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.
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.
The Package
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.
Distribution
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.
The Offering
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.
Tax Incentives
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