Do you find this Q&A interesting? What additional information would you like to know about?
Here is the Q&A from this article not yet out:
Kingsley Marshall: How hard is it to find movie financing in 2010?
JEFF STEELE: It’s very, very tough out there for single-picture, indie films. There are about six entertainment banks left that are actively lending, down from 12 in 2008, and only a handful of gap funds, down from a zillion in 2008. Wall Street equity, like hedge funds, has pretty much abandoned the single-picture finance business as well, but is still present in slate financing structures. And yet, films are still getting made.
Kingsley Marshall: How much is the credit crunch to blame?
JEFF STEELE: The credit crunch definitely played a key part in the production freeze in 2009, where the streets of Cannes and Toronto were paved with dead deals. 2010’s glut has to do more with (1) the plethora of bad film deals that were made during the go-go years of 2005-2008 that have barely recouped this budgets, (2) high net worth individuals not having the disposable income they once had (or thought they had), and (3) the lack of U.S. distributors (and P&A) available to the indie market. The credit crunch is definitely having a direct impact on the ability of foreign buyers and distributors to finance pre-sales and pre-sales deposits, which are critical elements in indie film financing.
Kingsley Marshall: Who/what has stepped into the vacuum left by the exit of banks and Wall Street from movie financing?
JEFF STEELE: I’m seeing new equity coming back into the market, as well as some gap funds, so business is definitely starting to pickup.
Kingsley Marshall: How different are these new financiers from their predecessors, if at all?
JEFF STEELE: The new financiers (both equity and debt) are so far proving to be more sophisticated and informed than their predecessors — they are either drawing from their own prior experiences or utilizing finance advisors to back them up. They demand more transparency in their deals (which is great for everybody), they’re more interested in partnering with other similar financiers (instead of trying to be the sole debt financier or equity investor), they’re generally not interested in financing 100% of the pictures, and they’re insisting on utilizing production tax credits.
Kingsley Marshall: You have discussed that traditional financiers tended to fund commercial and unchallenging films. My piece is about the rise of challenging independent film in times of change (60s/70s/recently). What effect do you think on movies does the source of the money have?
JEFF STEELE: So much of indie film financing is predicated on pre-selling international territories to buyers and distributors, that those buyers have become a de facto voice in the development of indie films. However, this is not necessarily a bad thing because (contrary to popular opinion) the #1 criteria for pre-buying a film these days is the script. If the story is not on the page, then they’re not interested in buying (unless it’s a slam dunk like Van Damme action flicks). So in this sense, the buyers have become much more selective as to which films they’re going to put their credit-crunched deposits into. This can be good news for challenging independent films that have great scripts, but might not be considered a “high-concept” sell (like The Hurt Locker). If a producer is going to take on a challenging film, then they should strongly consider attaching a director that has a successful track record of delivering compelling or mainstream films.
Kingsley Marshall: Do you think these factors are always inherently linked?
JEFF STEELE: Financiers aren’t interested in taking a backseat in the development process, and nor should they be expected to. They’re not interested in taking the lead either, but they do expect to have a meaningful voice in the packaging of the creative and financial elements. It is their investment, after all. There is nothing more tedious (or litigious) than dumb money.
Kingsley Marshall: Do you think the success of challenging films such as Precious and The Hurt Locker will draw more adventurous financiers to film?
JEFF STEELE: Precious, Hurt Locker, District 9, and Paranormal Activity are all good for the independent film business. They remind potential financiers that audiences will turn out if you give them something interesting and challenging. However, I would not recommend using them in your film’s business plan because that level of success is so remote. Success is relative, so managing your financiers’ expectations from Day 1 is essential to a productive relationship.
Kingsley Marshall: What are the differences in risk between studio funded and independently financed film? Is there a sense of the inmates taking over the asylum?
JEFF STEELE: Most studios are focusing their attention on blockbuster and franchise films (bet big, win big, market your audience into submission); this is a wholly different model than indies. Indies, if financed properly, can stand a reasonbly good chance of turning a profit, but it takes a lot of discipline and determination. Studios have output deals with international distributors that guarantee a level of return based on box office performance. Indies are just trying to get their equity investors paid back with maybe a 20% premium and some back end, so that they’ll reinvest in the producer’s next project.
Kingsley Marshall: How common are angel investors?
JEFF STEELE: “Angel Investor” is a term not generally used in film financing. If a producer can find somebody to pay for their script development, then I suppose that’s a form of angel. Somebody who funds pre-production is generally perceived as either an equity investor or a bridge lender. An “Angel” is generally the third stage in the fund raising lifecycle of a startup: Bootstrap, Friends/Family, Angel, Series A, Series B, IPO/Acquisition.
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I recently heard a report on NPR’s “Marketplace” about amateur videographers making a killing on YouTube, most famously the father behind “David After Dentist,” and Nebraska teenager Lucas Cruikshank, the creator and star of “Hey, It’s Fred.”
“David After the Dentist” seen by about 60 million people, has resulted in direct sales of merchandise, along with licensing of David’s catch-phrase, “Is This Real Life?”
“Fred” has more than 400 million views and, as the New York Times recently reported, in a first-of-its-kind deal for children’s entertainment, “Fred: the Movie” will debut on Nickelodeon this summer. Execs are hoping to create a franchise and may follow up with a Fred Christmas movie.
These are happy accidents, but should indie filmmakers be using YouTube as a component of their finance plan?
No, they should not.
Licensing a zeitgeist like “David After Dentist” is merely capitalizing on the here and now, right now; maintaining this enthusiasm for two years while a the film version is produced is far cry from from trying to convert right now. In addition, the Fred audience are tweens that move from fad to fad quickly and never look back. Will Fred be as cool to tweens in two years? The next generation of tweens will seek out the own Fred phenomenon. Trying to recapture lightening in a bottle after a two year lag time is foolish enough, let along trying to do it with the shortest attention span demographic.
Massify, Lionsgate, and YouTube are sponsoring a program called LINC, the Lionsgate Incubator, to make and distribute short comedy films online. In January, YouTube announced it would collaborate with Sundance to rent the top films from the 2009 and 2010 festivals.
Participation in these filmmaker opportunities is not unlike earlier opportunities offered by AFI, Fox Searchlight, Sundance, and other festivals. Now there’s a digital component, but whether or not a career can be launched through such an opportunity depends on what an individual wants out of their profession.
There are also YouTube partnerships: allowing YouTube to place ads on your content and share in the rewards.
One of the successes within this paradigm is Demand Media, which “brings together writers, editors, experts and filmmakers to create informative content and develop online communities around a wide range of topics that run the gamut from healthy lifestyles to adventure travel to learning how to manage your personal finances.” Demand Media has launched more than 20 different YouTube channels, some of which are among the top-most-viewed on the site.
The cornerstone of Demand Media’s success is that they embrace the fact they’re in the search-engine-optimization business: “While many see YouTube as a destination site, we know that YouTube is also a top search engine. In fact, the largest percentage of our channel views comes from searches on YouTube. So we take that into account and utilize many of YouTube’s services for increasing discoverability of long-tail content so that we do not have to rely on hits from general search engines to be successful,” says EVP Stephen Kydd.
I was looking for an indie film use of YouTube and came across Example of 3 Lads, An American Fool, One Night – indie gay film – first posted YouTube segment four years ago – now over 165,000 views. Buy the DVD for 1.99 on Amazon. How significant is this to the filmmaker’s success?
Based on the internet hype of festival-darling, “Kick-ass”, Lionsgate (which paid $15m for US rights) was rumored to have tried to shake down exhibitors for a nearly 100% take of its opening weekend box office. After a relatively disappointing $20m opening weekend, the the ability to quantify and parlay YouTube hits and online chatter into actual dollars, a negotiation position, or even a financing pitch is limited at best. If the film ends up having legs and can get carried by word of mouth, then it could be a precedent in the making.
Some indie films have claimed success in raising funds online by posting spec trailers, but the most successful example I’ve found only raised $60k over four years. Four years is too long to wait.
Instead of layering the “old school” indie on top of a new platform, the smart approach is to follow Demands’ lead and recognize this is a new medium, with different requirements; it’s actually more a search engine than a content delivery system or distributor.
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Just to set the record straight from previous comments about one of the main reasons entertainment banks ignore film budgets under 10m.
The traditional finance model (via senior banks and mezz lenders) does not willingly service films with budgets under $10m because there are numerous hard costs that (as a percentage of budget) cannot be reasonably sustained by low budgets.
It’s important to remember that each of the financing parties in a film are going to require the production to cover their legal expenses as well as a deposit before they even start the closing, in case you don’t close.
This being the case, expecting a production to pay $125k in legal fees for the pre-sale and gap loan is not unthinkable, which is in addition to:
- $80k for the equity deal
- $20k for the tax credit loan
- $25k – $50k to represent the producer for all of these deals
(side note: make sure you tell your attorney to make that a package deal which includes production legal if your attorney is competent in both or at a firm that handles each, production and finance).
That’s $275k in sunk costs, all billed to the production, and you haven’t even shot a frame of film. That’s 3% of a $10m budget, which isn’t great, but it’s bearable. But, when your legal costs reach parity with your 10% contingency (on any budget under 3m), that’s a problem — and that’s a big chunk of your budget that never makes it to the screen.
The exception to the $10m rule for banks is if they’re servicing an important relationship (like a producer of larger budget movies who decides to do a documentary.)
The current budgeting software that I know of won’t tell you the mistakes you’ve made and it certainly won’t remind the producer of the hard costs possibly over-looked, which in turn causes your budget to lose credibility with financiers and the bond company.
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Crowd-funding has a future, but that future will not look anything like the present. The current online crowd-funding models will soon be extinct, but it’s not too late for any of them to do a quick re-vamp of their business models to make them work. Here are my predictions as to the future of the crowd/tribe financing institutions as they currently stand:
- LOSER – Donations/Gifts fundraising is only mildly sustainable in social/issue and hyper-niche filmmaking. Otherwise, it’s business as usual for raising money for a cause, where grant writing is replaced by signing up for a funding site. Is anyone really making $250,000 or even $25,000 online? Outside of Nigeria?
- LOSER – Rewards in the form of gifts won’t work. It’s a passing fad and the novelty will wear off. People will tire of swag, the exception being for fan-boy films that already have a cult following and for which an exclusive reward of some value can be earned (e.g. graphic novel based films), or an animated film where one could earn actual cells from the movie (assuming it’s animated old school.)
- LOSER – Pre-selling DVDs as fundraising won’t last either. First, this, too, is a novelty. Second, people aren’t interested in owning DVDs any more. DVDs as a sell-through are down 40%, whereas DVD rentals are up 7%. But VOD is the fastest growing segment in home entertainment. I own a Blu-Ray player and I think Blu-Rays look amazing (especially “Coraline”), but I don’t buy them, I only Netflix them. The ONE except to this is family films/animation: kids love to pop in the same video and watch it over and over again. That’s why their video takes are 100% higher than other genres. But again, I use Netflix’s Watch Instantly feature for unlimited viewings of “Dora” and “The Wiggles.” Pre-selling a video download won’t cut it either — it’s valueless.
- LOSER – Building an audience as a way to appeal to investors/financiers might sound like a great idea, but having a bunch of YouTube hits does not translate into dollars and means almost nothing to the buyers or financiers. Filmmakers need to remember that their job is to market to buyers and distributors, not to audiences. It’s the distributors’ job to market to their audiences. It’s easy to lose sight of this during the publicity phase leading up to your film’s release, because distributors use filmmakers to market to their audiences. But you have to remember who is pulling the PR strings: the distributor.
If crowd-funding is going to have sustainable legs, it needs to appeal to the most basic of investor emotions: greed and self-interest.
In order to get disinterested investors to support a project, you’ve got to give them something back for their money – and it better be more than a sense of satisfaction. Think about it, what would you want in return?
I’ve been thumbing through the securities blogs for the past couple days (compelling reading) and the fundamental roadblock that crowds hit is the prohibition of “general solicitation and advertising” (unless it’s to accredited investors.) This clearly pulls the rug out from under the crowd concept. But where I do see a ray of hope is within the “intrastate exemption.” Following is an excerpt from a blog called Cutting Edge Capital Raising:
Intrastate exemption – this exemption is based on the premise that an offering that stays within a single state does not require federal regulation (it will be regulated by the relevant state). The business must be incorporated and do a significant portion of its business in the same state where the offering takes place (for example, if you are incorporated in Delaware but located in California, you cannot use this exemption). You must also take stringent measures to make sure all investors reside in your home state and do not sell their stock to anyone living outside that state. Because the statute is somewhat vague about how to qualify for this exemption, the SEC created a “safe harbor” for compliance. A safe harbor is a set of conditions that, if you comply with them, you can be assured that you will meet the requirements of an exemption. However, it is not necessary to comply with the safe harbor conditions to comply with the exemption. The conditions required to meet the safe harbor are as follows:
a. 80% of the company’s assets are located in the state in which the offering is made;
b. 80% of the company’s revenue comes from the state in which the offering is made; and
c. 80% of the proceeds from the offering will be used within the state in which the offering is made.
In short, if your film’s LLC is registered in the state where the film is going to shoot, then that is where you restrict your fundraising. While this isn’t as appealing as casting a net across the globe, it is perhaps more realistic for home grown filmmakers wanting to stay local.
Section A, above, is pretty straight forward if the film stays within the state.
Section C works if the film shoots in the state, while still leaving room to “post” elsewhere if your state does not have facilities.
Section B is a bit trickier, but not impossible… Deriving 80% of your film’s revenues from within California or New York is certainly plausible, since most of the entertainment companies that you could sell to would be intrastate, but you would have to restrict yourself to a buyout arrangement for all non-California revenues, like foreign sales and domestic exploitations outside California.
Basically, the buyout works to shield the LLC from foreign and out of state revenues.
If you’re outside a major media center, then perhaps arranging a non-recourse “buy-out” situation with an intrastate entity (like a broker of some sort) might be the way to go.
I’m not going to presume that this buyout will be the model that sustains crowd-funding, but this is how filmmakers and crowd-site business models need to think about their financing.
People don’t want kitsch — they want cash. And you should always give the people what they want.
POSSIBLE WINNER? – I’ll leave the details for the crowd sites to iron out; with the buyout. But this is one of my suggested possible frameworks I see most likely to succeed.
POSSIBLE WINNER? – The Biracy Project uses rewards as a deferred compensation model to motivate people to do actual work on behalf of the production. Like any other low budget film, these deferrals would be paid out of the film’s profits (if any). This may not let you “ride the upside” like an equity investment would, but at least they’re appealing to the right human motivation: self-interest.
POSSIBLE WINNER? – Another would be if local crowds could create local intrastate investment clubs that raise enough capital so that the club entity itself becomes accredited. This to me is a smart entrepreneurial move for the motivated business player.
POSSIBLE WINNER? – Offshore based crowd-funding business (like in the British Virgin Islands or Costa Rica), where income isn’t generally reported. Many large production companies keep their projects’ intellectual property rights there.
POSSIBLE WINNER? – Crowd-funding for post production: finishing funds, visual effects, editing, sound track, etc. has merit. Vlad Vukicevic of RocketHub.com mentioned this and I kind of like it.
This is crowd-investing, so the wisdom of the crowd will need to weigh in.
One of these crowd funding sites will get it right, but who it will be, I don’t know. The winner is the one I am waiting to work with as a future partner in alternative financing for indie films.
Note: I am not an attorney or a securities expert, so please don’t construe this blog post as legal or investment advice. But I do welcome all attorneys and securities experts to join the discussion.
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Regardless of whether your considering an individual, a group of dentists, your at home anesthesiologist, or alternative financing models such as crowd funding, tribe funding, “donations”, and pre-selling DVDs, etc., (i.e. any non-accredited investor) then you MUST consider Regulation-D of the Securities Act.
The following is taken from the Securities and Exchange Commission’s website:
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read our publications on Rules 504, 505, and 506 of Regulation D.
While companies using a Reg D. exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.
In February 2008, the SEC adopted amendments to Form D, requiring that electronic filing of Form D be phased in during the period September 15, 2008 to March 16, 2009. Although as amended, the electronic Form D requires much of the same information as the paper Form D, the amended Form D requires disclosure of the date of first sale in the offering. Previously, disclosure of the first date of sale was not required. The Office of Small Business Policy has posted information on its web page about the filing requirements for the new Form D.
If you are thinking about investing in a Reg D company, you should access the EDGAR database to determine whether the company has filed Form D. If you need a copy of a Form D filed as a paper filing (which will include any Form D filed before September 15, 2008) that has not been scanned into IDEA, you can request a copy using our online form. If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws
You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at +1 (202) 737-0900 or by visiting its website. You’ll also find this information in the state government section of your local phone book.
For more information about the SEC’s registration requirements and common exemptions, Q&A: Small Business & the SEC.
Please keep in mind that these are U.S. laws if you are dealing with foreign investors including Canada then you factor in their security laws as well. Which may be even more strict or incompatible with U.S. law.
There IS a way to do this legally. There always is. Knowledge of the laws will help achieve the end goal of alternative financing. The exciting part is that the model is a blank page waiting to be written.
Safety, security, risk assessment, numbers, waterfalls, bonding, exposure, bankability, variables.
Top independent filmmakers know their investors and lenders care about these things, and so before they submit their projects, they take their finance plans seriously. Without the finance plan, no funding will occur.
Producers may relate to this… Recently, a producer/writer/director submitted a project to me and asked for my assistance with funding. I emailed back:
- What is the current status of the project (i.e. talent, financing, pre sales, etc.)
- Do you have a finance plan?
- What is the budget level?
- What is the background on the script itself?
- Are you a first time producer?
- Is the script being adapted by a first time writer?
His concept was strong, and he had an intriguing film website, a stellar spec trailer, attractive concept art, an experienced production team, but he didn’t have a finance plan and so he was still far away from a film closing. I told him he wasn’t ready yet, and that until the finance plan was complete, he couldn’t acquire equity, gap loans, pre-sales, or tax-credit advances from a lender or investor.
I offered to give him specific reasons and fixes to the problems and then take a second look and re-consider the project after those issues were resolved. Many producers find this extremely helpful.
It can be frustrating to be stuck in an endless loop of needing financing in place in order to attach creative elements and needing creative elements attached to secure financing. Many indie producers who have commented on FilmClosings.com have told me so. We all know this story.
In today’s market, I am aware we need to explore alternatives to get us out of the no-financing abyss.
I may be a financier who works within the traditional film finance model, but I’m not traditional. In other words, I like disruption and I’m open to change.
The alternative finance models out there have some novel concepts behind them. Right now, I’m interested in exploring tribe/crowd financing to merge with our current model. This hasn’t been done before in the way that I’m proposing to my knowledge.
The traditional model certainly has its setbacks, but the rules are pretty straight forward and it can close relatively quickly. (It should be noted that even within the traditional model, no two financings are the same — they’re like snowflakes: they’re cold, tasteless, and always in a state of free-fall.) So, what’s wrong with adding one new snowflake to the mix?
Here’s my thought: Rather than trying to use tribe/crowd financing for the entire film, I am interested in finding out if any of the crowds, micros, tribes, socials, and hybrids in the alternative financing space (such as Biracy, IndieGoGo, Investedin, Kickstarter, Trampoline, Rockethub and Massify) can provide funding for 20-25% of the project’s budget. If so, I could wrap a finance structure around that.
I would be interested in hearing from people or companies who have experience with the tribe/crowd financing in the current model. Was it successful? Was it a nightmare?
For this new, merging option I’m proposing to even be considered: (1) Securities laws must be considered — ignorance is not a defense; (2) The funds need to be verifiable.
If nothing else, people like myself need to try to incorporate new sources for film finance. Help me help you. With your involvement, this merging of crowd/tribe financing into the traditional model may indeed be possible.
It can be dizzying how many film finance networking events there are. The Summits, The Forums, The Seminars, The Conferences, The Symposiums, The Markets, The Gatherings, The Workshops, The Roundtables, The Consortiums, or maybe even, The Speed Pitch Mosh Pits.
Spending money on these events range from as little as the cost of gas to 5K a pop. Those in attendance all have the same high hopes of learning that silver bullet of information they are dying to know, or meeting the people they need to meet to finally make their financing dreams come true.
Should you attend or should you not attend, that is the question and here is my answer:
- Yes, if you want to network
- No, if you want to learn groundbreaking information
A few things to consider before you drop your coin:
1. WHO IS ATTENDING: A mix is key. Make sure there will be a grouping of producers, financiers, sales agents, lawyers, packaging agents on the panels and in the audience. Are there fresh faces in the mix? Or is it the same participants and panelists from last time. Do the panelists relate to where you are in your career or have they become so out of touch that their wisdom holds no relevancy for your situation.
2. WHAT IS THE VENUE: A smaller venue with quality panelists can often foster a more casual, open and approachable experience than big ballroom conferences. Conversely, muti-day conferences can give you an opportunity to identify the people you want to meet and establish a repoir over those few days.
3. WHO IS MODERATING: Who’s moderating is just as important if not more than the panelists. They are responsible for creating an interesting and informative discussion for all. Moderators can put the experts on the spot, I know I like it when a moderator does this to me when I sit on panels. You want a moderator who can drill down with the right questions. It’s important the speakers stay on the point you came to hear about or was advertised. At the very least a moderator can help make the discussion a bit more entertaining and in-turn more palatable.
What’s on the docket?
TOO REMEDIAL: What I find frustrating, however, is that most of the information provided is either run-of-the-mill, or too abstract. Students aside, I think it’s safe to say that most producers know by now now that independent movies are made with a combination of foreign presales and gap loans, equity investors, and tax credits advances.
TOO ADVANCED: Panels consisting of slate/facility deals, studio/mini-major economics, Monte Carlo simulations, structured fianncing deals, investment bankers, hedging and so on, are very interesting and informative for the select few who can understand, but if you haven’t actually experienced these types of transactions, then you can’t contextualize it, which means it won’t stick. You’ll have spent good money to be bombarded with a lot of information you won’t retain.
WHO IS THE HOST BEHIND THE CURTAIN:
This is important, because you’ll know why the event is being put on in the first place. Here are a few of the different motivations.
Is it attorney sponsored? Because those are typically the most expensive due to the fact they can be counted as continuing education credits and the employers will pay. Is it business sponsored? These are the events to help market the sponsors business while using the event as a self promotion vehicle disguised as education. (hence your new found tote bag, key chain, or mini flashlight.) Lastly, there are events created by the entrepreneur who themselves might be interested in filmmaking and meeting the key players while at the same time creating a organization business model for hosting events and collecting memberships.
Note: None of these are bad motives; it just helps to know which type of event you are attending.
Worth the money or waste of time?
There is nothing more important than the relationships and connections in getting deals done. I have said this before, people do business with people they know. Your job is to get to know people face to face, not just through, online forums or message boards or social networking sites and email. Meet them in person. Give them a face to your name. These events are not the time to be shy. Panelists are usually well meaning while they are there and like to feel helpful (to give back). And who knows you might be sitting next to a new co-producing partner, lender, or future sales agent.
What I can promise you is that you won’t be sitting next to anyone alone at your computer.
Here is a list of some of the groups who hold film financing events.
(If your group is not listed and you would like it added here, just post it in the comment section of this post)