BY BOB LaBATE
Recently, I’ve been thinking about how so many people pursue so few seats at the table. No, I’m not talking about the academy awards or college admissions. I’m thinking about film financing and how so many producers–both experienced and new–pursue the rather small pool of investors willing to risk $25,000 to $50,000 each in a feature film project.
Like it or not, most independent films are produced with other people’s money–money invested in the hope of success and handsome returns. But there’s a paradox at the core of such money quests: Investors are attracted by the attachment of a well-known actor, writer or director, but such professionals are difficult to attach without money. Solving this paradox is the challenge faced by most independent producers and, while there are no magic bullets, there are a few steps that an independent producer can take to attract and retain investors.
Start With The Script. A great script will help attract big name talent, which, in turn, will fdattract investors. Yet, many indie producers try to raise money before the script is ready or, worse, before they have secured the underlying literary rights upon which the script is based. The script is your foundation for everything else.
Prepare A Short. A short film not only conveys the feel of your feature-length film, but it also assures investors that you understand the medium and can meet the rather significant technical expectations for feature films.
Prepare A Realistic Minimum/Maximum Budget. Use of a minimum/maximum budget is a good way to plan when the amount of your funding is uncertain. Escrowing most of the investors’ funds until you raise your minimum budget helps to assure investors that you will not spend a significant portion of their money unless you are financially able to "green light" the project.
Find An Experienced Executive Producer. An executive producer typically handles business and legal issues of the production, not the technical aspects of filmmaking. Often, however, executive producer credit is given to someone who obtains a significant portion of the production budget by "finding" funds from third party investors. Frequently overlooked are the industry contacts and credibility that an experienced executive producer brings to the project, particularly if the executive producer is committed to the project rather than to the money.
Prepare Your Required Legal Documents Before You Solicit Funds. Selling investments beyond a small circle of close friends and family (not more than 5 or 10) can trigger securities disclosure, anti-fraud and filing requirements under state and federal law. Such disclosures are generally provided to investors by way of a public prospectus or by a Private Offering Memo.
For example, the disclosure documents include: (1) a description of the production and its financial condition, (2) the business plan, (3) the risks involved in the industry and in this particular business, (4) the management and their backgrounds, (5) the anticipated source and use of funds, (6) the investment and the proposed return to investors, (7) the corporate operating provisions, (8) a list of material contracts, and (9) significant participants in the project. Preparing such documents is neither easy nor cheap (and must be done by a securities lawyer), but they are essential if you are raising money. Furthermore, serious investors will expect them.
Provide For Attractive Distributions To Investors. There are many ways to structure your production, but formation of a limited liability company ("LLC") is quite common. The Manager is the person (or entity) responsible for operating the LLC, and the Members are those who have contributed goods and/or services to the production in exchange for a distribution after payment of LLC costs and expenses.
The funds available for distribution to Members are sometimes called "Distributable Cash," which essentially means all gross revenues of the LLC minus (a) all operating expenses of the LLC; (b) such reserves as the Manager deems necessary in accord with good business practice to cover future LLC expenses; (c) all costs of production of the film which have not been supplied by the LLC, a completion guarantor or any pre-sales or other similar agreements; or (d) any deferrals or third-party percentage participations granted by the Manager for products or services provided in connection with the financing, production or distribution of the film.
While distribution percentages vary greatly, the following is a typical distribution scenario, which enables the Member/Investors to recoup more than their original investment before any significant distribution is made to the Producer/Manager: First, until Member/Investors recoup 120 percent of their original investments, 90 percent of the LLC’s Distributable Cash will be allocated and distributed to the Members as a group and the remaining 10 percent to the Producer/Manager; next, until Member/Investors recoup 300 percent of their original investments, the LLC’s Distributable Cash will be allocated and distributed 50 percent to Members as a group and 50 percent to the Manager; and thereafter, the LLC’s Distributable Cash will be allocated and distributed 70 percent to the Manager and 30 percent to Members as a group.
Seek Investors Who Believe In Your Project. Sophisticated investors know that less than three percent of independently produced films receive meaningful distribution and even fewer films return money to investors. Thus, instead of basing your search for funds on the wealth of the potential investor, look for potential investors who have some connection with your project or who believe in you and your film.
Keep Your Investors Informed. Your investors will want to be involved to some degree in your film so keep them well informed of your progress and, within limits, invite them to film set, film festivals and press events.
©2003 Robert J. Labate. This column is provided as a source of information and is not to be construed as legal advice or opinion. You may contact me via e-mail at robert.labate@hklaw.com or, via mail to Bob Labate at Holland & Knight LLC, 500 West Madison treet, Suite 4000, Chicago, Illinois 60661 312/715-5700.