Film Production Legal Issues Part I: Financing

Today I have a topic that most people don’t like to talk about: money.  I was initially going to write about the legal aspects of film production but that topic is too large for any one post to do it justice so I am breaking up my primer on film production in to different parts.  I’m going to start this series by discussing the legal aspects of various avenues through which you can finance your film. 

So how do you get funding?  There are as many ways to fund a film as you can imagine but I’m going to limit this article to the most common ways to fund an independent production.  Unless you want to pay for the film yourself, you are going to have to convince other people to give you their money.  There are three potential ways that people can give you their money: by donation, by loan, and by investment.  There is no one right or wrong way to finance your project, and in fact, you may be more successful in raising the capital you need if you diversify your funding efforts.

 

Donation

Donations (called gifts, in the other 49 states) are one way to fund your project.  To a certain extent, they are not taxable.  As of this writing, you can exclude from your federal income tax up to $14,000 dollars from each donor.  That amount is periodically adjusted upward.  Even donations above that amount may be excludable if the total donation does not go above the lifetime estate basic exclusion amount.  As you may have surmised, these tax laws are primarily concerned with taxing estates, not film funding efforts.  The kicker with donations is that the donor can’t really receive anything significant in return for their donation.  You could offer donors a token of appreciation in return for a donation but the value of that token must be significantly less than the value of the donation otherwise the IRS will view the “donation” as income.

Family and friends are the old standby target for film donation seekers but crowdfunding has changed that landscape.  At sites like Indiegogo and Kickstarter you can have others fund your project.  Crowdfunding sites have become more visible and more popular in recent years, for all kinds of business ventures, film included.  Crowdfunding is not a guarantee of success, but it is another financing tool that can work, so long as you make sure you navigate the tax issues correctly. 

 

Debt

Borrowing money is a risky choice for filmmakers because film production is an inherently financially risky endeavor.  The main problem with debt is that you generally have to start repaying it (with interest) before your film starts making money.  You may find it necessary, or even useful, to incur small amounts of debt from time to time.  However, you should avoid using debt alone to finance a film.

 

Royalties

Royalty financing operates in a kind of middle ground between debt and equity and so you can usually avoid the securities regulations that come with equity financing.  Essentially, someone gives you their money and in return, they get a percentage of your profits for a certain period of time or up to a certain cap.  The primary benefit of royalty financing is that you retain full ownership of the film without being tied to the payment schedule of a standard loan.   One downside to royalty financing is that if your film is wildly successful, you end up paying more because you are paying out of your profits.  However, investors who believe your film will be successful are more likely to invest in it.  And because the royalties are tied to profits, you don’t have to worry as much when your film sales hit a slump.

 

Equity

This is the big one, legally speaking.  With equity financing you are essentially selling an ownership stake in the film, or, more specifically, the entity you’ve created to own the film.  Equity financing runs into the world of securities regulations, which are quite complex.  This is truly not a do-it-yourself project.  If you choose equity financing you should really speak to an attorney as well as an accountant to ensure compliance with the regulations. 

First off, the law generally treats corporate stock, limited partnership interests, and non-managing LLC member interests as securities.  Production entities are pretty much always going to be private companies (even if they’re corporations) so you can’t offer equity shares to the public without running afoul of securities regulations.  Generally, you have to provide each potential investor an offering memorandum.  The offering memorandum is a type of prospectus and describes, in detail, the financial status of the company.  The offering memorandum is far more detailed than a standard business plan. 

The law provides many exemptions from the offering memorandum requirement.  Notably, you can take money from friends and family and accredited investors.  Who is an accredited investor?  Generally, an accredited investor is a natural person whose net worth is at least $1,000,000 (excluding the value of their primary residence) or has made at least $200,000 per year for the last two years or a bank or investment firm.  Even if you aren’t required to provide an offering memorandum, you should still err on the side of providing more information than is required so that investors don’t accuse you of providing misleading information about your production.

One new finance tool to keep your eye out for is equity crowdfunding.  Congress made this legal in 2013 with the JOBS Act.  However, it won’t come into effect until the SEC promulgates rules for its implementation.  The SEC published a draft of its rules in 2013 and finalized some rules in March 2015 but the concept of buying $100 worth of equity in a startup or film production remains elusive.

 

Tax Breaks 

It’s no secret that Louisiana has some pretty good tax breaks for film productions.  Tax breaks are a kind of soft financing; you get the money on the back end, not up front.  In order to qualify for Louisiana’s Motion Picture Investor Tax Credit, the production must spend at least $300,000 in the state of Louisiana.  The state offers a 30% credit for production related goods purchased in state and services used within the state.  Louisiana offers an additional 5% credit for production payroll paid to Louisiana residents, up to $1,000,000 for each resident.

So how do you get the credit?  You apply and if your production meets the legal requirements, you will receive an initial certification.  Then, when your production is complete, you submit an audit, which the state evaluates, and if the evaluation is favorable, it issues a final certification of your tax credits.

 

Next topic:  Choosing a Business Entity for your Film Production