This article is about independent producers and the investors they might gain to
produce a motion picture. In February of 2019, I received an e-mail asking about how this
would pass for securities. In no case does this have anything to do with selling securities, where
the ownership of the company is part of the deal. This article is about raising money for
the production of a film --- friends, relatives, other individuals --- not about selling securities,
which would indeed eliminate your bargaining power.
Independent producers should satisfy the investors that they are honorable and want to make every effort to get the investors a return on the investment, but a contract should also protect the producers from the possible exceptions that can occur during and after production.
Every independent producer should have a contract for the private investors to
sign. What goes into this contract is many times misunderstood, because there
is sometimes confusion between the producer and the investors concerning "what
the money is for" in the deal.
The producer has to be clear that the money is an investment, not a purchase in the company or the film.
For example, if investors want to purchase a piece of the film, that money is not working capital, but rather it is money placed in the pocket of the producer as a price for giving up some ownership. If the producer would then use that money as working capital, then he is giving away partial ownership for free to the investors.
On the other hand, if the money is being invested as working capital to bring a return on such an investment, no ownership stake is being offered by the producer, because no money is going into the pockets of the producer for such a sale.
There is a critical difference in the two different types of contracts.
This article will discuss the contract where an independent producer can gain investment in the film project from outside sources, solely as investment capital, not as an ownership stake in the film itself. The contract has to be specific, because it must foresee possible complications that may come out during production or post-production periods. It must also protect the producers from the possibility that some investors may be unscrupulous.
Let us call the contract INVESTMENT CONTRACT FOR MOTION PICTURE PRODUCTION, whereas one or more producers will sign this contract with one or more investors to produce an independent film for commercial distribution.
After the headers and setup, the TERMS AND CONDITIONS must be spelled out and enumerated, for these will make up the "entire agreement," and there should be a clause at the very end stipulating that the contract expresses the "entire agreement."
The first clause must be 1) The PRODUCERS alone will own 100% of the FILM, and no ownership in any part will be issued to the INVESTORS, whereas this is an investment opportunity and not a purchase agreement or buy-in.
Explanation: A purchase agreement or buy-in is a completely different contract which assigns to all of the parties of the contract a certain percentage of ownership. Since the investors are not writing the film, producing the film, or even distributing the film, no ownership needs to be offered. Only a substantial return on investment is required or needed, although this return on investment cannot be guaranteed in the contract.
After that clause, there should be several clauses describing the amount invested, and that it must be used for production and advertising for the film. To ensure the confidence of the investors, however, the producers should place the revenue clause at this point.
The clause should read something like this:
A) All revenue from box office receipts and distribution will be paid to the INVESTORS, as it comes in, until the total amount invested has been repaid in full.
B) After 100% of the investment has been repaid from box office receipts and distribution, so that the INVESTORS are owed no more money, the PRODUCERS agree to pay 20% of all additional revenue they receive from the FILM to the INVESTORS, and 80% of all additional revenue from the FILM shall remain with the PRODUCERS themselves.
Explanation: This states that the debt will be repaid first, but after that debt has been repaid, the producers will not give up anything above a certain percent (in this example 20%, but it could be any amount you want it to be).
That should satisfy the investors that you are honorable and want to make sure they get their investment back, if the film is a success. What is important now in the contract is to protect the producers from possible actions by the investors.
Here are five clauses that should be there. Each clause is followed by a brief paragraph of explanation.
(Creative Rights Clause): The INVESTORS do not have any legal right to oversee the FILM'S production, whereas they are simply giving financial backing to such a production, investing only money, and the PRODUCERS have the sole authority in producing the FILM.
Explanation: Self-explanatory right for creative control of the film.
("Investment at Risk of the Market" Clause): If the motion picture, when produced and distributed, does not earn enough revenue to fully pay back the INVESTORS the amount they invested, the INVESTORS will accept a business loss, and the INVESTORS are not due any amount of money in damages and the PRODUCERS face no liability; and the INVESTORS do hereby waive any right to file any litigation against the PRODUCERS or the production company they form to produce the FILM, and the INVESTORS cannot seek any portion of the production company or the FILM, whereas the production company and the FILM are owned solely by the PRODUCERS themselves in any case.
A) The INVESTORS are not entitled to any ownership of the FILM, the production company which produces the FILM, or to any copyright or other exclusive rights involved with the motion picture.
B) The INVESTORS are taking a business risk by putting up capital in a motion picture, where they might succeed by making back their investment plus 20% of additional revenue the FILM earns, or by taking a business loss and perhaps not making back their original investment.
C) All investment is at risk of the market.
D) How the money is spent in producing the motion picture is entirely up to the PRODUCERS, who rightly own 100% of the FILM, and control the artistic production.
Explanation: This long clause and all of its parts must be a part of every independent film contract. Every project is at risk of the market. Nobody can guarantee success or failure. Even on the "Schedule C" you have for Income Tax Returns with the IRS (USA), you are asked if all investment is at risk of the market. Therefore, the investors need to know they are taking a business risk.
(Failed Distribution Clause): In the event that no distribution can be gained for the FILM, despite the FILM being a good motion picture, and no additional money can be raised to produce duplicates for self-distribution or other distribution thus leaving the PRODUCERS with a master print and a work print, the INVESTORS cannot claim damages, whereas all is at risk of the market, whether the FILM is a good motion picture or a poor motion picture or otherwise.
A) The PRODUCERS will obviously attempt all avenues for distribution, but can never guarantee what they cannot control, and the PRODUCERS cannot be held liable.
Explanation: This is included mainly to protect the producers from unscrupulous investors, because sometimes distribution cannot be had even for a good film.
(Production Halted Clause): Should production of the motion picture be halted by an Act of God, death of any participant, or any other unforeseen thing, to the point where the motion picture cannot be completed with integrity, the PRODUCERS agree to return the balance and remainder of the original investment amount not then used up, concerning motion picture production, to the INVESTORS.
A) In the event that motion picture production can be resumed, despite the points made above which would halt the production temporarily, the PRODUCERS will retain all money in the account to finish the motion picture production and complete the FILM as best they can.
Explanation: The future cannot be seen by anyone. Protect yourself in all cases. The production might have to be halted for some reason. You never know.
(Time Element and Completion of Production Clause): The PRODUCERS and the INVESTORS agree that the FILM should be completed as a master print in final cut no later than 18 months from the first day of production, or 24 months from the date of the signing of this agreement, as a basic time schedule.
A) If the PRODUCERS cannot complete the FILM in that time, no additional money will be sought by the PRODUCERS from the INVESTORS, but rather the PRODUCERS will complete the FILM as they see fit, and the INVESTORS do not have to put up any more money after such a date.
B) No penalty of any kind can exist against the PRODUCERS for completing the FILM past the due date preferred.
Explanation: Many times a producer may face problems that make the film delayed in production. The issue is that they retain creative control to complete the film "as they see fit." If more money is available, certainly the producers will take it, but there should be some kind of statement that the producers do not intend to ask for more money than they need. The last thing a producer needs is for some investor to dictate the remainder of production because the producer has gone over budget or past a deadline.
That set of clauses should be enough to protect the producers of an independent film from unscrupulous investors who might try to take over the property, interfere with production or distribution, or file civil claims for a return on investment which was supposed to be at risk of the market.
Even if the investors are entirely honorable, these clauses must be included as a matter of principle.
Therefore, while the contract gives the investors confidence by stipulating that they shall be paid first and that their interests are highly regarded, the remainder of the contract must protect the producers and the film itself.
END OF ARTICLE
Mr. J.V. Presogna is a published writer, composer and artist, with a background in science and mathematics. He owned Presogna Productions Film Company in 1977-78. You might want to check out this article as well: "Still Looking For Respect."