Film Financing

Film Financing

Increasing Your Chances Of Finding Film Investors In North Carolina

Almost all independent filmmakers understand that the difference between dream and reality is financing. Most local filmmakers also know that many wealthy people live throughout North Carolina. The fundamental problem facing most filmmakers in North Carolina, however, is figuring out how to get the people with money to invest in their films. Understanding what these potential investors want, and explaining how they get it, is the key to tapping into their resources.

Not surprisingly, most investors want to earn a return on their investment. The filmmaker must convince the potential investor that his film has the potential to earn a profit and, more importantly, explain to the investor how the profit is made. Most investors are reluctant to invest in film because they do not understand the business--many think of filmmaking as frivolous or extremely risky. The filmmaker must persuade the investor to believe that, while the investment is indeed risky, it certainly is not frivolous--i.e., that it is a legitimate business investment. To do that, the filmmaker must treat his craft as a business and present the investment opportunity in the same manner as any other business person would. Investors are accustomed to seeing and reviewing professional-looking business plans and investment documents, and the filmmaker should provide similar materials.

In order to convince an investor to part with his money, the filmmaker must understand all aspects of film financing, production and distribution. More importantly, though, the filmmaker must have the ability to explain to the investor how the filmmaking and distribution process works (that is, how the investor's money will be converted from cash into a movie and then into a greater amount of cash). For instance, the filmmaker should explain to the investor that most independent films are produced through limited partnerships or limited liability companies. In both, the investor's liability is limited to the amount of his investment and he will usually not be responsible for the partnership or company debts or other obligations. The filmmaker should also explain that the producer or his production company will manage the partnership or company and will be responsible for all financial, production and creative decisions. The investor should understand that after he has contributed his capital, his input will be limited (especially on the creative side), but that the filmmaker will be attentive to his concerns.

The filmmaker must also explain how the investment is returned. Customarily, before anyone else receives a dime, investors are repaid in full (called "recoupment") and receive a premium for the use of their money and the risk they have taken. These amounts are generally paid from the revenues derived from all sources of exploitation of the film. After the investors have recouped and received their premium, a revenue-sharing mechanism is activated. Revenue sharing can be structured so that, after recoupment and payment of the premium, the investors receive 70% of the net revenues and the producer receives 30% of the net revenues until the investors have received an additional 25% return; and, thereafter, the investors receive 30% of the net revenues and the producer receives 70%. While there is no set formula, the filmmaker must make an educated guess as to how much of a return the investors will want for putting their money at risk.

Most of the pertinent information the filmmaker shares with his potential investors will be disclosed in a private placement memorandum or other offering document; this document should be thorough and professional. Remember, this is a business venture, and as such it deserves the same treatment as any other business undertaking. If the filmmaker treats his investors as business partners on a professional and knowledgeable level, the investors will respond similarly.

If there are tax or other financial advantages to the investment, these should be pointed out to the investor. Most filmmakers know that film production companies can qualify as a Qualified Business Venture. The result is investors may receive a 25% credit against their North Carolina income taxes. This is a great incentive to investors and should be described as one of the benefits of investing in the film.

Investors will also evaluate the production team to ensure that their money is in experienced hands. Because the filmmaker is responsible for all production and creative decisions, and the investor's input is limited after his money is invested, he must be comfortable with the production team skills and abilities. First-time filmmakers will have to convince investors that their inexperience should not prevent the investment from occurring. To do this, the first-timer should seek other team members with significant experience in their respective roles. The entire team must be able to work together and complement each others' strengths and weaknesses. For example, an accomplished director of photography will often bolster the skills of a first-time director. Also, the filmmaker should consult advisors who are knowledgeable in the film industry. An entertainment attorney or accountant involved in the film industry should be part of the production team. They can assist the filmmaker in explaining the complexities of a film investment and can help make sense of the processes involved in making motion pictures. The offering documents in a film private placement should include bios for each production team member describing the team members relevant industry experience.

Distribution of the film is critical to its financial success and the filmmaker should have a distribution plan. The plan need not be formal, but should at least demonstrate to the investors that the filmmaker has thought about and understands how distribution works. Since many independent films are produced without distribution deals in place, and because distribution is vital to financial success, it is extremely important that the filmmaker educate the investor as to how the process works. Letters or other information from distributors that indicate a distributor may be interested in screening the film once it is complete are also helpful.

In the simplest terms, filmmakers must educate investors about the film industry and, through that education, convince them that film investment in general, and their film in particular, is a viable opportunity. The effectiveness of the education will depend upon its presentation to investors, who, in turn, expect filmmakers to treat their art as a business. Investors are accustomed to seeing business plans, private placement documents, financial projections, budgets and other hard information. But filmmakers must go even further. Filmmakers must explain how the industry works, how money is spent, how money is earned, what the risks are and what the advantages are.

Mr. O'Brien is an attorney practicing with the law firm of Poyner & Spruill, L.L.P. in Raleigh, North Carolina and directs the firm's Entertainment Law Section.