An Independent Filmmaker’s Guide to Film Investment Agreements
As an independent filmmaker, the idea of investment financing for your production is probably both exciting and overwhelming at the same time. Naturally there’s the excitement around the possibility of your film being fully financed for production but you’ve also got to prepare yourself for the legal implications that come along with the decision to take this leap. Making sure that you’re prepared for all of the legal aspects that apply to film investment agreements before you start working out the arrangements with your investors is key to a smooth transaction. You certainly don’t want to appear amateur, and you definitely don’t want to enter any agreement that you don’t fully understand.
Of course you’ll have a production attorney on your side (or at least you should) during the process. But you’ll still feel more comfortable negotiating with the right knowledge and resources on your side.
Thus, learning all about film investment agreements and what to expect during the process of working out an arrangement with your investors is key.
Legal Terms You Should Know
First, let’s take a look at some legal terms that you should be aware of early on in this process. You’re going to hear, and read, a lot of different legal terminology over the course of this process. Some of it will be rather straightforward, but some not so much.
Consider This
For example, you might hear some financial terms like return on investment, expected gross revenue, and investment budget which are all relatively easy to follow. But you might also hear terms like “pari passu” or “pro rata”.
Which are certainly not as easy to pinpoint an exact meaning to. In these cases, you’re going to need to take a bit of time out. To discuss the meanings with your attorney ahead of signing the agreement.
Unless you do your homework ahead of time and learn about the various terms before you start.
Some legal terms that you should know in regards to film investment agreements include:
- Distribution waterfall – the method in which capital is distributed to investors.
- Hurdle rates – the minimum acceptable rate of return (MARR) for an investor.
- In-perpetuity – forever.
- PPM – private placement memorandum, an offering memorandum made to attract outside investors.
- Pari passu – equitably and without particular preference.
- Points – backend percentages that are paid when a film breaks even.
- Pro rata – proportionately.
Film Investments
These, and so many other, legal terms may come up over the course of establishing your film investment agreements. Particularly in regards to active film investment financing. Although they may be less likely in passive investment agreements.
Active vs. Passive Film Investment Agreements
Another consideration that’s going to come up quite early on in the process of securing investment financing from those with interest in investing in your film is whether the investor will be an active investor or a passive investor.
Many of the terms of the agreement might be similar between the two contracts but there will also be plenty of differing points of interest.
Active Participation
Active investors are going to provide a hands-on approach which includes active participation in your production. Typically, these investors help out in the day-to-day decisions associated with the production and the future distribution of the film.
They may take a very active role, investing their time (and decision-making) into just about every aspect of the film, acting at the helm of the business, taking control of major decisions related to finance or various other important aspects of the production.
Passive Investors
Passive investors, on the other hand, provide significantly less assistance. In fact, passive investors do not take any part in the guiding or decision making of the business.
They invest their funds to the production. In return all they expect is the anticipated ROI. Or other benefits that were promised to them in exchange for their investment.
When an investor is passive, they typically purchase a security, such as shares of the business, and the producer will be required to comply with SEC rules and regulations as a result.
Terms of the Investment Agreement
Depending on whether the film investment agreements are made between a producer or film business and an active investor or a passive investor, the terms will vary.
For active investors, the terms are likely to include details of the arrangement being made between the two parties. And the level of control that the investor will have in making decisions and acting for the “benefit” of the film production.
For passive investors, the terms are likely to stipulate an arrangement which essentially outlines the terms of the amount invested, the risk involved, the payments that are to be made should the film be a success.
Profit Distribution
Film investment agreements will usually address the distribution of profit. Which may arise from the distribution of the film. But only after all production related expenses, festival and screening fees, marketing campaign costs, and distribution fees have been paid out.
Investors will typically be entitled to a percentage of the net profits. The amount of that percentage is based on their total contribution.
The level of, and terms of, control that filmmakers and investors have over the approval of creative and financial matters. As well as all other matters relative to the film production is also apart of film investment agreements.
Legal terminology must also specify that the investor is not purchasing anything from the producer. But rather investing in an opportunity by which there are potentials for both risks and rewards.
The Takeaway
The terms, key sticking points, and details of film investment agreements that you enter between both active, and passive investors can offer protection from potential legal implications. Which may otherwise arise should you not have the terms of your investment agreements in writing.
By presenting your investors with a written contract which stipulates the terms of the investment. You’re not only showing them that you are knowledgeable and legally ready for what’s to come. But also that they can trust you with their investment.
So, before you begin negotiating the terms of the film investment agreements that apply to your project. Make sure that you’ve worked closely with your production attorney.
Hammed out any major details regarding how active, or passive, you intend your investors to be, and familiarize yourself with the legal terms that are most likely to arise during your negotiations. You’ll feel better, and your investors will too!
