01 February 2002 - 23 March 2002
Film Financing
darrell
3:48 pm friday february 1, 2002
I read somewhere recently that it is common practice to group three or four films and to finance them by insuring them as a group so losses on one film can offset the others, I know this is vague but I need to know how this works...Thanks
re: Film Financing
John Cones
9:30 am sunday february 3, 2002
Darrell:
Actually, the insurance-backed film packages were never that common, to the extent the practice is still done, it is less common, it never really worked that well (producers found they had just as much trouble getting money out of insurers as distributors, so what's the point?) and as a general rule, it was only available to well-established film production companies. In my view, it has never been a viable film finance option for low budget or less than established film producers.
John Cones
PPMs and loans
Dagmar Anderson
12:46 pm thursday february 7, 2002
Hi John,
We have in place a Reg D 506 private placement offering to secure funding for our children's television project. However, due to the slow economy and probably the fact that we're a start up company, it has been difficult to obtain the funds to get the ball rolling. We're looking around for alternate sources of financing and are considering applying for a loan so we can at least initiate production of the pilot. Is it OK to have the Reg D offering out there at the same time we are attempting to get a loan, or would we have to cancel the offering, hopefully get the loan, then start anew to obtain the balance of the amount we're seeking? If it's OK to keep the offering out there, we would, of course, add an addendum to the memorandum stating that the company had secured a loan to comply with disclosure laws.
Thanks and I look forward to your answer.
Dagmar Anderson
Exsisting Laws on film finance
Phil
1:19 pm thursday february 7, 2002
Hi John,
Back in 1976 I had a local stock broker raise $400,000. for an animated film project. Just before all legalities were finalized the House Ways and Means Committee imposed the current laws of film and oil and real estate tax shelter investments which of course now affects the current SEC laws protecting investors.Well my investorscould not be Grand-fathered in, so the production was never financed. My question is; with President Bush looking to find ways to stimulate the economy do you think there is a way for him andor a Bill in Congress to modify the old tax shelter system that would allow an investor to write off a movie investment as a tax loss, like itused to be? Wouldn't that release a tremendous amount of investors to have new incentive to invest in independent film projects? What would say if the Government asked you for some system changes? To increase excitement for investing in movies?
phil v
Active members and THEN passive
Shawn Adams
10:36 pm thursday february 7, 2002
First of all, thank you so very much for your support of independent filmmaking...I imagine you're quite a lifeline for many of us hoping to break into this biz...
I started an LLC six months ago when I began production on a short film that premiered in December. Now I'm hoping to produce one of my scripts as a feature, and would like to find investors. (Notice the key word in that sentence is "find").
Is it possible to bring in a couple of active members who would presumably have 'prior relationships' with rich folks...
And THEN have a private placement offering?
Cheers!
-Shawn
re: PPMs and loans
John Cones
8:32 am friday february 8, 2002
Dagmar:
There is nothing wrong with seeking a loan in conjunction with your current securities offering. A loan for startup funds, for example, may be the same as out of pocket expenses that the investors may reimburse, once you reach the offering's minimum, or if you plan to use the loan plus investments in the offering to reach the minimum, that ought to be disclosed.
John Cones
re: Exsisting Laws on film finance
John Cones
8:42 am friday february 8, 2002
Phil:
Sure, I am well aware of the significant tax benefits that existed until Congress passed the Tax Reform Act of 1986, and yes, it would be helpful to independent film producers to have some of those tax advantages to offer their investors. One of the difficulties, however, is that we have about a thousand feature films being produced each year and only about 300 to 400 obtain theatrical releases. Thus, even with the present system, the market is out of balance (i.e., we have a lot more films produced than there are available distributors who are willing and able to distribute them. Under those circumstances, it would be difficult to make the argument to Congress that there is a tremendous need for tax benefits in support of film projects. In addition, in order to pursue such a goal, independent producers need to organize an association (not a guild, since producers are by definition management not labor)that is authorized and prepared to lobby Congress. Rarely does such legislation get pushed through soley on the initiative of a Congressional representative. It takes a national organization to study the problem, draft legislation, help legislators get elected and push to get the bill passed. It's a major undertaking, and some years ago, I made an attempt to form such an organization, but could not get enough interest, even though nothing like that exists today.
John Cones
re: Active members and THEN passive
John Cones
8:48 am friday february 8, 2002
Shawn:
Yes, you would be conducting what we call issuer sales of a security under such circumstances, and thus you must comply with the SEC's issuer sales rules. In summary those rules require that these individuals be upper level management of your production company, have other duties besides raising money, not be compensated on a transaction-related basis (i.e., not paid commissions based on a percentage of the money they raise) and not have been involved in the selling of other securities in the past year. Under those circumstances, you can allow these upper level management folks raise money on your behalf and you can utilize their pre-existing relationships for purposes of complying with the private placement prohibition against general solicitations.
John Cones
finder's fees
Scott Forslund
9:32 am tuesday february 12, 2002
I would like to put together a Private Placement Offering for passive investors.
I know a person who looks for projects like mine for others to invest in, but wishes to receive compensation. My question is can this person act on behalf of an investor he knows (but not on behalf of my LLC), to find my project for them and receive a "finder's fee" in an arrangement solely between this "finder" and the investor? (The investor would pay a fee to this finder above what they would invest in my project in a separate transaction) In such an arrangement, would the "finder" not need to be a registered broker, or otherwise be associated with my LLC?
I'd appreciate any comments you might have, and thanks for providing such a great forum.
Scott
re: finder's fees
John Cones
1:55 pm tuesday february 12, 2002
Scott:
If this fellow is representing the interests of a prospective ivnestor, he really would not be a "finder" in the traditional sense, but an investment advisor. Although I don't work in this area, I believe there are SEC rules relating to the compensation of investment advisors and those should be consulted. If on the other hand, he was looking to you for compensation, as a general rule, persons not licensed as SEC/NASD broker/dealers and or registered representatives of broker/dealers are not allowed to be paid transaction-related compensation in the sale of securities. Finders who are paid commissions (i.e., a percentage of the amount they raise) can legitimately function in the sale of non-securities. Another possibility, however, is to make someone who is helping you to raise money upper level management of your production company and otherwise comply with the SEC's issuer sales rules, and you may be able to provide some compensation to such persons.
John Cones
re: finder's fees
Scott Forslund
7:57 am wednesday february 13, 2002
John,
Where might I find "SEC rules" regarding "investment advisors?" I logged onto several sites, including the government's SEC site which lists all the Regulation D laws (501, etc.), and I've also visited other attorney's sites who give overviews of the laws, but I can find no specifics in this area. Are such rules based on court actions and not actually in the code? Where can I find a resource to tell me what I need to know? Thanks for any input.
Scott
re: finder's fees
Scott Forslund
7:57 am wednesday february 13, 2002
John,
Where might I find "SEC rules" regarding "investment advisors?" I logged onto several sites, including the government's SEC site which lists all the Regulation D laws (501, etc.), and I've also visited other attorney's sites who give overviews of the laws, but I can find no specifics in this area. Are such rules based on court actions and not actually in the code? Where can I find a resource to tell me what I need to know? Thanks for any input.
Scott
pre-sales
Scott Forslund
9:11 am thursday february 14, 2002
John,
Thank you once again for your tips on finder's fees. I revisited the SEC site and found much more information.
Another financing method was suggested to me using pre-sales to cover production costs. I read your chapter on them in "43 Ways," and understand that, traditionally, pre-sales seem to originate with foreign distribs and are not always in the form of cash funds. But here's a question; could an individual (not a distrib) "buy" a piece of your film's rights (say, all foreign rights) instead of making a direct investment in the film via a private placement? A pre-sale is not an investment, is it? And if not, could you then have a simple pre-sales agreement that would replace a traditional investment route?
This seems logical if your pre-sale was sufficient to cover production costs.
Scott
re: pre-sales
John Cones
9:24 am thursday february 14, 2002
Scott:
Yes, what you are describing is not the way pre-sales are typically handled in the industry, but if you were able to find somone or an entity that would pay you cash in advance for rights to distribute the subsequently produced film in one or more countries, it would be fair to call that a pre-sale, and as described, the transaction would not be considered an investment. Such pre-sales are extremely rare and as you point out, are not likely to cover the entire cost of production.
John Cones
bank loans as a means to finance
Jim Frohna
3:44 pm thursday february 28, 2002
Dear Mr. Cones--
My producing partners and I have established an LLC for our film project. We are currently courting investors. A gentleman is emerging as one who could make this thing happen. He is smart and we have been very open with him about the process and the risks of this venture. He asked why in addition to his potential investment (20% of our budget) we wouldn't try to get a bank loan to finance the remaining 80%. Of course, loans must be paid back. And most films don't make their money back-- the big reason in my mind not to get a loan. But how do you say this to someone whose own money will probably not be recouped? What hard data or info can we provide this man as good reasons to avoid the bank loan route?
Thanks for your time and commitment to indie film.
Jim Frohna
HUNTING SEASON Producer
re: bank loans as a means to finance
John Cones
7:14 pm thursday february 28, 2002
Jim:
You might want to talk to a few banks and get their direct response to pass along to your prospective investor, but I think what you'll find is that banks as a general rule do not make loans on film projects without some form of collateral or some reasonable facsimile. The bank loans that you hear about in the film industry, being made by the entertainment divisions of banks, are almost exclusively supported by contractual commitments of credit-worthy distributors (mostly the major studio/distributors and/or their subsidiaries and affiliates)and those are generally not provided without commitments from recognizable name stars being firmly attached to the project, and of course, that takes money. Assuming your investor is going to be an active investor and therefore you are not selling a security, and the investor is willing to put his 20% investment at risk, that might allow you to make non-refundable deposit type offers to talent, to get them attached, then take that package to distributors to see if they will give you the distribution deal that can support a bank loan. You will also need the support of a completion guarantor, and that entity will probably also require that you hire an experienced line producer that it knows and has confidence in.
John Cones
How to find $$$
Kevin Hansford
6:39 pm monday march 4, 2002
I'm sure every indy filmmaker has asked this same exact question, but how does someone like myself find an investor?
re: How to find $$$
John Cones
8:16 am tuesday march 5, 2002
Kevin:
Initially, how you go about finding investors depends to a great extent on how much money you need to produce your film. As a general rule, if you're trying to produce a big or medium budget picture, investor financing probably won't work, so you will have to explore the studio or lender financing options (see "43 Ways to Finance Your Feature Film"). If you're trying to produce a low or ultra-low buget picture, then investor financing might work (even though it's never easy). Certainly, if your needs are in the $2 to $3 million range you are at the outer edge of what is likely to be successful in the investor financing arena. Of course, investor financing may be used to raise start-up funds (to cover acquisition, development and packaging costs) so that you then approach the industry with a package seeking studio or lender financing. If, as your question suggests, you are looking for a single investor, who is presumably actively involved in management, it is not likely that a securities offering is involved, you can look anywhere for such an investor, you can advertise, generally solicit, conduct cold calls, use mailing or call lists, do seminars, fly over the beach with a trailing banner, have a party and so forth. On the other hand, in my experience, it is extremely unlikley that a filmmaker will find a single or even two active investors who are willing to risk substantial sums of money on the production of a feature film. It's just too risky. So the other approach is to seek financing from a larger group of small and passive investors, in which case a securities offering is involved. In this case, most independent producers conduct exempt offerings (so-called private placements), in that they are exempt from the securities registration requirements (a public offering). But, if you are going to conduct a private placement you are limited to making sales to people you know. Now, it is highly unlikely that registered SEC/NASD broker/dealers or their registered reps are going to want to sell interests in a film deal (again, too risky), so to expand that pool of prospective investors that you know, you can do two things. Before you start your securities offering and while still conducting that general solicitation ostensibly seeking one or two active investors, introduce yourself and your project to as many people as possible. After they have all said they can't afford to give you the amount of money you need, then at some point your convert your funding effort into a securities offering, and go back to see those same people you met earlier. Now, you have the required pre-existing relationship with them for purposes of complying with the private placement rules. The 2nd method for expanding that pool of investors for a private placement involves bringing in other people who know prospective investors and making them upper level management of your production company, giving them other duties besides raising money, paying them (if you have to) on some basis other than transaction-related (i.e., not based on a percentage of the money they raise) and these people should not have been involved in the sale of securities in the past year. If these "executive or associate producers" meet the above-stated criteria (the so-called issuer sales rules), you can then rely on their pre-existing relationships for purposes of complying with the private placement rules (i.e., they can help raise money for your project from people they know). Thus, you are expanding that pool of prospective investors for your offering and increasing your likelihood of success. People who invest in independent films do so for a variety of reasons: because they want to help someone associated with the film, because the script says something they feel is important, because they want to associate with the glamor of a film project, they want to visit the set and meet the cast and crew, they want to help someone work on the film, they want to get involved in the film business and finally, in the back of their mind, they are hopeful that the investment will be a financial success, although they recognize that it's a long shot. Where are these people found? Wherever they live and work, because they are just ordinary people. There are no lists or groups of people sitting around waiting for an opportunity to invest in a high risk deal such as film. You have to go out and find them and convince them that your film project is worthy of a small investment that you can combine with lots of other small investments to spread the risk and get the job done. By the way, we'll be talking about these issues in more detail at a UCLA Extension seminar on Investor Financing of Entertainment Projects, Saturday, April 11. Contact UCLA Extension for details.
John Cones
Film Financing trends in the past decade
Jay
8:50 pm tuesday march 12, 2002
Dear Mr. Cones,
I am a Business School student, majoring in Media Management. I am in the middle of a research project on 'Trends in Feature Film Financing' We tried looking for your book on '43 Ways to Finance a Feature Film' but were unable to find it anywhere (including Barnes & Nobles). Could you please throw some light on the trends in Feature Film Financing over the past 2-3 decades. We are trying to find out how film financing has evolved over this period.
Thanking you,
Jay Mehta
re: Film Financing trends in the past
John Cones
7:43 am wednesday march 13, 2002
Jay:
To find "43 Ways to Finance Your Feature Film" try Samuel French Bookshop in Hollywood (online), or Amazon.com, or the publisher: Southern Illinois University Press in Carbondale, Illinois.
My analysis of film financing trends would look at two different levels: the studio level and the independent level. At the studio level in the early '80s, some of the studios took advantage of existing tax benefits and sought funding through large public offerings, which actually amounted to nothing more than low interest loans. The studios knew in advance they were not going to allow the investors to participate in the upside success of the movies financed. After the tax benefits were repealed and the public was sufficiently disenchanted the studios moved on to other sources. Next, came infusions of funding from the Japanese. In two instances that was in the form of actual studio purchases. But that never meant that the Hollywood insiders gave up control of the business. That just meant they were using someone's else's money -- the Japanese. Other slates of films were financed as joint ventures with Japanese investor groups. Once again, after these investors were sufficiently disenchanted with the ability of the major Hollywood studios to pay reasonable returns, the Japanese investors bailed out and the studios moved on to another crop of fools. The next group of investors, as I recall, came from South Korea, then came Germany, followed by insurance companies who sought to insure slates of films. For many reasons (all pretty much explained in my book "The Feature Film Distribution Deal"), all of these Hollywood investors have eventually determined that investing in Hollywood has not been a good deal. You'd think that the money would eventually dry up for Hollywood studios, but people just don't do their research and get carried away by the glamour (i.e., the Hollywood hucksters are world-class scam artists).
Now at the independent level, the methods of film finance have not changed all that much, although the different methods may have seemed to be more popular than others from time to time. Basically, you have various forms of lender financing (worldwide negative pickups, domestic negative pickups, international negative pickups, foreign pre-sales, gap financing, super-gap financing, insurance-backed schemes, investor financing (public and private offereings) and various foreign finance options including government subsidies, tax shelters, blocked currency deals, below-the-line or facilities deals, international co- productions, debt capitalization programs and foreign-equity financing. Each of these are discussed in "43 Ways to Finance Your Feature Films".
John Cones
re: Film Financing trends in the past
Jay
9:20 am wednesday march 13, 2002
Dear Mr. Cones,
Thank you very much for the prompt response. I really appreciate your time and help extended. Your reply contains precisely the information I was looking for. Besides, such historic information is not very accessible to students easily. I thank you once again. I would be glad if I could be of any help to you at anytime in the future.
Warm Regards,
Jay Mehta
re: Film Financing trends in the past
John Cones
8:00 am friday march 15, 2002
You are welcome.
John Cones
Recoupment of initial investment
Dagmar Anderson
10:18 am saturday march 23, 2002
Hi John,
We're slowly moving forward in obtaining funding for our children's TV project. We have interested parties, but we've been asked about recoupment of their inital investment. We do have in our offering that they will be repaid as "first dollar back" after business expenses, but what is the average amount that is offered above that, if any? Our understanding is that it's around 10-15%, but we wanted to ask you what your thoughts are.
Thanks!
Dagmar Anderson
re: Recoupment of initial investment
John Cones
8:12 am sunday march 24, 2002
Dagmar:
I'm sorry, but I cannot help but be amused by independent producers who will always hire a director, director of photography and other highly specialized individuals to assist them in producing a movie or television project, but will attempt on their on (maybe with some bits and pieces of information provided on a website like this or from other sources) to do something themselves that is certainly equaly as complex if not more complex so as to avoid paying the fees necessary to hire professionals to do that work.
As I recall, you were attempting to put together a Regulation D private placement offering. In terms of disclosure, it is necessary to set forth in writing all material aspects of such an investment. One of the things considered to be material (and therefore necessary to disclose) is the proposed revenue sharing formula as between management (the producers) and the investor group (i.e., how the money will flow; how the investors might expect to, not only recoup, but make a profit on their investment). If that has not already been done in your offering memorandum, you probably have not met your disclosure obligations. So you may have created some exposure for yourself with respect to non-compliance with the federal and state securities laws.
Now, to your specific question. No one would really know what an "average" is unless they had conducted a study covering a sufficient number of examples. And, since private placements are by their nature, private, no one has access to that kind of information, nor can it be obtained. If we were to change the question, to "What have I typically seen in such offerings?" I could answer that typically we see some high percentage of the investment entity's net revenues (we typically define that as "distributable cash"), such as 100%, 95%, or 90% for example, is to be paid to the investor group until they recoup their originally invested capital (and recoupment may be defined as 100%, 120%, 150% or 200% of that originally invested capital for example) and then the revenue-sharing ratio changes to 50/50 as between the management/producer group and the investor group for the life of the entity. Within the investor group such revenues are divided pro rata among the members of the group (i.e., based on the amount of their investment in relation to the total investment).
I would suggest that producers be very careful about promising "first dollar" of anything since such a vague term is so easily confused. For example, in your financial projections, it should be clear that the distributor, if any, will typically be paid its distribution fee out of the distributor's gross receipts, then it will typically deduct its distribution expenses, then it will pay the specific amount of the film's net profits or net proceeds negotiated to be paid to the producer group as per the distribution agreement. Then the producer group, as represented by the investment vehicle (e.g., LP, LLC or corporation) will probably make certain deductions out of its gross revenues (i.e., the "business expenses" to which you refer) before arriving at its net revenues or "distributable cash". But, that's for film, which is what I have most experience with. I can't answer your question for how revenues are handled for what is intended to be a television project, because I have no hands-on experience with how such revenues are handled, and I don't do research for this Q&A site.
You may want to accept your responsibility for conducting your business in a business-like manner and identify the persons with needed expertise for whatever it is you are doing and figuring out a way to pay them for their professional advice, rather than trying to do something this complicated on your own, and getting caught well into the process with the realization that you don't have all the information you need.
Good luck,
John Cones
microbudget finishing money needs
clayton
12:55 pm tuesday march 26, 2002
This is perhaps a departure from others on this forum - I have already shot the feature and it is waiting in cans for processing. We only need about $10K for this - ($15K would be nice, but 10 will work). I thought I could fund this through grants (due to an unusual technical quality of the film and its experimental nature), but have learned otherwise. It's not a mainstream film, probably won't make a bunch of money. But it's good. Do you have any advice for this amount of need? Form a non-profit and find "passive" investors who will drop in at a $1K or $2K or $5K level, and hopefully not expect a return? It seems like such a pittance in the greater scheme of things. Any ideas would be appreciated. PS - could you talk some more about finders? Thanks so much for this forum. - clayton
re: microbudget finishing money needs
John Cones
1:55 pm tuesday march 26, 2002
Clayton:
As I'm sure you suspect, a budget as small as yours would not justify the costs associated with a securities offering to passive investors. Also, the concept of passive investors is not useful in the context of a non-profit. In addition, creating a non-profit, tax-exempt entity would probably cost too much to justify the small amount of money your trying to raise. Since, you admit that there is little chance that the film would make money, it is not even useful to consider active investors (non- securities offerings). If you took the position that it might make money, you may want to consider using the investor financing agreement (found in the Film Industry Contracts book) with one or two active investors. So long as these investors are regularly involved in helping you to make important decisions with respect to the project, raising money in this manner would not likely involve a securities offering. In addition, finder's could help you find those investors and be paid a commission for their assistance. But, be careful, if you start going beyond one or two active investors, it becomes more and more difficult to legitimately consider them active since the presence of one passive investor in the group will make it a securities offering.
John Cones
Recoupment of initial investment
Dagmar Anderson
10:18 am saturday march 23, 2002
Hi John,
We're slowly moving forward in obtaining funding for our children's TV project. We have interested parties, but we've been asked about recoupment of their inital investment. We do have in our offering that they will be repaid as "first dollar back" after business expenses, but what is the average amount that is offered above that, if any? Our understanding is that it's around 10-15%, but we wanted to ask you what your thoughts are.
Thanks!
Dagmar Anderson
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