How Filmmakers Can Avoid the Business Plan Scam (John Cones Series: Part 3 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.  Together, 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 3 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 3: How Filmmakers Can Avoid the Business Plan Scam

By John W. Cones, Attorney 

A great deal of misinformation about the usefulness of business plans in raising money for a film project has been floating around in the film industry for years. Some of it is simply misinformation, while in other instances, the use of that misinformation rises to the level of an actual scam. The scam goes like this: a business plan consultant, someone who prepares a business plan for a filmmaker’s use in raising money from investors, knows that there are situations in which a business plan is not the appropriate document with which to approach investors, yet encourages the filmmaker to pay him or her a fee for the preparation of the business plan anyway. This is not to suggest that all business plan consultants engage in such unethical behavior, but the only protection for the filmmaker is to know when a business plan is appropriate and when it is not. Here is a short list of guidelines to separate fact from fiction:

1. If you are seeking to use a business plan for the purpose of raising money from investors (as opposed to merely using the business plan as a planning exercise), then from a legal point of view, a business plan can only be used to raise money from one to several active investors (see #4 below).
2. A business plan cannot be legally used to raise money from passive investors – that requires a securities disclosure document (a private placement offering memorandum for a private/exempt offering or a prospectus for a public/registered offering), since raising money from passive investors, by definition means a security is being offered and sold. 
3. A business plan is not needed to obtain financing for a film project from film industry sources. They only need a producer’s package, which at minimum consists of a completed script, a budget and evidence of attached elements (e.g., director and lead actors). 
4. Active investors are defined by law to be people (a) who are regularly involved in helping make the important decisions associated with the project; (b) that are capable of participating in the decision-making in a meaningful way (i.e., they must have “knowledge and experience” in the relevant industry – in this case the film industry); and (c) the documentation between you the producer and the active investor must clearly authorize the investor to participate in those important decisions (see the two federal appellate court cases cited below). 
5. A business plan is not an investment vehicle. No one can buy shares or units in a business plan. Thus, even if a business plan is the appropriate informational document with which to approach a few active investors, it must be paired with the right investment vehicle (see discussion of the appropriate active investor investment vehicles in my book: “43 Ways to Finance Your Feature Film”, Third Edition, published by Southern Illinois University Press in 2008. 
6. From a practical perspective, if you choose to go the business plan seeking a few active investors route, give some serious thought to the question as to whether your prospective investors are people you actually want to allow to be involved in helping you make the important decisions associated with a creative venture like a feature film.

Sources and Additional Reading:

• Consolidated Management Group, LLC versus the California Department of Corporations, 162 CA4th 598, 75 CR3d 795, 2008 (as reported in the California Business Law Reporter in its July 2008 issue).
• Dictionary of Film Finance and Distribution – A Guide for Filmmakers, John W. Cones, Marquette Books, 2007.
• Forty-Three Ways to Finance Your Feature Film, Third Edition, John W. Cones, Southern Illinois University Press, 2008.
• Williamson v. Tucker, 645 F.2d 404, 5th Cir. 1981.

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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.

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