Entertainment Financing Factors that Every Investor Must Know.

The entertainment industry has one major thing going for it – it’s sexy. People are drawn to the buzz around the biz. Crowdsourcing currently creates the ability for people to donate to entertainment projects. But other than getting a credit, those backers can’t really look forward to much else. Bragging rights are limited to “I donated to that project,” and that’s about it. But soon enough, crowdfunding will allow those same backers to become actual investors. So yes, they will still get the credit; they will still get to support an artistic project; but the difference will be that each investor will become a part owner of that project. That project will be created. It will be featured somewhere out there in the public sphere and each individual who invested in it will get to say “Hey I helped finance a film/TV show/commercial.” And they might even make money off of it – the icing on the cake.

Investing in entertainment, however, is not the same as investing in other standard businesses. Schuyler Moore, LA entertainment attorney and lecturer at UCLA, has been practicing in the legal sphere of entertainment since the early 80s. He’s published a book and lectured on the unique elements of financing films and the risks for investors. He states that there is no standard approach to film financing because “many transactions in the film industry do not fit within any standard paradigm.”[1] That being said, there are still some key factors a potential investor should pay attention to when considering investing in a project (specifically film & television):

Who are the key players? Who is the team? Take a look at the producer(s), director(s), writer(s), and production team and their reputation in the industry. This will help you get an idea of the type of work produced in the past by these players so that you can decide whether you’d like the finished product or whether there’s an audience for that product. This will also help you determine functional issues like whether they’re known for finishing production within budget and on time.

What do the financials look like? What is the order and priority of distributions? This will give you an idea of who gets paid before you do. What are the production costs and have credits or other sources of free money been sought out to reduce costs. The most common credit used to reduce production costs is a tax rebate or credit. Specifically, are these domestic or international credits and rebates? This matters because if a producer plans on offsetting the budget with money from international tax credits, he must be able to sell the credit to someone in that country to make some money back. Otherwise it’s a credit that’s useless (unless the producer has tax liabilities in that country). A budget incorporating a tax credit is a sign that the producer knows where to find the free money. This is important to a crowdfunding investor because it means that there are less people ahead of him in line to get paid from potential net proceeds.

What about the intellectual property rights? The producer or filmmaker should have secured permission to use copyrighted material, such as the script, music licenses, and the likeness of the actors. Additionally, the production team should be bound under a “work for hire” provision in their agreement so that they don’t try to assert that they have financial rights to the project. Oftentimes, distributors request that the producer secure agreements permitting use of copyrighted works from the owner of the works to avoid litigation or more people claiming to have a stake in the incoming revenue.

What kind of insurance has the producer purchased? Two main protections that a producer could obtain are a completion bond and errors & omissions insurance. A completion bond is a form of insurance where a company guarantees, for a percentage fee, that the producer will complete and deliver the film to distributors within the timeframe agreed to by the relevant parties. This will in effect allow the distributors to pay the minimum guarantees to the producer as soon as the completed project is delivered to them.  The errors and omissions insurance is an insurance that producers purchase to cover litigation risks due to an error in securing IP permissions (discussed above). Both insurances reduce the risk of incurring additional costs associated with litigation, delayed production or release. These are all factors that would negatively effect an investor’s potential return.

What business entity is the project encompassed in? It is very important for the project that you’re investing in to be organized into some corporate structure that protects investors from personal liability. An LLC is the ideal structure and the one most used in this scenario. The LLC protects investors from personal liability in the event that someone sues the company. Additionally, LLC’s allow pass-through taxation, meaning that there is no double taxation – taxation at the corporate and individual levels. Investors should also be careful to make sure that they are investing in either a single project or a slate deal rather than in the studio itself.

Although each entertainment deal is complex with many moving parts, these basic elements are great starting points to be aware of when seeking out investment opportunities in the entertainment realm. There are many more factors to research before investing in a project; but every deal is unique and so it is impossible to provide a quick overview of all the possibilities an investor may come across. The important point is to make sure to diligently research the nuances of any deal you’re considering putting your money into. What you see is not always what you get – so make sure to look beneath the surface.

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[1] Moore, Schuyler M. The Biz: The Basic Business, Legal, and Financial Aspects of the Film Industry. Los Angeles: Silman-James, 2011. Print.

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