FILM FINANCE SOURCES AND DOCUMENTATION

By John W. Cones, J.D.

If we step back and analyze the world of film finance sources, for
purposes of determining which is the appropriate initial documentation with
which to approach such sources, we can divide that world into two broad
categories:

     1. INDUSTRY SOURCES

     2. INVESTOR FINANCING



INDUSTRY SOURCES:

Industry sources would include the in-house development/production
Sources deal, the production-financing/distribution deal (P-F/D) and
co-productions (joint ventures), along with the various forms of third-party
lender financing for production costs (i.e., worldwide negative pickups,
domestic negative pickups, international negative pickups, split rights
deals, foreign pre-sales, gap financing and super gap).


Producer's Package

All of these industry sources, with the exception of the
in-house development/production deal, can only be accessed with a producer's
package (i.e., at minimum a completed script, a budget and evidence of key
attachments). The in-house development/production deal is accessed through
pitching an idea for a film, typically before the script is even completed
and a package assembled. It would not be appropriate to approach such
industry sources with a business plan.




INVESTOR FINANCING:

The world of investor financing can be further divided into
active versus passive investors.

Securities Disclosure Document

All offerings to passive investors involve the sale of a security
(typically, units in a limited partnership or manager-managed
LLC or shares in an existing corporation). The securities
disclosure document associated with a public/registered offering is called a
"prospectus". The securities disclosure document associated with a
private/exempt offering is called a "private placement offering memorandum"
or "PPM".


Business Plan

Generally speaking, active investors (investors who are
regularly involved in helping make the important decisions associated
with the project -- not necessarily a good idea for a creative venture like
film) can be approached with a business plan. Of course, a business plan is
not an investment vehicle, thus, it must be associated with a suitable
active investor investment vehicle (e.g., investor financing agreement,
joint venture agreement, initial incorporation or member-managed LLC).
Unfortunately, federal appellate courts construing securities regulations
have narrowed this field of active investors who may be approached with a
business plan even further. This line of cases (see case citations below)
require that not only must the active investor be regularly involved in
helping to make the important decisions, but all documentation of the deal
between the investors and the production company must make it clear that
these investors have the authority to participate in such decision-making
and most important, they must be capable of participating at a meaningful
level (i.e., they must have "knowledge and experience" in the relevant
industry - the film industry for purposes of our analysis here).

Upon reflection, we have to admit that these court-imposed
limitations relating to the world of active investors (from outside the film
industry) with whom a film producer might choose to and be willing to work
and that have knowledge and experience in the film industry is very limited
indeed. This effectively means that contrary to the misinformation routinely
being provided to filmmakers by business plan consultants and others, the
business plan is of very little use in seeking to raise film production
funds from investors.


Sources and Additional Reading

Consolidated Management Group, LLC versus the California Department of
Corporations, 162 CA4th 598, 75 CR3d 795, 2008 (as reported in the
California Business Law Reporter in its July 2008 issue.

Dictionary of Film Finance and Distribution - A Guide for Filmmakers, John
W. Cones, Marquette Books, 2007.

Forty-Three Ways to Finance Your Feature Film, Third Edition, John W. Cones,
Southern Illinois University Press, 2007.

Williamson v. Tucker, 645 F.2d 404, 5th Cir. 1981.