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This article is used by permission of Mark Litwak, Esq. and is taken from
www.marklitwak.com.
FINANCING INDEPENDENT FILMS
By Mark Litwak, Attorney at Law
Independent films can be financed in a variety of ways. In addition to a
filmmaker using his own funds to make a movie, the most common methods are
loans, investor financing, borrowing against pre-sales (a loan against distribution
contracts), and distributor-supplied financing.
LOANS
Loans can be secured or unsecured. A secured loan is supported or backed
by security or collateral. When one takes out a car or home loan, the loan
is secured by that property. If the person who borrows money fails to repay
the loan, the creditor may take legal action to have the collateral sold
and the proceeds applied to pay off the debt.
An unsecured loan, such as credit card debt or money given by family, has
no particular property backing it. If a debtor defaults on an unsecured loan,
the creditor can sue for repayment, however, the sale of his property may
not be sufficient to satisfy all creditors.
A secured creditor is in a stronger position to receive repayment. In the
event of a default, the secured property will be sold and all the proceeds
will first be applied to repay the secured creditor’s debt. Unsecured
creditors will share in whatever is left, if anything.
From a legal point of view, the advantage of a loan is that the transaction
can often be structured in a fairly simple and inexpensive manner. A short
promissory note can be used and the transaction often is not subject to the
complex security laws that govern many investments. Keep in mind that if
the agreement between the parties is labeled a “loan,” but gives
a creditor a “piece of the backend” or some other equity in the
project, the courts will likely view the transaction as an investment. And
if the filmmaker has not followed securities laws, the courts could hold
the filmmaker liable for violating the law.
EQUITY INVESTMENTS (INVESTOR FINANCING)
An equity investment can be structured in a number of ways. For example,
an investor could be a stockholder in a corporation, a non-managing member
of a Limited Liability Company (LLC), or a limited partner in a partnership.
An investor shares in potential rewards as well as the risks of failure.
If a movie is a hit, the investor is entitled to receive his investment back
and share in the proceeds as well. Of course, if the movie is a flop, the
investor may lose his entire investment because the producer is not obligated
to repay an investor his loss.
When individuals or companies that invest in an enterprise that they do
not manage, their interest is considered a security. These investors are
often called silent partners, limited partners, passive investors and stockholders.
They are putting money into a business that they are not running. State and
federal securities laws are designed to protect such investors by ensuring
that the people running the business do not defraud investors by giving them
false or misleading information, or by failing to disclose information that
a reasonably prudent investor would want to know.
In a limited partnership agreement, investors (limited partners) put up
the money needed to produce a film, but they don’t want to be financially
responsible for any cost overruns or liability that might arise if, for instance,
a stunt person is injured.
Because limited partnership interests are considered securities, they are
subject to state and federal securities laws. These laws are complex and
have strict requirements. A single technical violation can subject general
partners to liability. Therefore, it is important that filmmakers retain
an attorney with experience in securities work and familiarity with the entertainment
industry. This is one area where filmmakers should not attempt to do it themselves.
PRE-SALE AGREEMENTS
In a pre-sale agreement, a buyer licenses or pre-buys movie distribution
rights for a territory before the film has been produced. The deal works
something like this: Filmmaker Henry approaches Distributor Juan to sign
a contract to buy the right to distribute Henry’s next film in Spanish-speaking
countries outside North America.
Henry now takes this contract and similar pre-sale contracts to a bank and
asks for a loan, using the distribution contracts as collateral. Henry uses
this money to produce his film. When the movie is completed, he delivers
it to the companies that have licensed the right to distribute it in their
territory. They in turn pay their license fees to Henry’s bank to retire
Henry’s loan. The bank receives repayment of its loan plus interest.
The buyers receive the right to distribute the film in their territory. Henry
can now license the film in unsold territories. From these revenues Henry
makes his profit.
Because there are a lot of hoops to jump through, first-time filmmakers
may find it difficult to finance their films through pre-sales. With no track
record of successful films to their credit, they may not be able to persuade
a distributor to pre-buy their work. But if there’s a big name cast
and an acclaimed scriptwriter, the distributor may be persuaded to take that
risk.
Read the full article on financing films at: www.marklitwak.com/articles/general/financing.html
—Mark Litwak (www.marklitwak.com)
Mark Litwak is a veteran entertainment attorney and Producer’s Rep
based in Beverly Hills, California. He is the author of six books including:
Reel Power: The Struggle for Influence and Success in the New Hollywood,
Dealmaking in the Film and Television Industry, Contracts for the Film and
Television Industry, and the recently published Risky Business: Financing
and Distributing Independent Film. He is the author of the CD-ROM program
Movie Magic Contracts, and the creator of the Entertainment Law Resources
website at www.marklitwak.com. He can be reached at law@marklitwak.com.
Disclaimer-Any
material sent to or provided by Mark Litwak is for illustrative and educational
purposes only and should not be relied upon as legal advice, or be considered
confidential or the basis of an attorney client relationship. This
material may not be suitable for your particular situation and different
legal advice may be appropriate depending on your jurisdiction or circumstances.
Therefore, you should not rely on this material, or any part of it, without
the advice of competent legal counsel.
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