If we step back and analyze the world of film finance sources, for purposes of determining which is the appropriate initial documentation with which to approach such sources, we can divide that world into two broad categories: (1) Industry sources and (2) Investor financing

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

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

2. Investor Financing — The world of investor financing can be further divided into active versus passive investors.

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

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

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

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

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

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

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

Some entertainment attorneys recommend that independent producers seeking to finance the production costs of an independent film, raise the money through use of contingent promissory notes. These attorneys suggest that such notes are considered “debt” and therefore are not securities. Thus, according to these attorneys, compliance with the securities laws is not required. In other words, their advice appears to be partly motivated by either the attorney or the client’s desire to avoid what they consider to be the burdensome and potentially costly task of complying with the federal and state securities laws. Such promissory notes are typically either not collateralized, not adequately collateralized, not guaranteed, not insured or otherwise secured. The repayment of such notes is dependent upon the financed film earning sufficient revenues to repay the note or notes.

Unfortunately, this advice is extremely risky and overlooks most of a significant body of both federal and state statutory and case-made law regarding the question of whether promissory notes are securities. And, of course, if the promissory notes being offered by an independent film producer are securities, he or she would need to comply with the federal and state securities laws, including the antifraud rule, in order to avoid potential criminal or civil liability.

Part of the problem for the practitioner, however, is knowing in advance which interpretation of the law will apply to a particular client’s situation, and the standard used does vary, with at least three distinctive tests being applied. It is particularly problematic because independent film producers from other states commonly do seek entertainment law advice from Los Angeles-based attorneys. The problem becomes even more complicated when one realizes that this issue can be raised, in federal or state court, civil or criminal proceedings.

Because there are three separate standards, and because it is not clear which standard may be applied years into the future, the better practice may be to avoid running afoul of any of these three commonly used tests. The respective tests for determining which financial transactions involve the sale of a security are commonly referred to as:

1. the “family resemblance” test;
2. the “Howey” test;
3. the “risk capital” test;

The “family resemblance” test is used uniformly in Federal law situations.¹ The “family resemblance” test is also the primary test used in state civil and administrative cases.² The “Howey” test is primarily used in state criminal cases.³ The “risk capital” test is purportedly the primary test being used in the state of California for both civil and criminal proceedings,⁴ although the actual language of the courts in certain of those cases (as discussed below) appears to mix the “risk capital” test with the “Howey” test.

At the federal level, the 1933 Securities Act definition of a security,⁵ specifically includes “notes,” “bonds,” “debentures” and “evidences of indebtedness”. Thus, at first blush it would appear that all notes are securities, although the ‘33 Act also excludes from the securities registration requirement some notes with maturities no longer than nine months.⁶ On the other hand, a promissory note with a maturity date of less than nine months is of little use in the production financing of a feature film, although such short-term notes may be helpful for the bridge financing associated with the development and packaging of a film project.

For many years, the various federal appellate courts produced confusing and inconsistent standards with respect to the question as to what kind of notes were to be considered securities and which were to be exempt from the securities registration requirement. In 1990, the U.S. Supreme Court resolved much of the conflict for federal courts by excluding from securities coverage, debt instruments that resemble standard commercial, as opposed to investment, transactions.⁷

The leading federal case (Reves v. Ernst & Young), dealt with uncollateralized, uninsured demand notes. The Court held that the 1933 Act creates a presumption that any note in excess of nine months is a security.⁸ The Court, however, did not suggest that notes less than nine months were not securities. In point of fact, earlier case law has rather uniformly held that short-term notes are securities, as well, if they have investment characteristics. As an example, in the Briggs v. Sterner case,⁹ short-term demand notes, offered to obtain risk capital, were held to be securities. Thus, it would appear that even the short-term promissory note being used to raise funds for the development and packaging of a feature film may also have to be considered to be a security.

The Court in Reves went on to adopt the so-called “family resemblance” test that allows the above-noted presumption (that a note is a security) to be rebutted if the issuer of the note (i.e., the independent producer) can show that the note bears a “strong family resemblance” to items on a list of exceptions created by the courts. The notes in that list include the following:

1. notes delivered in consumer financing;
2. notes secured by a home mortgage;
3. short-term notes secured by a lien on a small business or some of its assets;
4. a character loan to a bank customer;
5. short-term notes secured by an assignment of accounts receivable;
6. open-account debt occurred in the ordinary course of business;
7. a loan by a commercial bank for current operations;¹⁰

Readers should note carefully that the contingent promissory note typically used by independent film producers to finance the production costs of their films are not listed, and therefore, once again, must be considered to be a security. Thus, compliance with the federal and state securities laws is required for the issuance of such promissory notes.

However, the Supreme Court in the Reves case offered another narrow possibility. It held that the above list could actually be expanded if certain standards were met. The Court stated that the following four factors should be considered in determining whether another form of note should be added to the list:

1. Motivations of the Buyer and Seller – If the purpose of the seller of the notes (i.e., the film producer) is to raise money for the general use of a business enterprise or to finance substantial investments (e.g., the production costs of a feature film), and the buyer of the note is interested primarily in the profit the note is expected to generate, the instrument is very likely to be considered a security. On the other hand, if the money is used to acquire a minor asset or consumer good, to correct the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, the note is less likely to be a security.

2. Plan of Distribution – If there is general, widespread distribution of the instrument, it is more likely to be a security.

3. Reasonable Expectations of the Investing Public – The Court will consider instruments to be “securities” on the basis of the reasonable expectation of the investing public.

4. Risk-Reducing Factors – If the application of the Securities Act is rendered unnecessary due to the existence of risk-reducing factors, thus eliminating the need for the application of the Securities Acts. As an example, bank certificate of deposits are not considered securities because of the elimination of risk through federal insurance.¹¹

This four-factor federal “family resemblance” test has been criticized in a law review article for being ambiguous and for not making clear whether all four factors have to be present.¹² However, Professor Stuart Cohn of the University of Florida College of Law expresses the opinion that not all four factors must be present. He writes specifically with respect to factor #3, that the perceptions of unsophisticated investors, unaware of whether an instrument is a security, would not control the question if other factors indicated that a security was in fact being issued.¹³

Once again, however, it is highly likely that a contingent promissory note used to provide the financing the substantial costs associated with the production of a feature or documentary film, without the presence of significant risk-reducing factors, would be considered a security using this test, regardless of what the investor’s expectations were or whether there was widespread distribution of the instrument. Thus, pursuant to the “family resemblance” test, it is not likely that such notes would be added to the list of instruments that are not considered securities.

As noted earlier, many state court decisions on this issue, based on definitions of securities that mirror the federal definition, have been consistent with the Supreme Court’s view (applying the “family resemblance” test), while others, including California, have not. In an effort to bring about more uniformity amongst the states with respect to the regulation of securities generally, Congress enacted the National Securities Markets Improvement Act (“NSMIA”) in 1996.¹⁴ NSMIA however, allowed states to continue to rely on their own definitions of what notes should be considered securities. Thus, state law is still the final authority on state law questions.¹⁵ Although, as seen below, the state courts often look to federal case law for guidance.

California does not follow the “family resemblance” test of Reves. Instead, California courts are known for using the so-called “risk capital” test which was first established (although not explained very clearly) in the Silver Hills Country Club v. Sobieski case in 1961.¹⁶

California and other states have also recognized that not every note is a security. As early as 1939 the California Supreme Court observed that “it plainly was not the legislature’s intent that ‘every’ note or evidence of indebtedness, regardless of its nature and of the circumstances surrounding its execution, should be considered as included within the meaning and purpose of the [securities] act.”¹⁷

The California Supreme Court has also consistently held that substance prevails over form in such transactions. In its Silver Hills case the Court conceded that the substance of a transaction is more important than its form by saying: “To effectuate this purpose the courts look through form to substance.”¹⁸ More recently, in the 1986 California Supreme Court case of People v. Figueroa¹⁹ the Court stated that “ . . . it is not the label affixed to a particular instrument which determines whether it constitutes a ‘security’. [In] searching for the meaning and scope of the word ‘security’ in the Act, form should be disregarded for substance and the emphasis should be on economic reality.”²⁰ In addition, the Court in People v. Figueroa stated further that it would look to federal decisions for guidance on the issue of what constitutes a security.²¹ Meanwhile, back at the federal level, the U.S. Supreme Court reaffirmed its commitment to the principle that substance governs over form in 1985.²²

California’s Silver Hills case, concerned the sale of country club memberships. The California Supreme Court stated that Section 25008 of the California Corporations Code “defines a security broadly to protect the public against spurious schemes, however ingeniously devised, to attract risk capital.”²³ The Court went on to say in Silver Hills that “ . . . [The] objective [of the Corporate Securities Laws] is to afford those who risk their capital at least a fair chance of realizing their objectives.”²⁴ The Court said the country club in this case was “ . . . soliciting the risk capital with which to develop a business for profit. The purchaser’s risk is not lessened merely because the interest he purchases is labeled a membership. Only because he risks his capital along with other purchasers can there be any chance that the benefits of club membership will materialize.”²⁵ The Court held that the state’s corporate securities act was “clearly applicable” to the sale of the promotional memberships, and went on to add that “otherwise it could to easily be vitiated by inventive substitutes for conventional means of raising risk capital.”²⁶

In at least two other California cases, promissory notes have been held to be securities because in the view of the court the transactions fell within the regulatory purpose of the law (i.e., to protect the public against spurious schemes to attract risk capital). In People v. Leach,²⁷ upheld by In re Leach²⁸ the Court of Appeals held that undersecured notes on real property were securities because they were “[unloaded] upon a trusting public . . . for a consideration far in excess of their reasonable value” and, therefore did not “protect the public against the imposition of [an] unsubstantial scheme . . .”²⁹ Also, in People v. Walberg³⁰ the Court found that unsecured, interest-bearing promissory notes that were issued for loans solicited for the purpose of refurbishing a hotel were in fact, securities. The court partly reasoned that the scheme “was quite as dangerous to investors as the typical blue-sky promotion of mining stocks and royalties³¹ In these and other similar cases, the courts have kept in mind that the general purpose of the state’s securities laws is to protect the public against fraudulent investment schemes.³²

Subsequently in the 1986 case of People v. Figueroa, the Court considered the question of whether promissory notes were securities within the meaning of the Corporate Securities Law.³³ Although the Court cited the Silver Hills “risk capital” test with approval, it also went on to analyze both federal and state cases and actually applied something more akin to a mix of California’s “risk capital” test with elements of the long-standing federal “Howey” test for investment contracts.³⁴

The federal landmark Howey case (involving an investment contract) held that if a scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others, that would be a security.³⁵ Subsequently in United Housing Foundation, Inc. v. Forman³⁶ the U.S. Supreme Court revised and restated the “Howey” test slightly by holding that “The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”

Incidentally, it makes no difference whether the expected profits are expressed as a percentage participation or as interest. The California Supreme Court in People v. Figueroa stated that: “The return on any investment which has not been secured with adequate collateral depends on the success of the business. This is true whether the investment contemplates a percentage of the profits or a fixed return.”³⁷

On the other hand, the California Supreme Court in People v. Schock pointed out that “The mere expectation of a return on an investment, together with the right of repayment, does not – without more – subject the transaction to security regulation.³⁸ As an example, the sale of a security was not involved in the case of Hamilton Jewelers v. Department of Corporations ³⁹ which dealt with the offer for sale of a diamond with a right of return for the full purchase price plus five percent interest. The court reasoned that no risk capital was placed with the jeweler and the diamond itself served as adequate collateral. California courts have further held that in promissory note situations where an investor receives adequate collateral and no risk capital is subject to the managerial efforts of the promoter of the investment scheme, such a business transaction is not likely to be considered to involve the sale of a security.⁴⁰

However, inadequacy of collateral is a problem. The Court in People v. Schock, also stated: “ . . . a finding of inadequacy of collateral, in addition to the investors’ dependency on the promoter’s success for a return on the investment, will subject the superficial loan transaction to security regulation.⁴¹ Inadequacy of collateral is thus an important factor in determining whether promissory notes are securities. However, inadequacy of collateral is not the only factor to be considered. As noted in Silver Hills⁴² “ . . . a passive position on the part of the investor; and the conduct of the enterprise by the issuer with other people’s money . . .” are factors that also should be considered.⁴³

There is one reported California case involving promissory notes and the film industry in which the court determined that the transaction was not a security.⁴⁴ However, if the same or similar circumstances were considered today, the outcome is likely to be different. In People v. Syde,⁴⁵ the transaction (held not to be a security) was between a purported film and television production company and the parents of children who were to be given acting training and featured in the film along with other children. The cast members were to be paid for their services and receive a percentage participation in the company’s gross receipts upon the sale or distribution of the completed movie. The court reasoned that it is settled that the state’s securities laws “ . . . were not intended to afford supervision and regulation of instruments which constitute agreements with persons who expect to reap a profit frm their own services or other active participation in a business venture. Such contracts are clearly distinguished from instruments issued to persons who, for a consideration paid, stipulate for a right to share in the profits or proceeds of a business enterprise to be conducted by others; and the court will look through form to substance to discover whether in fact the transaction contemplates the conduct of a business enterprise by others than the purchasers, in the profits or proceeds of which the purchasers are to share.⁴⁶

Unfortunately, the court did not distinguish between the parents (the actual investors) and the children who cannot, by any stretch of the imagination, be considered to be active in the sense that they are involved in management in any meaningful way. Also, even though the parents accompanied the children to their rehearsals, they were not permitted in the rehearsal studio, much less given any say with regard to management of the project.

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.⁴⁷ 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. Tucker⁴⁸ 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) an 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 Corporations⁴⁹ 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 (selling investments in oil well drilling equipment using a joint venture as the investment vehicle) “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 oil and gas industry”.

Note that the Consolidated Management case decided in California went beyond the requirement that an investor must be experienced and knowledgeable in business affairs generally and cited with approval a line of cases from the Federal Courts’ Fifth, Ninth and Eleventh Circuits) which take into account the reality that general business sophistication does not necessarily equip an investor to manage a specialized enterprise. These cases have found that “Regardless of investors’ general business experience, where they are inexperienced in the particular business they are likely to be relying solely on the efforts of the promoters to obtain their profits.”⁵⁰

Thus, if the circumstances of the 1951 People v. Syde case were revisited today, it is very unlikely that the decision would be the same. Because of the subsequent refinements created with respect to who may be considered to be an active investor in an investment transaction, it is clear that neither the parents, nor the children in People v. Syde would qualify pursuant to the standards established in Williamson v. Tucker or Consolidated Management.

Consequently, a film producer issuing one or more promissory notes to finance the production of a motion picture when the maturities for such notes exceed nine months, would have to presume that such notes are securities. And, even in situations where the notes are short-term demand notes, if they are offered to obtain risk capital (which is typically the case in independent film finance), those notes would also be securities.

If the transaction is questioned and the federal “family resemblance” test applies, the producer may seek to rebut the presumption that the note he or she is issuing bears a strong “family resemblance” to one or more of the notes listed by the courts as not being securities. But that does not appear to be likely. Further, the producer may also seek to convince a court that a new category of note not considered a security, needs to be created. But, once again, it appears that the contingent promissory note could not meet its burden of persuasion to be added to the list of excluded instruments. It would appear that such transactions are motivated for the purpose of raising money to finance substantial investments (i.e., the production of a feature film), that the reasonable expectation of the investing public is that the transaction is a security and there are no risk-reducing factors such as collateral or insurance. So, even if the transaction is limited in its distribution (sold to only a few investors), for all practical purposes, such notes would very likely still be recognized as securities.

If California state law applies, and either the “risk capital” test, or elements of the federal “Howey” test are used, the producer will need to make sure the promissory notes are adequately collateralized, insured or otherwise secured, or that the investor is not only actively involved in management of the project but capable of being involved in management in a meaningful way because of his or her knowledge and experience in the film industry. Of course, for most independent filmmakers, putting their own assets at risk in the hopes that their return on an independently produced film will adequately cover that risk is usually not a good idea. In most instances, it is better for such creative ventures, to spread the risk amongst a large group of passive investors (who are prohibited from interfering with the producer’s creative control), avoid putting the producer’s assets at risk, recognizing that a security is being offered and complying with the federal and state securities laws.⁵¹

^1. “Is a Note a ‘Security’? Current Tests Under State Law”, Kenneth L. MacRitchie, South Dakota Law Review, Vol. 46, at 409, Summer 2001.
^2. Id at 409.
^3. Id at 409.
^4. Id at 396 & 409.
^5. §2(1), 1933 Act, 15 USC §77b(1).
^6. §3(a)(3), 1933 Act, 15 USC §77c(a)(3).
^7. Securities Counseling for New and Developing Companies, Stuart R. Cohn, Clark Boardman Callaghan, Chapter 3, at 6, 2000.
^8. Reves v. Ernst & Young, 494 US 56, 108 L Ed 2d 47, 110 S Ct 945 (1990)
^9. Briggs v. Sterner, 529 F Supp 1155 (SD Iowa 1981).
^10. Notes 1-6 were listed in Exchange Nat. Bank of Chicago v. Touche Ross & Co., 544 F2d 1126, 1138 (CA2 1976). Note 7 was added by Chemical Bank v. Arthur Andersen & Co., 726 F2d 930 (CA2 1984), cert den 469 US 884 (1984).
^11. Marine Bank v. Weaver, 455 US 551, 71 L Ed 2d 409, 102 S Ct 1220 (1982).
^12. Reves Revisited, Janer Kerr and Karen M. Eisenhour, 19 Pepp. L. Rev. 1123, 1153-62 (1992).
^13. Securities Counseling for New and Developing Companies, Stuart R. Cohn, Clark Boardman Callaghan, Chapter 3, at 9, 2000.
^14. National Securities Markets Improvement Act, Pub. L. No. 104-290, 110 Stat. 3416 (1996).
^15. Erie R. Co. v. Tompkins, 304 US 64, (1938).
^16. Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811, 361 P.2d 906 (Cal. 1961).
^17. People v. Davenport 13 Cal. 2d 681 at 686; 91 P.2d 892, 1939.
^18. Domestic & Foreign Petr. Co., Ltd. v. Long, 4 Cal.2d 547, 555; 51 P.2d 73; Oil Lease Service, Inc. v. Stephenson, 162 Cal. App.2d 100, 107-108; 327 P.2d 628; Securities & Exchange Com. v. Howey (W.J.) Co., 328 US 293, 298; 66 S.Ct. 1100, 90 L Ed 1244, 163 ALR 1043.
^19. People v. Figueroa, 715 P.2d 680 (Cal. 1986).
^20. Tcherepnin v. Knight 389 US 332, 336 (1967) and United Housing Foundation, Inc. v. Forman 421 US 837, 848-852 (1975).
^21. People v. Figueroa, supra.
^22. Landreth Timber Co. v. Landreth 471 US 681, 686-687; 105 S.Ct. 2297, 2302, 2306, 1985.
^23. Citing People v. Syde, 37 Cal.2d 765, 768; 235 P.2d 601, 1951.
^24. Silver Hills Country Club, supra.
^25. Silver Hills Country Club, supra.
^26. Silver Hills Country Club, supra.
^27. People v. Leach 106 Cal. App 442; 290 P. 131, 1930.
^28. In re Leach 215 Cal. 536, at 536; 12 P. 2d 3, 1932.
^29. People v. Leach, supra at 450.
^30. People v. Walberg 263 Cal. App. 2d 286; 69 Cal. Rptr. 457, 1968.
^31. Id, at 291.
^32. People v. Syde, supra.
^33. Corp. Code, Section 2500 et seq.
^34. S.E.C. v. Howey, supra at 1251.
^35. S.E.C. v. Howey, supra.
^36. United Housing Foundation, Inc. v. Forman, 421 US at 852; 44 L Ed 2d at 632, 1975.
^37. People v. Figueroa, supra at 697.
^38. People v. Schock 152 Cal. App.3d 379, 384-385; 199 Cal. Rptr. 327, 1984, and citing People v. Davenport, supra, at 690.
^39. Hamilton Jewelers v. Department of Corporations, 37 Cal. App.3d 330, 333; 112 Cal. Rptr. 387, 1974.
^40. People v. Schock, supra.
^41. Citing People v. Leach, supra.
^42. Silver Hills Country Club, supra.
^43. Dahlquist, Tom, Regulation and Civil Liability Under the California Securities Act, 33 Cal.L.Rev. 343, at 360, 1945.
^44. People v. Syde, supra.
^45. People v. Syde, supra.
^46. People v. Syde, supra.
^47. Fundamentals of Securities Regulation, 4th Edition, Louis Loss and Joel Seligman, Aspen Publishers, 2007.
^48. Williamson v. Tucker, 645 F.2d 404, 5th Cir. 1981.
^49. Consolidated Management Group, LLC versus the California Department of Corporations, 162 CA4th 598, 75 CR3d 795, 2008.
^50. S.E.C. v. Merchant Capital, LLC, 483 F.3d 747, 11th Cir. 2007; Holden v. Hagopian, 978 F2d. 1115, 9th Cir. 1992 and the Williamson case cited above.
^51. For a discussion of various film finance methods see Forty-Three Ways to Finance Your Feature Film, Third Edition, John W. Cones, Southern Illinois University Press, 2007.

Although no one keeps accurate records of such matters, our best estimates are that about 1,000 feature films are produced in the U.S. each year. We know, for example, that about 1,000 or more are submitted to the Sundance Film Festival annually. Also we know that some 600 or so are submitted to the MPAA ratings board each year, ostensibly because their producers are at least hoping that such films will get a theatrical release. On the other hand, only about 400 or so actually get released theatrically in the domestic marketplace (U.S. and Canada), so obviously there are about 500 to 600 films produced each year that are not seen in the theatres.

Of those domestic theatrical releases, about 150 or so are distributed by the so-called major studio/distributors. The rest are released by distributors not affiliated with the majors. Unfortunately, for independent films, most of the theatre screens in the U.S. are taken up by major studio product with the result that about 95% of the domestic theatrical gross revenues are generated by major studio releases. So, there are several hundred independently produced feature films each year, that are scrambling around trying to get a week or two’s worth of screen time in the limited number (seldom more than 500 to 600 screens per release) of theatres not showing major studio films. On the other hand, about half of those 150 or so films released by the major studio/distributors each year are actually produced by independent producers (i.e, without the involvement of the majors). These completed independent films are acquired for distribution by the distribution arms of the major studio/distributors.

When the production costs of a feature film are furnished by a major studio (either as an in-house production or a production-financing/distribution deal) such films are clearly major studio productions and cannot be considered independent films, at least from a financial perspective. In addition, if a major studio/distributor’s distribution agreement and guarantee is used to obtain a bank loan to cover the production costs (negative pickup deal), that too (again from a financial perspective) has to be considered a major studio production, and not an independent film. On the other hand, if an independent producer uses the distribution agreement and guarantee of one or more non-major studio distributors to support a bank’s production loan, that would be considered an independently financed feature film, even if it were later acquired for distribution by a major studio/distributor. In addition, of course, the hundreds of feature films produced each year with pools of funds raised from groups of private investors (again without the involvement of major studios) are independently produced motion pictures.

The vast majority of independently produced feature films are financed either through (1) some form of lender transaction, (2) an investor deal or (3) a combination of the two. The lender transactions are generally supported by the distribution agreements and guarantees of one or more distributors, or in the alternative something that serves the same purpose of protecting the bank’s interest (i.e, letters of credit, insurance or projected foreign sales estimated by reputable foreign sales agents respected by the lender). Thus, an independent producer seeking a bank loan to cover some or all of the production costs of a film will either have to obtain a distribution agreement and guarantee acceptable to the lender, a letter of credit, reliable foreign sales estimates (for gap financing) or make arrangements for an insurance-backed scheme (which is both expensive and rarely done for single films). In addition, the producer will most likely have to go to a completion guarantor and make arrangements to have a completion bond in place so that the bank can avoid the risk that the film may not come in on time and under budget.

The investor transactions are generally either active investor (non-securities) transactions or passive investor (securities) transactions. In simple terms, an active investor is someone who is regularly involved in helping the producer make important decisions with respect to the project. Obviously for a creative venture like film, having one or two active investors involved in making important decisions may not be desirable at all. Also, the more active investors you try to put in the deal, the more difficult it is to keep them all truly active But the active investor scenario can work in some circumstances (e.g., an investor-financed development/packaging deal funded by one or two active investors).

In the alternative, the independent producer may want to seek to fund some or all of the required development or production budgets using a large group of passive investors, each of whom is contributing a small portion of the overall cost. Generally, these deals (either for a single film or a multiple film package) are structured as limited partnerships (LPs) or passive-investor limited liability companies (manager-managed LLCs). In both instances, the investors are restricted by law from getting involved in management, so from a creative point of view, this arrangement is desirable. The passive investor vehicles, on the other hand, will generally require compliance with the federal and state securities laws, and thus, the independent producer will commonly need the assistance of a securities attorney who specializes in this fairly technical area of the law.

Based on numerous conversations with independent feature film producers, there appears to be a considerable amount of misunderstanding and/or misinformation in this community regarding when to use a business plan as opposed to a securities disclosure document if seeking to raise money from investors to develop, produce or distribute one or more independent feature films, or to raise the equity component of a film’s financial plan. First, we have to understand what a business plan is and how it differs from a securities disclosure document. We have to recognize that although there may be similarities (i.e., some overlap), these two documents are not the same things. The differences are based on both the contents of these two documents as well as in the appropriate uses of the documents.

A business plan is a written statement that describes and analyzes a business (in this particular case, a proposed independently produced feature-length movie) and gives detailed projections about the future of that business. A business plan is not an investment vehicle. You cannot sell shares in a business plan. Nobody can invest in a business plan. If a business plan is used to actually raise money, it must be used in the proper circumstances and must be combined with an appropriate investment vehicle.

Thus, a business plan, combined with an appropriate investment vehicle, can be used to raise money, but only in limited circumstances. What are those circumstances? A business plan can be used to raise money from one, two or a few active investors. A business plan cannot be appropriately used to actually raise money from a larger group of passive investors.

So, what’s the difference between an active and a passive investor? An active investor is someone who is regularly involved in helping you the filmmaker make important decisions with respect to your film. In the context of a film, that means helping to select the script, making changes in the script, selecting the director and lead actors, choosing the line producer and director of photography, helping to solve problems that come up during production, helping to make decisions with respect to critical questions relating to distribution and so forth. These one, two or a few active investors need to be capable of making valuable contributions on these important questions (i.e., they need to have some knowledge of and experience in the film industry that is relevant to what you are doing) and be actively involved in helping to make such decisions on a regular basis. For case law guidance as to what constitutes an active investor see Williamson v. Tucker, 645 F.2d 404, 5th Cir. 1981 and Consolidated Management Group, LLC versus the California Department of Corporations, 162 CA4th 598, 75 CR3d 795, 2008 (as reported in the California Business Law Reporter in its July 2008 issue).

That does not mean the active investor(s) should have veto power, although some investors who put in most of the money to produce a film, for example, may insist on such control, and in that instance, it may become a problem for a producer. In addition, unless an entity is created to provide limited liability, active investors may also not have the limited liability protection offered by an entity, and, of course, most people with enough money to invest a substantial amount in a high-risk venture like an independent film, will most likely prefer to enjoy limited liability protection. That’s just another factor to consider when determining whether to use a business plan and seek financing from one, two or a few active investors.

On the other hand, a passive investor is someone who is not an active investor (i.e., someone who is not regularly involved in helping to make those important decisions). This is an important distinction, because it represents the essence of the difference between a non-securities offering and a securities offering. Essentially, anytime you are seeking to raise money from one or more passive investors, you are selling a security, no matter what you call it. So, the producer’s decision to raise money from active or passive investors has important implications and consequences.

If you are really trying to raise money from one, two or a few active investors, who are both capable of being regularly involved in helping to make important decisions and willing to be so involved, you can use a business plan combined with an appropriate investment vehicle to provide them with the information on which to base their decision. But, if you are raising money from one or more passive investors, you are required by law to provide those investors with a properly prepared securities disclosure document (not a business plan) prior to their investment.

In addition, that business plan should not suggest in any way that you are really seeking to raise money from passive investors. In other words, either leave out the discussion about the specific financial arrangements or at the very least, avoid references to interests in limited partnerships, or units of a manager-managed (passive-investor) limited liability company (“LLC”). Further, the language in a business plan should not suggest or imply that the investor will not be permitted to be regularly involved in helping to make important decisions, since that is at the very heart of what makes him or her an active investor. It may be the better practice to actually state that the business plan is being used in conjunction one of those specific but appropriate investment vehicles for the purpose of raising funds from one, two or a few active investors. In any case, absolutely do not include language that you either plan to or may later create a limited partnership or manager-managed LLC, because that language clearly indicates that you are planning a securities offering. Also, do not suggest by the language in the business plan that you intend to raise money from more than one, two or a few active investors, because at some undefined point, it is no longer possible to keep a large number of investors “actively” involved in a business venture in a meaningful way.

Now, what are those investment vehicles that can appropriately be used in conjunction with a business plan for seeking funds from one, two or a few active investors? As discussed in more detail in my book “43 Ways to Finance Your Feature Film”, the four vehicles are: (1) the investor financing agreement (a copy of which appears in the book “Film Industry Contracts”– available at the Samuel French Bookshop in Hollywood), (2) the joint venture agreement (a sample of which also appears in the “Film Industry Contracts” book), (3) the initial incorporation (see discussion in “43 Ways to Finance Your Feature Film”) and (4) a member-managed (active-investor) LLC (which, in addition to the filing with Secretary of State, must also have an LLC operating agreement to be properly formed).

So, recognizing that there are some obvious disadvantages to seeking funds from active investors (1) they may interfere with your creative control, (2) the investment vehicle chosen may not offer any limited liability protection to your investors and (3) it may be more difficult to find prospective investors who are both capable of and willing to be a lead investor in a high-risk investment like independent film, it is also important to recognize that by seeking active investor financing, you are eliminating at least two of the advantages of a securities offering (i.e., spreading the risk amongst a larger group of passive investors, none of whom will typically be hurt too badly if they don’t get their money back or make a profit, and, of course, passive investors don’t interfere with your creative control.

Now, a quick note about terminology. The securities disclosure document is a broad term that applies to the required written information that must be provided to prospective investors before they invest in all securities offerings. The terms “prospectus” and “offering circular” are used to describe the securities disclosure documents associated with various types of public/registered offerings. These securities offerings are usually too expensive, complicated and time-consuming to be of much interest to low-budget independent filmmakers. On the other hand, the private placement offering memorandum or “PPM” is the term used to describe the securities disclosure document associated with an exempt/private offering (most commonly used by low-budget indie filmmakers).

Specific rules promulgated by the federal Securities and Exchange Commission and, in some instances, state securities regulatory authorities, provide guidance on what information must be disclosed in these securities disclosure documents and how that information must be presented. There are no such rules for business plans, and that’s why there is both such a wide disparity in the content of business plans and why the contents of business plans are always different in some respects from the contents of a securities disclosure document, even though some elements of the two are the same or similar.

If you have additional questions, about these issues, feel free to post your questions relating to investor financing of independent film at my question and answer site online at http://www.homevideo.net/coneslaw/finforum.htm or http://www.mecfilms.com/guide4.htm or by entering “Investor Financing of Independent Films” in any search engine.

There are so many different ways to finance one or more feature 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, 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. Considerations regarding the manner in which the three major stages in a film’s life: (1) acquisition/development/packaging, (2) production (including pre-production, principal photography and post-production) and (3) distribution, may be separately financed are sometimes difficult to distinguish in many real world transactions. The combinations typically used in the industry today 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. In addition each such scenario tends to work best with different levels of film budgets.

1. In-House Production/Distribution–The selected studio/distributor to which the project has been pitched or submitted, provides the acquisition/development financing, develops the project at the studio under some level of supervision of studio creative executives, gives a “green-light” to studio production funding and distributes the completed film with the studio-affiliated distributor using the distributor’s funds to cover P&A expenses. An independent producer (or screenwriter, director, actor or actress) may have originally submitted the idea, concept, underlying property, outline, synopsis, treatment or screenplay to the studio, but rights to produce as a motion picture were then acquired by the studio. If the producer or others remain attached, they do so as employees of the studio or project.

2. Production-Financing/Distribution Agreement–The independent producer provides the acquisition/development financing (or raises such funds from investors) and takes the deal to a studio/distributor with a fairly complete package (i.e., significant elements are attached). The studio/distributor’s money is then 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.

3. Negative Pickups (and other forms of lender production-money financing)–The independent producer provides acquisition/development financing (or raises such funds from investors) and obtains one or more distributor commitments and guarantees to purchase the completed picture (for the worldwide, domestic or international markets, or individual territories) if the finished film meets specified delivery requirements (as set forth in detail in the distribution agreement). The producer takes this or these distributor commitment(s) to an entertainment lender to secure production funds using the distributor’s contract(s) as effective collateral. In this instance, the only part of the financing provided by the distributor relates to distribution expenses (i.e., the so-called P&A monies). 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. Other variations on lender production financing include foreign pre-sales, gap financing, so-called “super-gap” financing and partly- or wholly-insured sales estimates.

4. The Acquisition Distribution Deal–The independent producer raises acquisition/development as well as production monies, often from investors outside the film industry (often using various investor-financing techniques), but distributor funds are used to distribute the movie. The distribution agreement is entered into after the film is produced). 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.

5. Rent-A-Distributor–The independent producer raises acquisition/development, production and some or all of the money needed to distribute the film. 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%).

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.

Initial Considerations Regarding the Choice of Film Finance

Let’s say you’re a filmmaker and want to produce that special film (a feature or feature-length documentary) the way you envision it on the screen. How do you finance it? The answer to that question, of course, depends on a number of factors, not the least of which is the anticipated production budget for the film. In addition, the form of film finance chosen may have an impact on the level of creative freedom enjoyed by the producer team.

First however, it is important to note that there are three stages in the life of a motion picture that can be financed separately: (1) development (in the broader sense of the term), (2) production (including pre- and post-production) and (3) distribution.

If for example, you are set on producing an expensive movie, something in the $20 to $50 million dollar range and up, the financing choices are very limited. Those films are usually produced as in-house production/distribution deals or production-financing/distribution (P-F/D) deals by or with one of the major studio/distributors. For your film project to become the subject of an in-house production/distribution deal the writer, director, producer, actor or other person with an idea for a movie typically approaches a creative executive at one of the major studios and pitches a movie concept while it is still just an idea (no script exists yet). Of course, pitching movie ideas is fraught with danger and people who engage in that activity must make themselves aware of that body of existing law relating to protecting ideas from theft. Theft of ideas in Hollywood may be more common that we actually know. After all, copyright law does not extend to ideas and protecting ideas is based on contract law, the particulars of which are not all that familiar to many filmmakers (see “The Idea Submission Case: When Is An Idea Protected Under California Law?” Glen L. Kulik. Beverly Hills Bar Association Journal, Winter/Spring, 1998, pages 99-111).

In any event, the individual pitching a movie idea to a studio creative executive is ostensibly seeking a development deal in which the studio provides some financial support for the development of the idea into a script which may serve as the basis for producing the movie. Of the many thousands of scripts being developed by the studios in any given year, only a very small percentage actually get produced. However, if the studio likes the resulting script it may greenlight the project to be produced as an in-house production in which the studio also pays for the production cost and its affiliated distributor covers the cost of distribution. So, in this instance, the studio has been asked to pay for all three stages in the life of the film: development, production and distribution and studio executives can be expected to actively participate in helping to make some of the more important decisions with respect to the script and the production. So this approach to financing a film may provide the least amount of creative freedom, after all, the studio generally wants its movies to appeal to as broad an audience as possible, and that objective sometimes conflicts with the vision of the producer and/or director.

The P-F/D deal differs from the in-house production/distribution deal in that the independent producer (or writer, director, actor functioning as a producer) approaches the major studio/distributor at a later stage in the development of the movie (i.e, after a script has been written and a certain amount of packaging has occurred). In this sense, packaging refers to attaching elements to the script to create a movie package. Attaching elements means that firm commitments have been obtained from a director and actor leads. Several of these activities may cost money and this presents many filmmakers with their classic catch-22 (i.e., they often can’t attach recognizable name actors to the package without putting some money at risk and they can’t raise much money without recognizable actors attached).

So with respect to the P-F/D deal, the independent producer is responsible for financing that first stage in the life of the film – the development stage. Some of the costs that may be incurred in this development stage include: cost of acquiring underlying rights (if any), cost of developing the script (e.g., hiring an experienced screenwriter), hiring a line producer to prepare a budget based on the completed script, hiring a casting director, attaching the previously mentioned elements, among others. Some of these costs may be more traditionally considered pre-production items. So for financing purposes, there may be an overlap of development and pre-production activities.

Attaching elements may be the most expensive of these development costs and can range from the full pay or play deals (usually out of reach for most independent producers) to non-refundable deposits based on a percentage of the actor or director’s normal salary. This money is at risk because to get a firm commitment the talent needs to block out a certain amount of days on his or her calendar for participating in the production of your film, and if you fail to raise the production financing for any reason, the deposit will have been earned by the talent for the commitment alone. A good casting director can help establish what portion of the development budget will be required to attach elements.

These development costs may be raised in many ways. Such funds may be acquired as grants, gifts, collateralized loans or investments. It is not uncommon for independent producers to seek out a single active investor who will put up the development money needed to attach elements and to move the project forward. It is much less common for any single individual to actually put up all of the development funds and if they do, they are very likely to want to have a significant say in how the money is used (i.e., the active investor). So again, some of the producer’s creative freedom may be lost to such an investor. The active investor may be sought through the use of a business plan and an associated investment vehicle such as an investor financing agreement, joint venture agreement, the formation of a new corporation or a member-managed limited liability company (for additional information on each of these active investor investment vehicles see my book 43 Ways to Finance Your Feature Film, Third Edition, Southern Illinois University Press, 2008).

Another useful strategy for these risky development funds is to spread the risk as much as possible among a large group of passive investors. That way no single investor is assuming too great a risk and as passive investors, they have no say in the creative decision-making. Raising money from passive investors, however, typically involves the sale of a security and compliance with the federal and state securities laws (including the use of a securities disclosure document instead of a business plan), so at this point, the producer will want to consult with a securities attorney who is experienced with film offerings. The passive investor investment vehicles typically include the limited partnership, manager-managed limited liability company or possibly selling shares in an existing corporation, although the corporate investment vehicle is less common for independently financed film projects.

In order to avoid paying the costs for such a passive-investor development offering out of pocket, the producer may want to seek out a single prospective investor who is very supportive and may invest in the development deal anyway, to informally advance the funds to cover the offering expenses. Those may include: attorney fees, notice filing fees, costs of creating the entity, copying and binding for the securities disclosure document, possible artwork for the cover, along with miscellaneous marketing costs. The producer may want to offer this start-up investor a profit participation on the producer’s side as an added incentive to come in with these early funds, although the producer may want to try to structure these start-up deals initially as gifts or loans. Such start-up funds may also come from an active investor who is an equity owner in the producer’s production company (another choice of entity consideration).

n any case, the idea in this instance is to start small, to raise the money needed to cover the offering costs for an investor-financed development offering from a friend or family member that is supportive of your efforts as a filmmaker, then raise the development money for the film project from a larger group of passive investors. Once that’s done, the script is developed and elements are attached, the producer can approach the studio with a completed script and package seeking the P-F/D deal in which the studio will loan the producer the money to produce the film and the studio’s affiliated distributor will distribute the film once it’s produced. So, in this scenario, the independent producer has been responsible for raising the development funds, the studio has loaned the production funds and the studio’s affiliated distribution arm has paid for the distribution expenses.

A third possibility is for the producer to again raise the financing for the development phase, as described above, then take the completed script and attached elements (the package) to a distributor that is considered credit-worthy by the entertainment lenders (typically the major studio/distributors and possibly a few other of the most successful independents) seeking a distribution agreement and guarantee to pay a specified sum upon delivery of the completed film. The producer then takes that distribution agreement and guarantee to a bank that is in the business of making entertainment loans and if the bank is interested in providing the production loan to this producer for this particular film project, it will require the producer to obtain a completion bond so that the bank is not at risk for the film going over budget. If all is in order, the bank will provide a discounted loan to the producer (meaning it will not loan the full price guaranteed by the distributor but something less than 100%). The bank is in effect using the distributor’s agreement and guarantee as collateral for the loan. The producer then uses the loan funds to produce the film and upon delivery of the completed film to the distributor (assuming it meets all of the criteria set out in the distribution agreement with respect to running time, adherence to the approved script, use of the approved elements, MPAA rating and so forth) the distributor is then obligated to pay the specified amount, which through contractual arrangements between the producer and the lender is used to pay the lender’s principal, interest and fees. So the bank is out of the deal before the film is even released and the producer has raised the development funds, the bank has loaned the production funds and the distributor provides the moneys to cover the film’s distribution expenses.

If there is but one distributor and it has negotiated for worldwide rights, this describes the traditional worldwide negative pickup. If the producer negotiated two distribution agreements, one for domestic rights and another for international rights, that describes the split rights negative pickup deal. The film’s rights have been split between the domestic and international markets and two separate distributors are involved. In other lender financing situations, the producer may seek multiple distribution agreements through a foreign sales agent and with foreign territorial distributors so that the distribution agreements representing international rights serve as the effective collateral for the bank loan just as with the worldwide negative pickup or split rights deal. These various forms of lender financing for the film’s production phase are most commonly used for the mid-budget level films, somewhere in the $5 to $15 million dollar range.

Note again that such lender financed deals cannot be accessed without a completed script and attached elements (a package), so the independent producer is confronted once again with another variation of the producer’s catch-22: distributors typically want to know what recognizable names are attached both as actors and director, but it is extremely difficult to firmly attach such individuals to a project without putting some money at risk and it is difficult to raise money without a distribution deal and package in place. So again, one of the ways to move around that catch-22 is to spread this early financial risk amongst a large group of passive investors from outside the industry (with an investor-financed passive investor offering) so that no single investor is assuming too great a risk (for help in finding such investors see “Keys to Finding Prospective Investors” online at http://www.mecfilms.com/coneslaw/articles.htm).

In a fourth film financing possibility, the independent producer is responsible for financing the film’s development costs, however he or she chooses and then raises the production funds independently from a large group of passive investors conducting a securities offering as briefly described above. There are no legal limits to how much money can be raised in this manner, however, there appear to be practical limits. So, investor financing for the production phase is typically limited to the several million dollar low and ultra-low budget films unless the producer group has access to and interest from some high net worth individuals.

It is important to note at this point, that just as producing a motion picture is considered a collaborative process, so is the financing of a feature film. It usually takes not just a producer, but possibly several executive producers or associate producers, and one or more film finance specialists who may be securities attorneys, entertainment attorneys, business plan consultants, foreign sales agents, bank executives, completion guarantors and/or insurance brokers.

In this fourth scenario, the independent producer typically has the most creative freedom since presumably the producer funds have been raised from passive investors who are restricted from participating in the creative decision-making. On the other hand, this may also be one of the more risky film finance scenarios since there is no distribution in place and distribution arrangements are generally made after the film is completed. That effort typically occurs through film festivals and markets, sending DVDs directly to distributors or hiring a screening room in Los Angeles and sending out invitations to distributor representatives. In such situations, the distributor will acquire rights to distribute the film in all or some markets and media by means of an acquisition deal, often providing an advance to the producer. The strategy for the independent producer is to obtain an advance that is greater than the cost of producing the film so that even if an ongoing profit participation in the film’s revenue stream is negotiated, the producer and his or investors are into profits before the film is released. The odds of getting such a distribution agreement on an acquisition basis along with such an advance are not favorable, but on the other hand, all of the film finance scenarios described above are considered long shots for most independent film producers. Note that in this fourth film finance scenario as described the independent producer was responsible for financing the costs associated with the first two phases in the life of the film (development and production) while the distributor, if one comes on board, typically pays for the film’s distribution expenses.

A fifth film finance scenario may involve some of the above described techniques whereas the filmmaker is responsible for financing the costs of all three phases of the film (development, production and distribution), but then an established distributor is hired by the producer on a rent-a-distributor basis to use its facilities and expertise to actually distribute the film.

Other possibilities or combinations relating to film finance or distribution may include state, federal or international tax incentives, collateralized loans, gifts and grants along with various forms of self-distribution (for a better understanding of certain terms used in this article see my book Dictionary of Film Finance and Distribution – A Guide for Independent Filmmakers, Marquette Books, 2007).