Welcome to the Film Financing Series! While financing your film is a marvelous venture, it is essential to understand the risks and uncertainties that can arise in the process. From the initial stages of securing funding to the ultimate release and distribution of the film, every step presents its own set of unique, but rewarding challenges. Understanding the various types of financing will give filmmakers the tools to tackle their financing goals with a well thought out plan that can be executed. Here, we will break down the various financing options for films into three distinct categories: Equity Financing, Debt Financing, and Alternative Sources.
Equity financing primarily involves investors exchanging money for ownership interest in the film, otherwise known as “equity.” A single purpose entity (usually a limited liability company) is often created to produce independent film projects. Investors, thus, can be offered membership interests in the LLC in exchange for their investment, which in effect represents an ownership stake in the film itself. This creates an arrangement where investors put in money upfront for filmmakers to produce the film and in return, investors share in the profits generated by virtue of being partial owners. In addition, there is often the expectation that investors will be able to recoup their investment from the film’s gross profits, sometimes with a preferred rate of return. With that being said, investors do bear the risk of financial loss if the film underperforms, and it is important that there is a written agreement that states the investor is aware of this risk.
Debt financing, on the other hand, involves borrowing money from a lender to finance the production of your film. Banks, entities, or individuals may lend filmmakers money to produce the film and often require some form of promissory note to memorialize the promise to repay. While debt financing can come in many forms (like bridge or gap financing) or have different characteristics (like being secured or unsecured), one thing that is true across the board is the borrower’s obligation to repay. Unlike investments, in which there is a risk of non-recoupment, borrowers are absolutely obligated to pay back the lender the principal amount of what they are owed plus interest.
Beyond equity and debt financing, there are several alternative sources of funding that may also be utilized, depending on the budgetary and distribution goals of the filmmaker.
Crowdfunding: Donative crowdfunding is a very common method in today’s independent landscape because it allows filmmakers to leverage the internet and social media to raise funds. Crowdfunding platforms like Indiegogo, Kickstarter, and Seed&Spark allow filmmakers to pitch their projects to a wide audience and solicit funds, usually in exchange for small perks, such as first access to a digital download, behind-the-scenes content, and/or merchandise. One benefit of donative crowdfunding is that it is not subject to any federal or state securities laws since contributors do not receive any economic return. However, successful crowdfunding endeavors requires significant time and effort to build momentum and attract backers.
Grants: Grants are financial awards or subsidies provided to filmmakers to support the production and distribution of their film. Film grants are typically offered by government agencies, non-profit organizations, foundations, film commissions, and cultural institutions. Often utilized by documentary filmmakers, the process to secure a grant involves conducting thorough research and writing proposals to submit as part of the application.
State Tax Credits: Many states offer tax incentives or rebates to encourage more filmmakers to shoot films within those states. These incentives usually grant a tax credit for costs incurred within the state. When tax credits are transferable, they can even be sold to third parties, or used to secure an additional loan. When deciding on locations for shooting, filmmakers should take state tax incentives into account in order to maximize their opportunities.
Whether it’s attracting equity investors, securing a traditional loan, or tapping into alternative sources such as crowdfunding or state tax incentives, filmmakers must carefully weigh the costs and benefits of each approach. It is important for filmmakers to develop the right financing strategy for their film to ensure that their vision can come to fruition.
As you embark on the exhilarating journey of financing your film, remember that every decision shapes the path ahead. From equity investments to debt financing and alternative sources like crowdfunding and grants, the landscape of film financing is diverse and dynamic. Amidst the complexities, having a seasoned guide, a film financing lawyer, can be invaluable. With our expertise, we can help navigate the legal intricacies of financing your project, protect your interests, and help bring your cinematic vision to life. So, as you chart your course through the world of film financing, consider the support of the trusted film financing attorneys at Ameri Law to steer you towards success.
