Question:

For an unpublished screenplay writer what should one expect as a rule of thumb if a major studio wants to option the screenplay and the total cost of the film, if produced, might exceed $20 million?

Answer by Brandon Blake, Entertainment Lawyer:  

The question of the proper screenplay writers' fee or screenwriter salary is always difficult because it varies so much from project to project. The question above was very specific about the budget level of the project so I will respond regarding a high budget project. I have had more than 16 years of experience negotiating on behalf of screenwriters and producers so I have seen just about every offer that can be made.

One of my clients worked with a well-known production company that will go nameless here. That production company pays first-time screenwriters $50,000.00, regardless of the budget of the intended film. It was the producer's opinion that packaging the director and actors was where the value was added to the project, so he stubbornly refused to pay any more. You will find that sometimes the larger the production company and the more famous the producers and directors working for that company, the less they will pay, at least for first-time screenwriters. And by "first-time" I mean a screenwriter who has never had a screenplay produced by a studio.

Fortunately, there are a few rules of thumb that can help when negotiating with a production company. The first common one is that a screenplay should be sold for 2% to 3% of the budget. Of course this is referring to a "spec script sale" and usually writers are hired to write bigger budget scripts and assigned the material, rather than bringing in a finished script. In actually negotiating this percentage you might find a number of problems. The first being that nobody can agree on or even knows what the budget is going to be before a feature film is shot. I even had a producer suggest that no writer fee would be paid until the end of principal photography because that was when the final budget would be known. Typically there will also be a floor and ceiling with this method.

Alternatively, it often makes sense to refer to the Writers Guild of America minimums in order to figure out how much a writer should be paid. The WGA Basic Agreement is only binding on WGA signatory production companies and eligible writers, but if the budget is $20 million then most likely the production company is a WGA signatory.

As of the date of this article the WGA minimum for an original screenplay on a high budget project would be $89,417.00. However, the WGA actually discourages "spec script sales" and the real substance of the negotiations typically involve what else the writer may be providing, or might have provided before. Is there a treatment or a first draft? Are there going to be subsequent drafts, rewrites, revisions or polishes? Will the writer stay involved with script consulting or get a producer credit? These all bring in different fee structures. And of course this is a minimum, meaning that writers will try to be paid more than these figures.

From the producer's perspective, always miles away from the writer's point of view, there is the "no-money option." As the name suggests, this is about $89,000 less than the WGA minimum. Producers tend to desire to option projects, versus purchasing them, for little or no money for the purpose of attaching a director and A-list talent. Clearly before entering into this relationship you want to know the experience level of the Producer and you should still negotiate the purchase price before starting work with the Producer.

Finally, any writer or producer will benefit from having an experienced entertainment lawyer help to negotiate their side of the deal. I have been personally negotiating both independent and studio writing deals for more than 16 years and have seen just about every different offer that can be made. With experienced counsel, a writer or producer can get a good deal, regardless of whether this is your first or tenth feature film. Feel free to contact BLAKE & WANG P.A. (www.blakewang.com) for a quote for affordable, high quality legal service.

Question:

How do I set up a record label? How do I sell my music?

Answer by Brandon Blake, Entertainment Lawyer: 

I represent a lot of record labels as an entertainment lawyer and this is one of the most common questions I get when helping to organize a record label for clients. This is a multi-part question, but I will start with what an entertainment lawyer does in setting up a record label company, and then address music representation and sales.

Over the past few years the dominance of music delivered over the Internet, versus through retail stores or music clubs, has opened up access to the music business to both recording artists and clients seeking to start their own record labels. Most simply a record label signs recording artists who record music, which the record label then sells.

Sounds easy. But looking at it from a business standpoint the first thing that makes a record label is a record label company, which might be filed as a music corporation or music LLC (limited liability company). Besides hiring an entertainment lawyer to set up the company, the record label should consider whether music investors are going to be a potential. Many of my record label clients are organized to raise a certain amount of investor money, and there are many music investors looking for opportunities to get involved in a record label. So when the entertainment lawyer sets up the record label company, consider the possibilities for music investors.

Once the record label company has been filed, it is time to consider contracts with the people that are going to make music with the record label. The different parties involved will be music producers, the music studio, sound engineers, recording artists, musicians, as well as songwriters and others. Each of these parties will need a different contract prepared by the entertainment lawyer. If these parties want to participate in the sales of the album or tracks then a music royalty or music percentage will need to be worked out as well.

The most critical music contract will be the recording artist contract. This deal might take on several different shapes. A "360 Deal" is when a record label decides to manage all parts of a recording artist's career. A 360 Deal would include music management, music publishing and recording, allowing the record label to position the recording artist's career for success. However, that is also a tremendous amount of work for the record label and the record label should remember not to stretch its manpower to thin.

Once the music has been recorded and mastered it is time for the record label to address music sales and marketing. While many record labels want to sign artists to major labels, it is now mandatory to show verifiable sales of a substantial level before approaching major labels. There are many music distributors available to work with record labels to get music out both online and also into retail stores. Of course sales and marketing online is critical and working with the right partners will ensure the success of the label and the career of the recording artist. Finally an entertainment lawyer can represent a record label and help set up the necessary connections. Feel free to contact BLAKE & WANG P.A. (www.blakewang.com) for a quote for affordable, high quality legal service.

Question:

I would like to get angel investors for my television pilot. Can I set up a non-profit for donations? What kind of a return can I promise if the show makes money?

Answer by Brandon Blake, Entertainment Lawyer: 

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.

A proper structure can take several different shapes, including the use of a conduit organization to receive the donations or the creation of a viable non-profit that might assist in the development of feature film, documentary or television projects.

Other options exist as well, including the use of crowd funding websites. However, it is important to note that crowd funding websites neither provide for tax deductibility, nor do they allow for any return on profits to the investor/donors. In many ways crowd funding is currently the worst of both worlds in terms of tax treatment. The donors are required to record the funds provided as non-deductible gifts, which then reduces the donor’s lifetime limit on other such gifts to family, and at the same are blocked by the SEC from participating in any future profits from the venture.

However, there are a number of creative ways to try to create benefit for donors while still utilizing the benefits of crowd funding. One such technique is to use crowd funding in conjunction with forming a non-profit organization. 

I have been working with non-profit organizations ranging in size from public universities to galleries, theater groups and documentary production companies for more than 16 years with the law firm of BLAKE & WANG P.A. (www.blakewang.com). We can assist clients in organizing solid, broad based tax-exempt 501(c)(3) organizations that gain the broadest tax-deductibility for the donors. Properly organized, a tax-exempt organization is an ideal way to unlock capital for projects that have an appeal based on the message and cause promoted, rather than the potential box office returns.

Question: 

In a recent email, the answer states that: "Entertainment companies of all kinds require film producers and television producers to submit new projects through an agent or entertainment lawyer" Most recently, Mr. Blake responded to a question I submitted about pitching a screenplay idea with the answer: "The minimum would be that it was written as a script. There are not going to be any producers out there that will get involved before a screenwriter has prepared the script".

My question: Is the answer regarding a "project" referring to a project with a completed screenplay, or a proposed project that is starting with simply an idea or treatment?

Answer by Brandon Blake, Entertainment Lawyer:  

Thank you for the very thorough question. I think it is a great question because it does get to the heart of many issues that I am asked about how to protect projects and ideas, and how to submit film and television projects. Having worked with most of the major studios and television networks, I have gained a good perspective on what development executives are looking for and how to get a project noticed. While the question here involves a feature film project, the answer is going to be equally applicable to network television as well. 

When it comes to feature film development, the key is to have the project as well developed as possible. That means that it is better to have a script than a treatment. It is better to have a polished script than a rough draft script. It is even better to have prepared pitch materials like posters and websites, than to have just a script, etc. Finally, the best position to be in with a studio is to also have a-list performers attached to the project, because that will tend to get the attention of development executives. If studios know that performers, and their agents and managers like the project, then it means the executives are taking less of a chance on choosing the material over the tens-of-thousands of other scripts submitted every year.

But what about the situation where there is a great concept but it has not been written in script format, much less packaged? I have had clients in this position before and it generally revolves around true-life stories and events. There are times when a concept is so good that it can speak for itself. In such a situation the producer needs to make sure that all of the underlying rights to the project are secured before pitching it. Additionally, these are often the situations where well-known actors and actresses get involved, because the performers can see how the concept can be developed around them as the lead.

However, no matter how good the concept, there are some reasons why a producer might want to further develop the project before approaching a studio. The primary reason is copyright law. The copyright law is set up to protect “tangible forms of expression,” and right or wrong, the courts have interpreted that as meaning that mere ideas are not copyrightable. Where an idea ends and a treatment begins is a source of controversy, but no producer wants to be in court arguing why the idea pitched was more than an idea.

This copyright issue is also why most studios will not accept the submission of ideas in the first place. From their perspective, another “teen romance” or “space cowboy” idea is not going to be so unique as to differentiate it from thousands of other produced films or projects in development, but could get the studio in a lot of legal trouble if someone later claims their concept was stolen.

For network television the same rule applies, the more developed the better. But rather than a feature length script, networks are typically looking for well-developed pitch materials as well as recognizable performers or celebrity attachments. While not everyone can afford to produce a pilot, having a broadcast quality sizzle reel can also be a great addition to the pitch materials.

I have been working with studios and networks for more than 16 years with the law firm of BLAKE & WANG P.A. (www.blakewang.com). During that period I have learned a few things about the types of materials that studios and networks are looking for from producers. The key is top quality material, whether it is a treatment, screenplay, series pitch, pilot or trailer. Never ask the development executives to imagine how good the project will be with their help. Demonstrate the ability to finish the job, which will go a long way to getting the financing and assistance needed.

Question:

How do I set up a film PPM? What is the JOBS Act? Can I raise investment money from crowdfunding sites?

Answer by Brandon Blake, Entertainment Lawyer:  

There is no doubt that private equity investment is a major source of financing for independent feature films. In fact, investors in Rule 506 offerings invested $895 billion dollars last year alone. Yes, almost a trillion dollars was raised last year under Rule 506 for all different investment types. That is more than five times the $169.9 billion that was raised in IPOs globally for that year. So the money is out there, the question is how to bring that funding to feature film budgets.

Our law firm has been setting up Rule 506 offerings, as well as other offering types, for feature film producers for more than 16 years. We expect the next 12 months to be the best period we have ever seen for producers raising private equity financing.

The Jumpstart Our Business Startups (JOBS) Act was passed in April of 2012, and is being implemented by the SEC. The JOBS Act was designed to make raising money easier for small businesses, including feature film producers. The best feature of the JOBS Act is Title II, which will allow startups and film producers to advertise their investments to the general public for the first time, provided the offering only allows "accredited investors" to invest.

This new provision will overcome the only real disadvantage to exempt offerings, which was the restriction on general advertising. By providing for general advertising of film investment opportunities, the SEC is going to exponentially increase the success rate of private investor financing, unlocking groups of investors who have probably never been approached about feature film investing.

While the SEC seems to be doing everything right on the JOBS Act, Title II, it has disappointed many micro-financing entrepreneurs with the failure to fully implement the JOBS Act, Title III, which was supposed to allow for crowdfunding sites like Kickstarter.com and others to raise investor money, not just donations.

The SEC has greatly complicated that process, among other things requiring any crowdfunding website to be a member of FINRA, the same securities regulator that major brokerages and investment banks have to join. The regulatory and reporting requirements are so steep that there would be no way to profit from running a crowdfunding site in the United States. The SEC has also stepped up enforcement of crowdfunding sites, making them risky for both the owners and the users.

So the SEC is both giving and taking this Holiday season, but there is a good chance that with the new JOBS Act Title II in effect in the coming months, startups and film producers could more than double last years haul from Rule 506 offerings, which will make a great Holiday gift for the film industry. Feel free to contact BLAKE & WANG P.A. (www.blakewang.com) for a quote for affordable, high quality legal service.

Question:

As a feature film editor my wife has the option of working as a loan out company. There are several confusing aspects in making a decision. Such as, can she collect unemployment when not working? Are pension benefits accrued under her name or does she give them up? Are there other welfare benefits she would give up by working as a loan out company?

Answer by Brandon Blake, Entertainment Lawyer: 

Loan-out companies are a great way to reduce tax exposure and to avoid the pitfalls of the alternative minimum tax and self-employment taxes. Generally the only reason that people working in the entertainment field do not form loan-out companies is when the hiring company does not allow them. Before electing to work as a loan-out, you will need to have an entertainment law firm like ours organize the loan-out company.

In this question the studio has already provided the option of working as a loan-out. Although particular facts vary from case to case, and there is not going to be a way to provide one answer to every different situation, I would say that in almost every case I have reviewed it has been substantially to the benefit of the client to choose loan-out status rather than employment status.

The primary reason comes down to taxation, and more specifically the issue of business expenses. When you are an employee you do not have the option of taking business expenses out of your calculation of income. The amount reported on your W-2 is your income and the only way to reduce your tax bill is through deductions. There are various deductions for business expenses, such as the home office deduction, and others. But the problem is that these deductions are only partial, allowing you to take a portion of the expenditure off of your tax bill, but not allowing you to reduce the size of the income figure itself. Moreover, higher income individuals will reach the alternative minimum tax, in which case most of the business deductions are then eliminated, meaning that money spent on things like vehicles, business supplies, inventories, and office space is being paid for with after tax money. Essentially you are being taxed on your revenue, not on your profit.

The loan-out company allows the individual to run in the same way that a company runs, which means the costs of doing business are taken out and the company only pays tax on the profits. This makes sense because no one expects a major corporation to be paying income tax on money it is paying out for office space or for the raw materials it uses in the course of business. So why should an individual be forced to pay tax on the materials that he/or she must purchase in the course of business?

When I counsel clients who have always worked as employees on the differences between loan-out and employment status, it often takes a while for the client to get his or her head around just what a big difference it will make to the tax bill.  Then once the client gets it, there is often regret at not having switched years earlier.

I have spent a lot of time talking about the upside, but there are a few downsides too. One of those is unemployment insurance. In order to maintain unemployment insurance, you will need to pay yourself a fair salary. That means a portion of the money that flows into your loan-out will need to be paid to yourself, with the traditional withholdings and deductions.

Regarding the other questions, pension benefits will depend entirely on your guild rules so check with the Pension Health and Welfare people. Regarding other types of welfare benefits, generally those are tied to showing previous employment, which would still be possible with a loan-out. 

I have been setting up loan-out companies for clients for over 16 years with the law firm of BLAKE & WANG P.A. (www.blakewang.com). The reason to have a loan-out set up by an entertainment law firm like ours is that we can make sure you can take advantage of every possible tax benefit, and also ensure that your entertainment business is in compliance with federal and state tax law, saving you tax penalties and accounting fees in the long run. Feel free to contact us for a quote.

Question:

Dear Sir, I have a completed feature film and I would like to know what I need before I attend a film market?

Answer by Brandon Blake, Entertainment Lawyer:  

Having worked with feature filmmakers for more than 16 years, I know that perhaps the busiest time is during post-production as a producer begins to think about the successful distribution of the project. 

Typically the producer and director will be focused on getting the picture editing just right while the audio is second, the legal contracts are somewhere in the back of the producer’s mind, and the promotional materials end up only lightly considered. So I want to bring up a range of things that filmmakers should consider as they are completing the film, which touch on both legal issues and also film sales issues.

Most producers have a general idea about the need for contracts, copyrights and trademarks. I will not cover this ground too much in this article, although anyone interested in additional articles about film contracts as well as the film distribution agreement can visit my firm’s website at www.blakewang.com.

Entertainment legal should be handled during the production, since it is much easier to get actors and writers to sign off on agreements before they start work. At some point everyone that participates in the production will need to sign a contract, if the project is going to get a commercial release. That is because distributors require E&O insurance (errors and omissions insurance), and before the insurance company will agree to cover a film the insurer will require that all production legal has been completed.

When it comes to film sales, I routinely attend film markets around the world, including the Cannes Film Festival, AFM, Sundance, Hong Kong FilmArt and this October I will also attend the Busan International Film Festival (formerly Pusan), the largest film market in Asia. When I represent finished feature films, I am often surprised how many experienced producers spend a tremendous amount of time editing the images, without as much attention to either audio or marketing and promotions. The good news is that every film can get attention from buyers if the following materials are put together before the markets.

In my experience, more films get passes because of deficient audio than almost any other technical problem. Sound editing, sound design and audio mastering are all critical to successfully distributing a film. Moreover, often the sound elements are what cause needless additional distribution expenses if it is left to the distributor to fix.

The promotional materials are also key. Trailers are important, although many distributors will want to create their own, but the website, stills and yes, the poster are all crucial. The fact is that without an excellent website and poster, distributors will pass on the project without even reviewing it. The initial sell of a feature film comes from the poster and one-sheet, with the website and trailer being the tools to get the buyer interested enough to invest 90 minutes in the film.

With the right promotional materials and of course the proper legal paperwork and documentation for the chain-of-title, every film can get noticed by buyers. I have been representing feature films for over 16 years with the law firm of BLAKE & WANG P.A. (www.blakewang.com). Feel free to contact us for a quote.

Question:

How will "Obama-care" affect independent productions? Assuming the production has over 50 employees will we need to provide health insurance?

Answer by Brandon Blake, Entertainment Lawyer:  

The Patient Protection and Affordable Care Act (PPACA), better known to its supporters as the Affordable Care Act, or to its critics as Obamacare, will have substantial impact on film, television and music production companies, although a number of the requirements have been delayed. In addressing the Affordable Care Act (ACA) requirements, I will prioritize the information based on the schedule of provisions that are coming into effect the soonest. Like other recent legislation, there may well be provisions of the ACA that never come into effect, but there are certain requirements that are starting next month.

Starting October 1, 2013 all employers, large and small, had to begin providing ACA required disclosures. A lot of producers are not aware that even if the bulk of the ACA does not apply to smaller production companies with less than 50 employees, the disclosure requirements will apply to almost all film, television, and music production companies. 

The ACA disclosure requirements apply to all employers that are subject to the Fair Labor Standards Act (FLSA). In general, the FLSA applies to employers that employ one or more employees who are engaged in, or produce goods for, interstate commerce. There are certain exceptions, including an annual dollar volume of business, but given the broad scope of the Act it makes sense for all small production companies to provide the required disclosures.

These notices fall into the following categories:

Exchange Notices – Almost all employers will have to begin providing notices to staff regarding the existence of ACA health insurance exchanges, called the “Marketplace”, and included in this disclosure will be information about whether or not the employer is providing health insurance, whether it qualifies as the minimum health care coverage required by ACA, and how the staff member can get insurance if the employer is not providing coverage. This applies to existing staff and new hires. 

Revised COBRA Notice – The Department of Labor has provided for an updated model election notice under COBRA to inform qualified beneficiaries of coverage options through the ACA exchanges.

SBC Notice – A Summary of Benefits and Coverage (SBC) is now required annually. The point of the SBC form is to make it easy for employees and their family members to compare different plans so they can choose between them. This applies to employers who are providing group health insurance coverage.

W-2 Notice – The W-2 must include the cost of coverage for employees, but an exception to the requirement is in place for employers with fewer than 250 W-2s in the prior year. However, look for this exemption to go away at some point. 

So, in other words, even when a producer hires staff on a temporary, part-time, or independent contractor status basis, the producer should begin to routinely provide ACA notices to staff in their engagement contracts or face tax and legal penalties.

Starting January 1, 2014, the Marketplace health care exchanges took effect. Enrollment began October 1st 2013. These are the health insurance exchanges that are being set up in various states. 

Starting January 1, 2014, the individual mandate became effective, requiring all legal residents of the United States to obtain health insurance or face a tax penalty. This is especially important to many film, television and music production companies because often these are companies of one person, and so-called “self-employed” people will need to obtain coverage for themselves and their family or face a tax penalty.

Starting January 2015, the employer mandate began. This is the centerpiece of the legislation, which requires employers with 50 or more full-time-equivalent employees who have not met the ACA’s minimum health care coverage and affordability guidelines to pay “shared responsibility” payments (tax penalties). 

Starting January 2015, the 6055 and 6056 notice requirements begin. These are the IRS notice requirements set out by the Internal Revenue Code (Title 26) – Section 6055 and Section 6056. This part of the ACA has also been delayed along with the employer mandate until 2015. These IRS reporting requirements are currently envisioned to be required both of large and small employers and by the self-employed. 

So as the Affordable Care Act timeline shows, there are a number of things to begin doing this month for existing and new hires. Our firm has been handling employment agreements and production legal for film, television and music clients for more than 16 years. Feel free to contact BLAKE & WANG P.A. (www.blakewang.com) for a quote for affordable, high quality legal service.

NOTE: This timeline is not a comprehensive outline of all ACA requirements. Because of the changing nature of the ACA and potential amendments in the future, a complete summary of the Patient Protection and Affordable Care Act is beyond the scope of this newsletter. 

Question: 

I'm trying to fully understand the implications of the Section 181 Film and TV Tax Deductions expiring at the end of this year. We are planning on shooting a few days of our film in 2013 so that we can possibly offer section 181 tax deductions to future equity investors if section 181 does not get renewed.

If we continue to raise equity for our film in 2014, after our project has begun principal photography in 2013, can we offer these section 181 tax deductions to our investors who invest in 2014?

Answer by Brandon Blake, Entertainment Lawyer: 

Like horror icons Jason and Freddy, Section 181 has been resurrected so many times in the following year that simply nobody believes it will stay dead. Flashing back to the start of 2013 with the “fiscal cliff” negotiations, the America Taxpayer Relief Act was passed at 2 am in late night negotiations. Well, the drama of the moment has passed but we did get Section 181 extended for one additional year.

However, there is good reason to believe that this might in fact be the last year for the Section 181 deduction, since the White House seems less and less able to press through additional “stimulus” measures and the various stock indexes are all at record highs.

According to the extended section 181 of the American Jobs Creation Act, this revised domestic film production incentive program, covering the first $15 million of costs of all productions -- will be in effect for qualifying productions commencing before January 1, 2014.

If this really is the last year for Section 181 then film and television producers should consider starting at least a few days of principal photography this year, as well as meeting the other criteria needed to preserve the opportunity to offer the section 181 tax deduction to qualifying investors.

Moreover, it is not enough to simply start principal photography, because as Section 181 is drafted it is actually a tax election that must be taken by the investment company. So therefore an investment company and offering needs to be set up in 2013 and there must be the proper election taken on the company tax return that is filed on March 15, 2014, to preserve the status of the production.

As with any federal tax deduction, the regulations can and do change and it is possible for there to be mid-year changes in tax policy. Contact an attorney before making financial, tax, or business decisions. Our firm has been handling securities, limited offerings and PPMs for film, television and music clients for more than 16 years. Feel free to contact BLAKE & WANG P.A. for a quote for affordable, high quality legal service.