10 July 2002 - 12 August 2002
re: D.B.A.
John Cones
6:49 am wednesday july 10, 2002
WFM:
A dba (referred to as a fictitious name company in California) is not an entity nor an investment vehicle. It does not offer limited liability protection to its owner or owners. It might be suitable to use that form of doing business as the production company Manager of an LLC or a series of LLC's used for raising money from investors for various projects. If, on the other hand, your operating company is an active investor LLC, there is no limit to the number of other passive-investor LLC's that you may use as investment vehicles for various projects using the active- investor LLC as the Manager.
John Cones
re: Data: Neg Pickup vs. Box Office
John Cones
7:01 am wednesday july 10, 2002
Danny:
You are making sense, but the data you propose using (i.e., how much a distributor of a comparative project paid for the domestic or foreign distribution rights) is not readily available. That's why producers routinely use box office data as the starting point for their projections, regardless of the shortcomings. In addition, "how much a distributor pays" assumes either a complete buy-out without any ongoing percentage participation or only includes the distributor advance and excludes any possible profit participation. I also doubt that anyone can provide reliable statistics on how many of the Sundance deals are one-time pay offs only as opposed to including some contingent compensation. Anyone with that information would have to have access to the actual terms of each of the deals involved, and nobody has that access. As I've stated here before, I regularly provide a simplified format for movie financial projections to my clients doing investor offerings, and the distinctive features of those projections are as follows: we set out a written set of assumptions upon which the projections are based, we assume a world-wide gross for the film in all markets and all media (without bothering to do the impossible and break-down each market and media) then we assume and deduct an amount for distributor fees, distributor expenses, assume a reasonable deal as between the distributor and production entity, then factor in the revenue-sharing ratio as between the production entity and the investor group and carry out the calculation to the purchase of one unit in the investment vehicle. Then we do the same calculations for three scenarios: poor, good and excellent performances. That way, it is clear to the investor that we are not predicting how the film will perform, but only that if it performs at a certain reasonable level, this is how we expect the revenues to flow back to the investors.
John Cones
re: Investor Financing Agreement
John Cones
10:15 am friday july 12, 2002
Rick:
You are correct that an investor financing agreement is merely a contract between one or a few active investors and the producer or production company and therefore does not need to be filed with any state entity. You are also correct in that a limited partnership would be inappropriate for investors who are going to be materially involved. A limited partnership is one of the available vehicles for used when the investors are passive. As you state also, an investor financing agreement provides no limited liability protection for your investors, thus you have attempted to provide some protection for them through idemnification. However, indemnification may not be as effective as limited liability protection, since you may or may not have any assets with which to indemnify them, if needed. So, if they understand that and agree to it anyway, then you are in agreement on that point. Without seeing the entire agreement, I cannot provide any further comment with regard to your arrangements.
John Cones
re: LP v. LLC
John Cones
10:31 am friday july 12, 2002
Lou:
One of the differences between a limited partnership (LP) and limited liability company (LLC) is terminology. The managing individual or entity for an LP is called the General Partner, whereas for the LLC, themanaging individual or entity is referred to as the Manager. The investors in an LP are referred to as limited partners, whereas with an LLC, they are referred to as members. The underlying agreement for the LP is called a partnership agreement whereas for the LLC it is referred to as an operating agreeement. Also, keep in mind that it is possible to create a so-called "active-investor" (member-managed) LLC, as opposed to a "passive-investor" (manager-managed) LLC, whereas with an LP it's always used for passive investors.
An LLC offers limited liability protection to one or more individuals serving as the manager, whereas an LP does not offer limited liability protection to one or more individuals serving as the general partner. Both entities offer limited liability protection for the investors.
Some states charge a franchise or other tax on the gross LLC proceeds, thus that may be a factor in your choice. Check with Illinois authorities on that issue.
In both cases, creating such an entity involves filing the articles of organization with the secretary of state in the state in which it is being created. That can take several days to several weeks depending on how you approach it. If your attorney uses one of thos expediting services and pays the extra expediting fee, it can be done quickly. The filing is only part of the creation process, however. Drafting the underlying agreement is the other part. Usually, the agreement doesn't have to be filed with the state, but is still required. The complexity of the agreement and whether you are trying to do anything other than typical may slow the process too.
Sometimes it is difficult to know when an offering has started, but to be safe, if you plan to use an LP or LLC as your investment vehicle (with passive investors) it is safer to wait until the PPM is ready before approaching them. On the other hand, if you just want to have pre-liminary discussions with prospective investors and introduce the concept for the film, but not talk about any particulars relating to a possible investment, that may be ok. I doubt if most investors really want to read the script, anyway, so a synopsis may suffice for that.
Your securities attorney will advise you as to whether you should create the investment vehicle before the start of the offering. My offerings are typically for "pre-formation units of an LP or LLC", thus we wait until the minimum is reached before forming the entity.
John Cones
re: LP v. LLC
Lou
12:06 pm sunday july 14, 2002
What are the most important things that an LLC can protect the manager from?
thank you
Lou
re: LP v. LLC
John Cones
6:42 am monday july 15, 2002
Lou:
The most important protection the LLC entity provides is the limited liability protection offered to both the investors and the management. That means if any disgruntled investor decides to sue the LLC, or someone sues this producing entity for defamation based on the script, or negligence in the production of the film (i.e., someone gets hurt or killed on the set due to someone's negligence)such a plantiff will not ordinarily be able to reach the personal assets of the investors or the LLC management (i.e., if if the plaintiff wins such a lawsuit, he or she will not be able to force the investors and management to pay any additional sums of money beyond what was originally invested).
John Cones
AFM
Robert Arber
8:01 am thursday july 18, 2002
John,
Just discovered this discussion and am really enjoying it. I have a couple of questions...
Do you have experience setting up deals between Canadian prodcos (of which I am one) and US investors?
Do you have experience with the AFM, and would you recommend it as a place to go for an emerging producer/director team (Canadian) looking to pre-sell a feature film based on a final- draft screenplay, a trailer for the film, and one well-executed short to their credit?
Thanks very much for your time.
Rob
re: AFM
John Cones
8:29 am thursday july 18, 2002
Robert:
If a Canadian production company wanted to raise money from a group of passive US investors, the US securities laws would be involved and those are the kinds of offerings I primarily work on. In such an instance, however, we would be talking about a Canadian production company with an office in Los Angeles, so that we could create a California LLC managed by a Canadian and LA based production company/Manager. If, on the other hand, you are proposing one or two active US investors, that transaction might best be handled with a joint venture or investor financing agreeement, transactions I also handle. There may be other ways to structure such a deal, that I might not be comfortable with, but the above two I can handle.
With respect to the AFM, I have not worked in the area of pre- selling rights so I've had no need to attend much of the American Film Market. I have attended a few events from time to time. But it sounds like your project is at the right stage to attend a market like AFM. On the other hand, you also may want to attach some of the acting talent too, and to do that it may be necessary to conduct an investor offering seeking packaging monies.
John Cones
re: AFM
Robert Arber
9:10 am thursday july 18, 2002
John,
cool, thanks very much for your (fast!) reply. Are you associated with or do you know of any Canadian legal entities that offer the same sorts of services you do that you might recommend? I'm sure there are plenty, but I don't really know where to start...
information on film financing industry
Magdalena Reynés
10:09 am thursday july 18, 2002
Could you send me information on film financing industry in the
US? Tipically who finances films? what financial instruments do
they use?
Thanks,
Funding Films
Michael
2:03 pm thursday july 18, 2002
John,
I plan to get into raising money for the purpose of making low budget indie features. I was contemplating doing this for several production companies on my own or becoming part of a production team that I am very familiar with. My initial thought was to have a finder's fee with any monies I raise paid upon completion of the financing. But thanks to your web forum, I think I have a running start already! Let me get this straight...I have a group of passive investors who want to provide money for production of these indie films. According to what I've read, I need to have a private placement in place, be in a senior management in this production company, and not have sold a security in the last 12 months. Also, I cannot be paid per placement. I'm going to get your book, but am I on the right track so far? Also, do I need to be registered with the SEC? Can you explain the "not having sold a security in the last 12 months part?" Thanks. Love the forum.
re: Funding Films
John Cones
9:19 am friday july 19, 2002
Michael
You have a pretty good grasp of some of the fundamentals. However, the "issuer sales" rules apply for situations where the issuer of a security is raising the money itself. The issuer sales rules are not available for someone who is regularly involved in the business of selling securities. In that situation, you would need to be registered with the NASD as an SEC/NASD registered broker/dealer firm or registered representative of such a broker/dealer.
John Cones
re: information on film financing indust
John Cones
9:27 am friday july 19, 2002
Magdalena:
Your question, of course, is much too broad to handle here at this Q&A site. About the best I could offer is the book "43 Ways to Finance Your Feature Film", an overview of film finance and the "Film Industry Contracts", a collection of 100 sample film industry agreements. Both are available online at Samuel French Bookshop, Amazon.com and Barnes & Noble Online. Diskettes of the Film Industry Contracts are available directly through me at 310/477-6842.
John Cones
re: Low Budget Film
9:24 pm saturday july 20, 2002
We have a good story, crew, cast etc. We have all of the components to complete the project including experience. We have 200k and we need an additional 150k. I need guidance to develop a proposal for outside investors. I am totally ignorant when it comes to the design and format of the proposal. Are you knowleagable in this area and if so, would you be so kind to direct me. I have experience in many areas of business, however this area is foreign and simply out of my skillset.
Thank you for your consideration,
John Hornbuckle
World Medical Solutions
President CEO
LLC, Gifts and Investors
Dewey Moss
5:53 pm monday july 22, 2002
John -
I have formed an LLC in NY (already filed paperwork and received articles, etc.). I am beginning to seek investors for my first feature film (SAG expiramental set to film in October). While I'm putting up a great deal of money myself, I have several questions on other money issues: first, I have a number of people wanting to "donate" money (friends, family) without expectation of any return (other than special thanks in credits). Is this legal? Should I have them sign anything to make this clear?
As far as investors are concerned, I've been reading your advice on approaching them - If I give them a package which explains I'm seeking investors (with a synopsis or script and letter), is this the same as providing them with a security offering (in which I've heard something about only having 35 offerings out at once???) Do I have to provide any guarantee that they will earn any of their investment back?
Thanks - do you work with indie producers out of your state? I've purchased your book and look forward to reading it....
Regards,
Dewey Moss
re: LLC, Gifts and Investors
John Cones
6:50 am tuesday july 23, 2002
Dewey:
When seeking financing from passive investors, forming the LLC (with a filing of the articles of organization with the Secretary of State and drafting and executing the LLC operating agreement) is only a small part of the overall offering transaction. Drafting the offering memorandum and ensuring that it contains all material aspects of the transaction, does not omit anything material and sets forth the information in a manner that is not misleading, plus disclosing all of the information specifically required by the SEC in the proper format, and otherwise complying with all of the conditions and limitations imposed on the use of the federal and state exemptions from the registration requirement constitute the larger part of the activity.
Yes, it is legal to accept donations from family and friends without any expectation of any return other than special thanks in the film credits, but you should get that in writing.
With respect to the disclosure document you are offering your prospective investors, if you are not using Regulation D and Regulation C, along with the specific disclosure guidelines provided by the SEC to help determine how to properly draft the offering memorandum, it is highly unlikely that your disclosure document is adequate.
The "35" you mention probably comes from the Reg. D rule 505 or 506 numerical limitation on the number of investors: 35 unaccredited, unlimited accredited and unlimited foreign (see the SEC's Regulation D for a definition of "accredited"; or see "43 Ways to Finance Your Feature Film").
Of course you do not have to provide any guarantee that the investors wil earn any of their investment back. Their money is at risk. That is the nature of an investment.
And, yes, I do work with indie producers in other states, because most of the rules we're complying with in preparing the offering memorandum and conducting the offering are federal rules. On the other hand, if you create the LLC in your home state, that will reqire the involvement of a local attorney to handle that filing and to review the LLC operating agreement to ensure that it is consistent with state law, since the investment vehicle itself is created based on state law.
John Cones
Corporation and distribution deal
Ted
8:35 am tuesday july 23, 2002
Hi John,
I would appreciate any assistance you can give a fellow Texan. I am meeting with my investors in a couple of weeks and I am stuck on a couple of issues. To protect my investors liability how should I set up the entertainment company? Should I incorporate? S-corp? Also, should I do that now or should I wait until the financing is secure. The next issue is distribution. Once our film is complete and distributors are knocking down our door to sign a distribution deal, what process I can expect? Is there an advance paid out or does the distribution company pay one lump sum for domestic and international rights etc. One last question, if we optioned the screenplay for lets say $25,000 for 36 mos once the distribution deal is secured what is the process for the screenwriter? You assistance is appreciated. Hookem' Horns!!!
Ted O. Garza
T.O.G. Entertainment
re: Corporation and distribution deal
John Cones
7:29 am wednesday july 24, 2002
Ted:
Generally speaking, there is no significant different in the limited liability protection for investors provided by a regular "C" corporation, an "S" corp, a limited partnership or a limited liability company. Your choice entity is likely to be determined by other factors. Corporations are generaly most suited for the financing and operation of a long-term business, whereas limited partnerships and LLCs are best suited for so- called project financing (i.e., the entity will exist only for a limited term). Corporate financing also introduces significant questions about corporate control, so quite often independent film producer organize their production company as a corporation or even a fictitious name company (dba) and use an LP or LLC as the investment vehicle for the film project. That way, the investors in the film project are not owners of the production company and such control questions do not come up. In Texas, the preference seems to be for the LP as opposed to the LLC because of a more onerous tax burden imposed by the Texas legislature on LLC revenues (see "43 Ways to Finance Your Feature Film" for a more detailed discussion of each of these forms of doing business).
It is possible to wait until the minimum for a mini-maxi offering is in the bank before actually creating the LP or LLC. In that instance, you would be selling "pre-formation interests in an LP or LLC to be formed upon funding".
Distributors rarely pay advances at the time of signing. They are more likely to offer to pay an advance upon delivery of the finished film along with an ongoing percentage participation in the net profits or net proceeds of the film, with the advance being deducted from the percentage participation. In the alternative, a completed film may be purchased out right or licensed for distribution in some or all markets and media for a stated price. Generally, we explain all of these possibilities in the offering memorandum. They are also discussed more fully in the book "The Feature Film Distribution Deal". Both your distribution question and the one regarding the screenwriter are beyond the scope of this Q&A site however, but generally you'll want your option agreement to also serve as an acqusition agreement (i.e., an option/acquisition agreement) that provides for the terms of the acquisition (see "Film Industry Contracts").
John Cones
funds finding
JT
1:01 pm sunday july 28, 2002
Hi John,
I have obtained a list of high net worth individuals that I will be contacting for financial gift contributions for my film. The list only has e-mail addresses, what is the best way to approach these individuals legally?
Thanks,
JT
re: funds finding
John Cones
7:40 am monday july 29, 2002
JT:
This is a Q&A site for asking questions about investor financing. If you are using your list of high net worth individuals to solicit gift contributions, you are not asking them to invest, so your question is not appropriate for this site. On the other hand,if you decide to ask them to invest, then you may have securities compliance problems. If you attempt to conduct a securities private placement offering, then you may have a problem with the requirement that you and your upper level management have a pre-existing relationship with these prospective investors, unless, prior to the start of the offering you take steps to establish such a pre-existing relationship. Contrary to popular belief, I've seen nothing in the securities laws that suggests that the pre-existing relationship requirement is not mandatory for a private offering, regardless of whether they are high net worth or sophisticated investors. Another, not very satisfactory option is to consider a public offering. By the way, are the people selling these lists of high net worth individuals providing some contrary advice? Are they also suggesting that by soliciting gifts, you can avoid compliance with the securities laws? Do they also suggest that high net worth individuals would be willing to provide a gift to anyone? If so, I'd suggest you try to return the list and get your money back.
John Cones
shopping agreement
Jill
11:26 pm monday august 5, 2002
Do you have a form for an agreement between a producer
(me) and a writer (not me) that would enable me to shop a
script and have the authority to enter into a development or
outright production agreement with a third party? The writer
is unwilling at this time to option the screenplay outright, but
is more than wiling to allow me to promote the material as I
am able. I want to assure that I am "attached" as a
producer- for money or credit or in an actual day-to-day
producing capacity- any or all of the above, should any of my
endeavors result in a deal. I believe this procedure is called
a "shopping agreement" and I have searched in vain for
written contactual language that describes above...
Thanks very much!
Jill Frank
re: shopping agreement
John Cones
7:06 am tuesday august 6, 2002
Jill:
This Q&A site is available for questions relating to investor financing of entertainment projects, not just any entertainment law related question. On the other hand, maybe the reason you have found it difficult to find a sample "shopping agreement" is that the term "shopping agreement" is merely an informal descriptive term that is sometimes used to described one of the uses or functions of an option agreement. If you as a producer option the rights to a script, that gives you the authority to shop it around (i.e., seek production financing from third parties).
John Cones
Question
Ben Kaas
3:05 pm saturday august 10, 2002
I would like to know,how can I get funding for my film, Is it possible for me to do a favor for a production company and then make my film?
Sincerely,
Ben
re: Question
John Cones
7:08 am monday august 12, 2002
Ben:
In my opinion, there is no "favor" that you could do for a production company that would result in getting your film made. If you want to be more realistic, set about to spend some time and effort researching the subject of "film finance".
John Cones
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