Raising Money Part II - Studio Distribution and Private Investors

Distribution

The studio will have worldwide distribution in all media if it finances 100% of the picture’s production and distribution. The studio will own the picture, its copyright, the screenplay, and the motion picture rights to the underlying literary property upon which it is based (if any) and, therefore, it will have the right to further exploit the picture via remakes, sequels, television series, television spinoffs, merchandise, etc. Any rights that the producer wants to reserve and withhold from the studio need to be negotiated upfront.

Distribution Fees

The studio agrees to finance the picture in exchange for the right to own and distribute it. The distribution fees and expenses charged by the studio on behalf of the picture’s distribution are included in the Production Agreement. Fees range between 20%-40% depending on the territory (domestic or foreign) and media (theatrical, free TV, Pay TV, VOD, Cable, DVD, etc.). You will have to pay the equivalent of two distribution fees if the studio utilizes a sub-distributor in a foreign territory. I negotiate for a reduced studio distribution fee whenever a sub-distributor is used. Studios enter into agreements with sub-distributors when they do not distribute in a territory. For example, a studio might enter into an agreement with a sub-distributor in Colombia if it does not have a distribution operation there.

Investors

You can attempt to raise all or a portion of your picture’s production budget from private investors willing to bankroll your picture, who in return are allocated a financial interest in your picture in the form of a “security.” Securities and their sale are regulated by the Securities and Exchange Commission (“SEC”), which requires that all securities be registered unless they fall under one of the statutory exemptions under its Regulation D (“Reg D”).18

Private Placements

Registered offerings are expensive and are usually cost-prohibitive for independent filmmakers. As such, I am only discussing herein private placements—exempt offerings that are restricted to investors with whom you have a pre-existing relationship. Advertising and general solicitation are greatly restricted where Reg D offerings are concerned.

Your offering is exempt from registration if it falls within Reg D’s Sections 504, 505, or 506. Though you do not have to register the offering if you qualify under one of the aforementioned sections, you do need to file a Form D with the SEC.18 In addition, you have to comply with the rules and regulations of any state where you are offering your private placement.

Reg D: Section 504

Under this exemption, you may offer and sell your investment to an unlimited number of investors, so long as you are not raising more than $1 million dollars and do so within a 12 month period. You are not required to provide disclosure documents, which means that you do not have to furnish the investors with information about your picture, plan to pay them back, or the monetary and tax risks involved in motion picture investing. You are not allowed to engage in general solicitation and may not advertise the offering. The securities sold via the offering must be “restricted”: They cannot be sold in a public marketplace for a year, such as the New York Stock Exchange, because they are not registered. There are three exceptions to the solicitation and advertising ban under this section: 1) if you register and limit the offering to states that require a publicly filed registration statement and deliver disclosure documents to the investors; 2) you sell in a state that does not require registration, but you are also selling in a state that does and you provide the disclosure documents to all the investors; or, 3) you sell the offering in states that permit general solicitation and advertising, but only to “accredited investors.”

“General solicitation” and “advertising” are defined herein to mean any activity whereby you provide potential investors with information about your offerings, such as the deal terms or material information regarding your production company via mass communications, such as emails and newsletters; a public profile on an investment platform, such as Indiegogo.com and Kickstarter.com; a website that displays the investment opportunity; public speaking engagements to discuss the investment opportunity; public videos about your investment; solicitation of the investors or dissemination of information regarding the investment opportunity on social media sites, such as Facebook.com and Twitter.com. The above is not an exhaustive list. If you participate in an activity for the purpose of informing people about your investment opportunity, you are engaging in general solicitation and advertising.

“Accredited investors” are people or companies that the SEC believes are investment savvy and financially stable enough to make private placement investments and decisions. Included in the definition are individuals who earn at least $200,000 annually ($300,000 for a married couple) or have a net worth of $1 million excluding their primary residence; trusts with total assets in excess of $5 million dollars (so long as the trust was not formed to make the specific investment being offered); entities completely comprised of accredited investors; and non-profit organizations with total assets in excess of $5 million.18 If you want to familiarize yourself with the entire definition, you may do so at 17 CFR § 230.501.

Reg D: Section 505

This exemption allows you to offer and sell your investment to an unlimited number of accredited investors and up to 35 non-accredited investors, so long as you are not raising in excess of $5 million and do so within a 12-month period. You may not use general solicitation or advertising to sell your securities and must inform the investors that you are selling them restricted and, hence, illiquid securities. Furthermore, you must provide non-accredited investors with “full disclosure” so they have access to all the information they need in order to make an informed decision: the specifics of the investment opportunity; the deal terms; how they will recoup their investment; details about the company and its principals; the financial and tax risks inherent therein; financial statements, etc. I suggest you deliver the same information to both the accredited and non-accredited investors.

Reg D: Section 506

This exemption permits you to raise an unlimited sum of money without regard to time. You may sell the offering to an unlimited number of accredited investors and 35 non-accredited investors, but the latter must be investment savvy, sophisticated investors. You may only sell restricted securities and must inform your investors of this fact. You may not engage in general solicitation or advertising unless all the investors are accredited and you take reasonable steps to verify that they are indeed so. You must give the non-accredited investors the disclosure documents described in Section 505, and must be available to answer the questions of all prospective purchasers.21

Finder’s Fees

“Finders” are people who help producers raise financing via investors. The producer agrees to give the Finder an “Executive Producer” credit (on-screen and in paid ads), in addition to compensating the Finder for his services. The Finder is paid a fee/commission equal to up to 5% of the monies raised and profit participation equal to up to 5% of the net profits of the picture. The problem with this arrangement is that it is illegal. As per the Securities and Exchange Act of 1934 and FINRA (the Financial Regulatory Association) you may only pay fees/commissions to licensed broker/dealers. Chances are that if the Finder is not licensed to be a stockbroker, he is not a licensed broker/dealer.

Producers tend to throw caution to the wind when it comes to the issue of Finders because the practice of hiring Finders is so commonplace in the film industry. Note that just because everyone is doing it does not make it right—it just means that a lot of producers are breaking the law. Producers refuse to believe that the law is so black and white, but it is. There is no loophole. Get caught and you will have to return the monies, even if you have spent them, and maybe incarcerated for up to 25 years. How would the SEC/FINRA find out if you are using a Finder? The SEC/FINRA would find out when you get sued by an investor who lost her money.

An alternative to a Finder are your company’s employees, who may help you raise money if (1) the employee is an officer or director of the company; (2) raising money is not a predominant aspect of their work; (3) they are salaried (and their salary is not contingent on raising money); (4) they were not a licensed broker/dealer during the previous 12 months; and (5) only participate in the company’s private placement offerings once in any 12-month period. For example, you can hire a VP of marketing whose job duties include facilitating foreign sales and distribution, who might help introduce you to investors.

Please be cautious, legalities aside. There are a lot of people calling themselves “Finders.” Most do not have the capacity to raise money. They are either scammers or people who want to play “Executive Producer.” Never pay a Finder an advance against his future fee. Finders get paid when, and only if, they raise the money.