Crowdfunding and other production financing

Crowdfunding

Crowdfunding entails you raising money from an unlimited number of people via a third-party website set up for this purpose. Indiegogo.com and Kickstarter.com are the two most popular crowdfunding websites for filmmakers. You crowdfund by creating an online campaign, which you upload onto the third-party website. Anyone who likes your campaign can become a backer by contributing money towards\ your funding goal. In exchange, you offer these backers a “reward” or “perk,” which must be minimal to avoid falling under the auspices of the SEC. In other words, the reward or perk cannot be so big that it makes the backer’s contribution look like an investment. My clients have given their backers t-shirts, baseball caps, DVDs, autographed pictures and screenplays. You will be in breach of contract if you do not fulfill the reward or perk you offer the backers, so only offer what you know you can deliver. You cannot legally offer your backers a walk-on role or job, since it is against the law to make people pay for a job.

The greatest advantage of crowdfunding via Indiegogo and Kickstarter is that you retain 100% of the equity and ownership in your picture. In addition, you retain 100% of the monies earned by your picture because the backers are notinvestors. You can even solicit on behalf of your crowdfunding campaign.

You must meet 100% of your funding goal in order to withdraw the monies donated by your backers with Kickstarter, but may withdraw partial monies via Indiegogo if you opt for its “Flexible Funding Plan.” Kickstarter.com charges a fee equal to 5% of the monies raised plus credit card processing fees of up to 5%. Indiegogo charges 4% of the monies raised, a 3% credit card processing fee, and $25 wire fee for non-U.S. campaigns. You will pay Indiegogo 9% of the monies raised if you elect “Flexible Funding.” You do pay taxes on the monies you raise, so consult with your CPA prior to starting your crowdfunding campaign.

Regulation A+

In 2015, the SEC approved new Equity Crowdfunding Rules for Title IV of the Jobs Act (“Reg A+”), allowing filmmakers to raise up to $50 million from equity investors via crowdfunding portals like Indiegogo.com and Kickstarter.com. Money raised under Reg A+ is an equity investment—not a donation. As such, investors are allocated a pro rata equity stake in your picture in exchange for their investment—not perks.

You may raise money from both accredited and non-accredited investors under Reg A+. Unaccredited investors may invest up to 10% of their income or net worth, whichever is greater, if you are raising in excess of $20 million. There is no cap for non-accredited investors if you are raising no more than $20 million. Accredited investors have no limitations whatsoever.

Though you may solicit investors, you may not do so until the SEC has approved your offering (some states will also require that you register or qualify your offering too). The SEC’s approval process requires the submission of disclosure documents. If you are raising in excess of $20 million, you must include audited financial statements with your disclosure documents. Furthermore, you will have to provide the SEC and your investors with annual and semi-annual reports, along with annual audited financial statements.

Going this route is likely too expensive, complex, and time consuming for the average independent filmmaker, but it is an option for filmmakers raising large sums of investor monies, who require the marketing opportunities available through crowdfunding portals. I suggest that you instead opt to raise financing via a Private Placement Offering if you have access to investors.

Foreign Pre-Sales

You may raise production financing by pre-selling your picture’s foreign territories. When you “pre-sell,” you license territories to distributors who are paying for the right to distribute a picture that is yet to be produced. Each foreign distributor and you negotiate a “license fee” and an advance against the license fee (the “minimum guarantee”). The minimum guarantee gets paid when you deliver the completed picture to the foreign distributor. Minimum guarantees can be as high as 20% of the license fee and are influenced by your package (the cast attachments, the director, the screenplay, the producer, and the production budget); whether you have secured a domestic distributor; whether financing for the picture is already arranged; whether you have set a start date for the picture; and whether you know when you will be making delivery to the distributors.

Banks lend against these minimum guarantees because they are technically receivables that the foreign distributors are contractually bound to pay. All the picture’s receivables, that is revenues, will be directed to the bank until the bank loan is paid in full. Do not expect any bank to lend you a sum equal to 100%, of the minimum guarantees, since banks take each distributor’s creditworthiness into account and discount each minimum guarantee accordingly. The bank will require you to purchase a completion bond. Also, keep in mind that you have to pay the costs associated with the bank loan, such as legal fees, interest, and other loan related costs.

Whether you can raise production financing via foreign pre-sales is going to greatly depend on whether you have attached a “bankable” cast to your picture. As such, consult with a sales agent prior to making cast attachments, since bad casting choices will negatively impact your ability to secure a sales agent and foreign pre-sales. “Bankable” for the purposes of foreign pre-sales means actors that foreign distributors believe will make the picture appealing to the movie-going and television-viewing audience in their foreign territory. The cast does not necessarily have to be “A” level talent, which is why it is important to discuss casting with a sales agent beforehand.

Production Incentives

You can raise a portion of your picture’s production budget via the use of production incentives offered by a U.S. State or foreign country. The structure, type, and requirements vary by state and country. Below are descriptions of the different types of production incentives and their qualification requirements. Refer to the “Production Incentives” section in this book for specifics on the tax incentives offers in the U.S. and foreign territories.

Production Rebates

Production rebates are refunds or grants of money paid to production companies based on the jobs created or the qualifying expenditures made within the state or country during production. For example, Maryland will pay a production company a rebate equal to 25% of the total direct costs incurred while filming in the state, and South Carolina offers production companies a 25% wage rebate for persons employed within the state. You will be entitled to a $250,000 rebate if you spend $1,000,000 in qualified expenditures within Maryland, or pay $1,000,000 to crew you hire in South Carolina.

Refundable Tax Credits

Refundable tax credits result in the production entity receiving a tax refund in the state or country where the picture was produced.24 A refundable tax credit can result in a refund if the tax credit due to the production company is more than the taxes owed by it. The production company has to file a tax return in order to claim the tax credit. Refundable tax credits can help you finance your production because you can monetize them by securing a loan against them.

Transferable Tax Credits

You may sell a transferrable tax credit to a third party. If you are entitled to a transferable tax credit, but cannot utilize it to reduce your tax liability, make use of it to fund your picture’s production. You will likely require the services of a broker to help you secure a buyer, so be prepared to pay a commission and to sell it at a discount to make it appealing to the buyer. Be sure to consult with your CPA with regard to any tax credits you sell, since the sale may be taxable events.

Non-Refundable, Non-Transferable Tax Credits

Non-refundable, non-transferable tax credits cannot be sold or transferred. You may only use them to reduce the taxes you owe in the territory. In some instances they may be carried forward to reduce your tax liability in subsequent years. This tax credit may not help you unless your production company is a resident of the state.

Up-Front/Back-End Funding

Up-Front/Back-End funding is provided by local taxpayers who receive beneficial tax treatment from their jurisdiction. It is a pool of money that is made available for film production funding. Oklahoma has been known to provide this type of financing, but it is mostly an international incentive.