Unsolicited advice for filmmakers looking for financing

[Heath McKnight]

This is some quick, unsolicited advice from one filmmaker to the all the others. As I start looking for financing for my next film, I have learned many things. But as a college student with a minor in business (major in film), I want to pass along some advice.

DON'T ask for donations, don't even ask for "gifts," because I'm almost 100% positive none of you are making your movies as a "non-profit" ventures. I've gone to website after website of filmmakers, just like me, hoping to raise money for their next big flick. But what I see so many times is "Donate to our Film."

DON'T do that, because if you are trying to make money on your film, including profit, the legal ramifications will haunt you. I talked to my lawyer, just in case there was a way around it, and he said forget it! He also advised against gifts of money, because that can hurt you, too.

I don't want to see anyone get "hurt" with your first, second, third, etc. films. Especially if you're dealing with a budget in the thousands. The SEC
(USA) could even come down on you, believe it or not.

Am I being a little over-cautious? Heck yeah, because you're going to be "playing" with other people's money. And you're going to want to pay them back with your film's profits, so they can re-invest in your next film and so on, until you're winning the Oscar! :-)

I hope this helps, guys and gals! Keep makin' movies!

heath

[Christopher C. Murphy]

I second that notion...if you really look at it simply...taking money from lots of people for your film means you're a publically traded company operating without permission.

You know what that means? (enter sounds of Dragnet - bum, dum, dum bum) The SEC is coming to knock on your door.

It's not often talked about in the filmmaking circles, but Heath is definately correct - if you take anything from anyone for any purpose that's of monitary value (money!) - the Gov wants to know and wants a piece. I think the max you can take without problems is like $600 - total. After than you're making money - it doesn't matter if the film never recoups a dime. You got paid essentially.

These types of disscussions are WAY more of what I'd like to see on here. The business end is more useful to me at this point than learning about the latest new gadgets (although, I'm hugely interested in that too). They say knowledge is power - so, I would really like to get more knowledge on the legal side of film and video.

Thanks Heath for bringing up a great topic.

Murph

[Heath McKnight]

I honestly don't know how taxes work, but that's why, as filmmakers, we go to lawyers and accountants to get the lowdown.

Better safe than sorry!

heath

[Joe Carney]

Heath, if you setup and register as a not for profit enterprise, you can legally accept gifts and money. Just keep records like you would a regular business.

While most are hoping to make a profit, the truth is most will never make their investment back. (You know the joke about no film ever making money in Hollywood?).

If you study up on what constitutes a non profit or not for profit business or organization, you can do a lot of things legally, like hiring beginners as interns for less than minimum wage.

The key here is when you bring on interns, it gets legally classified as educational (pull them in from local film/video schools). Others, like talent and crew can legally donate their time, and get some sort of tax writeoff (not much). You can also pay people if you want to (all non profits have at least some paid staff).

You need distribution clauses so if you get a deal for your picture, you collect the money, and may have to pay taxes on anything over break even (if your entertainment accountant is any good, that shouldn't happen).

The key here is just like a regular business, consult a good lawyer and accountant experienced in such things.

Just as an example, think about how much money is brought in from Girl Scout cookies, and the Girl Scouts are a private,legal, not for profit organization.

[Christopher C. Murphy]

Hey, right now I've got a bunch of local crew helping me with my HD short film. I don't expect to make $ from this short. However, after this I plan to shoot a feature length with the idea of possible distribution.

My knowledge is that I need to "incorporate" a business entity - "NAME OF FILM" to legally do the entire process. Once it's complete, I sell it off and shelf the company. I literally only keep that incorporated business for that film only. The next time I do a film, I create a new business entity.

This is what I was told by various people in the business, so that's my plan of action. Anyone else do any research on this topic? I am very interested in learning more, so I start the process correctly and don't run into problems after I'm knee deep in production or post-production.

Anyway, that's the advice I got and have relayed that to others as well.

Murph

[Heath McKnight]

Many companies form an LLC to make a movie, like Big Bug Pictures for the first Starship Troopers. I don't know if I'll need to do that or not, since I already have an incorporated company.

Someone I know is already accepting donations AND investments, and said his attorney will figure it out. I also dont' think he's set up with the SEC. Uh oh...

heath

[Christopher C. Murphy]

Heath, yeah you might want him to check that out....cause they will come knocking. The producer for Sling Blade said that was the biggest thing - watch out for money exchanges. He even said that a simple FAX that says, "I want to invest in your project" could nail you. I used to have "Invest in our Films" on my website a long time ago, but took it down after talking with that guy. (his name is Larry Meistrich and he now runs "Film Movement" - a indie DVD mail order thing) The SEC will investigate and get court orders to go through everything you have in your office. It's pretty serious stuff from what I was told.

Also, can you tell me about your incorporated business? How much did it cost to incorporate? Do you have those monthly (or is quarterly) meetings with everyone involved where you make minutes of the meetings?

I'm wondering because that's my next step - incorporating. I've waited until the last moment, but it's time. I already registered my name with the State I live in, but I'm a sole proprietor right now.

Since you've done the incorportating already I figure you could give me the low down....filmmaker to filmmaker. :)

Oh, way back when you asked for some New England footage. I've got a bunch if you wanna download some....I've got like 100 gigs of non-demuxed "m2t" files you can look checkout. Obviously, you need broadband!

Murph

[Heath McKnight]

Chris,

You better check with your state's business office. Here in Florida, it's really easy to incorporate your company (I have two S-Corps and one non-profit) and the taxes aren't too bad. I have NO CLUE what to do up there.

If you're going to only have an incorporated company for a movie, maybe an LLC is for you. I like an S Corp., because I have the benefits of a C, but not the double taxation.

But I'm NOT a business expert. I'm good at filmmaking, but a lot of this business stuff is new to me.

heath

ps-Talk to your state's incorporation division!

[Christopher C. Murphy]

That's a good idea, I'll just call them and they can tell me what I need to do....duh, why didn't I think of that!

Thanks!

Murph

[Heath McKnight]

I found out that www.sunbiz.org is the one for Florida. Maybe other states have a website like this.

hwm

[John Jackman]

Warnings are correct, though details seem to be fuzzy.

Yes, the typical approach for indie films these days is to form an LLC for that project or for a specified set of projects.

If your family and friends are willing to "invest" in an informal manner with some sort of simple agreement, that's fine.

You can do a simple loan agreement with anybody, promising to repay the loan with any sort of interest you agree upon (subject to usury laws). If you do not repay the loan, the money must be reported to the IRS as income.

However, if the investment is a formal one, and esp if it goes beyond your family, then technically ANY sales of stock/percentage in a company or production needs to either abide by SEC filings for a public offering (FUHGEDABOUDIT) or meet a filing exemption, known as a Reg D offering. There are strict rules for a Reg D offering (which is how most indie films are financed) and they INCLUDE FILING A REPORT OF THE EXEMPT SALES WITH THE SEC. There are limits on the number of investors, etc. See http://www.sec.gov/answers/regd.htm and read the details of 504, 505, and 506 offerings.

I'll soon be offering a new workshop on how to raise money through a Reg D offering.

If people just GIVE you money ("donation") and it is not through the mechanism of a 501(c)(3) or similar nonprofit, you must report it as income to the IRS. Of course, since you'll probably lose all the money on your film, you then need to keep records and file the loss to offset the income.

John "It Ain't That Simple" Jackman

[Jonathan Stanley]

So all this applies to multiple investors, what if you have only one? For example, say someone was willing to give $50,000 to make a film. Would it still be the same?

[Heath McKnight]

I think anything over around $400 can be counted as income or investments.

John, great advice. I wish I could convince a friend to heed it. He claims his accountant friend will fix it. If his accountant doesn't already know it, he should get a new accountant.

heath

[Ken Tanaka]

John presented some generally good shards of guidelines. But, as his tagline suggested, "It ain't that simple" and there's quite a bit of financial misinformation in other parts of this thread. From a tax law and investment regulatory perspective there is nothing particularly unique about raising funds for making a movie as compared with other endeavors.

Unless you plan to fund your project from your own pocket I strongly advise you to retain the guidance of an attorney with some experience in tax and investment law. Such advice will likely cost in the $500-$1,000/hour range but it can keep you from inadvertently blundering into civil suits and/or criminal law problems.

[John Jackman]

<<<-- Originally posted by Jonathan Stanley : So all this applies to multiple investors, what if you have only one? For example, say someone was willing to give $50,000 to make a film. Would it still be the same? -->>>

One or thirty-five makes not difference. You also need legal documentation specifying how much of the film he owns and you own, how future profits will be paid out, etc.

This whole aspect of filmmaking is NO FUN and you need to involve a lawyer who knows how to write LLC bylaws and who is familiar with the details of Private Placements. Since laws vary state by state, you need advice on the specific issues for your state -- Which, I see, happens to be my state!

How's it up in Boone? We were up there this summer, went to Horn in the West and spent a couple of ours at Mast General Store.

PS. Send me the name and contact info for your $50K investor. :D