A producer sends a family friend the pitch deck for an independent feature. The deck shows the cast, the director, and the festival plan. The friend decides to put in $50,000.
The deck is a sales document. The operating agreement and the subscription agreement decide what her $50,000 buys.
What the $50,000 Buys
The money usually goes into a company formed for one picture. The friend buys units in that company.
The operating agreement sets out the rights that come with the units. The subscription agreement records her purchase. It also records what she tells the company about her income or net worth.
The operating agreement names the managers. It should also list what the managers can do without a vote of the investors. Some agreements let them borrow money, sell the distribution rights, or amend the agreement on their own.
Who Gets Paid Before the Investors
The waterfall is the section that sets the order of payment from the picture’s income.
A sales agent and a distributor each take a fee from that income. Each also recovers its expenses. A lender who financed part of the budget expects repayment with interest. Cast and crew who deferred part of their pay may also stand ahead of the investors.
The waterfall should show where the investors stand in that line.
Some agreements return the investors’ money with a premium before anyone shares in the profits. The agreement should state the premium, if there is one. It should also say how the producers and the investors divide what remains.
The budget shows the fees the producers take during production. Those fees come out of the money raised, before the picture earns anything.
Money that Comes in Later
A picture that runs short may raise more money. A later investor may ask to recoup first.
The agreement should say whether the managers can grant that without the earlier investors’ consent. It should say whether the managers can ask the investors for more money. It should also say what happens to the share of an investor who declines.
Statements and Records
The agreement should require regular statements to the investors. It should also give them the right to inspect the company’s books.
Some pictures use a collection account manager. That company receives the picture’s income and pays it out in the order the waterfall sets.
The SEC Filing
Federal law generally treats an interest sold to passive investors as a security.
A company that sells under Rule 506 of Regulation D must file a Form D with the SEC. The deadline is fifteen days after the first sale.
The filing is public. Anyone can search for it by the company’s name on the SEC’s EDGAR system. If the search finds nothing, the investor should ask which exemption the company relied on.
New Jersey Now
New Jersey requires its own notice filing for a Rule 506 sale to a New Jersey investor. The deadline is fifteen days after the first sale in the state.
A New Jersey production may plan to repay its investors with its state film tax credit. NJEDA says the credit typically issues five to six months after the production submits a complete CPA certification. The CPA certification comes after the production is complete.
Only the production company that earned the credit can sell it. The statute sets the minimum price at seventy-five percent of the credit transferred. NJEDA charges a non-refundable fee for each transfer.
The state’s 95 percent purchase program covers only certificates first issued to studio partners.
The waterfall should say who receives the credit money. A lender may have lent against it during production.
Alex Aldea is a Partner at Weiner Law Group LLP and Chair of the firm’s Entertainment Law Division. He serves as production counsel to independent film and media companies in New Jersey. This article is general information, not legal advice, and does not create an attorney-client relationship. His direct line is 973-503-1881, and his email is [email protected].