24 March 2002 - 09 July 2002
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 a 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
re: microbudget finishing money needs
clayton
6:16 pm monday april 1, 2002
Thanks a lot for your reply, and now I have 3 ill-informed questions for you: A) what is a securities offering, B) where can I find the Film Industry Contracts book, and C) can you indicate what "important decisions with respect to the project" might entail? In other words, what sorts of decisions? And thanks again for your advice.
One other thing - the small amount of money I mentioned before ($10-15K) would get the film processed and edited. A larger chunk (approx $65K) would get our film prints made, get festival distribution done, and lots of other details. I'm hoping to do this via finishing grants which need to see the final rough cut of the full film, but if I start considering investors, how would my strategy change if I wanted to raise the full amount rather than stopping at the first step of $10-15K?
Clayton
re: microbudget finishing money needs
John Cones
8:00 am tuesday april 2, 2002
Clayton:
Anytime you are trying to raise money from a group of passive investors, and it is your investors' hope that they will make a profit primarily off your managerial efforts, that's likely to be considered a securities offering by regulators, no matter how it is structured, and regardless of whether you realize it or not. Securities either need to be registered for sale (public offering) or you must qualify for an exemption from the registeration requirements (private placement).
The Film Industry Contracts Book can be ordered directly from the publisher (Rivas Canyon Press at 310/477-6842), through Amazon.com, or through the Samuel French Bookshop in Hollywood (also online).
There are too many decisions to be made with respect to a securities offering to set them out here, but the book "43 Ways to Finance Your Feature Film" covers many of those, or a more targeted discussion with a securities attorney with experience with film offerings could help. But, you will be deciding whether to do a securities or non-securities offering, a public or private offering, which states, how many investors, which investors are suitable for the offering, the minimum and maximum for the offering, the unit size, the investment vehicle, who or what entity will manage the offering, whether financial projections will be used and how to prepare them, whether box office comparables will be used and how to prepare them, a minimum and maximum budget or estimated use of proceeds, synopsis for the film or films, bios for those attached, anticipated MPAA rating for the film, whether it's a production-money offering or a development deal, and so forth.
John Cones
First investor financed independent film
Dan W
9:03 am tuesday april 2, 2002
Mr. Cones:
I will be working as a Business Consultant and possible Associate Producer for an Independent film requiring a relatively small amount of outside financing. My role will be in obtaining financing, writing business plan, and possibly assisting with marketing of the film. I've diligently read through Q&A's on the Investor Finance Forum to get an understanding of the industry and requirements of investor financing in order to serve my client and I've got a few questions that I hope you'd be able to answer:
1. Because the film's budget is relatively low, under $50,000, I believe it would be better to obtain some "active" investors rather than "passive" ones. I understand, through reading the Q&A's, that obtaining financing through passive investors would require an investment offering, which would be subject to all the SEC rules and regulations. I'd like to stay away from this for my client due to time and budget restrictions, so I want to know what constitutes an "active" investor, what role must they play, how many "active" investors can you have, and any recommendations on how to structure the investment (investor financing agreement, joint venture, initial incorporation, or active-investor LLC).
2. The producer/director has offered me a possible associate producer's title and a percentage of revenue as renumeration for my services. While this intrigues me, this is my first entertainment industry client, so I'm not sure how to structure our relationship so as not to create any type of conflict of interest or other ethical issues. Also, he'll be doing additional films and I'd like to have him as a client for future projects. Is it okay to assume an associate producers role, and if so, what type of renumeration is generally structured for this? Or, should I structure it as a "fee-based" relationship?
Any help you could provide me would be greatly appreciated.
Regards,
Dan
When does hype become fraud?
Hillary
9:50 am tuesday april 2, 2002
Mr. Cones:
I'm confused about the posting of February 28th on this board. On that day a filmmaker wrote that if someone invests in his film the money "probably will not be recouped." But he seems to want to hide that belief from a prospective investor. To me that sounds like a typical effort to fool an investor. You did not object to that kind of effort.
If a filmmaker believes that an investment will probably not be recouped, is that opinion a material fact that the filmmaker must disclose in a private placement memorandum?
Related to that, I understand that filmmakers must tell prospective passive investors that film investments are highly risky. But I've seen private placement memorandums where the filmmaker discloses the risk in one sentence and then in the next sentence basically says that he'll do all sorts of things to reduce the risk. Stating a risk and then stating a plan for risk reduction seem to cancel each other out, which leaves the investor thinking that the risk is minimal. Do those promises of risk reduction really just deceive investors by trivializing the risk?
I'm trying to understand when omissions and obfuscations rise to the level of fraud.
Thanks.
Hillary
re: First investor financed independent
John Cones
7:35 am wednesday april 3, 2002
Dan:
The best description of an active investor I can provide is someone who is regularly involved in helping you make important decisions with respect to your project. They do not have to have veto power, but should be significantly involved in the important decisions. To be safe, 1 or 2 is all I can recommend, maybe three. But, clearly, the more you bring in, the less likely that all will be considered active. If you have one investor who is passive, your selling a security, no matter what it's called. I suggest you err on the safe side. Also, you must consider the downside of having to involve so many other individuals in the decision-making relating to a creative activity. See the indy film "20 Dates" to get a feel for how that sometimes works out.
You've already set out the options with regard to active investor financing. Generally speaking, I think the investor financing agreement works best with one or two active investors, the joint venture works best between two already existing entities, the other two options might work with four or five investors, but consider further, the advantages and disadvantages for each option set out in "43 Ways to Finance Your Feature Film".
Your second question is really too broad to address here and ultimately depends on your own negotiations. An associate producer credit is not inappropriate for the kind of work proposed. You may want to seek an associate producer fee to be paid out of the film's budget, which assumes that you at least raise the minimum amount of money you need, and also ask for a percentage participation in a defined stage of the film's revenue.
John Cones
re: When does hype become fraud?
John Cones
7:51 am wednesday april 3, 2002
Hillary:
No one can predict with certainty what the future results of a film will be. Each year there are at least several highly publicized independent feature films that seem to experience economic success. In the case of your filmmaker, he is admitting that an investment in a film is a highly risky venture. There is an obligation to disclose that risk in its several specific forms. A properly drafted securities disclosure document will contain a "Risk Factors" section that fully discloses such risks. There is no attempt, in such disclosure documents to hide anything or fool any investor. If a filmmaker is so motivated, I could not recommend that such a filmmaker seek financing from investors. When I work with filmmakers, I assume they are trying to properly conduct an offering. If, as you say, a filmmaker actually belives that his investors will probably not recoup their investment, then he or she should not go the investor financing route. If, on the other hand, the filmmakers recognizes that the investment is a highly risky venture, properly discloses that fact, but he or she is hopeful that the investors will recoup and make and profit and that filmmaker is willing to make his or her best effort to see that it then such a filmmaker cannot be criticized for trying to make their dream come true.
When a filmmaker is using a securities disclosure document to raise money from investors, a "Risk Factors" section is required. In that section, all of the material risks associated with the investment must be disclosed. Such a section typically consists of 3 - 4 pages of text, with no rebuttal (i.e., it is not appropriate to try to soften the impact of the risk factors in the risk factors sections). More positive information relating to the offering should be placed elsewhere in the disclosure document.
The question as to whether such conduct rises to the level of fraud is a separate question. Fraud is intentional deception resulting in injury to another. Elements of fraud are (1) a false and material misrepresentation made by one who either knows it is false or is ignorant of its truth, (2) the maker's intent that the representation be relied on by another and in a manner reasonably contemplated, (3) the recipient's ignorance of the falisty of the representation, (4) the recipient's rightful or justified reliance on the representation and (5) proximate injury to the recipient.
John Cones
Budget proportioning
Ken Spassione
11:30 am tuesday april 9, 2002
Good Afternoon,
My question: How can I come up with $ 10,000 without incurring loan debt ?
Background:
I am an NJ filmmaker (and an attorney by day) and I am producing
a small short independent film in the fall of this year. I have
my 2 prinicple actors, a script, and locations owned by freinds
and family that I can use for free. I can also more than likely
wangle/borrow DV equipment and editing facilities.
I am also about to form an LLC (probably based in Delaware) to solidfy this as a business, and establish a history as business.
Off the cuff, I think we (see link for info www.stupanity.com) can do this for $ 2500.00. 10K would leave us lots of growing room, but I would like to know what you think the best avenues are for obtaining this capital.
Thanks
Ken Spassione
P.S. The above link is provided for responding parties to obtain some background information in order to inform their response, It is not intended as solicitiation in any way.
re: Budget proportioning
John Cones
5:28 pm tuesday april 9, 2002
Ken:
It is extremely difficult to make money with a film short, so you don't have much to offer investors. That sounds like something more suited to gifts, personal savings or credit-card financing.
John Cones
a business plan
jennifer
4:37 pm wednesday april 10, 2002
Hello,
I am wondering if you know where on the internet i would be able to find an example of a Limited partnership prospectus for an independant film with a budget of $5m or less. If you could please e-mail me with any iformation that you may have I would be very greatful.
Thank you,
Jen
re: a business plan
John Cones
7:05 am thursday april 11, 2002
Jen:
You started your posting with the headline "business plan", then moved on to a question about a "prospectus". Please understand that there is a clear and distinct difference between the two, and neither may be what you actually need. A business plan is a document containing information about an investment opportunity that is suitable for use with active investors, but its contents are not directly regulated by federal or state law, although you would still be obligated to avoid fraudulent statements. The word "prospectus" is a special term reserved for use in describing the required securities disclosure document used in conjunction with a public/registered offering. The term "private placement offering memorandum" or "PPM" for short is used to described the required securities disclosure document for a private placement (exempt) offering (i.e., exempt from the securities registration requirement because the offering complies with all of the conditions and limitations imposed on the use of the exemption). These are not fill-in-the-blank forms, and require the exercise of judgment based on extensive federal and state laws. You first have to decide whether you really need a business plan, a prospectus or a PPM, and in each case which laws you will be relying on. Then somebody, either you or an experienced securities attorney needs to review those laws to make sure you are in compliance. Even if you found something online that might be related to what you are trying to accomplish, the chances of finding something that is close enough to be really helpful, and being able to successfully modify the example you find to actually meet the many requirements of the law are miniscule. The answer to your question is no, I do not know of the existence of a limited partnership prospectus online, and again would caution you not to be misled into thinking that it's as easy as finding an example disclosure document and making simple changes to fit your deal. It's not that easy. As noted before, on this site, I have included a feature film limited partnership PPM in my book "Film Industry Contracts", but again, the information contained therein is quite dated.
John Cones
Cal. Corp. Code 25102(n) & related papers
Will S.
6:33 pm friday april 12, 2002
Hi, I've been thinking of using California's 25102(n) provision to help fund my next feature. But I had a question about the paperwork :
According to Cal. Corp. Code 25102(n)(7)(A) and (B), the state wants a "First Notice of Transaction" filed [with $600], and a second notice filed "within 10 business days following the close or abandonment of the offering, but in no case more than 210 days from the date of filing the first notice."
The second notice appears to be a record of the close of the offering. Question is, does this mean the entire offering must be wrapped up 210 days?
Thanks very much!
Will S.
L.L.C. considered a asset?
WFM
1:44 pm monday april 15, 2002
Since, a (film company) L.L.C. is considered a vehicle for investors to invest.
Relating this question to the defintion of "Compounding" interest.
Compounding: The ability of an asset(i.e. film company L.L.C.)to generate earnings that are then reinvested and generate their own earnings.
At what point or stage of financing, if at all, is a (film company) L.L.C. considered a asset?
re: L.L.C. considered a asset?
John Cones
7:40 am tuesday april 16, 2002
WFM:
There is a fundamental difference between an investment, wherein the investors' money is at risk and the timing and amount of return on the investment depends on the success of the venture. On the other hand, a loan is a promise to pay at a specified time and at a specified interest (if interest is promised). It is appropriate to consider compounding interest, but the concept of compounding does not apply to an investment. With an investment you are looking for the return of the investment and a return on that investment. The investment vehicle, whether it is an LLC, LP or corporation is not considered an asset or liability itself, but has its own assets and liabilities. Its assets are those things owned by the company that have monetary or exchange value. The company may have an asset value, however, but that is the worth of the company's assets considered collectively.
John Cones
re: Cal. Corp. Code 25102(n) & related papers
John Cones
8:14 am tuesday april 16, 2002
Will:
I think you are right to raise the question, but it appears that the language of 25102(n) doesn't really mean what it appears to mean. You are only required to file another notice within 210 days, but there is no specific time limit on the offering itself, as long as you stay within the minimum and maximum limits you set for the amount of money being raised in offering and do not conduct any other securities offerings during the same period, since such an additional offering may be integrated with the first. It took me a couple of extra days to make sure about this is the correct interpretation, since I wanted to consult the California Department of Corporations Duty Officer. Amazingly, she had gone into the hospital and wasn't able to check her messages until Tuesday, but she called me from the hospital! Now, that's a dedicated public servant!
John Cones
Long-term business proposal vs. Project
Isaac Anderson
5:41 pm tuesday april 16, 2002
Myself and three other business partners are in the process of
putting together our business plan. Our main concern at this
point is making sure we successfully raise funds for our first
feature length film. Do you feel that you have better odds of
raising funds if you approach your plan in a multi-project long-
term investment format or in a single project proposal? I
personally like the idea of focusing completely on one project
and then raising money strictly for it, but if that is a less
successful model for raising funds we will opt for the five-year
plan. The bottom line is, we feel that our first project will
speak for itself and give us legs so that our future projects
will become progressively easier to raise capital for.
Thanks for the wisdom,
Isaac
www.visionfilmworks.com
re: Long-term business proposal vs. Project
John Cones
7:29 am wednesday april 17, 2002
Isaac:
Theoretically, it makes more sense for an investor to be able to spread his or her investment out among several projects, the thinking being that at least one of them might become economically successful. On the other hand, there is no guarantee that you will be able to raise the level of funds for, let's say, a three-picture deal. Typically, these are structured as mini-maxi offerings, anyway, so if you just raise the minimum, you will just do one film. On the other hand, most of my clients raise money for single film projects.
John Cones
re: Cal. Corp. Code 25102(n) & related papers
Will S.
7:32 pm monday april 22, 2002
Thanks John, I appreciate the effort. I didn't realize it would be that much work! 25102(n) is a strange little guy.. wonder how they got that past the SEC, and in fact, wonder how they got the feds to adopt Reg. CE, 1001. Pretty sharp guys in Cali.
Thanks again!
WS
thanks
dan
6:50 am saturday april 27, 2002
I am amazed at the amount of info available at this site. I think its great that you are offering/making available so much expertise, particularly for free. What a wonderful public service!!!!! I am a wanna be film investor, however am currently licking my wounds after tech investment fiascos. thanks again, dan.
Foreign Investors and Praise for Your Materials
NL
11:53 am saturday april 27, 2002 Dear John,
First I want to thank you for not only this forum but also the contracts I ordered from you - which arrived promptly via UPS about 3 weeks ago. I'm not at the financing / incorporation stage yet - for which I may end up giving you a call. Nonetheless, your materials have already helped me get an overview helpful in negotiating with talent.
Anyway, if I am interested in seeking funds from foreign investors, what if any, Federal and California state laws might apply? Those laws would still apply to foreign close friends and family right?
Furthermore, is there any way to quickly research the laws in that foreign country? Or do you know of any professional who specializes in such work to whom you could refer me?
As a specific example, is there anything that would stop me from posting a business opportunities ad in Japan or some other foreign country?
Thanks again,
NL
re: Foreign Investors and Praise for Your Materials
John Cones
1:26 pm saturday april 27, 2002
NL:
U.S. securities law does not apply to residents of foreign countries, but the law of their jurisdiction does. I do not have expertise in the securities laws of such jurisdictions, nor do I personally know of other attorneys who do. You might have to go to some of the larger international firms for that.
John Cones
Film Finance statement
Marvin Pedigo
1:42 am monday april 29, 2002 John,
We are in the process of obtaining funds for our movie production. The pre-production is complete and we have our cast and crew all signed to letters of intent. We have spent many months in pre-production, to be sure that all the Ts were crossed and all the I's dotted. From my experience, the biggest mistake in independent movie production, is in the planning stage. We wanted to be sure the package was ready to go before we sent out the first letter to investors. We were fortunate to have investors waiting for the package. We have put the package together in three forms. We have a hard-copy presentation, a visual presentation on disc, and a web-site. We are prepared to shoot on a moments notice. Our plan is to start the shoot in late June, God willing. You can visit our web-site at: http://www.happymartmovie.com
I saw an article on your web-site, or on a web-site where I also found this board, and I was wondering if I could quote the article in my submission package? It was written in 1999 by a James Jager II, and is titled, "Why Invest In a Movie?". I think it is an excellent article and I feel it is exactally along the lines of my thought process on the subject. At the bottom of the article it says, all rights reserved.
Thank you, and you may respond off of this board if you feel this is not the proper format for posting here. I will also send you an e-mail on the subject.
Thank You,
Marvin E. Pedigo, Producer
happylife22842@yahoo.com
re: Film Finance statement
John Cones
7:14 am monday april 29, 2002
Marvin:
If you want to obtain permission to use James' article, you may write to him (via e-mail) by going back to the FIRM website at http:/www.homevideo.net/FIRM and clicking on the "Help FIRM" button. That allows you to send an e-mail message. Address it to James Jaeger and he can respond.
With respect to your plans for raising investor financing: (1) you must determine whether you plan to raise money from active investors or passive investors. (2) If passive investors, you are selling a security. (3) If selling a security, you must either register that security with the SEC at the federal level and with each state securities regulatory authority in which you expect to raise funds, or (4) in the alternative, you may seek to qualify your offering as an exempt (private placement) offering by complying with all of the conditions and limitations imposed on the use of such exemptions. (5) The public/registered option is expensive, time-consuming and quite complex, thus not typically used for low budget feature film projects. (6) On the other hand, the private placement exemption does not permit the use of any form of advertising or general solicitation. (7) Posting information about your film for purposes of soliciting investor financing is likely to be considered such a prohibited form of advertising or general solicitation, thus, you may want to take that information down until you have done the same sort of research into film finance that you have done regarding pre- production. You may want to consider my book "43 Ways to Finance Your Feature Film" as a start, and if you have more specific questions relating to investor financing, read the earlier postings at this Investor Financing site and post you own questions in the future.
Good luck.
John Cones
LLC's
Jerry Deal
4:22 pm tuesday april 30, 2002
John, in your book "43 Ways to Finance Your Feature Film", you mention that LLC's are not recognized in a number of states, and thus may not be a viable entity if you're seeking revenues worldwide in all media. Is this still true today, as that book I believe was written in 1995? Any comment, or update about that? Thanks,
Jerry Deal
re: LLC's
John Cones
6:58 am wednesday may 1, 2002
Jerry:
Yes, at the time the book was written there were still some states that had not authorized the LLC as a form of doing business in that state, but that just meant that a producer in that state could not choose to use a local LLC for doing business. That does not mean, however, that an LLC, formed in a state that did authorize such an entity could not earn revenues in all markets and media worldwide. In addition, of course, most if not all of those remaining states now authorize the LLC.
John Cones
Film Fund
Glen Berry
10:54 am tuesday may 7, 2002
I manage a popular independent filmmaking website. Part of our operation includes "Efilmfund", a simple match-making service between independent producers and investors. Over time, we have accumulated a database of investors and projects with new leads coming in daily.
We are interested in taking this venture to the next level. Specifically, spinning it off as an independent operation, possibly as an LLC, with investor partners pooling their resources into a fund. The money in this fund would be distributed across multiple projects. Any advice on finding a partner with knowledge of film investing and the reputation and experience to manage the fund?
Thanks.
re: Film Fund
John Cones
7:31 am wednesday may 8, 2002
Glen:
What efforts have you made to make certain that your so- called "simple match-making service" is in compliance with the federal and state securities laws. I would be surprised if the SEC or the state regulatory authorities considered posting information online to fall within the very limited parameters that "finders" may pursue (i.e., merely introducing the buyer and seller) in some states, and certainly not (assuming you are compensated on a transaction-related basis) in most of the states that prohibit such compensation to persons not licensed as an SEC/NASD broker/dealer form or registered representative. I would suggest a thorough investigation into these questions before you take this venture to the next level. Also, because of these concerns, I could not suggest anyone to partner with you,unless such questions were satisfactorily answered. For the same reason, I could not recommend that filmmakers seeking financing use such a facility, since just because the technology is available, does not necessarily make it legal.
Best wishes,
John Cones
re: Film Fund
Glen Berry
0:14 am thursday may 9, 2002
Thanks for your reply.
Actually, I'm very aware of the rigid restrictions on match- making and to answer your question, we do not charge on a per transaction basis. Producers can make a voluntary contribution to the operation of the site if they desire but it is optional. It truly is a very simple service and we have not become involved beyond that because of our lack of expertise with film investing and SEC regulations.
I'm much less interested in continuing on the path of match- making and more interested in moving in the direction of a managed fund. Our preliminary outline involves pooling investor resources and distributing them across multiple projects, paying out annual returns much like a mutual fund. Of course, this would involve consulting with a securities attorney and likely forming an LLC and filing an exemption notice/registering with the SEC.
We are looking for an experienced partner with a reputation and track record who can manage the fund and prepare a prospectus. We can provide the investor leads, marketing and technical expertise. If you know of anyone, I would appreciate it if you would pass the information on.
Thanks for your time.
re: Film Fund
John Cones
7:53 am thursday may 9, 2002
Glenn:
Yes, your fund idea would likely involve the sale of security, possibly as you suggest, interests in a manager/managed (passive investor) LLC. It is also possible that the pre-existing relationships with investors through your current online matching service might allow you to solicit those investor prospects for a private placement offering, however, there should be a separation in terms of several weeks from the end of your use of the matching service to generate leads for the subsequent private placement offering and the start of the offering itself. In other words, the matching service should not be used to generate new investor leads after the start of the private placement offering, because that would run afoul of the prohibition against raising money from people you and your upper level management did not know prior to the start of the offering.
With respect to the idea of bringing in an experienced securities attorney as a partner for the creating and managing the fund, my answer has to be no, I know of no such experienced securities attorney who would be willing to do the work involved on a "partner" basis.
John Cones
S Corp or LLC?
Jerry Deal
10:49 am wednesday may 15, 2002
John,
I have been looking into forming a production company as either an S Corp or LLC, but have yet to decide. I'm a little confused as to what personal liability and assets each protects, as it is not complete. Obviously, things such as outright fraud, illegal acts, etc. aren't protected. What are the pros and cons of each? Also, what about forming the company as one or the other, and the production as one or the other? Or does that just confuse the issue, and make a mountain of paperwork? Also, is it possible to get a rate sheet for your services? Thanks.
Jerry
re: Foreign Investors and Praise for Your materials
NL
11:35 am wednesday may 15, 2002
Thanks John!
re: S Corp or LLC?
John Cones
1:01 pm wednesday may 15, 2002
Jerry:
There's not much difference in the limited liability protection as between an S Corp and an LLC, except that even individual managers of the LLC enjoy limited liablity protection (i.e., nothing other than their investment is at risk). As a practical matter, however, an LLC is easier to maintain than a corporation, since there are no requirements for shareholder and board of director meetings with an LLC. On the other hand, you need to check with your state to see if it imposes any gross receipts tax on the LLC but not a corporation. An LLC or LP are commonly used vehicles for project financing, whereas the corporate structure is more commonly used for long-term operating companies. Thus, you may want to use the corporate structure for your production company and let that corporate production company serve as the manager of a series of LLC offerings to finance the production costs of specific films. My published fee schedule applies to private placement securities offerings only. If you'd like that information, call me at 310/477-6842 or e-mail at jcones@gte.net and provide me with a FAX number.
John Cones
Motion Picture Studio
Shelton Minor
2:02 pm friday june 28, 2002
In January it was announced that Calif. based Manex Ent. would be relocating to Trenton, New Jersey. The Co. did the effects for the Matrix and many others. The deal is a $41 million dollar 200,000 sq. ft. studio complex to be built over a 5 yr. period. I have put together a smaller smarter studio deal. We would be converting an old tv studio into a modern motion picture studio like no other in the country. I am in the process of finding the right investors that would be interested in a unique deal such as this and I was wondering if you could advise me.
Sincerely,
Shelton Minor
Ewing, NJ
re: Motion Picture Studio
John Cones
6:24 am saturday june 29, 2002
Shelton:
The purpose of this site is to provide information regarding investor financing of entertainment projects. So, in order to help you, I'll have to have more specific questions. If you want general help, you might want to take a look at the book "43 Ways to Finance Your Feature Film". The section on Investor Financing applies to all kinds of projects including small motion picture studios. You'll have to make the same decisions as others seeking money from investors: Are you seeking to raise money from passive investors and therefore selling a security? Should you do a public/registered offering or an exempt/private placement type offering? What investment vehicle to use (LP, LLC or Corp)? If a private placement, which federal exemption should you rely on? In which states do you want to raise money? How much money will you need to not only cover the costs of the project but the costs of the offering? What will be the size of the LP or LLC Unit or the corporate share? These are the kinds of questions you will need to discuss with your security attorney in determining which direction to go.
John Cones
TV show funding
Paul Weinstock
5:52 pm tuesday july 2, 2002
We have recently aquired the rights to a childrens show. It was rated 12th by the Annenberg Foundation. It is currently in syndication. Can you direct me to some funding sources..
Thanks
producer's rep
Vincent
10:49 pm tuesday july 2, 2002
Dear John
Does a producer need a representation besides when he needs to sell a completed film to distributors?
In your experience, is producer's rep's function similar to that of actors', directors'?
Rate of Return on Film Investment
Monika Biegler
5:36 am wednesday july 3, 2002
Dear Mr. Cones,
What are the laws with the Fed and state governing NY for film projects? To better explain my situation : I have a DVD project that needs funding and have 3 people interested that are all asking the same question. What type of rate of return on this DVD will I get? How do I answer that question in written contract format by Monday morning?
Thank you for all your help,
Monika
www.nyc-films.com
re: TV show funding
John Cones
6:35 am wednesday july 3, 2002
Paul:
I do not refer producers to funding services, but answer questions about how to comply with the federal and state securities laws in seeking passive investor funding, about preparation of the required disclosure documents and business plans similar topics.
Good luck!
John Cones
re: producer's rep
John Cones
6:40 am wednesday july 3, 2002
Vincent:
No, in my experience, a producer's rep functions much differently than actors or directors and the question of need depends on your own knowledge of the distribution segment of the industry and your relationships. An experienced producer's rep will bring that somewhat specialized expertise (of the distribution side of the industry) to the table, along with existing relationships with the people who work for distributors. They also may have expertise, particularly those that are entertainment attorneys, that may be helpful in negotiating the distribution deal. If you don't mind doing the leg work involved in finding the right distributor for your project and you have the help you need to negotiate the best available deal, then you may not feel you need a producer's rep. But, many producer's find that knowledgeable producer's reps are quite helpful at that critical stage in the process.
John Cones
re: Rate of Return on Film Investment
John Cones
6:48 am wednesday july 3, 2002
Monika:
As a general rule, there are no special laws relating to film deals at the federal level or in any state. But, if you are dealing with investors, you need to be sure that you are not selling them a security, because all states and the federal goverment do have laws relating to the offer and sale of securities. An over-simplified means for making that determination is to decide whether your investors are going to be passive or active. Active investors are regularly involved in helping you make important decisions. It is possible to keep three invesotrs actively involved, although there is a downside (i.e., you are making a movie by committee). If they are passive investors (i.e., relying primarily on your managerial efforts to produce the project and hoping to make a profit off of your efforts) then you are selling a security and you need to talk to one or more securities attorneys about what compliance involves. means. The rate of return for a DVD or film project is impossible to project with accuracy. About the best you can do is offer several alternative scenarios about how the money might flow based on numerous reasonable assumptions about the revenues generated by the project in the marketplace and the various deals that determine how the money will be divided along the way.
John Cones
re: Rate of Return on Film Investment
Monika
5:35 pm wednesday july 3, 2002
Thank you, I will seek a securities lawyer asap, I actually know that they are relying on my management of the project and then profiting off my efforts. Is it ok to send this type of an e- mail out to raise money as well?
Dear Mr. John Doe,
Hello, my name is Monika Biegler of www.nyc-films.com
a.k.a. Leah.
HOW WOULD YOU LIKE TO BE IN OUR MUSIC VIDEO!!!!!!!!
I am writing you because my documentary and music
video are in desperate need of funding.
We have cast nearly 100 BEAUTIFUL WOMEN from all over
the world, and have a fabulous CD Soundtrack!!!
I am contacting you because it has been difficult
finding co-producers to help fund the completion of
our entertainment projects at www.nyc-films.com
and we would like to give you the chance to not
only be in our credits but also in our music video.
Of course we need money, but all we are asking from
you is fourteen hundred dollars (covers your
transportation flight and hotel in Manhattan for
the film shoot).
On behalf of all the women in our documentary and
music video, I am contacting you as a means of perhaps
helping fund the continuation of our music video and
film. We can meet with you in New York City, let you
read our scripts, attach your name as Co-Producer
title in our credits, have a role on film in our music
video that will not be edited out of the final video
and party with us all at the wrap parties!!! We are a
legitimate East Coast entertainment company trying to
get off the ground with a slue of HOT and SEXY
projects.
Looking forward to speaking with you in the near
future and possibly working together.
CALL ME ASAP FOR ALL THE DETAILS!!!
Thank you for your support,
Monika Biegler
Sincerely,
Investor Relations
mbnycfilms@yahoo.com
(212) 253-7104
www.nyc-films.com
Thanks again,
Monika
re: Rate of Return on Film Investment
John Cones
8:34 am thursday july 4, 2002
Monika:
As a general rule, it is illegal to use the Internet to solicit investors unless your securities offering is registered with the SEC and in each state in which you seek investors. Unfortunately, I don't know of any experienced securities attorneys in New York who have been willing to structure their fee schedules to accomodate low budget independent filmmakers.
Good luck!
John Cones
re: Rate of Return on Film Investment
Monika
11:07 am thursday july 4, 2002
THank you Mr Cones, I will not attempt any type of solicitation via the internet. Is the following sentence appropriate or legitimate for an investor in regards to rate of return? :
"The profits entitled to the investors would be %40 of the net profits from the sales of each DVD and CD product. The $300,000 shall be doubled within a twelve-month period."
Thanks again!
Monika
re: Rate of Return on Film Investment
John Cones
7:42 am saturday july 6, 2002
Monika:
I absolutely could not suggest that you use the word "shall" and promise your investors that their $300,000 would double in twelve months. Such a return is impossible to predict and therefore will surely get you in hot water with your investors. In addition, if you use a limited libaibity company or limited partnership as the investment vehicle, it is also somewhat complicated to use a percentage of the film's "net profits" as your standard. After all, the distribution deal as between the producing entity (LLC or LP) has yet to be negotiated and therefore you do not know what percentage of the film's net profits the producing entity will receive. It is not likely to be 100%. Also, it is likely that some deductions from the gross receipts paid to the producing entity will be taken from the revenue stream (e.g., expenses of the entity itself, like paying an accountant to prepare K-1s). Then the net receipts to this producing entity, often referred to as "distributable cash" will be divided between the investor group and the producer group as per a revenue-sharing ratio set forth in your disclosure document. So, you can promise your investors a percentage of this producing entity's distributable cash, but if you promise them a percentage of the film's net profits, you will have to conver the percentage of net profits into the percentage of distributable cash and that conversion will be uncertain until the distribution deal is in place. Again, I would suggest that you not make these important decisions and communicate them to investors until you have a securities attorney on board and you've made the decisions about choice of entity (investment vehicle) and other questions relating to the overall deal with investors.
John Cones
re: Rate of Return on Film Investment
Monika
4:33 pm sunday july 7, 2002
Thanks again Mr Cones,
I have decided to allow my investors to have an active role in the project because of the nature of the film being a documentary. I still intend to sell this as a DVD product with a CD soundtrack product. Does this still mean I have to advise a securities attorney or will an entertainment attorney suffice? If not, I will continue searching for a securities attorney to be make the investment legal on all fronts. Hope you had a nice fourth of July weekend and thanks for all the tremendous wisdom.
Sincrely,
Monika
re: Rate of Return on Film Investment
John Cones
5:14 pm sunday july 7, 2002
Monika:
If, in fact, your investors are active, it is unlikely that you will be selling a security. Unfortunately, there is no really good definition for what makes an investor active, so you have to consider several factors and try to steer away from the close call. For example, the more investors, the less likely that all could truly be consider active. If one is passive, you are probably selling a security. I've always suggested that one or two, maybe three people who are regularly involved in helping to make important decisions with respect to the project may be considered active investors. But, that definition has no legal authority, it is just a guideline I've developed from tax law that is being applied to securities law since securities law has not dealt with the issue precisely. Further, if your investors are people who have no background or experience of relevance to the project, they still may not be considered active by the securities regulators. So, to be safe, whatever you decide to do, you may want to run it by a securities attorney to make sure the securities laws do not apply.
John Cones
financing
Troy Ewing
6:02 pm sunday july 7, 2002
In one of your previous post you mentioned having a finder raise the money for a film project. Are there any broker/dealers that specialize in selling reg d private placements if so how could i find them or an individual that specializes in this? Thank You
re: financing
John Cones
6:29 am monday july 8, 2002
Troy:
Few if any SEC/NASD broker/dealer firms specialize in Reg. D private placements. They generally offer a broad range of financial products. In addition, it is rare to find an established broker/dealer firm that is interested in sell interests in a highly risk investment like a low budget independent film. Thus, in my 15 years of working with independent producers, the issuer sales route has been the only successful route I've seen taken in investor financing.
John Cones
Gross floor provision
WFM
10:25 am monday july 8, 2002
Would you please explain the term "gross floor provision"?
re: Gross floor provision
John Cones
2:09 pm monday july 8, 2002
WFM:
This term relates to distribution deals and not investor financing so is not appropriate for this Q&A site. The term is discussed in two of my books: "Film Finance and Distribution--A Dictionary of Terms" and "The Feature Film Distribution Deal".
John Cones
re: Gross floor provision
WFM
3:30 pm monday july 8, 2002
Thanks
D.B.A.
WFM
3:18 pm tuesday july 9, 2002
Is there a limit to the number of D.B.A.'s or L.P.'s to be used as vehicles within the structure of a L.L.C.?
Since, it appears there is more flexibility in managing and accounting to investors as divisions of the L.L.C.related to: Distribution, Production, Acquisition, or other divisions to form a mini-mogul studio.
Data: Neg Pickup vs. Box Office
Danny Goldfield
10:04 pm tuesday july 9, 2002
I have been working on a business plan for an $850,000 coming-of- age film set at an overnight summer camp.
As I try to illustrate the prospects to potential investors, I am unsure about my approach.
I have read a number of other business plans that use domestic and foreign box office data to illustrate how their project will make good for the investor. But, isn't this data irrelevant?
Would it be more important for the investor to know how much a distributor of a comparative project paid for the domestic or foreign distribution rights?
When I read about a distributor buying an independently produced film at Sundance, my understanding is that it is a one-time pay off. How varied are these deals? When deals are made, what determines whether or not there is a "back-end deal".
Am I making any sense?
Thank you
Danny
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