Five Most Common Film Finance/Distribution Scenarios (John Cones Series: Part 1 of 6)

I had the pleasure of sharing a panel at the Hollywood Black Film Festival with John Cones - entertainment attorney who's worked extensively with independent producers and filmmakers.  While I emphasized the importance of audience-building and the role of fans as a contribution-based funding source, John focused on the role of passive and active investors as an equity-based funding source.   Both are complementary sources.

Filmmakers rarely raise money from one source.  Debt, equity, grants, fan funding, tax credits, rebates, and more are all sources filmmakers can tap at once.  Check out the "Show Me The Money Forum" to discuss the hybrid approach with IndieGoGo members. 

What follows is Part 1 of a Special 6-Part Weekly Series in the DIWO Download on equity-based film finance sources from John Cones.

• Part 1: Five Most Common Film Finance/Distribution Scenarios
• Part 2: Two Types of Equity-Based Film Funding Sources
• Part 3: How Filmmakers Can Avoid the Business Plan Scam
• Part 4: Business Plans vs. Securities Offering Disclosure Documentation
• Part 5: Securities Offering Disclosure Checklist & Fee Schedule
• Part 6: 12 Motivations for Investing in Film

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Part 1: Five Most Common Film Finance/Distribution Scenarios

By John W. Cones, Attorney 

There are so many different ways to finance one or more feature films, that it is extremely important for independent producers to focus their efforts on those forms of film finance that are most likely to produce favorable results for their current project. Without this focus of time and effort, the film finance campaign is less likely to succeed.

First, it is important to understand that there are three different stages in the life of a feature film, each of which can be financed separately. Considerations regarding the manner in which the three major stages in a film's life: (1) acquisition/development/packaging, (2) production (including preproduction, principal photography and postproduction) and (3) distribution, may be separately financed are sometimes difficult to distinguish in many real world transactions. The combinations typically used in the industry today tend to fall into one of the following five distinctive film finance/distribution scenarios (or some variation thereof). Each film finance/distribution scenario will typically require that the independent producer engage in a different set of activities and communicate with a different group of people. In addition each such scenario tends to work best with different levels of film budgets.

1. In-House Production/Distribution

The selected studio/distributor to which the project has been pitched or submitted, provides the acquisition/development financing, develops the project at the studio under some level of supervision of studio creative executives, gives a "greenlight" to studio production funding and distributes the completed film with the studioaffiliated distributor using the distributor's funds to cover P&A expenses. An independent producer (or screenwriter, director, actor or actress) may have originally submitted the idea, concept, underlying property, outline, synopsis, treatment or screenplay to the studio, but rights to produce as a motion picture were then acquired by the studio. If the producer or others remain attached, they do so as employees of the studio or project.

2. ProductionFinancing/Distribution Agreement

The independent producer provides the acquisition/development financing (or raises such funds from investors) and takes the deal to a studio/distributor with a fairly complete package (i.e., significant elements are attached). The studio/distributor's money is then used to produce and distribute the picture. The distribution agreement is entered into (theoretically) prior to the start of production, or at least before the end of production. The distributor will deduct its fee, recoup distributor expenses, collect interest on the production money loan and then reduce the negative cost with remaining gross receipts, if any.

3. Negative Pickups (and other forms of lender production money financing)

The independent producer provides acquisition/development financing (or raises such funds from investors) and obtains one or more distributor commitments and guarantees to purchase the completed picture (for the worldwide, domestic or international markets, or individual territories) if the finished film meets specified delivery requirements (as set forth in detail in the distribution agreement). The producer takes this or these distributor commitment(s) to an entertainment lender to secure production funds using the distributor's contract(s) as effective collateral. In this instance, the only part of the financing provided by the distributor relates to distribution expenses (i.e., the socalled P&A monies). The negative pickup and other forms of these distribution/finance agreements associated with lender financing are typically entered into prior to the production of the film. Other variations on lender production financing include foreign presales, gap financing, socalled "supergap" financing and partlyor whollyinsured sales estimates. 

4. Acquisition Deal

The independent producer raises acquisition/development as well as production monies, often from investors outside the film industry, but distributor funds are used to distribute the movie. The distribution agreement is entered into after the film is produced). Some in the industry still erroneously use the term "negative pickup" to describe this transaction which is clearly different from the true lender financed "negative pickup" described above. This "pure acquisition" approach to film finance and distribution generally provides the producer and creative team with the most creative control (over scenarios 1 3), but involves greater financial risk for the producer and/or the producer's investors.

5. Rent-A-Distributor

The independent producer raises acquisition/development, production and some or all of the money needed to distribute the film. This type of distribution agreement is generally entered into after the film is produced. Distributor fees are generally at their lowest with this transaction, (e.g., 15%).

In any given year, these five film finance/distribution scenarios will typically be represented on the film slates of each of the socalled major studio/distributors, although in terms of numbers, the PF/D, negative pickup and acquisition deal combinations probably generate most of the films appearing on such slates. On the other hand, almost all of the majors will have one or more inhouse productions each year (typically, their hopedfor blockbuster/"tentpoles") and the rentadistributor scenario is probably the least commonly used. Most of the independent films produced each year tend to rely on some variation of lender financing or investor financing combined with an acquisition deal. The major studio/distributor sales representatives tend to use their coming blockbusters as leverage to gain favored treatment from exhibitors for the mediocre to poor films on their annual slates, thus partially explaining why many independent features of equal or superior quality get squeezed off theatre screens in favor of major studio product.

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About John Cones

John Cones is a securities/entertainment attorney who has practiced in Los Angeles and area for nineteen years advising independent feature film producers and others on matters relating to investor financing of feature film and other entertainment projects. He has prepared or participated in the preparation of business plans and/or the required securities disclosure documents, along with Blue Sky compliance for more than 250 such offerings during this period, including public and private production¬money offerings for feature films, television pilots, documentaries, music projects, infomercials, live stage plays and Internet companies. Some 50 feature and documentary films have been produced by his clients with securities offering materials he has prepared. Other such offerings have been conducted for development, packaging, completion and distribution funding. In a broader sense, Mr. Cones also works with entrepreneurs on investor financing of business startups. 

Mr. Cones has lectured more than 300 times to an aggregate audience of approximately 5,400 on topics relating to film finance and distribution for the American Film Institute, the UCLA graduate level Independent Producers Program, UCLA Extension, The USC Cinema/TV School, the USC Cinema/TV Alumni Association, IFP/West, American University (Washington, D.C.), the Nashville Bar Association, Cal Western School of Law, The University of Texas Entertainment Law Institute, North Carolina School of the Arts, California Lawyers for the Arts and other film industry organizations. He has also published several books and articles on those same topics including Film Finance and Distribution¬¬A Dictionary of Terms, Film Industry Contracts, 43 Ways to Finance Your Film, The Feature Film Distribution Deal and How the Movie Wars Were Won. He also hosts a Q&A Internet site about investor financing of entertainment projects at http://www/mecfilms.com/guide4.htm and maintains a web site at http://www.mecfilms.com/coneslaw. 

John is a member of the California and Texas bar associations and the Independent Feature Project/West.  He can be reached at jwc6774 at roadrunner dot com.