Question for FilmTVLaw.com:
A friend of mine is investing into a movie and asked me to get involved too. I’ve never invested into that industry, but from my layman’s view the movie seems to have merit. What should I be looking for to protect myself if I decide to dive into this one?
Answer by Brandon Blake, Entertainment Lawyer:
Thanks for a great question about investing in a feature film. Over the last 19 years I have represented many feature film investors. Feature film finance has changed quite a bit over the past few years thanks to all the new tax incentives available to help reduce the risk of film and television investing. Please visit our website at www.filmtvlaw.com for more great articles and resources.
I want to focus on the whole process today, from the most basic things to look for in a film investment, to the more sophisticated incentives and tax credits that can make a film investment attractive.
First off, anyone new to feature film investing should be aware of the concept of packaging. Packaging is what the big agencies like WME and CAA do for client production companies, when they attach famous actors and directors to a project to increase the marketability of the film.
No matter how great the concept and the script might be, distributors and sales agents will be looking for well known cast to get the audience to turn out for the film.
While there are a number of ways to demonstrate the interest from cast, such as Letters of Intent, the fact is that a Letter of Intent will not ensure that that cast member will actually appear in the film.
Instead, investors should look for guarantees in the financing materials that particular actors will appear in the film, thereby securing the investment with bankable actors and directors.
Again, many independent filmmakers rush into production, and then end up with a finished feature film with no distribution. That generally happens because the film producer is deriving all the benefits from the film from the production of the film itself. Most likely the producer and director fees are tied to production, and the filmmakers can use the film as a kind of resume to make their next feature.
But the investors end up paying for a resume that might not be destined to finding distribution. So, investors should look for feature film projects where the filmmakers are lining up distribution before the start of production.
That is not to say that it is realistic to see a signed distribution agreement before the financing of a film occurs. If a distributor made that type of a commitment it would likely also be providing financing and then there would not necessarily be a place for private equity investors at all.
But investors should look for guarantees from the film producer that distribution will be lined up before production commences on the project.
It surprises me that there are still a large number of high-level production companies and film finance companies that do not conduct the legally required securities filings with the Securities and Exchange Commission (SEC) and with the State Securities Administrators.
From an investor standpoint there are a couple of reasons why you want to look for feature film and television investments that have been filed with the SEC.
1) Tax Incentives: There are many tax incentives that will not be available, or will not be easily claimable, without the right securities and finance paperwork. For example, the new Section 181 tax deduction, which relies on Section 168 bonus depreciation, requires a detailed process of qualification for the film, as well as the investment to be properly organized, to take the new tax incentive.
The best way to ensure that you can take the new Section 181 tax deduction is to make sure that all of the tax information and qualification materials are part of the securities offering. No law firm will take the risk of qualifying a film or television project after the project has already been produced.
Likewise, there are numerous other tax incentives that can virtually eliminate the risk of investing in film and television, but unless those incentives are part of the financing documents, an investor cannot guarantee that they will actually be available to the investor after the film is completed.
2) Liability: There are two factors to this issue.
First, a properly filed investment company and offering ensures that you as the investor will never be liable for anything more than your initial investment. Legally that cannot be guaranteed through a simple investor agreement or partnership document. Unless there is a properly filed investment company and offering, liability arising from the film or television project could actually be charged to the other partners or joint venturers in the project, including the investors.
Second, many investors I work with also tend to get involved with selling the investment to other friends and associates. That might be on a casual basis, or it might be for a commission. In either way, the only way that the investor can make sure that he or she does not take on liability for introducing other investors to the project is if the offering is properly filed with the SEC and the states where the investors reside.
It is really in the film producer’s interest to properly file the investment with the SEC because then he or she knows that investors will have the confidence to sell the project to others.
3) Clear Documentation: The SEC and the State Securities Administrators require clear and detailed instructions about how the investment is going to work and the rights that the investors will have in the project.
This is to the advantage and benefit of the investor, who otherwise might be in the dark as to the way that the investment works. In fact, one of the biggest problems I see with film and television investments is that no one knows how the profits of the film will be distributed to the investors. Typically, this is not intentional, the filmmakers simply are not concerned with financial aspects. Their goal is to produce a film, and very little thought is given to how investors will benefit from the project.
Finally, the number of tax incentives available today for film and television production is truly incredible and to not take full advantage of these incentives is a real lost opportunity for the investor.
For example, investors today can take a 100% tax deduction under the new section 181 tax deduction, with section 168(k) bonus depreciation, for a film or television investment.
That is just the start of the incentives and tax credits available for feature film and television production. If the film investment you are looking at is not telling you about these incentives and credits, it might well be that the filmmaker is taking these credits and incentives and not passing them through to the investors.
A good film investment should come with a thorough discussion of tax incentives and the ways that you as the investor can benefit. There should also be an attorney opinion letter from the production company attorney, which will allow you to more easily explain to your accountant or financial advisor how to take the deduction or credit. Remember, it is the attorney for the production company that can certify that an incentive or credit is available.
Feel free to contact my firm about reviewing any investment you intend on making in the film or television industry. We have reasonable rates and 19 years of experience protecting investors in the entertainment business.
- By Brandon Blake, Entertainment Lawyer
Question for FilmTVLaw.com:
I am putting together an indie film that I will seek distribution and place in festivals. The film in question will be based around one leading actor. What kind of contract or agreement should I create with the leading actor if the film gets distribution and it sells in the six-figures?
Answer by Brandon Blake, Entertainment Lawyer:
Some good questions today about independent film production, specifically involving actor agreements and distribution. The complete article is posted on my website.
Let’s talk about the actor contract first, and then we can address your questions about distribution of independent films and what types of deals to expect.
So, first off everyone should know that the Screen Actors Guild (SAG) makes available free contracts to independent filmmakers, which they hope that independent filmmakers will use to hire actors. I know that as soon as I write this, half the readers will quit reading and go look up the free SAG contracts.
But for the fifty-percent of those still reading this article, I want to point out how truly wrong it is to use contracts that are written by the union that is representing actors. Don’t get me wrong, the Screen Actors Guild is an incredible organization and has done a lot to protect performers’ rights and to generally elevate the workplace standards and safety of film and television productions.
However, using the contracts that they draft to protect and advocate for their members is very similar to using someone else’s attorney to look out for your own interests. It is a basic conflict of interest, and no matter how easy and quick it might seem, the filmmaker and the producer are going to get burned.
When it comes to the question at hand, the SAG actor agreements do not have any provisions for equity sharing, or for the kind of profit participation you are discussing. Moreover, you need to be careful about how you formulate your profit participation, because there is the potential for increasing your residual and Pension Health and Welfare obligations depending on how you draft these provisions, including offering deferred salary or compensation.
Stepping beyond the boilerplate SAG actor agreements, the most customary way of defining the profit participation of an actor is going to be adjusted gross receipts. This term alone creates a lot of questions in the minds of filmmakers, because it does have the word “gross” in it, and so then that invariably draws the reaction from many independent filmmakers that they will not share “gross” with actors if they can help it.
But not all gross profits are the same, and “adjusted gross receipts” or AGR are defined by the production company to take into account the costs of production, as well as being defined on the production side, meaning that distribution and sales fees are taken out.
With regard to the correct “percentage”, a percentage of AGR could range from the low side at 2.5% to the high side of 15% for a well-known celebrity that is working for scale or substantially below his quote. Of course, the question is always, percentage of what, and you want to make sure that your production company has properly defined its revenue sharing definitions. A note here, revenue sharing definitions do not come with a LegalZoom template LLC. I know it is tempting to simply not read the boilerplate pro-forma that comes with filing service company materials, but there is literally nothing of value in those pages of useless filling except for citations to 20 or 30 year old (often outdated) code provisions.
So that is a long way of saying that don’t assume because you have an LLC that you therefore have a definition of AGR somewhere.
I also wanted to address the inherent question that was posted about distribution and what types of deals to expect for an independent feature film project.
It is my opinion that one of the most surprising things that many independent film producers do is to wait until the movie is completed to begin thinking about distribution. Given that distribution is the ultimate goal of every independent filmmaker, why is it that distribution does not become part of the pre-production planning?
Our firm has been very successful in helping filmmakers to line-up distribution interest in projects before production starts. Whether that means a distribution deal, or an offer to consider the film on completion, you will be exponentially increasing your odds of successful distribution by beginning to engage distributors before you start production.
However, lets assume that you have progressed to post-production and are now shopping for a distribution deal. Again, the right time to get entertainment legal counsel like myself involved is as soon as you begin submitting to festivals. Our firm can help to tailor the approach to distributors, preventing missteps in presenting the film, and keeping the film from going stale before you even start getting market offers.
When it comes to the types of deals, basically you need to divide distribution into domestic and international. Domestic deals can involve a minimum guarantee or even an acquisition for very hot films with a lot festival interest or commercial elements.
However, don’t overlook a percentage deal with a larger distributor, because a 20% deal with Sony Pictures or Lionsgate might come to a lot more money than an offer with a minimum guarantee from a company with less distribution channels and where perhaps the minimum guarantee is a lot trickier to collect on than the initial deal letter makes it seem.
Foreign sales are a whole other question, and generally involves negotiating a good sales agreement with a reliable foreign sales agent. I would say that for an entertainment lawyer, one of the biggest challenges is to negotiate a sales deal with a foreign sales agent, because of the complexity of the terms and the revenue structure. There is no question, if a filmmaker tries to negotiate a sales deal without counsel, nothing will end up getting paid at all by the sales agent. That’s not an overstatement, it is just reality.
I have been representing film, television and music clients for 19 years with the law firm of BLAKE & WANG P.A. Please feel free to contact us for a quote to assist with production legal, distribution contracts, and representation to distributors and sales agents. Please do not decide about complex entertainment legal matters without consulting an experienced entertainment lawyer first.
- By Brandon Blake, Entertainment Attorney
QUESTION FOR FILMTVLAW.COM
About how much money can a web series make? I need a contract with my production partner, something simple to split up the show 50/50, but I’m not sure how money gets paid for a web series. Can you help us sort this out?
ANSWER BY BRANDON BLAKE, ENTERTAINMENT LAWYER
Thank you for posting a great question about web series. Independent television production is like the independent film business in the 1990s, it is growing fast and everyone wants to be a part of it. In addition to this article, you can also look up our Q&A blog at http://filmtvlaw.com/entertainment-lawyer-qa/, which is a huge resource of original articles and insight on the entertainment business.
Netflix, Amazon and Hulu, soon to be joined by Disney Plus, are the current big-name entertainment platforms in a quickly growing list, and all have collectively chosen to favor series over feature length programs. In a basically unlimited bandwidth environment, the only thing that matters is hooking viewers for longer periods of time, so a 12 hour miniseries does that better than a 90 minute feature.
Defining a Web Series
In some sense many high budget series could now be considered “web series.” SVOD, TVOD and AVOD platforms like Netflix, Amazon and Hulu are all streaming content, just like YouTube. Netflix alone has 150 million subscribers worldwide, which is more subscribers than the top five cable-TV companies combined. And as streaming platforms have grown, so has the percentage of original content.
So, what defines a project as a web series? “Web series” today are typically defined as series produced for Youtube.com or other non-subscription platforms, with episodes shorter than 30 minute. If you intend on showcasing directing or writing talent, then web series are an option. In some ways web series are like film festivals are for independent film. They should be approached as a means to demonstrate your abilities and get public recognition.
Revenue From Web Series
Revenue is a problem for web series on non-subscription platforms like YouTube. Since YouTube has reduced the CPM rates (Cost Per Mille), which is the amount of money paid per 1000 ad impressions, the real average CPM is now around $3. So that means $3 per 1000 ads viewed. But ads do not play on every video view, and if the viewer skips the ad or blocks the ad, then no revenue is generated at all from that view. Realistically you could be looking at $1 per 1000 views or less, equating to about $1000 for 1 million views on YouTube. Producers will need a lot of episodes with an astonishing number of views before making back costs for even a modest web series.
If you are viewing YouTube as a showcase for your series, then the second problem involves whether a network or platform will pick up an existing web series after it has been on YouTube. This point is two-fold. First, if a producer wants to approach a network about an existing web series, that web series must have over 100,000 views and preferably over 1M views per episode before the networks will even start to take notice. If a producer puts the series or pilot onto a public video service like YouTube and it only acquires a few thousand views, then the producer is actually making a case for the project having no market.
Second, the networks themselves are trying to survive as independent entities and hoping to not end up being just another channel on YouTube. That means finding fresh, unique content that is not available anywhere else. So, network executives will run the other direction when producers bring web content to them, unless of course the series has several million views per episode.
Although there are creative ways to generate revenue from web series, mostly involving sponsors and targeted content, in the end most web series end up being showcases for the directors and writers, and not much more. In order to generate revenue from a series, most experienced television producers will choose to do so with a network, platform or major production company to pick up the bills and guarantee marketing and distribution of the project.
Television Producer Agreements
So my first caution about the venture you are embarking on is whether you want to target this series as a web series at all, or whether you should consider developing the series independently for a network or major platform that can provide production financing and marketing money for the series.
If you choose to develop the project as a web series, then a 50/50 split of copyrights has some serious complications.
Sharing copyrights, if you do not have a well drafted agreement between the parties, generally means that neither party will be able to sell or distribute the series without the other’s approval. This is a classic situation to create deadlocks between the parties. Moreover, it is not the case that dividing the copyrights in some proportion other than 50/50 makes the situation any better. In fact, even sharing a 1% share or less of a copyright can cause the series to not be distributable without the approval of 100% of owners.
Television development has the additional problem that splitting the copyright is no guarantee that your producing partner will not circumvent your agreement and work out a much better deal for himself or herself directly with a future network or platform.
So, you could end up in the situation where your producing partner both has the ability to block your distribution of the series (on YouTube or elsewhere), and if you do get a network or major platform deal, your partner could still negotiate a separate deal without your participation.
Ultimately it is better to spend the time and money to negotiate a proper development agreement before deciding on distribution strategies. Please contact our office to discuss your project and contract needs.
As with any entertainment matter, please do not make a decision about complex matters without consulting an experienced entertainment lawyer first. At BLAKE & WANG P.A. I have been representing feature film projects, television series, and recording artists for more than 18 years. Please feel free to contact my office at www.filmtvlaw.com about a quote.
- By Brandon Blake, Entertainment Lawyer