Investor Finance of Independent Films

production company
Posted on March 31, 2006 at 10:30:27 AM by Scott

John:

I am producing a $300k feature and soon to meet with an entertainment attorney to prepare a PPM.

You mentioned in a previous post that in a manager-managed LLC the name of the film is generally used in the name of the LLC and the manager is the production company.

If there is no production company on record, would you recommend setting that up at the same time or is it imperative to establish the company before the LLC?

Also, the company is composed of just two individuals. We intend to make more than the one film for which this LLC is being created. What company formation would you say then is ideal?

One extra question if I may: You also once mentioned "the typical cost of a securities offering?" What might that be?

Many thanks. Your site is outstading.

Scott

Re(1): production company
Posted on March 31, 2006 at 11:03:14 AM by John Cones

Scott:

In the just prior post, I listed a number of options for your production company: fictitious name company (dba, general partnership, corporation (S corp or regular "C" corp) or the member-managed LLC. You should discuss the advantages and disadvantates of each with your attorney, considering your current situation and future goals. Often, when the producer is using a manager-managed LLC as the investment vehicle for raising film production or development monies from a large group of passive investors, the fictitious name company is adequate, because once the LLC is formed, it offers limited liability protection to both the LLC investors and the manager. Then, later, after your production company has made some money you may want to consider the other options.

It doesn't sound like me to say there is a "typical cost" for anything, much less a "securities offering", but if you are talking about a Reg. D private placement for a $300,000 offering in just a few states, it is possible to get that done for something in the $10,000 to $15,000 range including legal fees, copying, binding and cover artwork, state notice filing fees, creating the manager-managed LLC with the operating agreement and marketing costs. A number of these costs could vary however, depending on the choices you make.

Out of pocket expense could be substantially less, if the attorney is willing to work on a flat fee basis and defer a portion of the fee to be paid out of investor funds once the minimum is raised. In that situation, you might be able to get by on as little as $7,500 up front and out of pocket during the course of the offering (for all offering costs, not just legal fees).

Some attorneys charge more for their fees, some do not defer, some work on an open ended hourly rate, and some do not include all of the above in a flat fee arrangement. So you want to be clear on what you are getting.

You may also want to inquire as to whether the PPM will contain a federal tax discussion, an attorney's tax opinion, an attorney's securities opinion, to what extent will the attorney assist with the preparation of financial projections and what role will the attorney play in the preparation and filing of SEC and state notice filings?

You may also want to know whether the attorney has prepared a film offering before and whether any of the attorney's film offerings have been successful.

John Cones

Approaching Investors
Posted on April 3, 2006 at 11:36:13 AM by RB

John,

This may be a confusing question but here it goes:

While a producer is preparing a PPM is it appropiate to approach potential investors to pitch the project without a PPM at hand for signing to develop a relationship and interest for the project?

This approach could be used only to pitch the project and discuss how it would be financed (equity investment) but not to sell anything yet. This way one can get gage the investor's interest on the project based on the script, a marketing DVD, the amount needed to produce and the principals involved.

Thanks in advance.

RB

Re(1): Approaching Investors
Posted on April 4, 2006 at 11:10:37 AM by John Cones

RB:

Keep in mind that a PPM is the disclosure document associated with a private placement. One of the distinguishing features of a private placement is that the securities are not supposed to be offered or sold to people with whom you do not have a pre-existing relationship. Pre-existing in this sense means before the start of the offering. Normally, we consider the start of the offering to be the date on the cover page of the PPM. However, if you go out and start soliciting investors for the investment vehicle that is going to be presented in conjunction with the PPM, most securities regulators will consider that part of the offering (i.e., you've already started the securities offering whether the PPM is ready or not), thus the rules relating to pre-existing relationship apply.

On the other hand, if when you first start talking to prospective investors about your project you do not use any language either in writing or orally that suggests or implies that you may later re-structure the deal as a security (i.e., selling units or interests to a large number of passive investors)and instead, you indicate that at the time of this soliciation you are actually looking for one or two active investors to fund your project, under those circumstances, you conceivably could approach and/or talk to any prospective investors you like, regardless of whether you knew them before or not, because presumably you are not conducting a securities offering at that time.

On the other hand, if you only approach prospective investors that you and your company's upper level management already know, it's fine to approach and/or talk to them about the particulars of the deal that you expect to be represented later in the PPM recognizing that you have started the securities offering and everything you say orally needs to be consistent with what later appears in the PPM, or recognize that the language appearing in the PPM supersedes anything you say to the contrary in an earlier oral presentation. Hopefully, there's not much difference, since that could cause a problem.

John Cones

Re(2): Approaching Investors
Posted on April 5, 2006 at 05:17:50 AM by RB

John,

Thanks for your answer. It can obviously be a sensitive subject as to how and when one can approach potential investors with whom there is no pre-existing relationship.

RB

Re(3): Approaching Investors
Posted on April 5, 2006 at 07:31:52 AM by John Cones

RB:

It also depends on which set of securities rules apply. For example, if you are selling a security (typically interests in a manager-managed LLC or limited partnership when dealing with "project" financing like a feature film) and you are not seeking to raise more than $1 million, and you believe you can raise the amount sought from accredited investors only, you can rely on the Model Accredited Investor Act which permits some advertising and general solicitation. With the MAIA you don't have to be concerned with the private placement requirement of a pre-existing relationship.

John Cones

Re(4): Approaching Investors
Posted on April 5, 2006 at 11:11:32 AM by RB

John,

Got it. Thanks.

RB

Regular Corporation
Posted on April 5, 2006 at 07:48:33 PM by Dave N

John, as someone that read your book there is a situation that I've come across that isn't really addressed...Or maybe it is but I don't know under where it would fall.

I have a C corp that we're almost done structuring. The company will be buying and distributing indie films, producing our own, a recording label division as well as handeling many different aspects of the entertainment "world".

My accountant says that we're not limited to the number of investors and, I'm happy to say, they're lining up purchase our shares.

Is there some reason I can't sell shares to these people that want to invest in my C-corp? I don't have a ppm for these people. Do I need one for this type of investment? Will our business plan suffice?

Re(1): Regular Corporation
Posted on April 6, 2006 at 09:08:13 AM by Dave N

Oops, nevermind...I did find it. But just to be sure, the answers I seek are in Chapter 22 and 33 of the book. So, I do actually need a PPM for these investors?

It's also my understanding that under the 504 Offering people still need to be accredited investors? How do I sell shares to these people that are Non-accredited but want to invest? I have a lot of friends that want to put a decent amount of money into the company.

Re(1): Regular Corporation
Posted on April 6, 2006 at 08:04:37 AM by John Cones

Dave:

On an open forum like this I can only provide a general discussion of issues raised. And such a general discussion is provided based only on the assumption that legal advice is not being sought and no legal advice is being given, just a general discussion of issues for informational purposes only. If you need legal advice, you will want to establish an attorney/client relationship with an attorney, so that the attorney can ask questions and further investigate your specific needs.

As a general rule, however, once you've created a corporation, filed the articles of incorporation with the Secretary of State, prepared the initial shareholder and board of directors minutes reflecting the board members and officers, issued shares to the founding shareholders, logged the issuance of those shares into the corporation's share transfer log book, and actually physically issued the shares to those founding shareholders, if you choose to then seek additional shareholders, that clearly constitutes a securities offering and you must comply with the requirements of the federal and state securities laws. That means if you want to conduct a private offering (e.g., pursuant to Regulation D or other available federal exemption) you must provide a properly drafted disclosure document to each prospective investor.

In my view, and you must keep in mind that I am not a state securities regulator and specifically do not know what the position of the state regulatory authority is in your state, a business plan will not suffice in such an instance. On the other hand, if you have not formed the corporation and you are looking for a small number of founding shareholders, a business plan may suffice, since presumably all of these early investors will have the same opportunity to ask questions of the new corporation's promoters and to participate in electing the board of director members, etc. So there seems to be a difference between a new corporation and an existing corporation for securities offering purposes. I'd check this interpretation, however, with local counsel and the duty officer at the Secretary of State's office in your state.

John Cones

Re(2): Regular Corporation
Posted on April 6, 2006 at 09:11:30 AM by Dave N

My reply was posted as you were posting yours. You have already answered the question.

...unless you have anything further to add?

LLC Formation
Posted on April 9, 2006 at 06:39:40 PM by RB

John,

I have read in this forum about the idea that it is not necessary to form an LLC until a producer has raised the minimum of an offering (PPM) to avoid the expense of creating one.

Could this strategy be seen by investors as a lack of credibility or confidence in the producer's part not to have an LLC up and running while selling his project?

Thanks.

RB

Re(1): LLC Formation
Posted on April 10, 2006 at 07:36:00 PM by John Cones

RB:

Well, of course, that is one possible interpretation, but not a reasonable one in my opinion. What investor would think that a newly-formed, unfunded LLC is any more credible? In addition, just by filing the articles of organization with the Secretary of State does not mean that the formation process is complete. You have to have an LLC operating agreement approved by the members to complete the process. If you file the articles, and get an original member to approve of the operating agreement, then that original member has to assign interests to other members as they become members. The details of executing those transactions are more cumbersome, again, in my opinion than forming the LLC after the offering minimum is raised. Further, in the hundreds of film and other offerings, I've worked on, I've not seen any evidence that investors were deterred by the idea that the LLC or limited partnership was to be formed upon funding.

John Cones

Re(2): LLC Formation
Posted on April 11, 2006 at 04:49:21 AM by RB

John,

Thank you.

RB

Lawyers Agreement
Posted on April 10, 2006 at 07:22:14 AM by Al Webber

Hi! Thanks for this great service.

I'm planning to incorporate an LLC in USA to work "Off-shore" from my country.

Actually where I live there are not entertaiment lawyers specialist. Any way I count on a respectable local law firm to help in all phases of producing my project (a feature movie).

They studied my case and then proposed to work under a flat fee deal ascending 2.5 % of the total budget.

Do you consider this is fair offer?
Are there any standard numbers to serve as parameters for this kind of deals?

In case we go ahead (they wait for my answer... Can yon give a check-list of thing to consider to close the deal?

Thanks. Best,

Al Webber

Re(1): Lawyers Agreement
Posted on April 10, 2006 at 07:43:38 PM by John Cones

Al:

You do not "incorporate" an LLC. LLCs are formed. Corporations are incorporated.

Also, a 2.5% deal is not a "flat fee" deal it's a percentage of the budget deal.

I've heard of entertainment attorneys here in the U.S. asking for 5% of the budget, but that's usually when they are also heavily involved in helping to finance the production costs of the movie, as well as handling the production documentation. With either flat fees or percentage deals, the attorney will either get a windfall or spend more time on the project than it's worth. That's ok, as long as both parties are satisfied with the deal. Whether it's fair or not depends on what services they agree in their engagement letter to perform. Do a quick survey of entertainment attorneys and find out what specific services and tasks they will perform for their fees as the work relates to a film project. Then you will be in a better position to compare what you are getting for the fee.

John Cones

Agency involvment
Posted on April 12, 2006 at 11:27:34 AM by Byron Tully

My partner and I have about 10 projects (completed screenplays) of various budgets (2-50 million). We've spoken with the "indepedent film" divisions of various talent agencies. They love our scripts, but we can't seem to get them to do anything. Nor can we get them to articulate what they need in order to get involved. Could you enlighten us? Are we wasting our time? Thank you.

Re(1): Agency involvment
Posted on April 13, 2006 at 11:13:44 AM by John Cones

Byron:

I've not worked with the financing arms of agencies either and if that's all you're doing, your question is not appropriate for this site. Here we talk about investor financing. But, it is possible that you might get a better reception if you first conducted an investor-financed development offering, raised money to create an investment vehicle, acquire rights in one or more scripts for that entity, continue to develop the scripts and attach elements to the scripts, in addition to raising some production money. Then you would be in a position to make offers (at least in the form of non-refundable deposits for firm commitments from talent) and reduce your dependency on the agency for arranging for most or all of the films' financing. You might get better results that way. You may also want to use some of those development funds to hire an experienced casting director. He or she would most likely have some useful experience in working with talent agencies.

John Cones

Active Investors -- Risk
Posted on April 12, 2006 at 03:49:07 PM by John

I am raising approx. $15k for a low budget film for which we have formed an LLC. I have two potential active investors, both experienced in filmmaking and willing to be activly involved. What, if any, additional risks (besides of course no return on investment) do active investors open themselves up to by participating in this manner as opposed to passive investors?

This seems to be their (investors) biggest concern ie. not wanting such a small amount of money to open their personal assests up to unnecessary risk especially in consideration of the fact they have some name notoriety.

Re(1): Active Investors -- Risk
Posted on April 13, 2006 at 11:16:22 AM by John Cones

John:

One of the reasons producers create member-managed LLCs is to create an entity separate from the individual owners, so that the individual owners would enjoy limited liability protection. So, you want to be careful that the LLC is properly formed, then read the LLC statute under which it was formed to determine what level of limited liability is offered.

John Cones

Re(2): Active Investors -- Risk
Posted on April 13, 2006 at 12:22:45 PM by John

Thanks for your reply -- I have a follow-up question. In regards to using an Investor Finance Agreement, what is the typical relationship between an active investor and an LLC, if any. Must they become members if we use an Investor Finance Agreement?

Re(3): Active Investors -- Risk
Posted on April 13, 2006 at 03:33:19 PM by John Cones

John:

The Investor Financing Agreement is intended to be used when no entity is involved. When you create a member-managed LLC, the LLC Operating Agreement is the agreement that the member/owners of the newly-created LLC sign. If you don't create a member-managed LLC and you use the Investor Financing Agreement, no separate entity exists and the investors have no limited liability protection.

Defining "General Partners"
Posted on April 18, 2006 at 09:30:53 AM by W.F.M.

Hello Mr. Cones,

First, funny but excellent dialogue and explanations about the book, "Independent Film Producer's Survival Guide" posted on
"MATRIX"...funny!

My question: After forming a manager-managed L.L.C., with one manager, in my case, with 20% or more owned, by definition in the State of Arizona.

How is a "general partnership" defined when bringing in a "partner"?

Is defining the "general partnership" done during preparation of the manager-managed L.L.C. operating agreement? "Partners", to some extent meaning "two", when a manager-managed L.L.C. can be at least four: CEO, CFO, COO, President for example.

Second, this sounds weird, but doesn't make sense when investing in a media project...but, can a "partner" in a general partnership be another invest vehicle or company? Since from your statment in the discussion about "Independent Film Producer's Survival Guide", #23, Joint Venture, states a "joint venture" is a specialized form of "general partnership"

Re(1): Defining
Posted on April 19, 2006 at 07:24:19 AM by John Cones

WFM:

I don't have all of the facts of your situation here nor do I understand what you are trying to communicate about the 20% ownership of a manager-managed LLC, but as a general rule, two entities can enter into a general partnership pursuant to a partnership agreement to pursue a mutual business purpose. In the alternative, two entities can enter into a joint venture (that specialized form of a general partnership) for the purpose of working together on a specific project, like a media project. That means, for example, that your manager-managed LLC could enter into a joint venture agreement with another production company to produce a film or other media project. Your LLC might contribute the script and some financing. The other joint venturer might contribute some talent commitments and arrange for some foreign pre-sales, or something like that. The Joint Venture Agreement sets out the contributions of each party and how the profits of the venture (in film terms a co-production) are to be shared as between the two joint venturers. If the LLC is a manager-managed LLC and has a number of passive investor member/investors, the joint venture share of the joint venture's profits that go to the LLC will then be shared as between the LLC's manager and the LLC's member/investors as per the LLC's operating agreement and the securities disclosure document used to sell the LLC units.

On the other hand, an existing general partnership could also be an investor in your manager-managed LLC under some circumstances.

In the joint venture scenario, the joint venture is formed by virtue of a joint venture agreement which is separate from and not part of the manager-managed LLC's operating agreement.

John Cones

member-manged LLC
Posted on April 19, 2006 at 03:01:46 PM by Jake

John, as I understand it from your previous posts, when financing, say a $100K film, from a few active investors through a member-managed LLC, a PPM is not necessary and a business plan will suffice. Could you explain what documents are actually required to form this sort of LLC? I assume, perhaps incorrectly, that it's a lot less involved (and expensive) than the full blown private placement offering memorandum. Would it be possible to put together without an attorney?

Also, could you possibly discuss the benefits of a member-managed LLC as opposed to a Corporation for the purposes of this sort of low-budget project.

Thanks

Re(1): member-manged LLC
Posted on April 20, 2006 at 07:35:02 AM by John Cones

Jake:

The formation of an LLC is based on the state law of the state in which you choose to form the entity. Each state's law may differ slightly, so either an attorney in that state or the actual state statute should be consulted (or both).

As a general rule, however, creating a member-managed LLC, as with a manager-managed LLC, requires the preparation and filing of the LLC's articles of organization with the state's secretary of state. Then, the formation of the LLC requires the drafting (and approval by the members) of an LLC operating agreement.

It is possible to use services to prepare and file the articles of organization and that might expedite the filing process. On the other hand,if you have let's say three or form member/managers, all of whose interests are a bit different with respect to some issues relating to the management of the LLC, not only would an attorney be helpful in drafting the document that determines how the LLC would operate, but technically each member/manager may need their own attorney. Or, in the alternative, the attorney may have to put something in writing with respect to who he or she is representing in the transaction, because of the potential conflict of interest. Is it possible for a non-attorney to draft an LLC operating agreement? Sure, but there are also risks, in that attorneys are trained to foresee potential problems and to draft language to resolve such problems. If the non-attorney drafter doesn't even see the potential problems, it is less likely that they will be able to draft language that is helpful in resolving such problems.

For that matter, it is not even necessary to have a business plan, if you are not selling a security. There is nothing wrong with several people coming together to form a business and choosing to utilize the member-managed LLC as the business entity.

Some caution needs to be observed, however, with respect to the securities issue. I've taken the position that if you bring in a few active investors who are both capable of being actively involved in helping to make important decisions with respect to running the business and actually are involved, then in most instances such a transaction, in all likelihood, would not involve the sale of a security. However, that's just my view. It does not guarantee that in all situations, every state or federal regulator is going to agree -- or that the business is actually meeting the criteria for active investors.

As an example, a few state regulators have recently taken the position that if a business person (let's say a film producer) claims they are seeking active investors to produce a film, and advertise on the Internet, these regulators will take the position that the advertising alone causes what otherwise is not a security to magically become a security. I disagree with that view, but I'm not the regulator.

On the other hand, it appears more reasonable that in fact, the regulator actually called the film producer and asked the question: just how small an investment would you accept. That has been done. If the producer says they will accept a $5,000 investor, for example, and the producer is seeking to raise let's say $500,000, that tells the regulator that if all investors invested $5,000 then it would take 100 investors to raise the $500,000. So, under those circumstances, the regulator could safely assume that the producer was actually selling a security (i.e., seeking to raise money from a large group of passive investors, after all, it is impossible to have 100 active investors). So, in reality, this hypothetical producer was selling a security, regardless of the advertising on the Internet. The advertising, in my view, is a separate issue, but for some reason, some of these regulators are confusing the two issues: (1) the manner of the offering -- whether advertising or a general solicitation is involved in a non-registered offering; or (2) the number and involvement of the investors -- whether they are or can be active or passive.

In any case, as long as some regulators are out there taking the position that mere advertising on the Internet converts a non-security into a security, it is much more difficult to accurately predict what will be considered a security and what will not.

In the meantime, a corporation is more formal in its creation and maintenance. An LLC is less formal and requires less maintenance.

However, the two biggest disadvantages of using the member-managed LLC as the investment vehicle for a business (or in this case a film) are (1) the member/managers are actually involved in making the decisions (and that can be a disaster for a creative venture like producing a film) and (2) the risks inherent in producing an independent film are not spread over a larger pool of investors, thus each investor is being asked to assume a larger share of the risk, and therefore it is less likely that a film producer will be able to find a few investors who both want to be active and assume such a large portion of the risk in what is clearly a risky investment.

John Cones

Re(2): member-manged LLC
Posted on April 20, 2006 at 11:29:00 AM by Jake

Thanks John, one follow up if I may. Is it possible to have a manager-managed LLC when there are four or five active investors? In other words, say my partner and I are getting money to make a film from four or five people total. In the state of California, can we create a manager-managed, LLC in which the investors/members elect my partner and I to manage? Can such an arrangement be stipulated in an LLC Operating Agreement?

LLC Operating Agreement
Posted on April 20, 2006 at 04:38:36 PM by Bill

John:

If you're forming a manager-managed LLC which will require an attorney-prepared PPM, I understand the filing of the LLC's Articles of Organization are required, but will you also need an LLC Operating Agreement? Or does the information outlined in the PPM eliminate the need for an Operating Agreement? Thanks

Re(1): LLC Operating Agreement
Posted on April 21, 2006 at 08:05:23 AM by John Cones

Bill:

To form an LLC whether member-managed or manager-managed, you still need an operating agreement. The PPM is a disclosure document for the entire offering, meaning that it seeks to put in writing ("disclose") everything about the offering that would be considered important to know for investors. The contents of the LLC's Operating Agreement would be important (i.e., material), thus in addition, to including a copy of the LLC operating agreement as an exhibit to the PPM, the SEC would also like to see a summary of the provisions of the LLC's operating agreement in the main body of the PPM.

John Cones

PPM Disclosures
Posted on April 23, 2006 at 10:40:00 AM by RB

John,

The LLC Operating Agreement disclosure in a PPM does it include the following:

1. Who has creative control of the movie?
2. Who has control in a movie's budget?
3. Who has control of the final cut of a movie?

In a manager/managed LLC is this information disclse to investors in a PPM? Thank you.

RB

Re(1): PPM Disclosures
Posted on April 23, 2006 at 12:31:24 PM by John Cones

RB:

Yes, typically the three questions and others are covered in the LLC Operating Agreement, since that is the agreement as between the LLC investor/members and the Manager. Such questions (or their answers) are also disclosed in the PPM because the securities laws require that the PPM set forth in writing (i.e., disclose) all material aspects of the offering, that nothing material be omitted and the information that is stated must be set forth in a manner that is not misleading.

John Cones

Financing agreement for low budget indie?
Posted on April 24, 2006 at 01:36:30 PM by TL

I plan to shoot a $100,000 feature in California this summer. Right now I have $60,000 of my own money, and I want to get one or two investors to fund the other $40,000 so I can begin casting and shooting! My friend runs an investment/money-management firm and he thinks he can steer one or two of his investors to put in $20,000 a piece as a sort of longshot/diversification investment.

Questions:

What kind of agreement will I have with these investors? There will only be 1 or 2 of them, and they will probably be active as far as I know. What is the best and most simple agreement type for this situation: Investor Financing Agreement, Joint Venture Agreement, Investment Contract?

What will I be able to offer the investors in terms of ownership of the picture? For example, could I offer them 3% of gross for 20k? Will distributors have to honor that 3% if I get distribution?

Does HR 4520 make investing small amounts in my movie (say, 20k) attractive as a write-off for these potential investors?

Do I want to form an LLC for my own production company? Will this be member-managed or manager-managed? Are the investors involved, or will my LLC simply have an agreement with the investors? Should I set up an LLC just for this picture, or make a separate DBA under my LLC just for this picture?

I guess thats enough questions for now! Thanks a million for your time.

TL

Re(1): Financing agreement for low budget indie?
Posted on April 25, 2006 at 07:36:31 AM by John Cones

TL:

These are all questions that you'll want to discuss more thoroughly with your attorney, however, if you only plan to have a couple of investors and you and they are willing to be active investors (and they are capable of being active), you do not want to use the Investment Contract alternative, since that involves the sale of a security. The Investment Contract is a profit participation agreement with passive investors and involves no entity. It is also rarely used.

Of the other two you mention, the investor financing agreement is probably the most simple, but it also does not involve an entity and offers no limited liability protection for the investors. The joint venture agreement is similar but usually the choice when two or three entities come together for a project.

You'll have to talk to your active investors about what they think will be the best choice of vehicle for them. For example, they may feel that limited liability protection is important to them. In that case, the member-managed LLC may be the best option, since it is an entity and therefore offers limited liability protection. Keep in mind that forming a member-managed LLC involves more than just preparing and filing the articles of organization with the Secretary of State. It also involves the drafting and signing of the LLC operating agreement.

For both the joint venture and the investor financing agreement, you are not offering any "ownership of the picture". You are, instead, offering a profit participation in the film's revenue stream. With the member-managed LLC, you will be offering an ownership interest in the LLC and if the steps are taken to transfer rights to the script into the LLC, the LLC will own the script and the subsequent picture.

It is less likely that you will get a distributor for an independently produced, ultra-low budget film if you try to burden the distributor with some sort of investor participation in the distributor's gross receipts. So, I wouldn't suggest that. I don't even suggest offering a participation in the film's net profits, after all, the producing entity rarely controls 100% of a film's net profits. The percentage of net profits that flows to the producing entity depends on the negotiations between the producing entity and the distributor. So investor participations should be defined in terms of that part of the revenue stream the producing entity actually controls. For an LLC that's going to be something akin to gross or net revenues to the LLC. In some instances, we refer to that net as the LLC's Distributable Cash, but that's a term that has to be defined in the LLC's operating agreement.

HR 4520 (Section 181 of the IRS Code) may encourage investors to invest in film offerings, but it depends on their own tax situation and whether moving the timing of the tax deduction forward by a couple of years is important to those taxpayers.

As noted above, if you form a member-managed LLC with your two active investors, then you have formed an LLC as your production company. Each of you will be member-managers. It will not be a manager-managed LLC. The manager-managed LLC is more suited for situations where you have a large number of passive investors and in that instance, some individual or entity will be needed to serve as the manager. That manager could be a member-managed LLC, a general partnership, one or more individuals or a corporation.

John Cones

Member-Managed LLC
Posted on April 25, 2006 at 10:17:24 AM by Jake

John, is it possible to have a manager-managed LLC when there are four or five active investors? In other words, say my partner and I are getting money to make a film from four or five people total without the use of a PPM. In the state of California, can we create a manager-managed, LLC in which the investors/members elect my partner and I to manage? Can such an arrangement be stipulated in an LLC Operating Agreement?

Member-Managed LLC
Posted on April 25, 2006 at 01:09:57 PM by John Cones

Jake:

No, that doesn't sound appropriate to me. If the LLC is manager-managed, the investor/members are passive. The units are securities.

If you had four or five active investors in a member-managed LLC, that might work from a legal standpoint, but might be more difficult from an operational perspective.

John Cones

Another donation question
Posted on April 28, 2006 at 00:35:25 AM by MDM

I'm working on a project that is primarily targeted to a "special interest group". Because of this, I believe if I turn to that community for donations (vs 'investments') I just may get them.
1. Is there a cap on how much money one may raise via donation?
2.Can anyone seek funds via donations (i.e. 'gift') or is there licensing required?
Thank you.

Re(1): Another donation question
Posted on April 28, 2006 at 07:14:05 AM by John Cones

MDM:

At the beginning of this site, we have tried to explain that questions should be limited to investor financing questions. Questions about donations are not appropriate for this site.

Best wishes,

John Cones

Full Disclosure on PPM
Posted on May 2, 2006 at 11:43:13 AM by Chris

I am currently in the process of putting together a PPM, and I was wondering what constitutes 'full-disclosure' as far as revenue projections and other required data are concerned? And, who is responsible for the oversight ensuring there is full compliance in the PPM?

Re(1): Full Disclosure on PPM
Posted on May 3, 2006 at 07:47:08 AM by John Cones

Chris:

All securities disclosure documents are required to comply with the SECf's anti-fraud rule: disclose all material aspects of the offering, don't omit anything that is material and state whatever is disclosed in a manner that is not misleading (paraphrased). In many instances, it is best to rely on the judgment of an experienced securities attorney in determining whether your PPM has met this very general standard. The SEC also provides, however, some very specific disclosure rules and/or guidelines that you need to consult. If you are relying on Regulation D at the federal level, you need to read Regulation D and determine what disclosures are required pursuant to that rule. But, you must also go beyond Regulation D and read and comply with all of the rules and regulations referred to in Regulation D. Particular attention needs to be paid to the exhibits required (e.g., attorney's securities opinion, tax opinion, material contracts, etc.). So, in order to comply with the law, you must first determine exactly which federal and state exemptions from the securities registration requirement you are relying on or seeking to comply with, then carefully review those rules and regulations to make sure you are in compliance. Then this same methodology needs to be repeated for each state, if state jurisdiction applies. If you don't do these things and are merely relying on someone else's disclosure document as a model, the chances are extremely high that you are not complying with the law. And, the burden of proving that you complied with the law is on you the issuer of the security, if the question ever comes up. Private placement enforcement is sort of "after the fact". In other words, no one is likely to question your offering unless someone complains. On the other hand, in risky ventures like independent film where it is quite unlikely that the investors will make their money back much less make a profit, it is more likely that an one or more investors will complain to a regulatory authority and cause someone to review your compliance. All the investor has to show is that you took their money as consideration for a security and that the security was not registered as a public offering with the SEC and each state in which it was sold. Then the burden shifts to you the issuer to demonstrate that you complied with all conditions and limitations imposed on the use of the specific exemption relied on. If you don't know which exemptions you relied on at the federal and state level, you clearly do not know what the conditions and limitations are. And, even if you know which exemptions you relied on, if you haven't studied them, understood them and carefully complied in every material aspect, it is also clear that you have not complied. Thus, it is very likely that the exemption will be voided and that means you've sold an unregistered security, a felony on the criminal side and a transaction that allows the investors to demand his or her money back (after you've spent it) and leaves you without effective defenses. Such a scenario may not occur often, but the possibility alone ought to encourage those of you who would like to stay in compliance with the law and not do irreparable damages to your careers to do whatever is necessary to comply.

If you actually review the rules, you will discover that financial projections are not required for a private placement, but as a practical matter, investors tend to want to see some form of financial projections. On the other hand, if you choose to use financial projections, the SEC does have a rule that describes what ought to be contained in the financial projections.

Best wishes,

John Cones

Re(2): Full Disclosure on PPM
Posted on May 3, 2006 at 08:48:39 AM by Chris

John,

Thank you for your very thorough answer, you have helped tremendously.

Questions about Escrow?
Posted on May 9, 2006 at 07:52:05 AM by W.F.M.

What types of conditions or obligations are set on a escrow account when investors purchase a security for a film or television private placement offering?

Are the condition(s) or obligation(s) defined in the disclosure document of the PPM?

Does interest accrue while funds are in escrow?

Who chooses the bank or escrow service to
handle the sale of security transaction until obligations are fullfilled?

Does the bank or escrow service set the condition(s) or obligation(s), when the sale of the security is completed?

Is there a window or time limit based on how long a escrow account can be utilized during the process of completing a media project?

Re(1): Questions about Escrow?
Posted on May 9, 2006 at 05:28:36 PM by John Cones

WFM:

First, you should check with your attorney or the state law in which the securities are being offered to determine whether an escrow account is required for a private placement. In California, the Department of Corporations takes the position that private placements in compliance with the conditions imposed by the specific exemption available in the state is not otherwise subject to the state's jurisdiction and therefore no escrow account is required. In addition, if the offering is conducted pursuant to the National Securities Market Improvement Act (NSMIA)state jurisdiction is pre-empted by federal law, and again for purposes of a private placement, no escrow account is required. For these reasons, instead of an escrow account, we typically offer the investors a segregated, interest-bearing account from which no funds will be withdrawn until a specified minimum is reached. That kind of representation made as part of a securities disclosure document is in some ways stronger than an escrow account administered by a third party bank because if the issuer does not comply with the representation, that might amount to securities fraud.

In any case, if an escrow account is used, the production company issuer will negotiate an escrow agreement with the bank. That will set forth the terms, conditions and obligations of the production company with respect to the investor funds. The escrow agreement would then be appended to the PPM as an exhibit and to provide even more disclosure, its terms would be summarized in the body of the PPM. Certainly, the bank would offer interest in such funds. The producer chooses the bank in the passive investor offerings. If you are raising money from a few active investors, that might be negotiated. The terms of the escrow agreement would state when the offering minimum has been reached and what other conditions, if any, are to be imposed. The time limit for the escrow account is also set by the time period for the offering. That's disclosed in the PPM and would also be stated in the escrow agreement.

As stated above, however, in my view, using a bank administered bank account is more trouble than it's worth. It is also more expensive and offers no more protection to investors. Further, many banks no longer offer the service.

John Cones

Re(2): Questions about Escrow?
Posted on May 10, 2006 at 10:13:47 AM by W.F.M.

Thank You, Mr. Cones

Minimizing cost of offering
Posted on May 10, 2006 at 11:49:15 AM by Miles

Like most low budget filmmakers, we're trying to minimize our upfront costs. We are at the point where we need to raise additional capital (~$1.4MM) through a private placement and have talked with a couple of attorneys. We've been quoted rates between $15k and $18k. We have the capital available but those quotes seem high. Ouch!

My EP has taken it upon himself to create our own prospectus and other required docs then have a securities attorney "look them over." Is this a good way to go? Or, a penny-wise, pound foolish method in your experience? Should we contact someone like yourself to created the docs from the ground up?

Re(1): Minimizing cost of offering
Posted on May 11, 2006 at 07:57:43 AM by John Cones

Miles:

Offering costs for a private placement involve more than just the attorney fees. Such costs include: (1) copying and binding costs for the PPM itself, (2) the possible expense of special artwork for the cover if you choose to use a cover other than the cover page required by the securities laws, (3) filing fees for the investment vehicle, (4) marketing costs (i.e., travel, meetings, postage, envelopes, FedEx, phone, etc.) (5) notice filing fees to the states in which you intend to offer or sell securities and then (6) the attorney fees for preparation of the PPM, subscription agreement, along with assistance with preparation of financial projections, if any, assistance with the state and fedral notice filings, assistance with the creation of the investment vehicle and other consultations relating to overall compliance with all of the conditions and limitations imposed on the exemptions being relied on for the offering.

It is possible to find a securities attorney with experience preparing film offerings to do such work for as little as $6,000 up front with a deferred portion of a flat fee paid out of the proceeds of the offering (see the previous post re questions to ask the attorney).

The very fact that you use the term "prospectus" to describe a private placement offering memorandum (PPM) suggests that you have not done your homework, after all, the term "prospectus" is used in the securities world to describe the securities disclosure document associated with a public/registered offering, not a private placement. The term "private placement offering memorandum" is the term associated with a private/exempt offering's securities disclosure document.

Of course, no one preparaing a PPM starts from the "ground up". That would be foolish. Those of us who do this work start with the most recent similar offering. But, in such cases, we are working with a basic document that has evolved over many years, with input from many other attorneys, accountants, clients, consultants and securities regulators. In point of fact, if the securities attorney you choose to work with has successfully completed small public film offerings, such as Reg. A or Regulation SB-1 or 2, some of the language in that attorney's basic document (already in his or her computer) will have been approved by federal and state securities regulators. That provides some additional assurance that the language used complies with the complex securities law requirements for disclosure. To the extent that such language can be used for another offering puts that basic document ahead of the game.

Whenever a producer tries to prepare their own draft, and then have a securities attorney review it, that means that the securities attorney has to review every line of the document. Whereas, if the attorney is working with a document that he or she knows and trusts, not all of the basic document has to be reviewed again. As the producer-prepared document is reviwed, the attorney is very likely to have to look up some of the law, since such documents usually raise novel issues or questions not considered by the attorney in a while. That takes up more time. Then the attorney has to provide some sort of report to the producer-client. That may take the form of a several hour discussion or a written memorandum. The last time I did one of those, it consisted of 30 pages of deficiences, and that document was prepared by a Harvard-educated attorney turned producer. So, yes, my experience is that producer-prepared securities disclosure documents never come close to complying with the law and being asked to review one is more trouble than it's worth. Another of the main reasons for this is that non-attorneys attempting to prepare a securities disclosure document seldom, if ever, go beyond just relying on some other disclosure document that they've found and modifying the language to fit their offering. On the other hand, you have no assurances that the person who prepared that original disclosure document actually consulted the law itself when preparing what is now your model PPM. To do it right, somebody has to determine which exemption is being relied on at the federal level and which exemptions are being relied on at the state level in each state in which the securities will be offered or sold. Then you have to read each of those statutes or regulations, understand them and effectively implement their terms. As an example, most non-attorneys trying to prepare a PPM never get to the list of exhibits that are required for some of such offerings, including the attorney's tax opinion and the securities opinion. Also, it is not appropriate for a non-attorney or non-accountant to provide a tax discussion in a PPM. So, whoever got the idea or suggested that it is appropriate for a non-attorney to prepare an offering memorandum is not well informed about the actual requirements of the law.

You have to be careful about the advice of the non-attorney film finance consultants in the film industry who suggest that they or some other non-attorney could just get a PPM and use it as a "template" to prepare another PPM. There are significant risks to such an approach and it ultimately could result in the producer becoming obligated to return all of the money raised.

I am always available to talk with independent producers regarding their investor financing options. That's what I do. Just as with your choice of finance options, there will always be advantages and disadvantages relating to your choice of securities law exemptions and your choice of securities attorneys. I'd be happy to review those options with you.

John Cones

Start Up LLC
Posted on May 13, 2006 at 07:41:26 PM by Julia

Dear John,

My partner and I formed an LLC a year ago (still no Op agreement) and we formed it before we had funding or investors. We thought the LLC would help raise the money. On paper, we're both managers. [Is there such a thing as a manager/manager-managed LLC???]

Now we need start up financing for both the company and a film project. It's a bit like being on a runaway train: the project is hot and we have a bankable director and well-known distributor on board, but no financing yet. My partner is struggling to pay costs off our credit cards, and I'm eating burgers in LA. We really can't afford an att'y unless someone comes in with us.

Do we raise money using the company LLC vehicle or the film project (which has been signed over to the LLC)? We're looking for about 3-500K to develop, attach the director, and do R&D.

Since it's under a million, what about craigslist :-) What do you know about capmatch.com?

But most of all, can and should our op agreement add 1-3 active investors to the company in exchange for the money? And if so, what should our presentation/offering be? My experience says "presentation" is key.

We're on a roll but we need to get some serious players aboard so we don't stall a good thing.

Thanks, as ever, for this great site!

Julia

Re(1): Start Up LLC
Posted on May 14, 2006 at 08:34:03 AM by John Cones

Julia:

An LLC can help raise money in the limited sense that it can serve as an investment vehicle. In other words, investors have to invest in something. Producer often make the mistake of thinking that all they need to raise money is a business plan, but investors cannot invest in business plans. They can invest in an investment vehicle or an entity. The LLC is both.

There is no such thing as a "manager/manager-managed LLC". There is a manager-managed LLC and a member-managed LLC. In a situation where you have two individuals who are owners of a member-managed LLC, both of these individuals are members and managers (i.e., they are member-managers). In the manager-managed LLC, the investors are members and if two individuals were serving as the managers, each such individual would be a manager. However, the LLC would still be referred to as a manager-managed LLC. The choice of the type of LLC is made at the time of the filing of the LLC's articles of organization. The state form will typically have a check-the-box type question something like: "Will the LLC be managed by all its members?" or "Will the LLC be managed by one or more managers?"

Then the LLC operating agreement must be drafted so as to be consistent with the type of LLC created.

It may be possible to change the type of LLC, but that would likely involve the preparation and filing of an amendment with the Secretary of State.

If you want to bring in some limited start-up funds into a member-managed LLC, that means you will be seeking to bring in one or two active investors, people who in addition to investing money are also capable of and willing to be involved in helping make the company's important decisions (i.e., they must materially participate in management).

Theoretically, interests in a member-managed LLC, since the investors are actively involved, would not constitute a security. Under that characterization, it would be permissible to advertize for one or two active investor member/managers to join the member-managed LLC. However, at least a couple of states have taken the rather illogical position in recent years that merely by advertising online, what is essentially a non-security becomes a security and they can issue a cease and desist order. I disagree with that position, but there is no guarantee that some securities regulator somewhere will see an ad posted on Craig's list and take that position. So this area of the law is a bit muddy at this time. The fact that you are only seeking less than $1 million dollars is not relevant. If it's a security and it's not registered, then it's being sold pursuant to a private placement exemption from registration, and that generally means no advertising and no general solicitation. Advertising on the Internet through any site would violate that rule, again, assuming you are selling a security.

Consistent with the thinking that seeking a very small number of active investors for a venture does not involve the sale of a security, your "presentation" would take the form of a business plan. But, if you are selling a security and you are not willing to register it, you would need a private placement offering disclosure document.

Your first need is start up funds that can also cover the cost of some competent advice from a securities attorney. You may be able to acquire that through loans or gifts, from close friends and/or family.

Best wishes,

John Cones

Re(2): Start Up LLC
Posted on May 16, 2006 at 08:05:45 AM by Julia

Thanks for your helpful answer. I have no idea which box was checked and it's disquieting, but I've been focusing on the creative, not the financial. I have another question which I'll post above re the operating agreement. Then I'll order your book!

Julia

LLC Operating Agreement
Posted on May 16, 2006 at 08:30:52 AM by Julia

So, our partnership LLC was formed in June a year ago. Again, don't know which box was checked. We paid our att'y several thousand dollars (2-4K overall is my guess) for the filing and some meetings alone and still have no fundable entity, as you point out. Is it common practice for the incorporation fee to include at least an operating agreement? And how can we draft one reasonably before we take in our third-party Active investor, who will fund the company? Won't they need to make key decisions re how the company will operate since they have more business experience, as well as the money? So, basically...

What is the reasonable cost-range for the following?

(1) forming an LLC on-line (form only)
(2) A business plan
(3) An operating agreement
(4) A PPM

Is there a conflict of interest in having your attorney as a member, and how proactive should they be in making introductions...

Thanks for now,
Julia

Re(1): LLC Operating Agreement
Posted on May 16, 2006 at 12:55:55 PM by John Cones

Julia:

First let's deal with some terminology issues. A partnership is not the same as an LLC so an LLC should not be referred to as a partnership. An LLC is a limited liability company. It's an entity that is treated much the same as a limited partnership for federal tax purposes, and there may be other similarities, but the two entities are not the same and should not confused.

Also, forming an LLC does not involve an "incorporation". You form an LLC but incorporate a corporation. Again, these are different entities and using the wrong terminology may confuse anyone dealing with you.

Maybe you can check with the Secretary of State's office where the LLC's Articles of Organization were filed and get a copy of the form originally filed, to determine whether it was formed as a member-managed or manager-managed LLC. The Articles of Organization need to be consistent with the operating agreement and the actual operation of the LLC.

Maybe you could also ask the attorney who helped you with the filing, if that was the case.

When you hire an attorney, you generally discuss and agree on exactly what the attorney is going to do for you. Usually, those specific tasks are set forth in an engagement letter. You may want to review your engagement letter, if you have one, to see what the attorney indicated he or she would do for the fee paid. If drafting the LLC operating agreement was not one of those tasks, you may want to ask why. You may also want to get a copy of your state's LLC statute and confirm whether an LLC must have an operating agreement.

The members of a member-managed LLC are all actively involved in helping make the important decisions relating to the operation of the company. The decision-making process, voting procedures, etc. should be described in the LLC operating agreement.

You may be able to find LLC operating agreements online, and also find examples of LLC operating agreements in the libraries of nearby law schools, but I would not be comfortable recommending that a non-lawyer draft their own operating agreement, because its terms must be consistent with the authorizing statute of the state you are creating the LLC in. If you don't even look at the statute or have the background for interpreting such laws, it is very unlikely that using somebody else's model operating agreement as a guide, and not even knowing which state it came from, would result in a satisfactory document.

With respect to your cost questions: (1) I don't think forming an LLC online is a good idea for the reasons that you've already experienced; (2) decent business plans tailored to a specific industry and business objective may range from $2,000 to $10,000 depending on who's preparing it; (3) just the operating agreement alone might be done for approximately $1,000, but it also depends on whether the attorney is charging on an hourly fee basis and how much negotiating back and forth amongst the members is involved; and (4) private placement offering memoranda, along with the associated subscription agreement and other associated tasks such as notice filings may be performed for a wide range of fees from $5,000 on the low end to $30,000 and up on the high end, again depending on whether the attorney is working on an hourly fee basis, how much money is being raised and other factors. Here again, it is extremely important to set out in a written engagement letter exactly what tasks are being undertaken by the attorney for the fee paid (e.g., preparation of the PPM including a tax discussion, subscription agreement, financial projections, tax opinion, securities, federal and state notice filings, etc.).

You might want to check with the state bar association in your state to discuss how to handle potential conflicts of interest involved in bringing in your attorney as an LLC member.

John Cones

subscription agreement
Posted on May 17, 2006 at 12:49:53 PM by Merlin Gaspers

I am looking for a securities lawyer to prepare a subscription agreement for the purpose of raising funds for an independent film. We are an LLC based in Nevada. The investments will be Capital Contributions. Is this a service that you or anyone you know can provide for us?

Thanks,

Merlin

Re(1): subscription agreement
Posted on May 17, 2006 at 02:20:44 PM by John Cones

Merlin:

Contact me directly at jwc6774@adelphia.net to ask questions relating to the actual legal services I may be able to provide. However, for purposes of general discussion, a securities attorney would need to know whether your LLC is a member-managed or manager-managed, how many investors you anticipate, whether those investors will be active or passive and what are the terms of the current LLC's operating agreement. If, for example, your current LLC is a member-managed LLC with just a few active investor member/managers you may not be able to raise money from a large group of passive investors using your current structure. At some point, too many active investors makes it impossible for all of such investors to be regularly involved in the making of the LLC's important decisions, thus, some of the investors are obviously passive. If you have one passive investor, you've sold a security. If that is the case, a subscription agreement alone is not all you need. You'll also need a private placement offering memorandum, and a subscription agreement to go with it.

If, on the other hand, you have a member-managed LLC and anticipate bringing in just a few more active investors, a subscription agreement may suffice, so long as its terms are consistent with the terms of the LLC's operating agreement.

John Cones

How important is Code 181 among other things!
Posted on May 18, 2006 at 07:42:18 PM by Michel Gill

Hi there,

My partner and I have written a screenplay and we are going to produce it. Our budget is $3 million. On our inaugural fundraising trip we were able to raise $1 mil - most from UK and Europe. We have US investors as well. We did this without a business plan. We haven't created an LLC yet. It was just the two of us, our script and a visual style guide.

The investors are not in the movie business. They are all, in their own right, extremely successful and creative. Helping us make our dream come true is part of the thrill for them. They also have a desire to participate in something that is quite out of their ordinary.

Our focus is now on the corporate setup. We want to set up a parent company, an LLC and all the necessary documents. We are keen to create a document that explains the movie business clearly and dynamically to our investors, and to educate ourselves on all the various incentives and financing options available to both foreign and domestic investors.

We have been consulting with a law firm in NYC. They have a boutique, a sort of one-stop shop. One section of the firm executes corporate setups at the cost of $7500. They take care of all the documents including the ones to form the entities and investment documents for the Production, all drafting and negotiating of the documents necessary to commence the investment vehicle (with regards to the negotiating and filing of organizational documents, the PPM, the operating agreement, subscription agreement and other origination documents. The other part of their business deals with what really interests them - proprietary financial structures around the use of section 181 of the tax code. They have been selling us on the idea that they have developed certain structures to leverage private and corporate financing for films. We like their energy but can't corroborate their claims. Their engagement agreements for the financial structures seem to be full of all sorts of fees that we are wary of.

One of our questions is, is 181 such a big deal? Is it such a complex area that we shouldn't be "trying this at home?" Or could we get someone to do it for a reasonable fee and not 5% of gross after P+A. Should a corporate setup cost $7500?

We also have a gentleman who for $3500 will write us up a tailored business plan, with our mission, philosophy, company strategy as well as current market and comparable film analyses. Overview of marketing and distribution and marketing, distribution dynamics, strategies and marketing. And finally investors' recoupment, financial model and risks.

So, we�re not sure if we should go with the �Firm!� or stick to one guy to do the business plan, another to set up the LLC, another to deal with the financial structures, which could be somewhat complex seeing that many of our investors are international?

Would a business plan be redundant with a PPM. Can a PPM be as tailored and personal as a business plan?

Anyway, many questions. Thank you for your patience. And thank you for this forum.

We hope to hear from you, sir.

Michel

Re(1): How important is Code 181 among other things!
Posted on May 19, 2006 at 08:03:47 AM by John Cones

Michel:

The importance of the IRS Code Section 181 (otherwise known as the film industry provisions of the American Jobs Creation Act of 2004) will vary from investor to investor, depending, in part on whether a particular investor has a significant tax liability in the year in which the film production expense is incurred and is therefore available as a deduction. In my view, it is important to disclose in the offering document the pertinent elements of the new tax provisions (which also are elections to be made by the individual taxpayer) along with the alternative tax provisions that would be in effect should the taxpayer elect not to take advantage of the Section 181 provisions. However, under no circumstances should you go so far as to write or say anything that might be reasonably construed as tax advice for such a prospective investor. For that, he or she should rely on their own tax advisor. For that reason, if you go too far in the disclosure document with respect to the impact of Section 181 on any given taxpayer, that taxpayer may come back to you at some later date and take the position that since the IRS did not agree with your advice you caused them to incur some extra tax liability. So, my suggestion is that you simply stick with the basics in disclosing tax provisions and not try to go too far in explaining to an investor how such provisions may impact a given taxpayer in a given year. Sometimes, practitioners come up with these interpretations of tax laws (as passed by Congress) that the IRS does not yet understand and the interpretations end up being wrong. That could, in turn, create a difficult situation for both you and your investors.

It sounds as if you seem to think that you have a choice as to whether to use a business plan or a private placement offering memorandum (i.e., that one is merely a substitute for the other). That�s not true! It depends on your circumstances. If you are raising money from just a few active investors, it is possible that you can use a business plan to help in that process, so long as it is combined with an appropriate investment vehicle. In the situation you describe, there is no mention of an investment vehicle, and the implication is that you are raising a large amount of money from a rather large group of investors. The number of investors suggests that they are passive. These facts indicate that you are selling a security whether you realize it or not. Under those circumstances, a business plan, even one �tailored� is worthless and you should avoid the business plan consultants who try to sell you a business plan when you actually need a PPM. Also, at this point, it sounds as if you have actually raised money from people in foreign countries without any consideration of how to comply with the securities laws of those countries, and that you are thinking about raising money from U.S. investors, again without much consideration for which investment vehicle is the most appropriate and whether you are selling a security.

So, a business plan is not redundant with a PPM, they are used in different circumstances. And, yes, a PPM can be as tailored and personal as a business plan. Anyone suggesting that the nature of the documents themselves prevents that got a bad batch.

First, you need to determine whether you are selling a security. As a general rule, if the investors are passive (i.e., not regularly involved in helping make the important decisions for the company or venture) you are selling a security. By implication, if you raise money from a large group of investors, it is impossible and impractical for some or all of them to be active. If you are selling a security to U.S. investors, determine how to comply with the federal and state securities laws. If you are selling a security in another country, try to find out what you need to do in that country to comply with their securities laws. If you are selling a security and therefore do not need a business plan, a single securities attorney can draft the PPM, subscription documents, create the financial structures, help with financial projections, assist with the required notice filings and set up the LLC.

John Cones

look for finance me film
Posted on May 21, 2006 at 12:16:29 PM by al hasan al askar

We are cartoon film making and we full of hoops to show u our activity in this time .
We produce cartoon film as the same quality of madagascar and ice age
which produced by dreamwork and that is the first film of us as company at dubai
at this time i start up my company with apartner hwom suport me with $1000000 . and i am going to build my animators team and prepar every thing that i need to produce my film .
my qustion is if i fensh the storyboard and model my character and complet the voice over and reach to the point which show the strong of the story and directing and quality . at this time can i found finance to compleat the the film ? can i found ivestor to complet the film with the sam quality that i begain with it ?

Re(1): look for finance me film
Posted on May 21, 2006 at 06:06:01 PM by John Cones

Hasan:

You can organize your contributions to a project any way you want and then bring in investors to complete the project. The fact that it is possible to do this does not mean that you will be able to attract investors to a particular project.

John Cones

Funding for new business
Posted on May 30, 2006 at 08:10:53 AM by Alana

John-
We are relatively new in the movie business but have a lot of wall st. experience. We are in the process of nailing down a bunch of new projects with award winning directors and producers and actors. The budgets in total are approaching 25 million.

Is there some kind of single-source funding i.e. hedgefunds, investment banking, etc. that could provide or would be interested in taking on a bunch of new projects at once? Do the projects have to be separate llc's? We have some big names here and want to keep our projects and not give them away.

Thanks,
Alana

Re(1): Funding for new business
Posted on May 30, 2006 at 01:27:17 PM by John Cones

Alana:

There may be a single financing source that could provide that kind of money for a studio-backed slate of films, but not likely for a new independent, at least I'm not aware of any. The projects do not have to be in separate LLCs.

John Cones

Re(2): Funding for new business
Posted on July 24, 2006 at 04:42:31 AM by Kyle

If you have experience in Wall Street my advice would be to look around Wall Street as they are the ones financing big studios, you may have an in.

Kyle

Protection
Posted on May 30, 2006 at 11:40:37 AM by Beth

John-

If I wanted to approach wealthy investors like Bob Yari, Mark Cuban, James Stern or someone else of that nature with new works my production company has received (we are fairly new) and I don't want them to "usurp" my projects, how can I protect myself? (this note has nothing against or accusational about these figures)
Thanks,
Beth

Re(1): Protection
Posted on May 30, 2006 at 01:24:31 PM by John Cones

Beth:

That's more of a pure entertainment law question probably relating to copyright or other intellectual property issues, as opposed to the kind of investor financing questions we discuss here. I'd suggest you contact an entertainment attorney with copyright and/or intellectual property expertise and have them help you with that question.

Best wishes,

John Cones

Selling copyright to finance film
Posted on May 31, 2006 at 06:37:54 PM by Robert

Hi John,

Telefilm Canada invests in Canadian film productions by purchasing a per cent ownership in the copyright of the film. They then assign all rights w/r/t the selling/distribution of the film BACK to the Producer / prodco.

I am considering applying this structure to raise money from private investors: selling units of copyright on a per cent basis (while retaining my own chunk) and ensuring that I have been assigned all rights to sell the film. Investors (owners) participate in revenues according to their per cent ownership.

Do you have any thoughts on this kind of structure? Good bad or indifferent?

Thank you,
Rob

Re(1): Selling copyright to finance film
Posted on June 1, 2006 at 09:25:53 AM by John Cones

Rob:

Throughout the time I've been working with independent film producers on investor financing of their films, some have tried from time to time to come up with what they believe are new and innovative ways to raise financing. I suppose they believe that a new method is needed because it is difficult to raise financing for an independent film. That is a fact. On the other hand, I've yet to see any evidence that any of such so-called "new methods" are any better or more effective than the more traditional methods. In addition, such "new methods" are likely to involve novel questions relating to legality, thus are likely to cost more in legal fees. Recognizing that about 1 in 3 of the film offerings of my independent producer clients have been successfully funded using the traditional manager-managed LLC or limited parternship structure in which a profit participation in the revenue-stream of the film is offered to the investors (as opposed to a share of copyright), and knowing that the odds of getting an independent film financed using other methods are no better or worse, an independent producer proposing a "new method" would have to create a successful track record over time in order to persuade me or others that the "new method" is worth consideration, or that any "new method" is worth the extra effort, or that there is even a need for such a "new method". I personally know an independent filmmaker who spent his entire life's savings (in excess of $500,000) vigorously pursuing one of these new and innovative methods of film finance and he never got his film produced. I know another independent filmmaker (formerly an attorney) who came to Hollywood with the dream of going straight to making big budget films with big-time stars, and the last time I saw him he was wandering around on the street, homeless and mumbling incoherently. So, my experience with the novel, innovative and risky approaches is tainted with some known tragedies. Thus, my reaction tends to be somewhere around "not impressed".

Best wishes,

John Cones

Re(2): Selling copyright to finance film
Posted on June 1, 2006 at 11:17:51 AM by Robert

Wow! Sounds like you've certainly seen the dark side of failed film dreams...

I hadn't thought what I was proposing was a "new method" of film financing at all-- neither "novel, innovative," nor "risky." Simply an alternative.

As I mentioned, this is the way that the Canadian government has participated in film financing for years. Not to say that it's the best way-- as independent producers we certainly have our fair share of gripes with the Canadian funding system!

Many Canadian producers (myself included) would like to see a more "American" style of film financing applied here, which basically means utilizing more private money and less government loans and grants.

My thought was that there might be a way to bring the Telefilm style of film investment to the private sector.

Either way, I'll let you know how it goes and you can add my story to your collection...

Thanks for the feedback,
Rob

Funding for Educational Animation Company
Posted on June 2, 2006 at 11:22:11 AM by Michael S. Thompson

John, I have started an animation company that teaches children history. Targeted distribution channels are Television, Direct to DVD, Educational Supply Market, and Home School. We have two program series with complete show bibles. My questions.

1) Should we reaise money for the C Corp?
2) Shoulds we make each show an LLC and raise money on a project basis.

Re(1): Funding for Educational Animation Company
Posted on June 3, 2006 at 04:06:05 PM by John Cones

Michael:

I cannot tell you or any other filmmaker what they should or should not do based on the limited information that can be provided in a forum like this. However, I can provide some general discussion of the issues you raise.

For example, a corporation is typically used as a long-term operating company. If you use it as a fund raising vehicle, you almost always run into corporate control issues. That's one of the main reasons why independent producers often limit the number of investors they bring into their operating production company and use other investment vehicles such as limited partnerships or manager-managed LLC's as the investment vehicles for one or more projects. Note that I said "one or more projects". There is no need to create a single investment vehicle or entity for each project, if you don't want. You could conduct a mini-maxi offering seeking to raise a minimum, which would be enough to finance the production cost of a single project, up to a maximum, which would be enough to finance the cost of additional projects. The corporation could serve as the manager of each of the LLCs used in this way. You could also raise a limited amount of startup funds in the organization phase of the corporation to help finance the project financing phases to follow.

Keep in mind also that investors don't get the same tax advantages when investing in a corporation that they do with flow-through vehicles like LPs or LLCs. Also, corporate income is taxed at the entity level, whereas the income of the flow-through vehicles is not taxed by the IRS until the revenues are credited to the accounts of the individual investors.

John Cones

United Marketing Leads
Posted on June 2, 2006 at 11:28:21 AM by Michael S. Thompson

John, I am raising money for our educational animation company. I have heard of United Marketing, a company that works with financial firms and provides leads of investors who are looking for investment. Question:

1) Cannot seem to find contact info for them are you familiar with them and have any contact info for them
2) If I am raising money for the C-Corp as opposed to LLC projects is this an efficint way to raise the funds. The deal: raising 3 million in 1st round. 1st $1 million will be raised as convertible note.

Re(1): United Marketing Leads
Posted on June 2, 2006 at 02:31:45 PM by John Cones

Michael:

No, I'm not familiar with any of the list purveyors and not too optimistic that using such lists will result in funding. You are not likely to find lists specifically tailored for film investments and most investors on such lists are not that interested in investing in film. There are too many other competing investments out there that are less risky.

Furthermore, if you are cold calling from a list like that, you are calling people that you do not know. So that means you will either have to conduct the offering as a public/registered offering (SCOR, Reg A, SB-1, SB-2 or S-1) or the public/private hybrid (Model Accredited Investor Act). You won't be able to conduct an offering for either corporate shares or LLC units as a private placement if you are cold calling strangers.

John Cones

Contracts
Posted on June 5, 2006 at 08:25:23 AM by Alana

what is the strongest form of commitment an actor can give to be attached to a project
that would lead a new executive producer to persue raising money for the project. Is a lois enough or do I need to see a contract? Are most movies started with or without a contract?

Re(1): Contracts
Posted on June 5, 2006 at 12:36:14 PM by John Cones

Alana:

Your questions are not really tied to investor financing situations. However, the strongest form of commitment an actor can give is a written contract supported by consideration. Most movies are started without such a commitment from a recognizable name actor, but most movies does get a theatrical release. Most movies that get a theatrical release probably do have one or more recognizable actors in them, however, they may or may not have committed in any form prior to the funding.

John Cones

Test the waters
Posted on June 5, 2006 at 11:03:59 AM by W.F.M.

In reading Rule 254 of Regulation "A" for offerings up to $5,000,000, which allow small companies to publish,deliver to prospective purchasers a written document or to make scripted or television broadcast to "test the waters" to determine if there is any interest, before undertaking a full-blown offering.

And understanding MAIE, which permits advertising and general solicitation for Rule 504 of Regulation "D",not exceeding $1,000,000.

Questions:

How are these rules different in there scope of advertising, one seems broader in scope(Rule254,RegA),but guards against waisted time and money and the other is limited(Rule504,RegD), but with no "test the waters" scope?

Is there a similar "test the waters" provision related to Rule 504 of Reg D, before conducting this kind of offering?

Re(1): Test the waters
Posted on June 6, 2006 at 08:16:17 AM by John Cones

WFM:

Regulation A provides that printed advertisements may be published or radio or television broadcasts made, if they state from who a Preliminary Offering Circular or Final Offering Circular may be obtained, and contain no more than the following information:

(1) the name of the issuer of the security;
(2) the title of the security, the amount being offered and the per unit offering price to the public;
(3) the general type of the issuer�s business; and
(4) a brief statement as to the general character and location of its property.

A general announcement per the MAIA may be published by written document only if it sets forth: (1) the name of the issuer; (2) the full title of the security; (3) the anticipated suitability standards; (4) a statement that no money will be accepted or is being solicited; no obligation if the recipient responds; and if a disclosure statement is required, no consideration until five days after delivery; (5) legend as to where can one get additional information; B. The announcement may also contain: (1) A brief description of the business; (2) the location of the issuer and its business; (3) the price of the security or range, and if not known, the method of arriving at the price, and the aggregate offering price. C. No other information is allowed to be included. D. Dissemination to non-qualified investors is allowed.

The MAIA �announcement� provision does to seem to allow radio or television broadcasts and requires some additional disclosure while also allowing a bit more information to be included. Reg. D�s prohibition against general solicitation and advertising do not apply to a Rule 504 offering. However, the anti-fraud provisions do, thus an MAIA offering conducted pursuant to Reg. D, Rule 504 at the federal level can rely on the MAIA test the waters provision.

John Cones

Re(2): Test the waters
Posted on June 6, 2006 at 08:25:12 AM by W.F.M.

Thank You, Mr. Cones.

Financing/Tax Code
Posted on June 13, 2006 at 09:24:00 AM by Rich

Hey John!

We currently have financers for our million dollar feature. The money will be allocated to us over a period of 5 months to cover pre, prod. and post costs.

We want to draft a "bank note" that states that our financers have the money and will allocate it to our production. This would be used to confirm to guilds, agency's, etc that we have our budget. Is this a solid approach?

Also, what is the best resource to retrieve information on the job creations act of 2004 section 181 code? If you are privy to this code could you summarize in the most layman terms as possible?

We want to keep it simple for our financers!

Thanks.

Rich

Re(1): Financing/Tax Code
Posted on July 20, 2006 at 07:39:57 AM by Evan A Spier

I am considering making passive investments in my company's movies (I am an employee).

What type of deductions can I take under Code 181?

How will my deductions differ from non-employee investors?

Thanks John.

Re(1): Financing/Tax Code
Posted on June 14, 2006 at 07:19:15 AM by John Cones

Rich:

The bank note question is not an investor financing question, so that needs to be researched elsewhere.

A brief summary of Section 191 of the IRS Code follows:

Pursuant to the Special Rules for Certain Film and Television at
Section 244 of the American Jobs Creation Act of 2004 (which apply to films commencing production after October 22, 2004 and before January 1, 2009), if an investment vehicle such as an LLC acquires the rights to produce a feature film, an LLC member/taxpayer may elect to deduct his or her pro rata share of 100% of the direct and indirect costs of producing the film as an expense for the taxable year in which the costs of production are first incurred, so long as the aggregate cost of the film does not exceed $15 million and 75% of the total compensation paid to actors, directors, producers and other relevant production personnel working on the film is paid for services performed in the United States. If such election is made, no other depreciation or amortization deduction will be allowed.

Other summaries appear online at numerous sites which can be reached by searching for "IRS Code Section 181". A summary is provided by the DGA. You can also go to the IRS Code and look for the actual section. In addition, the actual language appears in the American Jobs Creation Act online, so long as you are careful to look at the bill actuall passed by both the House and Senate and signed by the President.

John Cones

Business entity
Posted on June 30, 2006 at 11:49:38 AM by TN

Hello John,

My dba production would like to make a film w/ budget of $800k, we plan to invest $200k, and have 4 other active investors (director, producers�) to put out the rest.
From reading your book and the discussion here, we have an idea that a member-managed LLC might work for us, but my concern is:

Will this lock our budget, or can we still use this member-managed LLC to raise more money in the future if needed (eg. Sign inverstor financing contract, add members�) or what other choices will we have in the case we need more money to complete the film?

Thank you for sharing your expertise,
TN

Re(1): Business entity
Posted on June 30, 2006 at 02:22:23 PM by John Cones

TN:

The more investors you have the less likely they will all qualify as "active" investors, thus, continuing to add investors may create securities compliance problems. If you want that kind of flexibility, and you're raising as much money as you indicate, go ahead and invest a small amount of money in doing a manager-managed LLC offering, do a mini-maxi, and give yourself the flexibility to raise money from a larger group of people in varying amounts (e.g., with a $25,000 unit size you could raise $800,000 from 32 investors; you could have the flexibility to sell fractional units or multiple units).

John Cones