Wednesday, May 5, 2004

Frequently Asked Questions: Financing

Answers from Mark Litwak, Attorney At Law



DISCLAIMER: The information provided here is intended to provide general information and does not constitute legal advice. You should not act or rely on such information without seeking the advice of an attorney and receiving counsel based on your particular facts and circumstances. Many of the legal principles mentioned might be subject to exceptions and qualifications, which are not necessarily noted in the answers. Furthermore, laws are subject to change and vary by jurisdiction.



Question: Can you please provide me with the title of any books or other publications that provide a good overview of financing in the motion picture industry? I am particularly interested in limited partnerships and alternative forms of financing.



Answer: Financing in the motion picture industry covers a wide range of diverse topics. You might check out: Movie Money: Understanding Hollywood's (Creative) Accounting Practices by Bill Daniels & David Leedy; and The Biz: The Basic Business, Legal and Financial Aspects of the Film Industry by Schuyler M. Moore. I have just recently completed a book called Risky Business: Financing and Distributing Independent Films, which will be published by Silman-James Press.



If you are going to take equity investments you will need to comply with various security laws. This is a very complicated area of law, and it's best to retain a securities attorney if you are thinking of raising funds. See my article on film financing for additional information (at www.marklitwak.com).



Question: Can you tell me what an acceptable finder's fee is for someone bringing financing to a project that I've created? And would I pay this percentage based on the entire funding for the project or just the portion that I'll personally receive.



Answer: Finders' fees are generally 5% of the amount of money that the finder brings into a project. The percentage may be reduced if large amounts are raised.



Question: I am a screenwriter and co-producer working with established independents to develop a family film I wrote. We have received a 20/80 offer from a European trust: if we put up 20% of our $4 million budget, they will fund the rest of the film. Operating through their "sister" company, they have given us a letter of intent and an 8-page offer agreement, the specific terms of which they assure us are negotiable. We are understandably pleased about this, but part of the deal consists of depositing our 20% in a European bank, under our control, with them adding the remaining 80% within 30-60 days. After that, the agreement says, we can begin drawdown per our prescribed schedule to make the film. We pay a 2% finders fee and 6% interest on the funds we use, including our 20% because the sister company will take responsibility for repayment of the first money within one year after our agreement is signed. They also want 35% of our adjusted gross, meaning after our distributor gets paid, until we have repaid our loan and the interest accrued. We do not have to begin making interest payments until 2 years after the film is released. Now, this all sounds very nice, and my producers are pleased. I am a skeptic, however. I was raised to believe there is no free lunch, and if anything sounds too good to be true, it probably is. Despite the fact that the sister company rep says the terms are negotiable, he will not reveal the names or sources of the European trust, and he says that's deliberate because they don't want to be known. One of my producers says this is no surprise. But without knowing exactly who we are dealing with, how can we do diligence on this agreement? The sister company rep says that is why they will issue a bank guarantee from top rated bank for our 20%. It's also why the agreement says if they default, we get our money back, and why the agreement requires that we hire a mutually agreed upon independent auditor to oversee the escrow account. Yet they admit, after we deposit our 20%, all the money will be under THEIR control. They insist that they have built safeguards into the agreement that will protect us, and they are willing to add more. But, as much as I am dying to make this movie, I would hate to be ripped off for $800 K. What is your reaction? What kind of additional safeguards would you recommend?



Answer: My advice to you is that you should thoroughly check out the track record and integrity of the parties that you are thinking of going into business with. Then, hire yourself a good entertainment attorney to negotiate a tight agreement on your behalf.



Question: Could you give me any information on sponsoring? I'm currently in the middle of my script and I plan to produce and direct it myself. I've heard that sponsoring is quite common in the U.S. (I'm German but plan to make an American movie) and now would like to know more about it. Any kind of information would be greatly appreciated.



Answer: If what you mean by sponsoring is product placements, a good place to start is the Hollywood Bluebook Directory, which has a listing of product placement agents. These agents don't represent people they represent products. Product manufacturers may be willing to donate free goods or services and occasionally some money in order for their product to be shown in a movie. The amount of money that can be obtained from sponsors for feature films is usually quite limited. However, the Care Bears movies were reportedly funded entirely by the Care Bears Toy Company and Steven Spielberg's "The Goonies" received a hundred thousand dollars from Nabisco for plugging the Baby Ruth candy bars. Specialty and art films are unlikely to receive much cash in return for product placement.



Question: Several investors in my area, familiar with my company, work and industry relationships have banded together and offered to put together a sizeable pool of funds to make several films. As I am located in the state of Texas, I am wondering what is the best vehicle to use to accept the funds. The investors do not want involvement on a project-by-project basis so we are looking at doing this as a "blind" pool. The last part of the question is where would I find a boilerplate agreement that I could rework for the specifics of this deal.



Answer: This is much too complex a question to be answered summarily. The best vehicle would depend on the facts and circumstances, particularly how much risk the parties are willing to bear and who will control the enterprise. There may also be tax considerations. If you don't understand all the issues involved here, it would be dangerous indeed for you to rely on a boilerplate agreement.



Question: What is the difference between a "business plan" and a "limited offering memorandum"? Am I allowed to show and propose investment opportunities (i.e., business plan) to investors without having to file with the SEC before I actually receive financing from them?



Answer: A business plan and limited offering memorandum are similar in that they both discuss a proposed business endeavor. A business plan is meant for a potential business partner who will actively run the business with you. A limited offering memorandum is designed to comply with federal and state security laws by making full disclosure to a prospective passive investor. Federal and state security laws require that you make full disclosure before you take money from an investor who is not actively running the business. The disclosure document is called a prospectus or a limited offering memorandum. You do not need to register it with the SEC if you fall within one of the limited offering exemptions. This is a very complex area and you should consult an attorney who has experience in both entertainment and security law before proceeding. There are criminal and civil penalties for violating the law. Do not use a business plan to solicit money from private investors who are not going to be actively involved in making your movie.



Question: I'd like to learn more about presales. What specifically do I need to provide the presales agent to be taken seriously by potential investors, distributors, etc.? How do I find a presales agent, in particular, one who works with ultra-low budget features (with little star power attached)?



Answer: In order to find a foreign sales agent who will do pre-sales for you, you should check out the bumper editions of the trade papers (Hollywood Reporter, Variety, Screen International and Moving Pictures). Each of these publications distributes an extensive bumper edition before the major television and film markets. These editions list various foreign sales companies, along with ads for films being sold. By looking through these bumper editions, you can locate foreign sales companies that have a history of making pre-sales for your genre of picture. In order to succeed in the pre-sale business, you need a package that is sufficiently strong that a foreign buyer would be willing to make a binding commitment and sign a contract to purchase your film before it is made. While there are no hard and fast rules, the most desirable projects are those with name actors, to be made by a director with a track record, and based on a commercial story.



Question: What is the standard on paying back investors in an independent film? Specifically do investors continue to make money on the film indefinitely, or is there a cut-off point in relation to time or percentage made back on their initial investment?



Answer: Generally speaking, the first monies that come in from a film go to repay the capital contribution of the investors. In many instances, the investors may receive a return of 110% or 115% of their investment to compensate them for the loss of the use of their money over time. Then after all deferments and any other debts are paid, the revenue left (i.e., the profit) is typically split 50-50 with the producer. In other words, 50% of the profits go to the investors. The 50% that goes to the producer is often split between the producer and any third parties that are entitled to profit participation (i.e., the writer, director, or stars). Any source

No comments:

Post a Comment