Risky (Film) Business - What (Not) to Do

George Rush April 21, 2009

If you are reading this, and you want to make a narrative feature, I am going to make a bold prediction about you: You are seeking a wealthy fellow to become your patron and finance your dream. Find the wealthy fellow, and then your vision becomes a reality! But where to find this coveted person? I often have people ask me if there is a list of rich people who invest in films. The answer is yes, but not for independent film. Independent film is an incredibly high risk and speculative investment. Statistically, it is highly likely that the investor will lose all of his investment. Everyone thinks their film is the exception, but I also always think the Lotto ticket I buy will be the exception (note: I have yet to win the Lotto). There are certain steps you can take to mitigate that risk, such as getting a known cast that will work for scale, getting your crew to work for very little pay, having a budget that reflects the independent film marketplace, etc., but even then, your film is still a very risky endeavor.

I often go to film presentations where it is noted that the Bay Area has a lot of wealthy people and is a hub in the venture capital world. It is implied that some of that wealth will be siphoned off to our local film scene, I guess as a way to diversify their portfolio. However, keep in mind that venture capitalists are in the business of making money, and therefore you don’t see many savvy venture capitalists jonesing to get a piece of the independent film action. In a nutshell, it’s bad business. So why would someone invest in independent film? Generally, not because it’s a prudent investment. Clearly, these investors must have deep pockets, and must be willing to potentially lose some, if not all of their investment.

In my experience, film investors do it for three reasons: they love you, they love your film, or they are extremely bored and need something sexy to do. If they love you, this could be your rich parents, friend, creepy ex-boyfriend—whatever—they are investing to see you succeed. If they love your project, then generally there is an issue in your film that they are passionate about. So if you are doing a film about a crusading attorney, maybe some partners at a law firm would be interested. Or if your project is about an entertainment attorney in San Francisco who loves college football, perhaps I’m the ideal investor (this sounds like a fantastic film, btw). The third category, the guy looking for something fun to do, is a little trickier; generally, you are looking for someone with money who does something boring; maybe a dentist, or a wealthy retiree. From their perspective, your project may seem like the perfect opportunity to hang out with cool good looking people!!! Who doesn’t like that? I’ve seen plenty of investors who lost their money, but had a satisfactory experience because they got to do something cool for a change. So in my experience, those are the folks who are most likely to invest. Sure, there are some established independent producers who will put their own money into projects—but those people generally have very specific films in mind. Don’t go to them unless you are sure your film fits their taste.

Whoever decides to invest, this is one of the greatest sources of liability for you as the filmmaker. As I have said, it is highly unlikely that you will be able to get your investors their money back, and you do not want to be sued for losing their money. If you are producing a film and taking on investors, you absolutely need to hire an attorney familiar with securities law. This is not the type of area where you should use a form or some example that someone gave you. In taking on investors, you are making what is known as a "Regulation D" offering of securities, and you need to comply with SEC regulations. This can take place in a number of different ways, but I’ll summarize the most common. The process involves the formation of an LLC (limited liability corporation) whose sole purpose is this one movie. This requires the creation of a private placement memorandum for a security offering in the LLC. The offering is for a finite period of time—usually under a year. Keep in mind that a private placement memorandum means just that—it is private—this is not a public offering of securities. The memorandum requires disclosures about what the project is, how the investment/business operates, and most importantly, discloses in great detail the risk factors, i.e., the fact that the investors will probably lose their money.

By doing this, and so long as you stick to all the terms you’ve laid out, the investors know what they are getting into and you will be protected. Also keep in mind, that although Regulation D is an exemption to normal security filings, you still have to file with the SEC. Also, if you take on investors outside of California, you need to register in that jurisdiction. Don’t screw around with this part of things—get an attorney to prepare this for you. A lot of filmmakers want to edit the private placement memorandum to minimize the risk factors and to highlight the upside. This is unwise: The whole purpose of the private placement memorandum is so that your investor is fully informed of what he is doing. This isn’t the document that you give to someone who is on the fence, this is the document you give to someone who has already told you he’ll invest.

Also keep in mind that a standard way of setting these up is to put the money you raise into an escrow account until you raise the minimum amount to finish the film. Generally, the money you raise you can’t spend until you raise all of it. This is already a risky endeavor, at the very least, the investor needs a guarantee that the film will get done.

The above is an oversimplified summary so you have a general idea of the process—don’t cut and paste something you dig up online. There is a lot more to it than above. I’ve seen situations where the investment document is written out on a cocktail napkin, and when things go south, the producer is personally liable to the investor. Very bad scene. If you do it right, you will not have this problem. And who knows, maybe the film will succeed and make everyone some money!!! I wouldn’t call it the norm, but it happens!

In the meantime, if you know that I love you, you’re film is about a lawyer that has a semester of eligibility left and leads Cal to the BCS championship, and your film involves lots of cool beautiful people, then I am your investor. Call me. Oh yeah, that budget must be under $500.

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