SURVEY OF INVESTOR FINANCING OF INDIE FILM PROJECTS
By John W. Cones
The purpose of this article is not to provide details regarding securities compliance for filmmakers seeking to raise funds from groups of passive investors (see endnote # 1) but instead to set out and describe the various strategies independent filmmakers may employ as they utilize investor financing to enhance their chances for getting their vision on the screen.
In my 18 years of working with independent producers on investor financing of their entertainment projects, most producers have sought to raise funds from investors for ultra-low and low-budget feature films (see endnote #2), and the following strategies have been employed or are possible:
1. Funding the Startup Phase–There are actually three different stages in the life of a feature film that can be financed separately. We might call the first stage the startup phase. It includes the funding of acquisition costs, development costs and packaging costs. Actual production of the film is the 2nd phase that can be funded separately and distribution is the third phase, that can also be funded separately from the other two.
This first investor financing strategy involves seeking investor funds for the purpose of funding the costs associated with a film’s acquisition, development and packaging costs. Then the producer, on behalf of his or her investors seeks industry financing for the production and distribution costs either through:
(A) A Production-Financing/Distribution (P-F/D) deal with a major studio (studio loans production funds and studio affiliated distributor covers distribution expenses to be recovered from distributor gross receipts);
(B) A Worldwide negative pickup with a major studio (used to obtain production loan from entertainment lender or lenders)
(C) Domestic negative pickup with domestic distributor (to be used again to obtain production loan from entertainment lender)
(E) International negative pickup with independent distributor (also to be used to obtain production loan from entertainment lender or lenders)
2. Full Funding of Production Costs–Some independent feature film projects may be fully funded with investor funds. In addition, these offerings usually also authorize the producers to reimburse themselves for their out-of-pocket startup costs. As a practical matter, however, it is not likely that more than $1 or 2 million dollars can be raised in this manner, so its use may be limited to low and ultra-low budget projects. On the other hand, the willingness of investors to invest in such high risk deals as feature film will vary considerably from time to time depending on many factors including the general state of the economy, who the producer is and how he or she relates to the prospective investors, what the film is about, who makes up the production team and what creative attachments are in place, among other factors.
3. Partial Funding of Production Costs–It would be fair to say that a producer is almost always in a better position to make deals if he or she (or the production company) has some funds under his, her or its control, in the bank. In other words, it is much more persuasive when talking or negotiating with other possible funding sources to be able to say that: “We already have $500,000 in the bank”, for example, as opposed to saying, “We plan to raise $500,000 from investors”. An existing fund in the bank can then be used in several ways: (a) to attract co-financing from another production entity, (b) to combine with foreign pre-sales (a form of lender financing) to cover the full budget or (c) to combine with some mix of personal funds, foreign pre-sales, gap financing, blocked currency deals, foreign currency deals, foreign below-the-line or facilities deals, international co-productions, foreign tax shelters and incentives, foreign government grants or subsidies, foreign debt capitalization programs or foreign equity financing (again see 43 Ways to Finance Your Feature Film for further discussion of these possibilities).
The strategy here is to raise the first money from a group of investors, for the fully disclosed purpose of using that money to combine it with funding from a number of other specifically identified sources. It may be necessary to promise the investors that you will not use any of their money until the other funds needed to produce the film are also in place.
4. Funding of Distribution Costs–We are assuming in this situation that the startup costs covering acquisition, development and packaging, along with production have already been secured and that the film has been produced or is in the process of being produced, and that other distribution options are either not available or not desired. In this situation, it may be possible to raise distribution funds from investors. Let’s say for example, you need $300,000 to provide a platform release for your film in a small number of theatres, and you hope then to expand into other markets using some of the film’s own revenues after that initial release. It is possible then to conduct an offering to investors to raise the $300,000 in the form of a so-called P&A fund, and structure the deal so that some of the film’s revenues will flow back to the investment vehicle/distributor for further distribution. It is also possible to create and raise money for a P&A fund for multiple projects, in effect using investor financing to fund a small distribution company.
5. Funding of a Film Development Company–Some in the film industry enjoy and have the skills needed to work on film projects during a film’s early stages. They enjoy seeking out new writing talent and acquiring rights to underlying literary material, developing and polishing scripts and attaching talent to these projects. They would rather create a business model that engages in these limited activities than engage in actual film production and get involved in activities relating to distribution. If that is the case, it is possible to use investor financing to fund these film development activities.
The development company’s objectives are to raise a certain amount of money from a group of investors, use that money to acquire rights and development scripts, possibly to package some of these projects and/or sell them outright to others who may then produce the film(s) and make arrangements for distribution. The development company presumably adds value to its film projects along the way and is able to sell its rights to these film projects for more money than it invested, thus creating an opportunity for these development company owner/producers and their investors to make a profit and move on to other development projects.
6. Financing for a Completion Fund–Another possible option for filmmakers is to use investor financing to fund a so-called completion fund or finishing fund. The strategy here is to raise a certain amount of money from investors, disclosing to them the plan to identify independent films that are in various stages of completion and provide the money to finish the film and get them to the marketplace. Generally speaking, the last money invested in such situations is in the best position to negotiate the most favorable terms, so theoretically, there might be an advantage for a group of investors to utilize this strategy for investing in film. In addition, this approach allows a group of investors and the producer/management group to spread the risk of their investment amongst a number of film projects.
7. Funding of a Multiple Film Offering–Another way to spread the risk of investing in film is to invest in several films at once. With this strategy in mind, the filmmaker can acquire rights and put together a so-called multiple film offering. The hope of the investors in this situation is that even if one or two of the films in the package do not perform well at the box office, maybe one in the package will, and the revenues from that one will be enough create a profit for the entire investment. Once again, a producer seeking to fund a multiple film offering will run into the practical limits as to how much money can be raised from investors at any given time. So, this approach may only be useful for really low and ultra-low projects, possibly a series of digital video projects, for example, but there is still some merit to the “spread-the-risk” concept.
No one is suggesting here that investor financing is the best way to finance one or more feature films, or that it is an easy way to finance films. On the other hand, for some low and ultra-low budget film projects, investor financing may be the only way to get the filmmaker’s vision on the screen. Filmmakers simply need to be realistic and select a strategy that appeals to him or her, and that is likely to attract investors along with the amount of money needed.
1. For that information see 43 Ways to Finance Your Feature Film and “Feature Film Limited Partnerships: A Practical Guide Focusing on Securities and Marketing for Independent Producers and Their Attorneys”, Loyola of Los Angeles Entertainment Law Journal, Vol.12, No. 1, 1992.
2. Other projects that have been financed using investor financing techniques include production company startups, documentaries, television pilots, live stage plays, music ventures and infomercials.
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