your support for the indie film community. Two questions:
1) I am producing a script with a very timely and relevant liberal social message/theme. Established companies won't touch it b/c too edgy. I need some equity investors that believe in it. Any recommondations on connecting with progressive groups/individuals that might want to be involved with equity financing?
2) I really value your concern on the lack of diversity in the biz. Any quick thoughts on how a producer might find those diverse voices out there?

Thank you so much

Re(1): Financing a social message film
Posted on August 4, 2003 at 08:26:36 AM by John Cones

Ryan:

If you propose raising money from passive investors, people who are not regularly involved in helping you make important decisions with respect to the project, you will likely be selling a security. In order to sell a security, you either need to conduct a public/registered offering or a private placement. With a public/registered offering you can advertise and conduct what is called a general solicitation (i.e., approach people you don't know). In a private placement, you are limited to approaching people with whom you and your upper level management had a pre-existing relationship prior to the start of the offering. Thus, if you feel today that you do not know enough prospective investors to fund your project, you need to both meet more people yourself and find several people who know a lot of people and who are interested in seeing your vision on the screen. These people are everywhere, not in any particular place. Just make a list of the characteristics of the people you think might be interested in your film for one reason or the other and start talking to people you know about where those people might be. Conduct all of this "general solicitation" well before you start a securities offering.

John Cones

cast and crew as investors
Posted on August 11, 2003 at 06:05:33 PM by dave

I'm currently putting together a low budget project. What I want to do is to set up my cast and crew as investors instead of being paid up front. The additional project budget will be raised from investors through a private offering. Will this work?

Re(1): cast and crew as investors
Posted on August 12, 2003 at 08:32:23 AM by John Cones

Dave:

Sure it could work, but it could hurt your efforts to raise money from investors. In other words, let's say you create an LLC offering (which, by the way for everyone reading this, involves much more than just creating an LLC)you could reach an agreement with cast and crew regarding the value of their contributions and convert those contributions into LLC units which are also valued at some arbitrary figure. Then you could sell additional LLC units to investors and all of these unit holders would share in the LLC revenues on a pro rata basis at the same time. Unfortunately, it is generally more difficult to raise money from investors for a risky investment like a feature film than it is to find cast and crew willing to participate, so investors may balk at allowing anyone to share in the LLC revenues on a significant basis prior to their recoupment of their original investment. I don't know your investors and haven't talked to them, so you have to look into this issue. Make sure your investors like the plan before you go forward with it. In most instances, my clients offer the investors some level of recoupment, then pay deferrals to cast and crew, then the producers and investors begin sharing the LLC revenues at some defined level. Whatever plan you come up with must be properly disclosed in the offering memorandum to prospective investors.

John Cones

(no subject)
Posted on August 11, 2003 at 06:09:53 PM by Rob

I'm currently trying to raise less than $50,000 for a short film project. What are the pros and cons to setting this up as a Reg A offering?

Rob

Re(1): (no subject)
Posted on August 12, 2003 at 08:24:05 AM by John Cones

Rob:

It probably does not make much sense to raise any amount of money from investors for a short film unless you can demonstrate to such investors that a short film has a possibility of being a commercial project. Since there is a very limited commercial market for short films, that may be difficult to do.

Further, only raising $50,000 is, in my opinion, not enough money to bother with a Reg. A offering, because the Reg. A offering is likely to be too expensive to justify the expense. In other words, you will end up spending so much on attorney fees, SEC filing fees, state filing fees, copying and binding charges, entity creation charges and marketing costs, that those costs will represent too high a percentage of the money raised. That small amount of money hardly justifies the cost of a private placement, much less the small public offering like Reg. A.

John Cones

 

 

 

 

distribution of short films
Posted on August 12, 2003 at 01:32:25 AM by Dominic

I am in the process of negotiating a short film about 12 minutes long, I am not aure what the going market is for such a film. I was offered 50 % of net revenue. They want all rights for 10 years .Can I ask for licensing fee or more on revue side. Any advice on how to handle this?
DL

Re(1): distribution of short films
Posted on August 12, 2003 at 08:19:55 AM by John Cones

Dominic:

This site is for asking question relating to investor financing of independent film or other entertainment projects. Your question is not appropriate for this site. You need to ask it elsewhere. Good luck!

John Cones

Approaching investors.
Posted on August 12, 2003 at 07:08:56 PM by Diane

I know that you can't advertise for selling a security, but could you call potential investors and just show them a business plan without asking them to buy securities?

D

Re(1): Approaching investors.
Posted on August 13, 2003 at 08:30:25 AM by John Cones

Diane:

Actually, it is not always true that you cannot advertise a security. If the securities offering is registered with the SEC and in each state in which offers or sales are anticipated, then certain forms of advertising are permissible. But, in a private placement offering, which is probably what you are talking about, neither advertising nor any form of general solicitation is permissible. As we have discussed at this site before, if you initially go out into the marketplace with a business plan drafted for the purpose of seeking funds from one or two active investors (who also have experience in the film industry) you are probably not selling a security, so under those circumstances, you can approach anyone you like. You simply then have to deal with the problems associated with bringing in active investors to your project.

John Cones

Re(2): Approaching investors.
Posted on August 13, 2003 at 07:39:32 PM by Diane

So what is the difference between selling securities and selling membership units in an LLC? Can I show a business plan for my LLC to potential members?

D

Re(3): Approaching investors.
Posted on August 14, 2003 at 09:00:43 AM by John Cones

Diane:

First, you must understand that there are two different kinds of LLCs (and this obviously causes a lot of confusion). Interests (or units) in one kind of LLC are securities, the others are not securities.

If your LLC investors are passive (i.e., they are not regularly involved in helping make the important management decisions), those LLC units are going to be securities. In legal terms that kind of LLC is referred to as a "Manager-Managed LLC", since the members (investors) do not participate in management, but one or more "managers" handle these responsibilities. Because the language is clearer, I refer to this type of LLC as a "passive-investor LLC", because the passive nature of the investors is really at the crux of the matter.

On the other hand, if your members (investors) are very limited in number, let's say, just two or three (and it is difficult to draw the line precisely, so it is best to be conservative on this issue) and they are active in management, then those interests in the LLC are not considered securities, thus in selling those units you do not have to comply with the securities laws. These LLC's are referred to in legal terms as "Member-Managed LLC's" or in my more simplified terminology, "active-investor LLC's" (i.e., management by committee). Thus, you can use a business plan (i.e., a non-securities disclosure documument) to go out and sell units to several active investors in an active-investor LLC without having to comply with the securities laws. But, the more investors you have the less likely that they will all be active, and if any of them is actively involved in management, you are selling a security not matter what you call it, the securities laws apply and you may be guilty of selling an unregistered security which can result in both civil and criminal penalties. With such serious consequences involved if you make a mistatke, it's best to get the advice of an experienced securities attorney.

Good luck!

John Cones

Book to Movie
Posted on August 17, 2003 at 08:18:42 AM by Donita

I have an agent at APA interested in a story of mine for a movie. I have just completed the manuscript, but he won't bring it to the table until I have the manuscript published, which is understandable.

My problem is that I want to self-publish my book instead of playing the waiting game with Literary Agents.

My question is, do private investors for film also dip their feet into the book area of financing. If so, does this seperate the type of private investor I need?

Re(1): Book to Movie
Posted on August 17, 2003 at 11:04:21 AM by John Cones

Donita:

It is possible for investors to invest in any project, including publishing a book, the writing of a script based on the book and producing a movie based on that script. This plan of action simply needs to be spelled out in the disclosure document so that investors know what they are investing in (1) publication of book, (2) development of script, and/or (3) production of movie. There is really no way to distinguish between investors who may be interested in such a deal as opposed to a straight movie offering. You'll just have to start talking to all of your prospective investors.

John Cones

Re(2): Book to Movie
Posted on August 17, 2003 at 09:12:03 PM by Donita

I won't have to worry about the development of the script and or the production of the movie. The agent told me that will be taken care of. Being as I'm a real go-getter when I want something, getting investors to help get the book published shouldn't be too hard.

Thank you for the advice.

Donita

Finders
Posted on August 19, 2003 at 06:12:03 PM by Olman

I want to identify the types of financing arrangements in which I can use, or be, a finder and get paid on a percentage basis without being a registered representative on the grounds that the financing involved is not considered a security.

To put it another way, can you provide examples of the types of financing for films that are not considered securities?

Re(1): Finders
Posted on August 20, 2003 at 08:54:29 AM by John Cones

Olman:

Five chapters in the book "43 Ways to Finance Your Feature Film" is devoted to this very topic. It's entitled "Active Investor (Nonsecurities) Vehicles". There are actually four investment vehicles for non-securities (active investor) fund raising and the fifth chapter covers the proper use of the business plan in conjunction with these non-securities fund raising methods. The vehicles are (1) the investor financing agreement, (2) the joint venture or co-production agreement, (3) the initial incorporation and (4) the member-managed or active-investor LLC. For a more thorough discussion of the advantages and disadvantages of each form of finance, see these chapters in the "43 Ways" book.

John Cones

need help, how do i find investors or raise money?
Posted on August 24, 2003 at 04:52:47 PM by george

hello there, i am pretty new to this world of film...weve been writing a script for a couple of months now and were almost complete, and we have all the actors and the whole scene set....now were just looking for some investors..do you know of any places where we can go too? any firms ,agencies...i cant find anything..maybe im searching in the wrong places....can you please let me know where i should search for? thank you...

george

Re(1): need help, how do i find investors or raise money?
Posted on August 24, 2003 at 06:08:19 PM by John Cones

George:

C'mon George, investors are people, thus they are found everywhere you find people. There is no line of investors waiting to invest in high risk independent film deals, so you have to look for people who might otherwise be motivated. This might include people who think that investing in a film deal might be more interesting than some of their other investments, people who might have a son or daughter who could appear in the film, someone who really supports whatever it is that your script/film is communicating, someone who supports your career objectives, someone trying to get involved in the film industry for their own reasons, and so forth. It may prove helpful to try to recruit one or two other individuals to help you raise money, so long as their participation is consistent with the so-called "issuer sales" rule of the SEC.

John Cones

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