Question For FilmTVLaw.com:
I would like to get investors for my television pilot. Should I try crowdfunding? Can I set up a non-profit for donations? What about selling stock in my company? Can a television series get a business loan too?
Answer by Brandon Blake, Entertainment Lawyer:
Great questions. There are so many choices in indie finance today, and all of them can be successful. There is no one best way to tap into independent financing, but there are some things to consider that can move you in the right direction when it comes to film and television finance. Below I am going to discuss the benefits of crowdfunding, non-profits, securities offerings, and business loans. Please also check out my other articles that I publish twice a month about all things entertainment, on my entertainment legal blog at www.filmtvlaw.com/entertainment-lawyer-qa/
Crowdfunding can be a viable option for independent financing, although none of the crowdfunding sites will generate donations “natively,” meaning that you must bring an existing fanbase to your Kickstarter or Indiegogo site. Before you decide on crowdfunding, go and search for other projects like your own. Don’t search by “Projects We Love”, “Trending”, “Nearly Funded”, etc. These just stack the most successful sites on top, and do not provide a sense for the depth of the number of competing projects. Instead, search by “Everything” and then choose “End Date.” Now you can see the realistic returns for crowdfunded sites without major promotional backing. Lots of “$0” projects, and lots of projects under $1000.00.
The above exercise is not to dissuade anyone from crowdfunding, but you need to keep a couple of things in mind: 1) Know your audience. Make sure you have an existing fanbase, don’t expect Kickstarter or Indiegogo to bring the crowd to you. 2) Make sure your product, subject matter, and genre work for crowdfunding. Some things work incredibly well, are almost guaranteed to raise money. Other projects are going to be one in a million on crowdfunding.
Non-profit financing has become increasingly popular for television, documentary and feature film development. Often it is the concept or script that hooks investor interest, rather than a promise of big financial returns. So it makes sense that the tax deductibility of financing is interesting to many potential angel “investors.”
The good news is that with a properly organized tax-exempt organization it is possible to collect tax-exempt donations for a project that is otherwise a “for-profit” venture, provided that the content of the project, whether that is a film, television or music project, fits within the mission statement of the tax-exempt organization and that the finances and control of the non-profit and for-profit entities are kept separate.
However, it is not possible to mix tax-deductibility and a future interest in profits in the same transaction. Tax deductibility and profit are like oil and water, they just do not mix. I have reviewed a number of structures by clients hoping to be able to convert a donation into an investment at a later date, thereby getting the best of both worlds. The problem with this concept is that if the “donation” were re-characterized at a later point, then the deductibility of that donation would retroactively be taken away, creating a true mess for the investor’s accountant. Moreover, in the IRS’ zeal to eliminate tax shelters, any arrangement with a contractual right to profits later would most likely be characterized up front as an investment, not a donation.
Yet our firm has successfully set up many 501(c)(3) tax-exempt organizations that participate in the financing of documentaries, television, and feature film projects. And those projects have gone on to be commercially distributed. The key to the proper use of the non-profit in entertainment finance is to understand that donations can be used to finance any project but that profits cannot flow to the donors.
One huge benefit compared to crowdfunding websites is that a 501(c)3 company allows tax deductibility, so your donors can write off their contribution as a charitable contribution. That is a big deal and crowdfunding does not allow it.
SECURITIES OFFERINGS AND PPMs
Securities offerings are an “old-fashioned” way of raising financing that is becoming a big deal again this year. I have had more clients raise more money through film and television limited offerings than any other technique this year. Just like with any other technique, you still have to “bring the crowd” to your project. But a securities offering allows your investors to meaningfully profit from your success.
Moreover, when our law firm sets up securities offerings, these are not “your fathers” securities offerings. There have been a lot of innovations in the last few years which allow more flexible structures that protect your investors capital and get them excited about investing in film and television. Gross profits, net profits, recoupable development funds, and many other ways to make investors comfortable about a securities offering.
SMALL BUSINESS LOANS (SBA LOANS)
Finally, you asked about loans, and yes, I am seeing more and more clients funding projects through small business loans. In fact, the Small Business Administration (SBA) approved loans for film and television productions more than a decade ago, and just in the past year the terms have become much more relaxed. The SBA finally recognizes that independent film and television production is a viable small business.
However, remember that SBA loans still require collateral, and also a loan must be repaid. When I work with clients who have chosen loan financing, I focus extensively on distribution and festival planning, to help lessen the risks associated with loss on the film. Proper planning can make loan financing a safe and convenient way to finance an independent television or film project.
As with any entertainment matter, please do not make a decision about complex issues without consulting our experienced entertainment law firm first. Contact my office at www.filmtvlaw.com about a quote.
- By Brandon Blake, Entertainment Lawyer