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An Overview of Film Finance

There are so many different ways to finance one or more feature or feature-length documentary films, that it is extremely important for independent producers to focus their efforts on those forms of film finance that are most likely to produce favorable results for their current project. Without this focus of time and effort, the film finance campaign is less likely to succeed.

First, we must recognize that some forms of film finance are tied to distribution. Others are not. This article does not advocate always choosing one of those two approaches over another, since both have advantages and disadvantages for particular films. Sometimes the filmmaker simply has to go with the form of film finance that is available regardless of whether distribution is in place. A more detailed analysis of the advantages and disadvantages of each form of film finance is set out in my book “43 Ways to Finance Your Feature Film – Third Edition” (Southern Illinois University Press).

Secondly, it is important to understand that there are three different stages in the life of a feature film, each of which can be financed separately (i.e., in a different way). These three major stages in a film’s life are: (1) the development phase (including the cost of acquisition of rights, developing a script, attaching elements and marketing the package to production financing sources), (2) the production phase (including pre-production, principal photography and post-production) and (3) distribution.

Considerations regarding the manner in which these three stages may be separately financed are sometimes difficult to distinguish in many real world transactions. The combinations traditionally used in the industry tend to fall into one of the following five distinctive film finance/distribution scenarios (or some variation thereof). Each film finance/distribution scenario will typically require that the independent producer engage in a different set of activities and communicate with a different group of people and to seek financing at varying stages in the life of the film. In addition each such scenario tends to work best with different levels of film budgets.

In-House Production/Distribution – The so-called vertically-integrated, major studio/distributors, along with some of the other more established film production companies offer filmmaker support for the development of film projects. In such cases, the filmmaker (who may be a producer, director, screenwriter or actor) is approaching the film entity at the idea stage. The filmmaker may have documented the idea by creating a synopsis, outline or treatment, but usually has yet to complete a screenplay. The filmmaker seeks an opportunity to pitch his or her idea to a creative executive at one of these film entities and is seeking to obtain a so-called development deal from the film entity through which the film entity provides development funding for the project. If obtained, the filmmaker develops the project at the studio under some level of supervision of studio creative executives and hopes to eventually obtain “green-light” (i.e., approval) for studio production funding, although the odds of obtaining production approval for an in-house project are estimated to be in the 1 to 500 neighborhood. If the film is produced, then the film entity that provided the development funding would have the right to distribute the completed film with the studio-affiliated distributor using the distributor’s funds to cover distribution expenses. If the filmmaker or others originally involved with the project remain attached, they do so as employees of the studio or project. In this in-house production/distribution scenario, one film entity is providing the funding for all three phases in the life of the film. Usually, the in-house production/distribution deal is reserved for some of the more high-budget pictures, let’s say in the $50 million and up category.

Production-Financing/Distribution Agreement – A filmmaker seeking a production-financing/distribution (P-F/D) deal approaches the film entity at a later stage in the development of the project. The filmmaker is responsible for raising or otherwise providing the funds to cover the development phase financing and puts together a producer’s package before approaching the film entity. The producer’s package minimally consists of the completed script, a budget, evidence of attached elements (i.e., written commitments from a director and lead actors) and chain of title documents. The filmmaker is actually asking the film entity to provide production funding and distribution. Usually, the production funding takes the form of a loan to the filmmaker’s company and the interest on that loan has to be paid back to the funding entity prior to negative recoupment. The film entity’s money is used to produce and distribute the picture. The distribution agreement is entered into (theoretically) prior to the start of production, or at least before the end of production. The distributor will deduct its fee, recoup distributor expenses, collect interest on the production money loan and then reduce the negative cost with remaining gross receipts, if any. In this scenario, the filmmaker was responsible for financing the development phase of the project, then asked the film entity to finance the production and distribution phases. The P-F/D deal at the major studios is typically reserved for the medium-budget pictures, let’s say in the $20 million to $50 million dollar range.

Negative Pickups (and other forms of lender production-money financing) – When a filmmaker is seeking a negative pickup deal, he or she is approaching the film entity at the same stage in the life of the film project as for the P-F/D deal (i.e., after the development phase has resulted in a producer’s package) but approaching an executive in the distribution division of the film entity (as opposed to a creative executive on the production side). And the filmmaker is not asking for production financing from the distributor, rather he or she is asking for a distribution agreement and guarantee to pay a specified sum of money upon delivery of the completed film as described in the negative pickup distribution agreement. That agreement, for example, will state that the film must not significantly depart from the script in any significant way, that the specified actors appear in their respective roles, that the named director direct the film, that the film be produced for a specified amount, that it be limited to a specific running time and that it obtain an MPAA rating no more restrictive than the specified rating.

The filmmaker then takes that negative pickup distribution agreement and guarantee to an entertainment lender (the entertainment division of a bank) and seeks to obtain a production loan from the bank, effectively using the distribution agreement as collateral. The bank will require the filmmaker to obtain a completion bond so that the bank will not be exposed to the risk that the film will go over budget. In this scenario, if the loan is made, the film is produced and delivered to the distributor per the terms of the negative pickup distribution agreement and guarantee, the distributor will then pay the specified sum and the money flows to the bank to repay its principal, interest and fees. In this scenario, the filmmaker was responsible for financing the development phase of the project (i.e., he or she created and approached the distributor with a producer’s package), a bank loaned the production funds and the distributor pays for the distribution expenses. Three different entities paid for the three phases in the life of the film.

The negative pickup and other forms of these distribution/finance agreements associated with lender financing are typically entered into prior to the production of the film and are most commonly used to finance the production costs associated with low to medium range budgets (e.g., $5 million to $15 million). Other variations on lender production financing include foreign pre-sales and gap financing (for additional information re these specialized forms of film finance see my book “43 Ways to Finance Your Feature Film”).

The Acquisition Distribution Deal – In one sense, all of these five so-called film finance/distribution scenarios are, from the distributor’s point of view, different ways to acquire product. But, for the filmmaker to better understand how film finance relates to distribution, it is important to look more closely at the nuances of each of these deals. When the filmmaker is seeking to approach a distributor with a completed motion picture and the distributor is seeking to acquire the rights to distribute that motion picture, the independent producer has already been responsible for financing both the development and production phases in the life of that film. Quite commonly, some form of investor financing (aka equity) is involved in the financing of such projects, often from investors outside the film industry. But, if the distributor acquires the film, distributor funds are typically used to distribute the movie. The distribution agreement is entered into after the film is produced. As a general rule, there is less risk for a distributor in acquiring a completed film, but more risk for a producer in waiting until the film is complete to seek distribution. On the other hand, at least theoretically, the producer with a quality film should have less difficulty attracting a distribution deal and negotiating a favorable agreement.

Some in the industry still erroneously use the term “negative pickup” to describe this transaction which is clearly different from the true lender financed “negative pickup” described above. This “pure acquisition” approach to film finance and distribution generally provides the producer and creative team with the most creative control (over scenarios 1 – 3), but involves greater financial risk for the producer and/or the producer’s investors. Although there is no legal limit ultimately on how much money can be raised from investors, investor financing is most commonly used to fund the low and ultra-low budget projects (e.g., $100,00 to $4.5 million or so).

Of course, investor (equity) financing may also be used in conjunction with other forms of film finance to raise the equity component of a film finance plan. Such plans may, for example, call for raising 50% of the film’s budget from equity investors, 15% from foreign or domestic tax incentives, 20% from foreign pre-sales, 10% with gap financing and 5% from cast and crew deferrals. Both the percentages and the combined sources for a film finance plan may vary. The film resulting from such a film finance plan still may need to find one or more distributors to acquire the rights to distribute the film on an acquisition basis in specific markets or media, other than in the foreign territories where the film’s rights have already been acquired in conjunction with a foreign pre-sale.

The much talked about crowd-funding scenario which is generally only suited for film’s of $100,000 budgets or less would also fall into this acquisition distribution arrangement. True crowd-funding involves contributions (i.e., gifts) not investments (i.e., no profit sharing is offered). Crowd-funding may also be useful for startup funds relating to a film project.

Rent-A-Distributor Deal – In this situation, the independent producer is responsible for raising acquisition/development, production and some or all of the money needed to distribute the film. The producer is hiring an established distributor and its staff expertise to do all of the things distributors do (i.e., design and implement a marketing campaign, book the film in theatres, monitor and collect film earnings, calculate, report and pay all profit participants, etc.). Usually the producer will be able to provide more significant input to the distributor with respect to the marketing of the film in this arrangement. This type of distribution agreement is generally entered into after the film is produced. Distributor fees are generally at their lowest with this transaction, (e.g., 15%).

Conclusion – In any given year, these five film finance/distribution scenarios will typically be represented on the film slates of each of the so-called major studio/distributors, although in terms of numbers, the P-F/D, negative pickup and acquisition deal combinations probably generate most of the films appearing on such slates. On the other hand, almost all of the majors will have one or more in-house productions each year (typically, their hoped-for blockbuster/tentpoles) and the rent-a-distributor scenario is probably the least commonly used. The major studio/distributor sales representatives tend to use their coming blockbusters as leverage to gain favored treatment from exhibitors for the mediocre to poor films on their annual slates, thus partially explaining why many independent features of equal or superior quality get squeezed off theatre screens in favor of major studio product.

The independent distributors tend to rely more heavily on the acquisition and rent-a-distributor arrangements. Some of the more recent distribution approaches that work on an acquisition or rent-a-distributor basis include a distributor focusing on digital family films for theatrical release to the so-called second-run theaters in small towns across the country, a specialized sub-distributor that focuses on the hand-held device market and the non-profit distributor seeking to help filmmakers find markets for their films.

After reviewing this overview of film finance, hopefully, filmmakers will have a better sense of direction with respect to the type of film financing they should pursue for their current projects.

Categories: Film Finance

When You Don’t Need a Business Plan

In film finance situations, it is common for independent filmmakers here in the U.S. to get the advice that they need a business plan. Aside from situations where putting your ideas on paper may be helpful for planning the future of any business, or helpful in obtaining a collateral-based bank loan, when filmmakers are looking to actually raise production funds for a film, there are many instances when a business plan is not needed.

Filmmakers need to know when it is appropriate to use a business plan and when it is not.

1. Film Industry Sources – As a general rule, when seeking financing from film industry sources, a business plan is not needed.

a. Studio In-House Development Deal – When seeking a studio in-house development/production/distribution deal, a business plan is not needed. In that situation, you are merely pitching an idea. That idea may be expressed in writing as a synopsis, outline, treatment or even a script (hopefully registered with the U.S. Copyright Office), but in any case, you are just pitching an idea and you do not need a business plan, nor is the project far enough along to support the creation of a producer’s package. On the other hand, the filmmaker in this situation needs to be concerned about theft of ideas and should review the body of law relating to that issue. [For definitions of film finance terminology see my book “Dictionary of Film Finance and Distribution – A Guide for Independent Filmmakers”, Marquette Books, LLC, 2008]

b. Studio P-F/D Deal – Next, when talking to a creative executive and seeking a studio production-financing/distribution deal from a major studio or other vertically integrated film organization, you do not need a business plan. In that situation, you should use a producer’s package. A producer’s package is not bound like a business plan and at minimum contains the script, budget, chain of title documents and evidence of attachments.

c. Negative Pickup Deal – In the alternative, when talking to an acquisitions executive at a distributor, you do not need a business plan. In that situation, you again need a producer’s package. For those not familiar with the term “negative pickup” it is a term of art used in the film industry to describe a film finance and distribution transaction in which a producer obtains a distribution agreement and guarantee to pay a specified sum, upon delivery of a completed film, the elements of which are described in the negative pickup agreement. The producer then takes that distribution agreement to an entertainment lender and obtains a production loan, effectively using the distribution agreement and guarantee as collateral. The bank will require that the producer also obtain a completion bond, so in all, there are four parties involved in a negative pickup deal: producer, distributor, bank and completion guarantor. In any case, to seek a negative pickup, you do not need a business plan, rather a producer’s package. [For additional detail on the negative pickup arrangement and other forms of film finance briefly mentioned here, see my book “43 Ways to Finance Your Feature Film – Third Edition”, Southern Illinois University Press, 2008]

d. Split Rights Deal – In another variation on the lender financing described above as a negative pickup, you may want to split the distribution rights to a film between domestic and international markets. In that situation, you would be seeking two separate distribution deals, a domestic distribution deal and an international distribution deal – one from a domestic distributor and a second from an international distributor. The presumed advantage of such an arrangement is that the revenue stream generated by the exploitation of the film is not cross-collateralized, since there are two distributors involved. In other words, if the film is financially successful in one of those two markets, but not in the other, the distributor for the market in which the film performed poorly does not get to participate in the profits of the distributor where the film performed well. In any case, just as with the negative pickup arrangement, the producer takes the two distribution agreements to a bank, seeking a production loan. The bank still requires the completion bond. The producer delivers the film to each distributor upon completion and assuming the distribution agreements are properly drafted, the distributor is obligated to pay the amount specified in the agreement. The bottom line for purposes of this article, this film finance transaction does not require a business plan, rather a producer’s package.

e. Foreign Pre-Sales and Gap Financing – A third variation on the lender financing described above is the foreign pre-sale, and that extension of foreign pre-sales, “gap” financing. In these situations, the producer is usually working through a foreign sales agent and is seeking to obtain distribution agreements and guarantees from five or six of the top ten foreign territorial distributors. The idea is not to seek full funding for the film using these territorial distribution deals, but a significant portion of the film’s budget, with the rest coming from other sources. The foreign pre-sale deal works like the negative pickup and the split rights deal described above. The producer obtains, in this case, the multiple distribution agreements and guarantees, takes them to a bank that will make loans on foreign paper, gets the completion bond, and assuming the production loan is provided, delivers the completed film to the distributors who pay the guaranteed amount upon delivery. “Gap” financing differs slightly in that the foreign-pre sale is not actually obtained, but the bank goes ahead and loans a specified amount of production funds based on the good-faith foreign sales estimates of an experienced foreign sales agent the bank knows and trusts. Once again, no where in these transactions is it necessary to use a business plan, but instead, the foreign sales agent will be using something akin to a producer’s package including glossy promotional materials to sell your package to the territorial distributors.

2. Investor Financing – The appropriate time to use a business plan involves investor financing, that is financing provided by companies or individuals from outside the film industry. But not even all investor financing transactions (often referred to as the equity component of a film finance plan) require a business plan.

a. Active Investors – The most appropriate situation in which to use a business plan is when seeking to raise some or all of your financing for your film from one or a few active investors. For many filmmakers, this is the ideal situation, getting all of the money needed from just a few people. Sometimes such investors are referred to as “angel” investors. But let’s be clear about who active investors are. The definition of an active investor is not one of those “grey” areas of the law, as filmmakers and others sometimes pretend. It is actually rather precise. That is because the term has been defined by at least two federal appellate courts in cases involving the question of whether a security was being sold.

The leading federal case on when a general partnership interest (and by analogy a joint venture, a member-managed LLC or any other so-called active-investor investment vehicle) constitutes a security is the 1981 case of Williamson v. Tucker. [Williamson v. Tucker, 645 F.2d 404, 5th Cir. 1981] Basically, in the Williamson case, the federal Fifth Circuit Court of Appeals said that a general partnership or joint venture interest can be designated as a security if the investor can establish, for example, that:

(1) the agreement among the parties leaves so little power in the hands of the partner or venturer that the arrangement in fact distributes power as would a limited partnership (i.e., units in a limited partnership are always considered securities); or

(2) the partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers; or

(3) the partner or venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.

Further, California courts have supported the securities regulators’ view that an active investor must have some level of knowledge and understanding of the field in which he or she is investing. In the case of Consolidated Management Group, LLC versus the California Department of Corporations [162 CA4th 598, 75 CR3d 795, 2008] a California appellate court ruled that “the investor’s inexperience and dependence on a managing venturer served to establish that the joint venture interests were in fact securities.” The court further stated that these business promoters “were soliciting investments from people who would, as a practical matter, lack the knowledge to effectively exercise the managerial powers conferred by the joint venture agreements . . .” The court went on to say that “the success of the particular projects marketed was uniquely dependent on the efforts of the . . . managing venturer, and that investors would be relying on those efforts in making their investments.” Ultimately, the court observed that the investments were solicited from persons with no experience in the relevant industry.

To summarize the law on active investors, when seeking to fund a film through such persons, the number of active investors needs to be limited to no more than several (i.e., the more investors, the more likely that one will be considered passive and thus a security has been sold). In addition, the investors need to have “knowledge and experience” in the film industry, the investors need to be actively involved in helping to make the important decisions associated with the undertaking and the agreement with these investors needs to clearly set out their authority to participate in that decision-making. If we step back from the courts’ decisions and the case law in this matter, we have to admit that there are not really that many active investors outside the film industry, who have the requisite knowledge and experience in the film industry. So there is always a risk when using a business plan to seek financing from a few active investors (the appropriate use of a business plan when seeking financing for a film), that such investors and the transaction will not meet the criteria set out by the courts. If that is the situation and if an investor ever complains to federal or state securities regulators (who are only a phone call away), the transaction may be considered to have involved the sale of a security and the filmmaker may be civilly and criminally liable for failing to register the same.

It is true that where profits are expected to come from the joint efforts of partners (the typical case in a general partnership, joint venture or a member-managed LLC) the courts are not likely to consider that arrangement a security. [Fundamentals of Securities Regulation, 4th Edition, Louis Loss and Joel Seligman, Aspen Publishers, 2007]. So again, those are the situations in which use of a business plan to seek active investors may be appropriate. However, keep in mind that the courts will not rely on the form of the transaction (i.e., the use of an active investor investment vehicle), but instead will look to the substance of the transaction and use the criteria set out above to determine whether a security has been sold. If you are selling a security (whether you know it or not) and you have not attempted to register the security with the SEC at the federal level and with the state securities regulatory authority in each state where the security is being sold, or failed to qualify for an available exemption from the registration requirement, then it is very likely that you are guilty of selling an unregistered security, which is a felony. So, the best advice we can provide to filmmakers is to be careful when choosing to raise money through the use of a business plan and from a few active investors.

b. Passive Investors – The alternative film finance approach involving investors is to seek to raise the money needed (whether the full budget or the equity component of a film finance plan) from a larger group of passive investors. In this situation, the film producer recognizes he or she is selling a security (usually structured as a manager-managed LLC or a limited partnership) and typically seeks to qualify for an available exemption from the securities registration requirement. The federal exemption may be Regulation D, Rule 505 or 506 and the compatible state exemptions, or the state level Model Accredited Investor Exemption (paired with the SEC’s Regulation D, Rule 504). In any case, the information document to be provided to passive investors is not a business plan. It is a securities disclosure document, most commonly referred to as a private placement offering memorandum or PPM. Some people mistakenly believe that a business plan and a PPM are the same thing. They are different, however, in at least two ways. Although there is some overlap in the contents, a PPM is required by law to include a considerable amount of information that is not required to be in and will never been seen in a business plan. In addition, the business plan and PPM are intended to be used in different situations. The business plan is to be used when seeking to raise money from a few active investors. The PPM is to be used when seeking to raise money from a larger group of passive investors (when the security has not ben registered).

3. PPM Supplements – When some filmmakers and their advisors learn about the law relating to the limited use of business plans, they sometimes argue that a business plan still should be used as a supplement to a PPM. They reason that a PPM is typically more of a “compliance document” than a “selling document” and therefore not as effective in persuading prospective investors to invest. It is true that one of the primary purposes of the PPM, which is required by law to be delivered to each prospective passive investor prior to the sale of a security in an unregistered securities offering, is intended to help the filmmaker comply with the federal and state securities laws (i.e. prevent them from running afoul of the law). However, some PPMs are more appealing than others, so you cannot assume that all PPMs are the same. In addition, if a business plan used in such a manner duplicates significant portions of the PPM, that’s a waste of trees. The better practice, in my view, if you feel a supplement is needed at all, is to supplement the PPM with a four-page, full-color brochure, or something to that effect. It is important however, that the language, numbers and graphics included in the supplement be consistent with the PPM and approved by the securities attorney who prepared the PPM, since that supplement becomes part of the offering materials and can be requested for review by securities regulators. Securities fraud committed in a supplement can be just as detrimental to your filmmaking future as securities fraud in a business plan or any other document.

Thus, as you can see, there are many film finance situations where it is not appropriate to use a business plan, and there are some limited circumstances where it is appropriate to use a business plan. Hopefully, filmmakers and their advisers will be able to use the law-based information in this article to know and observe the difference.

Good luck!

John Cones, Attorney, Author, Lecturer

Categories: Film Finance

Why Filmmakers Should Register Their Scripts With the U.S. Copyright Office

When independent filmmakers come to me for help with investor financing of their film projects, in situations where they are seeking to raise money from passive investors, we typically are preparing a private placement offering memorandum (PPM), and I provide them with what I call a “disclosure checklist”. It is a list of the items of information, based on U.S. Securities and Exchange Commission (SEC) disclosure guidelines, that I need them to provide to me so that I can properly prepare the PPM. As you may know the SEC’s anti-fraud rule applies to all securities offerings (i.e., passive investor financing). The anti-fraud rule requires that all material aspects of the transaction be disclosed (i.e., put in writing and given to prospective investors before they invest), that no material information be omitted and that everything stated in writing be disclosed in a manner that is not misleading.

One among many items of information I routinely ask for is the date of U.S. Copyright Office registration for the script on which the movie is to be based, along with the registration number. Such information is material to these investor financing transactions, and is a way of demonstrating to prospective investors that the filmmakers are conducting themselves in a business-like manner (i.e., they are taking care of the underlying rights). Occasionally, a filmmaker will ask if script registration with the Writers Guild of America, West (WGAW) will suffice, and my unequivocal answer is “No”. The WGAW script registration service does not provide or enhance most of the valuable rights associated with copyright registration for a script, and thus WGAW script registration alone is not enough. In addition, WGAW registration is partly redundant, and I see no good reason why any filmmaker should both pay to register with the WGAW and with the U.S. Copyright Office. Here are my reasons in support of this position:

1. E&O Carriers – Registration of a script with the U.S. Copyright Office is typically required by errors and omissions insurance carriers, and distributors typically require that producers obtain E&O insurance, so if you want your production insured and distributed, the script and film will need to be registered with the U.S. Copyright Office.

2. Screen Actors Guild – If you want to use SAG actors, SAG will require a copy of the U.S. Copyright Office registration and receipt for your script’s registration.

3. Distributors – Copyright registration is typically required by film distributors, so again, if you want your film distributed, you’ll have to register the script and film with the U.S. Copyright Office.

4. U.S. Customs Service – Registration allows the copyright owner to record registration with the U.S. Customs Service for protection against the importation of infringing copies.

5. Protecting Your Rights Through Litigation – If you want to file an infringement lawsuit in court, registration with the U.S. Copyright Office is required for works of U.S. origin.

6. Plaintiff’s Presumption – If registration occurs before or within 5 years of publication, courts start with the presumption that the copyright is valid and all facts in the certificate are correct. This presumption gives a significant advantage to the plaintiff in a copyright infringement lawsuit.

7. Statutory Damages and Attorney Fees – If copyright registration is made within three months after publication of the work or prior to an infringement of the work, statutory damages and attorney’s fees will be available to the copyright owner in court actions. Otherwise, only an award of actual damages and profits is available to the copyright owner. This makes it easier and more likely that you would be able to hire an experienced copyright litigator to pursue the copyright infringement case on your behalf.

Note that the errors and omissions insurance carriers, the Screen Actors Guild, the film distributors, the U.S. Customs Office and the courts do not ask for a record of script registration with the WGAW. They all require script’s to be registered with the U.S. Copyright Office.

Nevertheless, when I was teaching entertainment law and film finance courses at several film schools in Los Angeles, I would ask my students what the rest of the faculty was advising them to do with respect to script registration. I was told repeatedly that these faculties (mostly made up of working film industry professionals, although few attorneys) consistently recommended registration with the WGAW. So I went to the WGAW Registry website looking for good reasons to support this position. Here’s what I found.

In its introductory material to the Writers Guild of America, West Registry site, the WGAW refers to its services as “the official script and screenplay registration service of the Writers Guild of America, West and world’s number one intellectual property service.” The WGAW continues, stating:

“Since 1927, the Writers Guild of America, West Registry has been the industry standard in the creation of legal evidence for the protection of writers and their work. When you register your script prior to submitting it to agents, managers, or producers, you document your authorship on a given date should there be unauthorized usage.”

The introductory material continues stating:

“The WGA, West is the home to nearly 12,000 of Hollywood’s leading TV and screenwriters, but you do not need to be a WGAW member to use this vital Guild service. Registration can be used as a supplement to a U.S. copyright, and it’s fast, easy and convenient to register online.”

So, I raise the following questions with regard to this service and the WGAW’s promotional rhetoric:

Is the WGAW’s claim that its registration service is “official” a good reason to register with the WGAW? No, it is not.

Is the WGAW’s claim that its registration service is the “world’s number one intellectual property service” a good reason to register with its service? No, unless you are the kind of person who believes you should do something because a lot of other people are doing the same thing.

Is the statistic that the WGAW cites regarding “12,000 . . . screenwriters” using their service a good reason to do so? No, that’s a repeat of the above-noted “follow the herd” argument and mentality.

Is the WGAW Registry’s use of the word “vital” a good reason to use its service? No, that’s just so much self-promotion.

Is the WGAW Registry’s claim that script registration with its service useful as a “supplement to a U.S. copyright” a good reason to register with its service? No, unless you just want to duplicate time, expense and effort.

Is the WGAW Registry’s claim that its service is “fast, easy and convenient to register online” a good reason to register your script there? This may be the primary reason why the WGAW’s script registration facility exists – because it is easier and cheaper than registering with the U.S. Copyright Office. Nevertheless, it’s still not a good reason to register a script with the WGAW, because the screenwriter who does so will be giving up valuable legal rights conferred by registration with the U.S. Copyright Office in exchange for the WGAW’s “fast, easy and convenient” registration – not really a fair exchange.

Thus, most of what the WGAW states about registering a script with its service, is nothing more than smoke and mirrors, just so much Hollywood fluff. The only credible reason to register a script with the WGAW based on its own literature is because it is “fast, easy and convenient”. It’s also probably a little less expensive than registration with the U.S. Copyright Office.

So, here’s the bottom line: First, if you think that saving a little money, time and effort is worth giving away valuable legal rights when you don’t register with the U.S. Copyright Office, you probably don’t deserve those rights. And, as a consequence, most informed investors won’t invest in your project, you won’t be able to get E&O insurance, you won’t be able to get your film distributed and you may not be able to hire an experienced copyright litigator to protect your ownership interests, if needed, in a court of law. Secondly, if you think that using WGAW registration as a supplement to registration with the U.S. Copyright Office is a good idea, it’s not. You’re just wasting your time and money in a partly duplicative effort.

My suggestion is that the WGAW stop confusing screenwriters with its promotional rhetoric and stop maintaining this secondary registration facility altogether. No one can persuasively argue that it provides a more effective legal basis for protecting the works of screenwriters. Thus, the only remaining justifications for its existence is that it represents another revenue stream for the WGAW, and it saves a little, time, money and effort for screenwriters who only register their scripts with the WGAW, and are not well informed enough to realize that their ability to protect their scripts from copyright infringement is thereby severely diminished. If screenwriters find it too difficult or expensive to register with the U.S. Copyright Office, the WGAW should work with the Copyright Office to improve the federal government’s script registration system, not try to duplicate it with a less effective system.

Have a nice day!

So yes, if we take this reasoning to its logical conclusion, what I’m saying here is that the WGAW and 12,000 screenwriters are wrong! Screenwriters need to stop following the herd and take the necessary steps to protect their legal rights by registering their scripts with the U.S. Copyright Office, and not the WGAW. You should quit listening to the WGAW fluff and propaganda and start listening to your entertainment attorney. Ultimately, script registration with the WGAW is nothing more than a money-making scheme for the WGAW and leaves screenwriters unprotected. The WGAW really ought to just get out of the business of script registration and stay with what the guild does best (i.e., representing the interests of its screenwriter members in collective bargaining with film industry producers).

Funding Portal Requirements Under the New Crowdfunding Law

The new crowdfunding law passed by both houses of Congress and signed into law by the President (H.R. 3606 – the Crowdfund Act) sets out specific requirements for funding portals at Section 304(b). The term “funding portal” means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933, that does not:

(a) offer investment advice or recommendations;

(b) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;

(c) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

(d) hold, manage, possess, or otherwise handle investor funds or securities; or

(e) engage in such other activities as the Commission, by rule, determines appropriate.

Registration – Funding portals must register with the SEC and with any applicable self-regulatory organization as defined in Section 3(a)(26) of the Securities Exchange Act of 1934.

Disclosures – Funding portals must also provide certain disclosures (i.e., written information given to each prospective investor before they invest), including disclosures related to risks and other investor education materials, as the SEC determines by rule, to be appropriate.

Investor Education – These funding portals must also ensure the following with respect to each investor utilizing their facility:

(a) reviews investor-education information, in accordance with standards established by the SEC rule to be promulgated;

(b) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and

(c) answers questions demonstrating the following:

(i) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

(ii) an understanding of the risk of illiquidity; and

(iii) an understanding of such other matters as the Commission determines appropriate, by rule.

Background Checks – The funding portals must also take such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person.

Providing Issuer Information to SEC – Then, not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the SEC may establish), make available to the SEC and to potential investors any information provided by the issuer pursuant to section of this law relating to issuer disclosure (i.e., Subsection (b).

Offering Proceeds – The funding portals must also ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the SEC, by rule, determines to be appropriate.

Investment Limits – Further, the funding portals must make such efforts as the SEC determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to section 4(6) that, in the aggregate, from all issuers, exceed the investment limits set forth in section 4(6)(B) [see earlier article re the crowdfunding requirements for issuers) .

Privacy of Investor Information – In addition, the funding portals must take such steps to protect the privacy of information collected from investors as the SEC determines, by rule, to be appropriate.

Compensation – The funding portals may not compensate promoters, finders or lead generators for providing a broker or funding portal with the personal identifying information of any potential investor.

Financial Interests in Issuers – The funding portal’s directors, officers or partners (or any person occupying a similar status or performing a similar function) is prohibited from having any financial interest in an issuer using its services.

SEC Rules – The funding portal will have to meet such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.

JOBS Act Relaxes General Solicitation Restrictions for Regulation D, Rule 506 Offerings

JOBS Act (HR 3606) Title II – Removing General Solicitation Prohibition from Certain Reg. D, Rule 506 Offerings

SEC must promulgate rules

General solicitation and advertising restrictions do not apply to offerings conducted pursuant to Rule 506 under Regulation D, provided that the issuer takes reasonable steps to verify that each ultimate purchaser is an accredited investor.

As most independent film producers now know, on April 5, 2012, President Obama signed into law the so-called Jumpstart Our Business Startups (JOBS) Act (H.R. 3606). The new law combines several pieces of stand-alone legislation and refers to each section as a Title.

Title I relaxes certain offering, disclosure and compliance requirements for a class of companies categorized as emerging growth companies (EGCs) and institutes certain reforms relating to the initial public offering (IPO) process.

Title II requires the SEC to promulgate rules providing that general solicitation restrictions do not apply to offerings conducted pursuant to the SEC’s Regulation D, Rule 506 under certain circumstances. The Title II provisions are the subject of this article.

To continue, however, with a brief statement of the subjects addressed in the remaining sections of the new law, Title III creates a new exemption under the Securities Act for investment-based “crowdfunding.” Those provisions are discussed in my two earlier articles (“The New Crowdfunding Law As Applied to Filmmaker Issuers” and “Funding Portal Requirements Under the New Crowdfunding Law”) both of which were also previously posted here at BaselineIntel.com in their “ResearchWrapBlog”).

Title IV provides a new exemption from the registration requirements of the Securities Act of 1933 modeled on Regulation A, which is being referred to as “Regulation A+”. This new exemption increases the permitted size of Regulation A offerings to $50 million of unrestricted securities within a 12-month period to investors, who need not be accredited, subject to the annual filing of audited financial statements and other conditions to be prescribed by the SEC, including periodic reporting requirements.

Titles V and VI of the JOBS Act raise the shareholder thresholds under Section 12(g) of the Exchange Act before a private company is required to register as a public reporting company.

So, back to Title II – the removal of the general solicitation restrictions for Regulation D, Rule 506 offerings. This provision of the new law requires the SEC to promulgate rules within 90 days, providing that the general solicitation and advertising restrictions do not apply to offerings conducted pursuant to Rule 506 under Regulation D, provided that the issuer takes reasonable steps to verify that each ultimate purchaser is an accredited investor. The SEC will presumably provide guidance with respect to what steps are reasonable in its forthcoming rules.

The SEC’s Regulation D sets forth 8 different categories or individuals or entities that are considered “accredited”. Two of those apply to natural persons:

(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000 (exclusive of the primary residence of such person) and

(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

Title II of the JOBS Act also requires that the SEC amend Rule 144A to provide that securities may be offered by means of general solicitation or general advertising, including to persons other than qualified institutional buyers (QIBs), so long as the issuer reasonably believes that each ultimate purchaser is a QIB.

The SEC’s Rule 144 sets out the requirements relating to the re-sale of restricted securities, such as securities originally purchased pursuant to a Regulation D, Rule 506 offering. Those specific requirements are discussed in my article “Re-Selling Units of a Private Film Offering” (also posted at BaselineIntel.com in their “ResearchWrapBlog”).

The term qualified institutional buyer refers to institutions that manage at least $100 million in securities including banks, savings and loans institutions, insurance companies, investment companies, employee benefit plans, or an entity owned entirely by qualified investors. Also included are registered broker-dealers owning and investing, on a discretionary basis, $10 million in securities of non-affiliates.

As a consequence, in future Regulation D, Rule 506 transactions, the issuers of securities and/or their financial advisors would need to obtain detailed representations and warranties from potential investors regarding their accredited investor or QIB status. Without benefit of the SEC rules relating to this issue, it is presumed that such action on the part of the issuer will be sufficient to verify the status of each ultimate purchaser in the transaction. Thus, it is very likely that certain modifications will have to be made to the private placement offering memoranda and subscription documents used in marketing this new form of private placement.

It is important to keep in mind that the legislation did not change current law, since it is not effective until the SEC promulgates its related rules. Thus, until the SEC issues its new rules relating to these Regulation D, Rule 506 private placements, the existing rule mandating that a pre-existing relationship exist between the issuer and its prospective investors is still in effect.

Who Really Represents the Independent Feature Film Producers?

The following article has been written for the purpose of stimulating discussion of an important issue for independent film producers. It first provides an overview of association management generally, and then provides a critical review of the various currently existing film industry organizations purportedly representing the interests of independent film producers in today’s marketplace. It concludes with suggestions relating to what producers must do to create an effective organization to represent their vital interests and restore some semblance of health and prosperity to their segment of the film industry. Such suggestions are based on the underlying assumption that the independent film world is weaker than it should be and that it will never become revitalized without a single, effective association representing the interests of independent filmmakers. Much of the information contained in this article is based on and extracted directly from the respective Internet web sites of the various organizations discussed. The balance is based on the personal experiences of the author combined with his own opinions.

In most mature industries, the people working in those industries have organized professional or trade associations to represent their interests on the important issues of the day. As examples, attorneys have their bar associations, doctors have their medical societies, engineers and architects have their national and state associations, independent insurance agents and adjusters have their respective groups, just to name a few of many thousands of such groups (see The Riley Guide and the Directory of Associations online).

These groups are generally organized as not-for-profit organizations. There are literally hundreds of thousands of non-profit organizations registered in the United States. The Internal Revenue Service (IRS) also reports that new trade associations, professional societies, charities, foundations and other non-profits apply for tax-exempt status each year. Just in recent years, the IRS has recognized more than 71,000 organizations as tax exempt under Section 501(c)(6) of the Tax Code. Trade associations, business leagues and chambers of commerce fall under the 501(c)(6) classification. To meet the requirements of Section 501(c)(6), an organization must be an association of persons having some common business interest and its purpose must be to promote this common business interest; it must be a membership organization; it must not be organized for profit; and no part of its net earnings may inure to the benefit of any private shareholder or individual.

These professional and trade groups provide numerous services to their members. In addition to the very important legislative advocacy work, they also generally provide group insurance programs, continuing education in their specialized field (lectures, seminars and panel discussions), information relating to the industry (newsletters, magazines, bulletins), certification programs, ethical standards, legal assistance, standardized forms and other services.

Most of these professional and trade associations are generally staffed by professional association executives (i.e., people who have the specialized skills and training that help make them effective in this unique work, as opposed to people who come out of the particular industry represented). There are so many professional and trade associations that professional association executives have organized their own associations at both the national and state levels. At the national level the professional association executives have organized the American Society of Association Executives (ASAE), based in Washington, D.C. The majority of ASAE members’ organizations are classified as trade associations; individual membership organizations, or professional societies; or philanthropic organizations.

More than a thousand association executives have formed a state association of association executives in California (CalSAE), based in Sacramento. This group is the fourth largest society of association executives in the country. Similar societies of association executives exist in most of the state capitols, for the reason that most consider their legislative advocacy programs to be one of their more important reasons for existing. Some of such groups are also organized at a regional, county or city level because their member interests must be protected there too. Association executives who want to be professional in their field and take advantage of the vast resources available through associating with other association executives typically join these associations and participate in their programs, including their professional certification programs.

The Hollywood-based U.S. film industry is more than 100 years old, thus surely, it must be considered a mature industry. Other important interests in the film industry, besides the independent film producers, have effectively organized. The major studio/distributors have their MPAA or MPA. The independent and international distributors (along with the foreign sales agents) have their Independent Film and Television Alliance (IFTA — formerly known as the AFMA). Actors, directors and screen writers have appropriately organized in their respective guilds. All of these are powerful organizations that exercise clout on behalf of their members. And, their members benefit significantly.

In a recent example of lobbying or legislative affairs activities impacting the interests of independent producers, Congress passed and the President signed legislation (HR 4520 – the American Jobs Creation Act) containing tax incentives for certain films. In a backstage.com article (Oct. 29, ‘04) written by Roger Armbrust (with contributions from The Hollywood Reporter’s Brooks Boliek) eight different film industry organizations were cited for helping to pass the new law. None of the groups purportedly representing the interests of independent producers were named:

“SAG and AFTRA were mainstays of the state entertainment industry’s effort to form the legislation and get it approved. . . A broad base of entertainment industry organizations has joined SAG and the DGA in the Runaway Production Alliance, which supported the legislation. They include the International Brotherhood of Teamsters, the American Federation of Television and Radio Artists, and the Writers Guild of America. On the management side, such groups as the Motion Picture Association of America and the Association of Independent Commercial Producers were involved. The Association of Talent Agents may have had its struggles with SAG over a franchise agreement, but the two evidently worked together through the alliance on the new law.”

Every independent producer should be asking whether any of the group’s currently purporting to represent the interests of independent producers were significantly involved in that legislative effort.

Unfortunately, the power of any segment of an industry (e.g., independent film producers in the film industry), is partly a function of the number of members an association represents. And, even more unfortunately, independent feature film producers have not been able to create a single, effective association to aggressively represent and protect their interests. Since, independent film producers have not yet been able to bring themselves together under one large organization, they have limited their influence on most matters of importance, and the independent segment of the marketplace has become less and less important. Currently, there are a number of different, small groups attempting to perform some of the important functions that need to be addressed, but each is limited in one or more significant ways.

1. The Producer’s Guild of America (PGA)

The Producer’s Guild of America (PGA) claims to represent more than 1,300 members of the Producing Team (from Production Coordinators on up), including the interests of a substantial number of major producers in the motion picture and television industries. The PGA provides an extensive website that can apparently be used to get in touch with other producers; to gather information on producers and on their productions; to find answers to production questions; to consult with the PGA regarding producer credit issues; to pursue other issues that matter industry-wide; to voice complaints; to explore all aspects of the world of producing and to link to other key industry-related websites.

The PGA’s Mission Statement provides that “The PGA represents, protects, and promotes the interests of all members of the producing team. However, the first two stated “primary goals” of the PGA are quite limited. Those stated goals are: (1) combating credit proliferation and (2) expanding health benefits. The PGA’s third stated “primary goal” is so broad as not to be a goal at all, but something more akin to a mission statement. That third PGA goal is “(3) representing the entire producing team”.

The PGA defines the producer team to include all those whose interdependency and support of each other are necessary for the creation of motion pictures and television programs (i.e., producers and all those on the career path to becoming producers). The PGA takes the position that as a unit, the producing team is responsible for the art, craft and science of production in the entertainment industry. The producing team includes Executive Producers, Producers, Co-Executive Producers, Supervising Producers, Senior Producers, Line Producers, Co-Producers, Associate Producers, Segment Producers, Production Managers, Post-Production Supervisors & Managers and Production & Post-Production Coordinators.

Unfortunately, the PGA appears to be confused about its very nature. The PGA now holds itself out as a “professional organization”, but unfortunately retains the word “guild” in its name. In point of fact, the PGA should consider itself a professional and/or trade association (it can be both) and it should take the word “guild” out of the name to avoid confusion and signify its own recognition of this fact. To further enhance this transition, their top executives should join the American Society of Association Executives and the California Society of Association Executives, and even possibly seek to become Certified Association Executives.

Elsewhere on its own website, the PGA states that it intends to “act as a trade organization, rather than a labor union.” The members of a trade organization are usually companies in the same industry, not individuals. So the PGA should not refer to itself as a trade organization unless its members are production companies. Or, if its members are both companies and producer individuals, it may more accurately refer to itself as a professional and trade association. If its members are individual producers, then it should consider itself a professional association. In other words, if the PGA wants to be an organization of professionals, its memberships should be held by individual professionals and the name should not suggest that it is a labor organization. The group also must do more to “represent the entire producing team” including legislative advocacy in both Sacramento and Washington, D.C., and it should commence negotiations immediately with other groups purporting to represent independent producers to bring about a much needed merger.

2. The Independent Film & Television Alliance (IFTA)

The Independent Film & Television Alliance, formerly known as the American Film Marketing Association claims it is the trade association for the independent film and television industry. It claims to represent both independent producers and distributors.

IFTA’s global membership distributes internationally (and often produces and finances) the films and television programs that are produced outside of the seven major U.S. studios. Members control the exploitation of their programs by licensing on a territory-by-territory basis to third-party national distributors, rather than through corporate networks. The IFTA suggests that these economic characteristics define the world’s independent industry.

The IFTA defines an independent film as a film or program for which more than fifty percent of its financing comes from sources other than the seven major U.S. studios. Independent productions cover all budget ranges and genres and are aimed at wide, as well as niche, audiences.

In reality, the IFTA is a trade group dominated by international distributors and foreign sales agents, some of whom also produce. On the other hand, it is next to impossible for a single organization to effectively represent the interests of both film distributors and producers – that combination creates too many inherent and unresolvable conflicts of interest. The IFTA should not even attempt such a feat, since it will inevitably fail on some specific issues, and therefore the organization will not be able to effectively represent the interests of producers as opposed to distributors or vice versa. Any production companies that also have distribution arms should have the producing group join a professional/trade association specifically devoted to protecting and promoting the interests of independent film producers. Furthermore, an association of independent producers should not also include or claim to include “major” production companies as members, since those companies are already members of the MPAA, the same group that has engaged in anti-competitive business practices for years that have resulted in a less potent independent sector.

3. Association of Independent Feature Film Producers (AIFFP)

The AIFFP started with an informal network of global indie filmmakers and allied personnel who sought to create worldwide connections to people who could learn together, work together, and succeed together outside the major studios. They believed that an organization like this could forever change the way independent films are made.

The Association of Independent Feature Film Producers (AIFFP) claims to be “The Voice of Independent Feature Film Producers Worldwide”. It is difficult to substantiate such a claim in light of the fact that the other organizations discussed in this article, also purportedly represent independent producers at some level and make similar claims.

The AIFFP, however, is a California Non-Profit Educational and Advocacy Organization based in Hollywood. It is supposedly dedicated to the advancement of the business of independent feature film production; the advancement of the profession of the independent feature film producer; the education of the independent feature film producer and allied professions; the advancement of the application of technology in independent feature film production and the advancement and use of new media in independent feature film production.

The AIFFP leadership feels these goals can be achieved through: educational opportunities provided by AIFFP and coordinated with approved learning institutions; a certification program for independent feature film producers, news services for members; publications; online discussion groups and communications capabilities; tools for production organization and awards for excellence.

The AIFFP takes the position that independent (“indie”) filmmakers are those not associated with a particular major studio. They contend that indie filmmakers are individuals who have, without the massive resources of a major, developed and produced feature films for theatrical release. The “indie” umbrella covers almost anyone who could not or would not work in the factory-like conditions of Hollywood. Capturing and telling stories of every kind, in every language, involving every aspect of the human condition and the world around us, is what drives indie filmmakers (according to the AIFFP website). While most filmmakers would like to be creating product that sells and pays the bills, the majority of what drives an indie filmmaker is the passion of the art and science of filmmaking.

The AIFFP further takes the position that “independent” filmmaking is actually a misnomer, since there is no other art that is so dependent as indie filmmaking. The AIFFP suggests that indie filmmakers are dependent on like-minded individuals who work with them at every step of the way, from finding the money to make it happen, production, post production and sales.

AIFFP is an entirely volunteer organization. Focusing on the business aspects of producing, AIFFP states that it leads in education of its members in filmmaking, as well as global advocacy for freedom of the arts in oppressed countries. The AIFFP seeks to support global independent feature filmmaking through education, information, networking, analysis, exposure and advocacy for both equal opportunities for independent feature filmmakers at studios as well as freedom of artistic expression for feature filmmakers in countries that oppress and/or restrict filmmaking. The AIFFP encourages diversity in independent feature filmmaking.

The AIFFP provides no membership numbers. It’s chief staff executive has been a producer (as opposed to a professional association executive). It may also be inaccurate to state that the AIFFP is a trade organization, since it may more accurately be described as a professional association. The group is self-described as a mere Internet presence, thus like many film industry organizations, its rhetoric (although well-meaning) is much more expansive than its reality.

4. Association of Independent Video and Filmmakers (AIVF)

The Association of Independent Video and Filmmakers is a membership organization serving local and international film and videomakers – from documentarians and experimental artists to makers of narrative features. The AIFV seeks to enhance the growth of independent media by providing services and resources, including:

  • Informative seminars and networking events
  • Trade discounts and access to group health and production insurance;
  • A public resource library
  • Publication of essential books and directories, including The AIVF Guide to International Film & Video Festivals, and The AIVF Self-Distribution Toolkit.
  • The Independent Film & Video Monthly – national publication dedicated to the diverse issues facing the independent media field.
  • Media advocacy for independent artists.
  • Information services including advice and referral for independent filmmakers and media artists.

The AIVF eventually evolved from a president- and board-led local entity with an active membership to a national executive-directed operation with a largely passive national membership. In sheer numbers membership increased dramatically, but apparently few members attend meetings. By 1980 the AIVF changed from an organization of meetings, screenings, workshops and membership activity, to a group run by office staff, an executive director and a magazine that has since become the focal point of AIVF activity.

AIVF observers point out that some of the inspiration and creative energy evident during the organization’s formation stage has been lost, and that when filmmakers have to choose between career and voluntary service to the community, they would inevitably opt to take care of their own needs. Of course, the whole concept of professional association management as applied to this industry and context is to allow the independent filmmaker to continue to pursue his or her career and even enhance those career possibilities, while service to the association tends to occur along the way, but without detracting from the career.

Now the AIVF has an in-house library, a festival bureau and its own publication, The Independent. The organization also provides a certain level of comfort to members who know they are not alone in their struggle as independent filmmakers.

One of the inherent problems with a New York based film producers group, however, is that the center of the film world is still in Los Angeles. Thus, from time to time, some of the producers who have contributed significantly to the strength of the AIVF have left New York for Los Angeles and thus the AIVF is periodically weakened by such losses.

5. Independent Feature Project

IFP is a not-for-profit service organization dedicated to providing resources, information and avenues of communication for its members: independent filmmakers, industry professionals and independent film enthusiasts. It is committed to the idea that independent film is an important art form and a powerful voice in our society. IFP provides services to independent filmmakers of varying levels of experience, which assist them in expressing their unique points of view. It facilitates a connection between the creative and business communities. Other goals of the organization are to expand and educate the audience for independent film, and to encourage the diversity and quality of independent production.

IFP has six chapters located in Chicago, Los Angeles, Miami, Minneapolis/St. Paul, New York and Seattle, and the organization recognizes that American independent filmmaking has no one address and speaks to people everywhere.

Offering assistance, information and access to the world of independent film, IFP programs strive to help members make connections, and find out the latest on who’s who, who’s buying, who’s financing and who’s making what features, shorts and documentaries.

IFP claims to be “ the leading resource of the American independent film movement today”. Again, such claims are difficult to substantiate since there are competing associations. The IFP’s 9,000 filmmaker and film industry members participate year-round in activities ranging from popular screenings to “cutting-edge” workshops and seminars. That’s the hype. Here’s the reality.

Incredibly, the IFP can’t even come up with an objective and easily understood definition of an independent film even though the entire organization is based on that single concept. The IFP takes the position that an independent film is one that exhibits uniqueness of vision, contains original, provocative subject matter, was produced using an economy of means (with particular attention paid to total production cost and individual compensation) and then requires only that some unstated percentage of financing come from independent sources. That means that at the discretion of the IFP, films partially financed by the major studios can compete for IFP awards. Thus, the IFP is literally inviting the major studio/distributors to gobble up even more of the attention and marketplace desperately needed by independent filmmakers.

Further, the IFP/LA places so much emphasis on making more and more money each year, partly so that staff executives can continue to increase their salaries, they have chosen to allow some of their seminars to be sponsored by law firms and other organizations for a fee, then, taking their “sell-out” to commercialization one more step, to allow those seminar sponsors to serve as panel discussion moderators or panel members regardless of whether such sponsor groups have bona fide expertise on the subject of the panel discussion. So “cutting-edge workshops and seminars” is an absolutely false claim in some instances. This unseemly practice has resulted in not only poor to inadequate seminar presentations on more than one occasion, but actual misinformation being presented to independent producers. Thus, the IFP, has failed to serve the needs of its producer members by actually misinforming them about some important legal matters, and has failed to institute reasonable safeguards to prevent the harm caused by these obvious conflicts of interest.

Another problem with many of the IFP/LA seminars is that they are panel discussions. As a general rule, the entertainment industry panel discussions provide less substantive and reliable information than prepared lectures by people with bona fide expertise in a given area. From the IFP/LA’s and the panel presenters’ point of view, however, the panel discussion requires less preparation and is therefore easier to present. Unfortunately, the IFP/LA has also repeatedly chosen to populate its panel discussions, particularly those relating to the fairly technical subject of film finance, with independent producers who may know something about producing a film, but have little, if any, actual expertise on film finance. Thus, this feature of IFP/LA panel discussions often results in more misinformation for the IFP’s own dues paying members and seminar attendees.

The truth is that producers cannot reasonably expect the IFP to support them on important issues. It is an organization whose membership is too broad. Members include actors, directors, cinematographers, writers and producers, thus, the organization is paralyzed when it comes to effectively representing the interests of independent producers. For this reason alone, it engages in little, if any, true advocacy on behalf of its members. Further, the IFP/LA staff and board of directors is dominated by actors both at the executive staff level and on the board of directors. It appears, the IFP/LA has succumbed to the temptation facing most professional associations, that is for the executive staff to protect their own jobs by bringing on friendly board members. Thus, independent producers should abandon the IFP and either start their own organization or move over to the PGA, if and when it comes up with a suitable name for its organization, or to the AIFFP.


In summary, some of these organizations purporting to represent the interests of independent film producers have difficult problems to overcome. The Producers Guild of America will never be able to effectively represent the interests of professional independent producers until it has the courage to remove the word “guild” from its name, quits acting like a guild and quits relating to other professional and trade associations in the film industry as a guild. The IFTA will never be able to effectively represent the interests of independent film producers because the organization is dominated by distributors. The IFP/LA will never be able to effectively represent the interests of independent producers because the organization is not strictly a producers’ group, it is quite confused as to what constitutes an independent film and its executive staff is too busy trying to protect its own interests and sponsoring too many seminars for the primary purpose of making money, as opposed to insuring that the information provided is accurate and dependable.

Another one of the problems for independent producers is that the leadership of these groups tends to become entrenched, and after awhile, they start to place and protect their own interests before those of the producers they supposedly serve. Thus, the question of trying to merge existing groups as opposed to starting anew is a difficult one. But it is up to the producers themselves to take charge of their segment of the industry and their own collective careers. Independent producers must insist on an effective professional association of their own. It could be the PGA with a new name and expanded mission. It can’t be the IFTA or the IFP/LA because their organizations have too many built-in conflicts of interest, and the IFP/LA in particular has for many years been managed in an unethical manner. It might be the AIVF but that group is primarily an East Coast organization which took a wrong turn in years past toward attempting to fund independent film, a move that was inevitably destructive. It could be the AIFFP, but they appear to be fairly small are not much more than an Internet presence. So, it’s difficult to know whether to encourage all independent film producers to move to one of the existing organizations and (despite the efforts of their management to prevent such action) seek to merge with the others, or to start from scratch with a new group. Ultimately, that’s up to the producers themselves. At minimum, independent producers must be talking amongst themselves about these issues.

Here are some suggestions, however, for creating a properly oriented professional association of independent film producers:

  1. Producers have to decide whether the group is a labor union (guild), a trade group or a professional association and understand the difference.
  2. Producers have to decide the scope of its membership: does it cover “media”, “film producers”, “feature film producers”, “all members of the producers team”, “documentary film producers” or what?
  3. The association should be managed by professional association executives, Certified Association Executives, if possible, or at least people whose career path is association management, as opposed to acting, producing, directing, screen writing or practicing law.
  4. The association should focus on the needs of the independent film producer, not those of actors, directors, screen writers, distributors or other segments of this highly competitive film industry.
  5. The association’s management must maintain the highest ethical standards when designing its seminar programs and avoid the inherent conflicts of interest commonly found in the IFP/LA model whereby seminar sponsorships are sold to the highest bidder and tied to seminar moderator positions regardless of the level of expertise of the seminar sponsor.
  6. The organization must avoid the quagmire inevitably associated with becoming directly involved in funding film projects or even conducting itself as some sort of joint business venture.
  7. The association must strive to provide objective and comprehensive information to its members regarding subjects of interest (e.g., film finance and production related information).
  8. Recognizing that film finance is the one topic that film students and producers get little or no training in, such an association of independent producers should place a strong emphasis on providing comprehensive and reliable information on this important topic. It is important that an association of independent producers not get stuck in a relationship with just one or a few sources of film finance information, but explore all possible sources of such information.
  9. The association management must be professional and ethical enough to reject the temptation to create private alliances with service providers such as attorneys, law firms, bankers, completion bond companies and others, so as to favor any such service provider over another, since such favoritism is in direct conflict with the interest of the producer members the group is supposed to serve and may, in fact, be an antitrust law violation.
  10. The association must avoid the inherent conflicts of interest stemming from allowing its own board members to personally benefit financially from serving on the board. All board members should benefit from such service, but those benefits must be of an indirect nature.
  11. The association executive for the independent producers group should have a copy of the ASAE’s “Association Law Handbook” handy for reference to important articles on fiduciary duties, conflicts of interest, confidentiality, executive employment contracts, association taxation, association antitrust laws, ethical standards, political action committees and lobbying, among others.
  12. The association should strive to become involved in advocacy on behalf of its members (as soon as practicable), establish a legislative program and engage lobbyists to represent its interests in Sacramento and Washington, D.C.

Categories: Film Industry

NASAA’s Model Accredited Investor Exemption

In January of 1997, NASAA encouraged all states to adopt rules similar to, but simpler than, the one adopted in California. Though many states have now adopted legislation to allow those businesses trying to raise funds to “advertise”, most of the states promulgated laws limit sales to “Accredited” as opposed to the “Qualified Investors” as in the California version, and limited the amount of money that could be raised to $1 million, as opposed to the limit of $5 million, imposed on the California 25102(n) by federal law. Thus, for inter-state offerings, the California exemption is not all that useful.

Furthermore, the states other than California that adopted such a public/private “hybrid” exemption paired it with Regulation D, Rule 504 at the federal level as opposed to the intrastate exemption [Section 3(a)(11)] which was the federal exemption intended to be used in conjunction with the California exemption.

As a consequence, an issuer can make an offering of securities to accredited investors via a “General Announcement” in a significant number of, but not all states pursuant to the Model Accredited Investor Exemption and Regulation D, Rule 504. Notice filings are still required in each state under the MAIE.

Elements of the MAIE

NASAA adopted a Model Accredited Investor Exemption (MAIE) on April 27, 1997.

MAIE summary. The Model Accredited Investor Exemption exempts from registration and sales/advertising filing requirements those offers and sales of securities issued to accredited investors. The term “accredited investor” is defined at Regulation D, Rule 501, with a listing of entities and individuals possessing substantial assets and/or net worth. Pursuant to the MAIE, securities may only be sold to persons reasonably believed by issuers to be accredited investors who are purchasing for investment and not for resale. These state exemptions are generally not available to issuers in the development stage of their business or to issuers and affiliates who have been subject to various “bad boy” disqualifying provisions.

Issuers of such securities may use any means to generally announce the proposed offering but unless permitted by the state securities administrator, the information contained in the announcement has to be restricted to the (1) name, address and telephone number of the issuer; (2) name, price and aggregate amount of the offered securities; and (3) brief descriptions of the offered securities and issuer’s business. In addition, a statement must be included that indicates (1) the securities will be sold only to accredited investors; (2) no money or other consideration will be solicited or accepted by means of the general announcement; (3) the securities have not been registered with or approved by the SEC (or any other state agency); and (4) the securities are being offered and sold under an exemption to the securities registration requirement. To qualify for the exemption, states typically require issuers to file, within 15 days after the first sale of the securities in the state, a notice of transaction, a consent to service of process, a copy of the general announcement and a fee.

The MAIE was and is intended to serve as a model for state securities regulators to adopt in their respective states so that small businesses seeking to raise $1,000,000 or less can engage in a limited form of advertising without having to register their securities in the state. A majority, but not all states have since adopted a version of the MAIE. This state exemption is intended to be paired with a Regulation D, Rule 504 exemption at the federal level.

More specifically, the MAIE provides that any offer or sale of a security by an issuer in a transaction that meets the requirements of this rule is exempt from those sections of the state’s securities law requiring registration and filing of advertising materials. This allows a film producer to advertise, use the Internet and makes sales without the requirement of a preexisting relationship. The requirements to be complied with are:

Accredited investors only. Sales of securities must be made only to persons who are or the issuer reasonably believes are accredited investors. The term “accredited investor” is defined in the SEC’s Regulation D, Rule 501(a).

No development stage companies. The exemption is not available to an issuer that is in the development stage that either has no specific business plan or purpose or had indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.

Not for resale. The issuer reasonably believes that all purchasers are purchasing for investment and not with the view to or for sale in connection with a distribution of the security. Any resale of a security sold in reliance on this exemption within 12 months of its original sale will be presumed to be with a view to distribution and not for investment, except a resale pursuant to a registration statement effective under the state’s law relating to the registration of securities to be sold in that state, or to an accredited investor pursuant to an exemption available under the state’s securities act.

“Bad Boy” provisions. The exemption is not available if certain persons associated with the offering have engaged in specifically prescribed conduct in the past five (5) years. Thus, the exemption is not available to an issuer if the issuer, any of the issuer’s predecessors, any affiliated issuer, any of the issuer’s directors, officers, general partners, beneficial owners of 10 percent or more of any class of its equity securities, any of the issuer’s promoters presently connected with the issuer in any capacity, any underwriter of the securities to be offered, or any partner, director or officer of such underwriter: (a) within the last five years, has filed a registration statement which is the subject of a currently effective registration stop order entered by any state securities administrator or the SEC; (b) within the last five years, has been convicted of any criminal offense in connection with the offer, purchase or sale of any security, or involving fraud or deceit; (c) is currently subject to any state or federal administrative enforcement order or judgment, entered within the last five years, finding fraud or deceit in connection with the purchase or sale of any security; or (d) is currently subject to any order, judgment or decree of any court of competent jurisdiction, entered within the last five years, temporarily, preliminary or permanently restraining or enjoining such party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of any security.

The above-referenced “bad boy” disqualifying provisions do not apply if: (a) the party subject to the disqualification is licensed or registered to conduct securities related business in the state in which the order, judgment or decree creating the disqualification was entered against such party; (b) before the first offer under this exemption, the state securities administrator, or the court or regulatory authority that entered the order, judgment, or decree, waives the disqualification; or (c) the issuer establishes that it did not know and in the exercise of reasonable care, based on a factual inquiry, could not have known that a disqualification existed under this paragraph.

Limited advertising. A general announcement of the proposed offering may be made by any means, but the general announcement can only include the following information, unless additional information is specifically permitted by the state’s securities regulator:

  1. the name, address and telephone number of the issuer of the securities;
  2. the name, a brief description and price (if known) of any security to be issued;
  3. a brief description of the business of the issuer in 25 words or less;
  4. the type, number and aggregate amount of securities being offered;
  5. the name, address and telephone number of the person to contact for additional information; and
  6. a statement that: (a) sales will only be made to accredited investors; (b) no money or other consideration is being solicited or will be accepted by way of this general announcement; and (c) the securities have not been registered with or approved by any state securities agency or the SEC and are being offered and sold pursuant to an exemption from registration.

Use of the Internet. The issuer, in connection with an offer, may provide information in addition to the general announcement described above, if such information: (1) is delivered through an electronic database that is restricted to persons who have been pre-qualified as accredited investors; or (2) is delivered after the issuer reasonably believes that the prospective purchaser is an accredited investor.

Telephone solicitation. No telephone solicitation is permitted unless prior to placing the call, the issuer reasonably believes that the prospective purchaser to be solicited is an accredited investor.

Unqualified recipients. Dissemination of the general announcement of the proposed offering to persons who are not accredited investors will not disqualify the issuer from claiming the exemption under this rule.

Notice filings. The issuer must file with each state regulatory agency in the state’s in which sales occur a notice of transaction, a consent to service of process, a copy of the general announcement, and the prescribed fee within 15 days after the first sale in each state.

Even though no specific disclosure requirements are imposed, a film producer would still need to provide each prospective investor with a securities disclosure document that complies with the antifraud rule (i.e., disclose all material aspects of the transaction, do not omit anything that is important and state what is disclosed in a manner that is not misleading). On the other hand, such a disclosure document can be delivered electronically (i.e., through the Internet).

The two major differences between the two schemes (that adopted by California and that adopted by the other states pursuant to the NASAA model) is that (1) California requires and defines “Qualified Investors” whereas the other states require the less complicated “Accredited Investor” definition as already set forth in Regulation D, and (2) California allows up to $5 million to be raised, whereas the other states impose a ceiling of $1 million. So if a film producer believes he or she can raise all of the money in the one state of California, it may make sense to use the California Section 25102(n) exemption (but for the other limitations imposed by the Instrastate Exemption – see discussion at Chapter 11) While, on the other hand, if a film producer believes that he or she may need to raise money in more than the one state of California and can limit the amount of money raised from investors to $1 million, it may be worthwhile to investigate which states have adopted the NASAA model and use that approach, combined with an Internet announcement.

NASAA’s adoption of the MAIE was not actually a response to the California Section 25102(n) concept, but was rather in response to the Small Business Administration’s ACE-NET program (now defunct or at least in private hands). A majority of the states, the District of Columbia and Puerto Rico have adopted the MAIE which works in conjunction with the federal Rule 504 of Reg. D with its $1 million dollar limit. Even as to those states that have not adopted the MAIE, almost all have some form of exemption pertaining to accredited investors.

Use of the Internet. The use of the Internet as a means of disseminating the General Announcement and delivering the Offeree Questionnaire and Disclosure Document has been approved by the securities regulators for MAIE offerings. They have expressed the opinion that the downloading of such materials complies with the requirements of being “published by written document only.

The Internet may also provide a platform from which to obtain leads. However, the follow-up must be done rather precisely in order to “qualify” the purchaser. In addition, the producer or producer’s attorney must be sure to check with the securities regulator in each state where sales or proposed, to be certain that the conduct of the offering complies with the applicable state rule. Presumably, as the Internet attracts more investors looking for opportunities, the California Section 25102(n) and MAIE exemptions may become the preferred types of offerings for those who have limited access to “qualified” investors and who are only seeking a limited amount of funds (if it can be demonstrated that Internet offerings actually work).

On the other hand, that underlying assumption may never come true, in that investors rarely look for investment opportunities anywhere, much less on the Internet, and there is even less reason to believe that very many investors will set out specifically to find an investment opportunity in a high risk investment like independent film. It is more likely true that most securities are “sold”, not “bought”, meaning that the sale of a security, including interests in film LPs or LLCs are more likely to be sold through means of a face-to-face meeting with someone known to the producer and his or her upper level management, than through some Internet scheme.


Advertising and general solicitation. The MAIE allows a limited amount of advertising and general solicitation for non-registered offerings of $1 million dollars or less.


Of limited use. If an offering extends into other states that have not adopted the MAIE, the permitted general announcement in California would be “integrated” into the other states’ offering and this would prevent any private placement in those states, since the general announcement would be considered a general solicitation (public offering).

Smaller pool of prospective investors. Arbitrarily limiting the pool of prospective investors to only accredited investors that reside in the single state of California significantly shrinks the pool of prospective investors for the offering.

Internet sales. The ability to effectively sell film offerings to investors over the Internet has yet to be demonstrated.

Public/Registered Offerings

If a filmmaker believes he or she needs to seek to raise money from an even larger pool of prospective investors than that available for a private placement or a so-called public/private “hybrid” offering, one of the public/registered securities offerings to a large group of passive investors may be appropriate. The public/registered offerings typically allow the issuers to advertise and to conduct a general solicitation.

Manager-Managed Limited Liability Company

The manager-managed LLC is one of the more popular passive investor vehicles for project financing of feature and documentary films. Its formation is similar to the creation of a member-managed LLC, in that articles or organization need to be prepared and filed with the office of the Secretary of State in the state in which the LLC is being created. Generally, the form or articles used will provide a space for designating that the LLC is to be a manager-managed LLC as opposed to member-managed. In addition however, an LLC operating agreement must be drafted, approved by the members and signed, so that the LLC will have a set of rules by which to operate. And, the operating rules for a manager-managed LLC or significantly different, more lengthy and more complex than the corresponding LLC operating rules (agreement) for a member-managed LLC. The LLC operating agreement usually does not have to be filed with the Secretary of State, but is kept in the LLC’s files. Formation of the manager-managed LLC is neither the end of the task, nor the most significant portion of the work involved in using such a vehicle to raise capital (see discussion re “Choice of Securities Offering” below).

Limited Liability

Particularly of importance to low budget filmmakers, the manager-managed LLC offers limited liability protection to one or more individuals or a fictitious name company serving as the LLC’s manager without the time, trouble and expense of creating and maintaining another entity. This means that an individual or a fictitious name company (dba) can serve as the manager of the manager-managed LLC and enjoy limited liability protection, without creating and maintaining a corporation or a member-managed LLC to serve as the manager.

When to Form the LLC

In many instances, entertainment attorneys and accountants advise filmmakers to first go out and form a limited liability company, for example, without ever discussing whether it should be a member-managed LLC or a manager-managed LLC, or that there are securities law implications for the latter.

In addition, there exists differing opinions as to when to form a manager-managed LLC that is being used as the investment vehicle to raise money from a large group of passive investors. Some practitioners insist that forming the LLC must be the first step in the process. They suggest that investors will not invest in a company that has yet to be formed. However, hundreds if not thousands of successful manager-managed LLC securities offerings have been conducted in the U.S. selling what are termed “pre-formation units in an LLC to be formed upon funding”, thus the argument that investors won’t invest in a company to be formed is not based on an adequate sampling of real world experience.

The same is true of many corporate and limited partnership offerings over the years. The advantage of this deferred approach is that no out of pocket expense is incurred by the manager/producer until the investor funds are known to be in the bank, and therefore available for prompt reimbursement, as soon as the LLC is formed and a second bank account as been opened in the name of the newly formed LLC.

The liability most commonly associated with the production of films (negligence on the set or defamation) does not occur until after principal photography has begun or, in the latter instance, after the film is released, thus, so long as the manager-managed LLC is formed before principal photography begins, the manager will still enjoy the limited liability protection needed.

Bad Advice

Many independent film producers are either being misled by somebody or they are simply misunderstanding what they are being told about LLCs. These independent producers repeatedly indicate that they have been advised that all they need to do to raise money from passive investors using an LLC is to create the LLC, and that merely involves the preparation and filing of the articles of organization with the Secretary of State’s office in the state in which the LLC is to be formed. This is bad advice on several levels:

(1) There is another aspect to the actual creation of an LLC. Not only should the articles of organization be properly prepared and filed with the Secretary of State, but also an LLC operating agreement must be drafted, approved and signed. Without an operating agreement, there are no rules set out for operating the LLC, thus it cannot function effectively.

(2) When the articles of organization are filed and the operating agreement is drafted, the producer must be certain that he or she properly designates in the articles which form of LLC is being created, a member-managed or manager-managed LLC, and carry over this distinction into the LLC operating agreement, because the provisions associated with each different form of LLC are significantly different in the respective operating agreements. Before a producer can make that designation, he or she must understand the difference between the two LLC forms and to what purpose they will be devoted.

(3) Assuming the LLC is being created to serve as the investment vehicle for a large group of passive investors (the manager-managed LLC – the form of LLC being discussed in this chapter) the filing of the articles and the drafting of the LLC operating agreement amount to a small part of the tasks involved. Since the units or interests in a manager-managed LLC are securities, compliance with the federal and state securities laws is required. That involves an informed choice with respect to the appropriate form of registration or exemption, the proper drafting of a securities disclosure document and an understanding of and compliance with other applicable securities laws and rules.


Number of investors. There are no limits on the number of investors imposed by the LLC statutes, but such limitations may be imposed by the securities laws, although Regulation D, for example, permits 35 unaccredited investors and an unlimited number of accredited investors (see discussion of the SEC’s Regulation D below).

No creative control issues. Since the manager-managed LLC is controlled and operated (pursuant to statutory law and agreement) by the manager or managers, and the investor/members are passive, there are no conflicts with the investor/members over creative matters.

Less oversight. So long as the manager of a manager-managed LLC acts in the manner described in the securities disclosure document, the manager does not have to go back to any board of directors or the investor/members for approval to conduct the business. Significant departures from the original plan of business may need the approval of the investor/members, but provisions in the LLC’s operating agreement control this question.


Securities compliance required. Compliance with the applicable federal and/or state securities laws are required because manager-managed LLC interests are being offered and sold to passive investors (i.e., such interests are securities).

Keys to Finding Prospective Investors

The key factor that helps independent feature film producers in finding investors or other individuals who may help find investors is investor motivation. First do some brainstorming with your associates regarding what might motivate anyone with money to invest some of it in your high risk venture. There may be others besides those listed below that are unique to a specific film project, but a fairly good list of possible investor motivation follows. Some of these descriptions of investor motivation are closely related and may even overlap.


  1. Is interested in supporting the filmmaker’s career (career support);
  2. Is enamored with the glamor of the film industry (glamour of film industry);
  3. Feels the investment has a certain amount of “cocktail chatter” value, that is, it’s more interesting and fun to talk about than most boring investments (cocktail chatter value);
  4. Wants to be able to spend some time on the set and rub elbows with the cast and crew, although this needs to be carefully controlled so that it does not get out of hand (associate);
  5. Wants to use this investment as an opportunity to learn about how the film industry works, so that he or she can get more involved in the future (learning experience);
  6. Has a son, daughter, niece or nephew who can appear as an extra in the movie (film extras);
  7. May want to appear in the movie as an actor or actress (appear in movie);
  8. May (in rare and unusual circumstances) be allowed to direct the movie (directing);
  9. May thereby get his or her script produced (screenwriter);
  10. Realizes that by investing in the movie, it will help bring the movie to a specific locale which will benefit the local economy (local economy);
  11. Is very interested in one or more of the messages being communicated by the movie (movie message) and/or
  12. Is looking at the upside potential for making money on the investment even though the investor recognizes investing in independent films is highly risky.

Of course, enterprising filmmakers may be able to come up with other descriptions of investor motivation that could be added to this list.

Financial Projections for Film Projects

Financial projections are estimates of the future economic performance of a proposed business or venture. Financial projections are not required for investor offerings for film projects regardless of whether the selected investment vehicle involves the sale of a security or not. However, investors seem to prefer that a presentation of financial projections accompany whatever documentation is used to approach such investors. Financial projections provide the prospective investor and the film producer seeking investor financing with an additional point of discussion and they serve as an excellent exercise for the producer in helping him or her to understand how film revenues might flow back to the financing vehicle, the producer group and the investors. In all likelihood, a producer seeking investor financing will be subjected to questions from investors about how they will get their money back and make a profit, thus, it behooves the producer to do some research about this aspect of the transaction, to understand it and to be able to explain it as clearly as possible.

If the sale of a security is involved, the SEC has a position on financial projections and offers some guidelines for their preparation and use. These SEC guidelines may be helpful in the preparation of financial projections for both non-securities and securities offerings.

Pursuant to the SEC’s Regulation S-B, Part 228 (Integrated Disclosure System for Small Business Issuers) Section 228, Item 10(d) or Section 228.10(d) the SEC encourages the use of management’s projections of future economic performance that have a reasonable basis and are presented in an appropriate format.

From the SEC’s perspective, the following guidelines set forth the Commission’s views on important factors to be considered in preparing and disclosing such projections.

Basis for projections. A film producer (i.e., management) has the option to present its good faith assessment of a small business issuer’s future performance. Such a person or management, however, must have a reasonable basis for such an assessment. In other words, the calculations and numbers associated with financial projections must be based on assumptions, and those assumptions must be reasonable in light of current circumstances in the industry. Such assumptions cannot represent wild speculation on the part of the producer regarding the anticipated earnings of a proposed film.

Outside review. An outside review of the film producer’s (management’s) projections may furnish additional support in this regard. If a film producer (management) decides to include a report of such a review, it should also disclose the qualifications of the reviewer, the extent of the review, the relationship between the reviewer and the issuer, and other material factors concerning the process by which any outside review was sought or obtained.

Format for projections. Traditionally, projections have been given for three financial items generally considered to be of primary importance to investors (revenues, net income (loss) and earnings (loss) per share or unit), however, projection information need not necessarily be limited to these three items. On the other hand, a producer (management) should take care to assure that the choice of items projected is not susceptible to misleading inferences through selective projection of only favorable items. It generally would be misleading to present sales or revenue projections without any of the foregoing measures of income.

Period covered. The period that appropriately may be covered by a projection depends to a large extent on the particular circumstances of the company involved. For certain companies in certain industries, a projection covering a two or three year period may be entirely reasonable. Other companies may not have a reasonable basis for projections beyond the current year. For a film project, attempting to annualize (project expenses and revenues for each year) may create an unnecessary quagmire of information that cannot be understood by either the prospective investors or the producer.

Investor understanding. Disclosures accompanying the projections should facilitate investor understanding of the basis for and limitations of projections. The SEC believes that investor understanding would be enhanced by disclosure of the assumptions which in management’s opinion are most significant to the projections or are the key factors upon which the financial results of the enterprise depend and encourages disclosure of assumptions in a manner that will provide a frame-work for analysis of the projections. In other words, the assumptions on which the calculations and numbers are based not only should be reasonable, based on what is currently occurring in the industry, but they should be set forth in writing.

With the ideal of investor understanding in mind, and recognizing that it is impossible to predict with any accuracy how any independent feature or documentary film may perform in the marketplace, it would appear to be even more safe to offer several calculations (e.g., using a three-column format to show “Poor Performance”, “Good Performance” and “Excellent Performance”). That way, it is clear to prospective investors that the film producer, or whoever prepared the financial projections, is not attempting to predict the future performance of the film. Instead, they are simply illustrating how the film’s revenues may flow back to the investors and what deductions may be taken from the revenue stream at various stages along the way, while basing the projections on certain reasonable and written assumptions that accompany the actual numbers and calculations.

The amount of detail. Some film producers often make the mistake of trying to provide too much detail with respect to anticipated revenue streams when preparing financial projections associated with investor financing of a film project. In many such instances, neither the producer nor the prospective investors understand such complicated projections and the money paid for them is wasted. In any case, such elaborate projections do not come any closer to accurately projecting the financial results of a film project than the format recommended here. In addition, the film industry is notorious for failing to provide useful, relevant and accurate financial information regarding the prior performances of feature films, even more so for the markets and media beyond the theatrical marketplace and worse yet for the independent sector. For that reason, it may be a lost cause to attempt to find reliable information regarding anticipated revenues from each of the individual markets and media through which a film might generate income. Merely assuming a reasonable overall performance level for a film (as it is exploited in all markets and media throughout the world) and then deducting the expected (and reasonable) fees, expenses and percentage participations from the revenue stream as it flows back to the investor group may be a more rational approach.