Protecting Film Investors

This from Mark Litwak. I've made use of Mark's digital contracts and a number of his very good books for years. He's a valuable resource. 

Law Offices of Mark Litwak & Associates

201 Santa Monica Blvd., Suite 300

Santa Monica, CA 90401

Phone: (310) 859-9595

E Mail: Law3@marklitwak.com

Website: www.marklitwak.com 

A more comprehensive version of this article by Mark Litwalt appeared in the Vanderbilt Law Journal. Mark made it available as a PDF. It's here for your edification. 

The Hollywood Shuffle: Protecting Film Investors

I have a shelf full of Movie Finance related books, and I've written my share of Film Business Plan using Mark's advice as a template. This is good stuff.

Protecting Film Investors Film investments have a bad reputation, and deservedly so. There are instances where financiers have been cheated and lost their entire investment. Consequently, some investors simply refuse to consider film-related investments. This is unfortunate because an intelligent investment in a motion picture can earn substantial returns. While film investments are risky, the potential return from a hit can be enormous. No only can the film earn revenue from box office receipts, but there are many ancillary sources of income. These sources include revenue from television, home video, merchandising, music publishing, soundtrack albums, sequels and remakes. As an attorney who represents investors, as well as filmmakers, I have learned that there are ways to reduce the risk of film investments. Here is a checklist to guide investors. DUE DILIGENCE:  Thoroughly investigate the reputation and track record of any producer or distributor you contemplate doing business with. No contract can adequately protect you against a scoundrel. Speak to filmmakers and investors who have done business with a candidate. Check court records to see if the company has been sued. FULL DISCLOSURE: Federal and State security laws are designed to protect investors. Offerings to the public generally require prior registration with the SEC or a state agency. Usually private placements are limited to persons with whom the offeror has a pre-existing relationship. Even if registration is not required, the anti-fraud provisions of the security laws require that the offeror make full disclosure of all facts that a reasonably prudent investor would need to know in deciding whether to invest. The information disclosed should include a detailed recitation of all the risks involved in developing, producing and marketing a movie. Avoid any offering that appears to violate this requirement by making less than full and truthful disclosure. Carefully read the private placement memorandum (PPM) and consult your own financial and legal advisors before making a decision to invest. TRACK RECORD:  Do not back a filmmaker or production team that does not possess the proven skill needed to make a professional-looking movie. Avoid first-time filmmakers. You are safer backing filmmakers whose have completed at least one short or a feature-length work. Partner with people of integrity who bring the skills, expertise and resources to the endeavor that you lack. For instance, if you don't have the knowledge necessary to evaluate a script, bring aboard someone who has that expertise, or hire a script doctor. IDENTIFY THE POTENTIAL MARKET FOR THE FILM:  There is a very limited market, and modest potential revenue, to be earned from short films, documentaries, black and white films, and foreign language pictures.  Certain themes, topics and genres can be difficult to sell. Religiously-themed pictures can easily offend audiences. Cerebral comedies can be difficult to export because their humor may not translate well. Films with a great deal of violence may be shunned by European television which is a prime market for independents. Films with explicit sex may not pass censorship boards in certain countries. Independent films without name actors are difficult to sell. Of course, name recognition varies around the world. The star of an American television series may be a big name in the United State but unknown abroad. On the other hand, some actors have large following aboard, yet are relatively unknown in the United States. You can consult a source like IMDBpro.com for how well known an actor is. DON'T BACK DIRECTORS WHO ARE ONLY CONCERNED WITH THEIR OWN VISION:  The director of the film is the key person who will determine whether the final product is marketable. If a filmmaker shows no concern about making a movie with audience appeal, you can expect a film whose exhibition will be limited to the family and friends of the filmmaker. This is not to say that the only films you should invest in are low-brow fare like "Dumb and Dumber." A well-made "art" film like "Elizabeth," can win awards and make a handsome return on investment. Filmmakers should give some thought beforehand as to the nature of the film's intended audience. I once watched a wonderful "Lassie" type film spiced with four-letter words uttered by one character. I explained to the filmmaker that his film would never sell in the family market because of the vulgar language, and it was too soft a story to appeal to teens and adults. CONGRUENCE OF INTERESTS:  It is best to invest in an endeavor where everyone shares the same risks and rewards. A filmmaker who takes a large fee from the production budget may financially prosper from a picture that returns nothing to the investors. It is better to back a filmmaker willing to work for a modest wage and share in the success of the endeavor through deferments or profit participation. An investor can take some comfort investing in a motion picture on the same terms as a producer or distributor where all parties recoup at the same time. Beware of investing in a project where other parties benefit when you lose.  UNDERSTAND THE PARAMETERS OF A FAIR DEAL:  Usually, investors are entitled to recoup all of their investment from first revenues before payment of deferments or profits. Many times investors are allowed to recoup 110% or more of their investment in order to compensate them for loss of interest and inflation. Profits are declared after payment of debts, investor recoupment and payment of deferments. Profits are generally split 50/50 between the producer(s) and the investors. Thus, investors who provide 100% of the financing are entitled to 50% of the profits. From the producer's half of net profits are paid any third-party profit participants (e.g. the writer, director and stars). Continue Reading  1. See section 1268.2, California Code of Civil Procedure.

Mark Litwak is an entertainment attorney, author and expert witness based in Los Angeles, California. His practice includes work in the areas of copyright, trademark, contract, multimedia law, intellectual property, and book publishing. As a Producer's Representative, he assists filmmakers in arranging financing, marketing and distribution of their films. He is an Adjunct Professor at U.S.C. Gould School of Law.  Profile

Why Invest in Movies?

When I wrote the last blog post on The Sequence Approach, inspiration hit. I wrote a screenplay in about 10 days that had been languishing in the back of my mind for a number of years. Yes, there had been two false starts.

But after Christopher Pratt's observation that Story Diamond beats should be repeated in each and every one of the sequences, I had to try it. Ironically, I had said as much as that in my workshops, but I had never tired it. 

I had just trashed the last false start to something I was calling BAD3. It was a romantic comedy about Brad, Annaliese and Derrick, and how they were all millennials afraid to make commitments, and how they shared an electric car with the license tag that read B.A.D.3. I asked, "Can three millennials find happiness in their loss?"

After Mr. Pratt's inspiration, I combined Brad and Derrick's characters, and wrote ANNALIESE! ANNALIESE! It took two days to beat out, and eight days to write—one sequence per day.

Now, granted there have been a number of revisions since, but the basic structure has held up through perhaps 12 reviews by readers, and nearly many revisions by me...although the revision number is only 4.3.

Enough people liked it that I began making plans to shoot the ultra-low budget RomCom late this year or early next. But like anything, the roller coaster drama of getting a film made can be more dramatic than the actual story where the writer makes great effort to install the maintain the roller coaster.

Now, we're at the point where two things happen at once, and neither one can happen without the other. It's the Catch-22 of motion picture development. We have to cast the picture. But talent agents don't want to give you the time of day until the  picture is fully funded. And one of the hardest ways to fund a movie is through Private Equity Financing.

I have invested in my fair share of shorts and full length television programs and I can tell you the decision to spend money on high risk ventures (even if you're convinced of the upside) is difficult. Now as I approach investors for ANNALIESE! ANNALIESE! I had to finally write down what was inside my head for so many years. The blog posts linked below are the result, and they should help anyone looking for funding. Now, not all these ideas are original with me...in fact, probably none of them are. Over the years I've read many a book and blog on the topic. So, none of this is copyrighted, use it if it helps.

WHY INVEST IN MOVIES.
WHAT CAN INVESTORS DO TO MINIMIZE RISK?
WHAT CAN COMPANIES DO TO ENABLE SUCCESS.

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