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A How-to Guide on

Independent Film Investing

 

Investing in a film is like giving lots of money to a homeless guy and hoping that one day he'll pay you back

 

11/26/2019 NEWS ALERT: Amazon Prime slashes royalty rate to 1 cent per hour

 

Are you being pitched an investment in a movie? There is very little information available about investing in movies. It seems glamorous. You've probably heard about big Hollywood movies from Sony, Paramount and others bringing in 100's of millions of dollars. According to the-Numbers.com Titanic has grossed 1.8 billion world wide. So what about low budget movies with budgets from $10,000 to $500,000 or more? Recouping an investment must be promising if it's on a much smaller scale? Right? WRONG! For starters, there is a massive over-supply of movies due to cheap technology (cameras, editing software, etc). Couple that with our culture of free or almost-free content (YouTube, Amazon Prime, etc) and that doesn't bode well for filmmakers who are trying to stand out in the crowd and make a profit, let alone just break even.

 

"The movie business is the worst business I've ever seen in my entire life"

- Kevin O'Leary from Shark Tank

 

"Entertainment fraud has become an epidemic in Southern California"

-- CNBC's American Greed

 

"78 percent of [studio] movies lose money"

-- Bloomberg

 

RIDING THE COATTAILS OF EXTREMELY RARE SUCCESSES: Producers are quick to lure investors into financing their projects by citing extremely rare successes like "Clerks", "Blair Witch Project", "Open Water" and "Paranormal Activity" which all defied great odds. But if there was such a thing as truth in advertising, producers would instead tell investors that you're probably going to lose most if not all of your investment. The odds of shooting a $100,000 independent film and breaking even are perhaps as likely as the average person becoming a YouTube star. At least that's the type of viral popularity it will take to recoup 100K.

 

CONSUMERS, DISTRIBUTORS, RETAILERS HAVE VERY HIGH EXPECTATIONS: Consumers have grown to expect a big budget look, and distributors and retailers know it. The selling of movies is driven by having star actors (with genuine box office draw power) attached to the movie, it fits a specific genre that is in currently in demand, a big budget "look" (shot on 35mm film with expensive sets and locations, fancy camera moves, etc), a big advertising budget, etc. And it takes a big company with lots of money and the time tested skills and established connections to get the job done. It's just extremely rare that a low budget movie can even begin to compete.

 

THIS IS NOT 1990 ANYMORE: Technology and the Internet has killed indie movie revenue. People are not willing to pay for content anymore. Video content has been reduced to earning fractions of a cent per view on YouTube.

movies

Once upon a time rental stores like Blockbuster and Hollywood video would order thousands of indie DVD's for their physical stores to stock right next to big budget blockbuster hits. Now these rental stores have been replaced by VOD (video on demand) platforms such as Amazon Prime and iTunes. Netflix still ships DVD's for rental, but those numbers have been in decline as consumers shift their preference to VOD. Once upon a time, when the shipping of DVD's was at its peak, NetFlix would order from filmmakers perhaps about 60 copies or less for the entire nation. NetFlix pays wholesale for each DVD and is allowed to rent out those DVD's as many times as they wish (paying no royalties). Chain retailers like Wal-Mart and Best Buy who once used to sell indie DVD's have slashed their selection, focusing only on the "hits" in their physical stores. Instead of ordering thousands of copies of indie movies to sell (not rent) in stores, according to reports they now only order perhaps about 100 copies of an indie DVD for their online store only.

 

TECHNOLOGY: Back in the day there were much fewer people making movies because it was so cost prohibitive. For starters you had to shoot on expensive 35mm film. And there was no such thing as video editing software like Final Cut Studio, motion graphics software like After Effects, audio editing software like Pro Tools, Nuendo or Florida Studio and DVD authoring software like DVD Studio Pro, all of which today allow you to complete your finished movie product. So from a supply and demand perspective, technology has killed the business of making money making movies. The business has become fragmented by an explosion of filmmakers producing content.

 

WAY TOO MANY MOVIES AND VIDEOS: A simple search of Amazon.com's weekly "new releases" during the fall of 2009 revealed that an average of about 600 movies and videos of all genres were released each week. With that pace we're talking about 30,000 new releases per year!!! There's even more independent DVD's being released on other sites like getmopix.com (some of which are likely not included on Amazon). Yet every year investors are duped by producers into believing that there is "great opportunity" in film investment. Film investment is a huge long shot that is also littered with numerous traps and pitfalls. Junk bonds, stock market puts and calls, penny stocks (or even pump and dump penny stocks), or a few hours spent in a Las Vegas high roller room would be a better investment, not to mention MUCH less hassle. "Invest" in lottery tickets?

 

2009 week of Number of new Amazon.com DVD releases
July 28, 2009 506
Aug 4, 2009 407
Aug 11, 2009 401
Aug 18, 2009 383
Aug 25, 2009 849
Sept 1, 2009 1,197
Sept 8, 2009 556
Sept 15, 2009 687
Sept 22, 2009 489
Sept 29, 2009 663
Oct 6, 2009 633
Oct 13, 2009 392
12 week average = 597 per week
Yearly average = 31,044 per year!!!!

 

 

CAN YOUR INDIE MOVIE CAN GET A THEATRICAL RELEASE? Forget about it. The numbers are staggering, and a few big companies dominate the business of releasing movies in theaters. Between 1995 and 2009, the top 6 distributors have accounted for 73.88% of all US box office revenue. The top 12 distributors have accounted for a staggering 92.13% of box office revenue. Troma Films represents the stereotypical producer / releaser of independent horror films. Their best and only box office release called Poultrygeist "raked in" a meager $13,804 at the box office. People are probably getting struck by lightning more often than low budget indie films are getting widely self-released at the box office. One's best hope is to get picked up by a large distributor if there's any chance of making money theatrically. Unfortunately for all intents and purposes, the DVD / Blu Ray / rental / digital download market is where indie filmmakers usually make 100% of whatever money the movie earns. Big companies like Warner Brothers make about 50% of their profits off theatrical ticket sales, so right out of the gates the independent filmmaker is at a 50% disadvantage!

 

According to Arthur De Vany 78% of studio movies lose money. That's movies made by established studios. We're not even talking about indie productions by people with less experience making movies!

 

ASTRONOMICAL MARKETING DIFFICULTIES: Rarely does an indie movie get any meaningful publicity. Without publicity it doesn't matter how great the movie is, how great the acting is, etc. Nobody will know about it and it won't sell. Unlike music albums that get great free publicity through airplay on Internet radio stations as well as on terrestrial radio stations that play music 24 hours a day in every city, indie movies don't have these great promotional outlets. Radio stations don't air movies! TV stations already have content. Some TV stations have half hour shows that talk about movies and movie stars but when was the last time you saw them talking about an indie film or a no-name indie film actor on any TV show such as Entertainment Tonight or Access Hollywood? If you did it was one of those extremely rare successes (like Open Water, Paranormal Activity, etc) that defied great odds. Instead movies must be promoted by creating a website, Facebook page, Myspace page, Twitter page, Pinterst page, trailer on YouTube, etc. In a best case scenario a movie generates a buzz in which people gossip about your movie, post and re post your trailer on Facebook, etc. But this is highly unlikely.

 

Thinking about spending money on advertising? You might spend a little bit on Internet advertising to get an initial push but generally speaking you will be lucky to earn back 1 cent for every advertising dollar spent. This is why you never see advertisements for indie movies on TV, radio or print. Advertising only makes sense for big blockbuster movies trying to increase awareness.

 

YouTube offers the very best opportunity for indie movie promotion. You can upload your trailer and scene clips, but unless and until a video goes "viral" it just gets lost in the vast shuffle of over 120 million videos. It's also worth noting that most of the viral YouTube videos were simply home made videos -- not big budget productions! All too often the indie movies that you see look like something that's a dime-a-dozen on YouTube. Again, consumers expect top notch production, famous actors, great acting, wow-factor sets and locations, car chases, and everything else before they will begin to get excited about actually paying money for content. YouTube videos can be monetized but until you generate millions of views you will be earning peanuts. YouTube only pays about $1,200 to $1,600 per MILLION views for monetized videos! Few reach the million view milestone. That won't even begin to pay for the cost of making your film.

 

NOBODY BUYS INDIE MOVIES: Have you ever browsed through a friend's DVD / Blue Ray collection? Can you find any of those 30,000 low budget no-name indie movies in their collection? Probably not. The average consumer has a collection of familiar titles. That's the sad reality of indie films. What's left? Online views.

 

FROM BAD TO WORSE: AMAZON SLASHES INDIE PRIME VIDEO ROYALTIES BY 94%. Once upon a time Amazon paid 16 cents per streamed hour. But in a series a royalty reductions, that rate has fallen to 1 cent. That's right! On January 1, 2020 Amazon will start paying just 1 cent per hour that a title is viewed in the US on Amazon Prime.

 

That means if a hundred thousand people view your 90 minute movie (extremely unlikely) you'll earn just $1,500!

 

Amazon may not even accept your movie. Or even after accepted, Amazon may remove your movie if someone complains for a whole laundry list of arbitrary George Orwell-esque reasons (hate speech or derogatory comments, incites racial or gender hatred, or promotes groups or organizations that support such beliefs, content that glorifies or promotes illegal or controlled drug use, content containing abusive, debasing, and/or humiliating language, etc, etc). Amazon is always looking to purge low view titles from their system, as movies take up lots of disk space.

 

FROM BAD TO WORSE: AMAZON PURGING TITLES WITHOUT EXPLANATION. Your might get permanently removed from Amazon. Here's an actual removal email provided by a reader. Requests for an explanation fell on deaf ears.

amazon-purging

 

FROM BAD TO WORSE: YOUTUBE DISCONTINUES PAID CONTENT VIDEOS. On January 1, 2018 YouTube discontinued paid channel subscriptions and paid content offerings. There just wasn't enough public interest. Again, as discussed earlier, nobody pays for content anymore. Consumers have come to expect and get free content.

 

Their regular platform pays anywhere from $0.00175 to $0.011 per viewed video. It's most common that payouts are at the low end of this range. That means a thousand views will pay between $1.75 and $11.00. Therefore an incredibly successful video that draws a million views will only pay between $1,750 to $11,000. That's hardly going to put a dent in a film production budget.

 

THE OBSCENELY HIGH COST OF GETTING ON iTUNES: Want your movie on iTunes? Distribber charges a $1,595 "delivery charge". There's also a "$225 annual fee". Adding insult to injury, if you want out, there's a $200 "take down fee". Step one is to get accepted. iTunes is very selective. If the quality isn't there then the movie gets rejected.

 

10/01/2019 Story -- Blow to Indie Filmmakers: DIY digital film distributor Distribber has apparently closed. There are reports of filmmakers being owed money for sales. One filmmaker reports that they cannot even log on to the Distribber website. Distribber had charged filmmakers $1,595 for iTunes placement, then charged them $150 per year. Variety reports that Distribber and its parent company GoDigital have hired a bankruptcy specialist.

This story should serve as just one more example of how the film making business is littered with obstcles.

 

THE HIGH COST OF DELAYED RETURN ON INVESTMENT: Putting aside the fact that the chances of getting your money back are very low, let's assume for demonstration purposes that you will eventually not just break even, but double your money. But consider that it typically takes years for an indie film just to actually start generating income from a distributor. In a very best case scenario it might take a year and a half to complete a movie, although often it can take quite a bit longer. Then begins the process of entering the movie into festivals, shopping it to producer's reps (if you go that route) and shopping it to distributors. Then it takes time to manufacture and distribute DVD's or digital content. With DVD's it is common that there is perhaps about an 18 month lag time between purchase order, shipment to retailers and then actual payment to the vendor for product sold. By the way, actually getting paid in full rather than ripped off is a whole other discussion. If you double the return on your investment it might take 5 or 10 years to do that. But stop the presses!!! History indicates that you could achieve the same thing by simply investing in plain old stock and bond index funds and without all of the day to day movie investing headaches. As an investor you don't want to sit and wait a long time to get your money back. Stocks have returned 9.5% from 1929 to 2015. That translates to a doubling of your money after only 7.64 years! So when Mr. Producer paints an overly ambitious, bight and rosy picture of doubling your money in 5 to 10 years, say to him, SO WHAT!

 

THE 5% RULE: Recently the Securities and Exchange Commission relaxed rules, making it even easier to obtain money from investors. Little do unsuspecting investors know that investing in a film is like giving lots of money to a homeless guy and hoping that one day he'll pay you back. Still interested in throwing away your money? The last line of defense for your investment rationality is to adhere to what any honest investment advisor will tell you, and that is to never invest more than 5% of your savings (not net worth) in any one investment, especially private equity (anything that is not publicly traded on a stock exchange). Preferably you should invest no more than ZERO! Never put too many of your savings eggs in one risky basket. Understand also that nowadays films are financed by companies with specialized expertise - not individual investors. So why are you wanting to venture down this complex path that you know absolutely nothing about? This is not the same as investing in stocks, bonds and index funds. The securities and exchange commission will not be regulating your movie investment. This is an extremely high risk business venture that requires intimate knowledge about the business, requires lawyers, bullet-proof contracts with "teeth", checks and balances, day to day monitoring and head aches. Once money is creatively stolen it's usually gone for good. Other issues may need to be remedied in court, which may take several years, is enormously expensive and the outcome may be uncertain. Hopefully after reading about just some of the traps to look out for (below) you will decide that investing in a film is just not worth the headache...

 

Still have "movie fever"?

 

MITIGATING RISK: By investing in just one movie you are compounding your risk. A better choice is to invest in a movie making company that is pooling investors to make several movies.

 

STAR ACTOR POWER: One critical piece in selling any film is having a star in it with actual movie selling power. Be sure to differentiate between actors who have merely played small support roles in big movies and actors who actually have a significant following. Without a star attached to your film, the odds of it getting any traction become very difficult.

 

CATCH 22: Most movies are just plain terrible investments that are risky, long-shots. But some are much worse. Just as you want to avoid films that don't have any star power, if anyone ever pitches to you an "opportunity" to invest in a movie that has a major star attached to it, this should be an instant red flag! Million dollar movies with major stars are financed by companies -- not by individual investors or through "crowd funding".

 

EVERYONE THINKS THEY HAVE A GREAT SCRIPT: There's no point in making a movie without a great story. If you're being pushed on investing in a film then find out if the script has won any script competitions. Did the people behind the film even bother to enter it into any festivals or have they just made excuses (ex- "Everyone loves the script", "We don't want someone to steal our idea", etc)? Winning a script competition can confirm to investors that disinterested critics like it. Unfortunately in the vast majority of cases it's just the producer and people wanting to make the movie who think that the script is great. But everyone thinks that their script is great.

 

By default, beware of all producers!

 

Why do producers want to make movies anyway? Why are they in this business if it's such a long shot?

 

1) SALARY: Mr. Producer wants to earn his paid salary for producing the movie. He gets paid even if the movie is a complete flop. Like any other private equity investment, movies are no different. Private equity creates high paid jobs for the people pushing the investment.

TRAP: Beware of any producer who says that they will produce the movie for "free", while only being paid on the back-end (revenue from sales) if and when the movie makes money. This is a red flag. It is very possible that their true intentions are to creatively steal from the production coffers. At best, they are just plain ignorant to believe that any movie will produce a profit. Then you have to question their skills and knowledge.

 

2) RESPECT & ADMIRATION: Mr. Producer also wants build a resume of credits that will hopefully lead to other much bigger movie making opportunities in a glamorous industry.

 

3) EVEN MORE MONEY: Producers would also like to make some money on the back end, even though it's like trying to squeeze blood out of a rock. Some producers are ignorant of the fact that most independent low budget films don't have a snowball's chance in hell of earning a profit.

 

Some movie productions are much worse than a producer trying to create a job for himself. Most notably was when Joseph Medawar duped investors including Congressman Dana Rohrabacher. But there are plenty of other less prominent Hollywood sharks who fly much lower under the radar with more subtle schemes to siphon smaller amounts of money from production budgets. Some of these sharks may never have been caught and may actually have long lists of credits on IMDB.com. They would appear to be the last people you would ever expect to steal from a production budget.

 

Always remember that a producer is not your investment advisor or financial analyst. Don't ever make a financial decision based on "the sale" being given to you by the person pitching the investment, the fancy website, etc. They are going to say whatever it takes to get you to fork over your money. In fact, anyone who has great things to say about the prospects of making money with their indie film is just plain distorting the truth.

 

There's no shortage of producers out there who are the polar opposite of Simon Cowell. They are delusionally enthusiastic about anything and everything, especially the movie they are trying to sell you on! In the entertainment business only the most discriminating eyes, ears and minds succeed.

 

CONSULT WITH A FILM BUSINESS EXPERT: Who can you trust for advice on investing in a film? Even your personal investment adviser likely doesn't have a clue about the likely outcome of a film investment other than to tell you that private equity in general is high risk and that you should never invest more than 5% in private equity if any at all. A film attorney would be a good person to speak to, however these guys are in the business of drafting film contracts -- not telling you to scrap the whole idea. Otherwise they're out of lots of money that they would have otherwise earned had you hired them to draft a contract. If you do consult with an attorney about investing, make it clear that you will not be hiring them to draft a contract if you decide to invest in the film.

 

A paid criminal / civil case history & background search is an absolute must!

This most critical first step can't be emphasized enough. When you rent to a tenant you always do a background search. If you are considering investing tens or hundreds of thousands of dollars into a movie or other private equity investment you do an even more thorough background search. Some producers who appear to be the most squeaky clean are anything but! Don't wait until after you've handed over your money to find out.

 

Just who is this producer you are considering contracting with anyway? For starters how many feature films (not other types of videos) have they produced? If just a few then don't even bother. There is no room for people learning on the job when making a movie. Conversely just because they might have a long list of credits means nothing.

 

Can they be trusted? Are they dependable? Has the producer ever declared bankruptcy? It's just common sense that you should beware of anyone who is not financially stable. Understand that even people who appear to be financially stable may not be. Once you conduct a full specialized search, you might be surprised to find some producers named multiple times as defendants in civil lawsuits. Now just imagine all of the other people who didn't want to be bothered with or didn't have the financial means to go through the court process. Where there's smoke there is fire. The best predictor of future behavior is prior acts.

 

A consumer-level nationwide criminal background search is not enough. Never invest in a movie without doing a specialized search of their civil and criminal case history. Unfortunately online case locators (such as Pacer) are completely unreliable, and (due to the Fair Credit Reporting Act) consumer reporting agencies can only report events going back 7 years. 7 years is absolutely not enough. To find out someone's litigation history beyond 7 years you will have to hire someone such as a private investigator who has access to paid subscription databases and other sources that aren't available to the general public. There is actually no single database that keeps an archive of all court records, so it is possible that a private investigator might miss some important events, but you can expect to uncover lots if there are any past events. Ask them how thorough of a search they are able to conduct. To do a more complete search it may come down to doing in-person case file searches at local courthouses in the county where the producer in question lives or once lived. This you can easily do on your own if you live in that area.

 

Interviewing their past partners is an absolute must!

Have you interviewed the executive producers (investors) whom they worked with on ALL of their past projects? This kind of research is even easier. With the Internet and websites like IMDB.com, it shouldn't be hard to determine who these investors are and how to contact them. You have no excuse for not doing this little bit of leg work and it won't cost you a dime. You can do this research yourself. Were their past movies profitable? Did they complete all of these movies without going over budget? Were there any problems? Any litigation? Asking a producer for "references" is a red herring because they will only refer you to the people who have good things to say. You want to instead interview all of the executive producers who they don't reference or whom they may have bad things to say about. One person might provide a treasure trove of information.

 

Interviewing low level crew people (grips, gaffers, makeup artists, etc) and actors is probably a waste of time, but might be helpful if you speak to someone who has quit the business. There is a "code of silence" in the entertainment industry whereby most people won't "bad mouth" a producer for fear of losing work or being blackballed in a close-knit industry. More than likely you won't hear one bad word about a nasty producer from anyone unless perhaps the crew member or actor retired from the business. Crew and actors are usually not even privy to anything other than what happened on set. This is why you need to focus on interviewing executive producers (investors) and possibly "line producers" rather than low level personnel.

 

Distribution of profits

The standard model for a pure film investor who has no involvement in the making of the movie is for the investor to earn 100% of "first monies" and THEN 50% to 70% of "2nd monies". 1st monies are all net profits earned up until the total investment amount is paid off. 2nd monies are all net profits earned thereafter. If someone has already been pitching an "investment opportunity" to you whereby you would split ALL profits 50 / 50 then you are being taken. That's a sweetheart deal for the producer.

 

Hire a Film Attorney to Draft a Contract

If you aren't ready to pay perhaps $3,000 to $10,000 to have a contract drafted up by a film attorney then you have no business financing a movie. A bullet proof contract with "teeth" drafted by a film attorney is an absolute must regardless of who you are dealing with. It doesn't matter who you are contracting with because con-artists are the people you least expect: a friend, someone "well connected", "well-established", "experienced", a "great guy", etc. A lot of people in the entertainment industry got to where they are not by being talented, but by being really good bull sh***ers. So cut no corners on having a bullet proof contract because "common law" will not protect you when things go awry. Understand that even with a bullet proof contract you can still get ripped off and so you need to protect yourself in other ways as well. A film attorney can best advise you about what to look out for, but don't count on them to tell you everything.

 

Before hiring an attorney you should compare notes with the producer to see if you are even on the same page. Note that even entertainment attorneys do not know all of the pitfalls to look out for. Be sure to hire specifically a film attorney (who knows the business of indie film) even if it costs you more. Here's some things that you need to emphasize.....

 

What does a "producer" do anyway???

Define in great detail exactly what work the person you are contracting with is supposed to do, and in consideration for what amount of money or back end payment, and what are the remedies if he doesn't perform as required. The job detail of a "producer" could be interpreted to include everything from A to Z or nothing in between. Unless defined in writing, there is a gray area as to what a "producer" does and what a "line producer" does during pre-production, production, and post-production. Furthermore once the movie is completed, must the producer work to sell the movie or does he turn it over to someone else (known as a "producer's rep" or "sales rep") who normally gets paid even before the first monies are paid out to you? Left unchecked (with no bullet proof contract) a producer could quickly turn into a virtual dead beat as soon as the ink dries, and you get left with no recourse! Instead of doing the work he promised, a producer could sit on his ass and hire a line producer with production money to do all of his work, then declare the movie "over budget" and demand more money to get the movie finished. Basically the producer cannibalizes production budget money that was earmarked for other things like set design, etc. Suddenly the look of your movie investment is getting seriously compromised because his job as a producer was never defined!

 

Note in the contract any representations made by the the producer such as promises to provide various things for "free" (such as equipment, locations, his own travel costs, etc), otherwise he can pull a bait and switch on you after the ink dries.

 

Contractually you must have clear and concise remedies that protect you (the investor) from any breaches that may occur at every step of the way. For example, what is the time frame in which specific jobs must be completed before the producer is in breach? If the producer fails to do his job you need to contractually be able to fire them without any further pay. If he turns into a psychopath and has temper tantrums on set then you need to be free to fire him without any recourse on his part. Some people cannot handle the stress of production and then their true colors come out on set. Ideally you should be able to fire a producer for any reason.

 

Agree in writing that the producer's expenses and salaries must be made in the form of a check -- not cash. Otherwise a producer could pay $3,000 cash to his friend "employee X", but create a false invoice for $5,000 while pocketing (stealing) the $2,000 difference or perhaps splitting the difference with his buddy.

 

There are endless conflicts of interest that you need to be contractually protected from. If left unchecked, producers may elect to pay their friends, business partners and family excessive salaries. It could literally be anyone... an actor, a director of photography, someone renting a location, producer's rep, sales agent, etc. You also contractually don't want to allow a producer to conveniently hire themselves (at any high rate of salary they choose) to do various jobs either. Only a lawyer can create the contractual language that prohibits this.

 

Require the producer to gather and provide signed deal memos for key people such as irreplaceable actors, crew and locations well in advance of the shoot. I know of one producer who helped his actor buddy leverage money out of an investor by not having this key actor sign any deal memo in advance of a production. In the last week before shooting, the actor suddenly sprung into action and demanded $5,000, which was much more than previously verbally agreed to. It was cost prohibitive to halt the production, and with no time left to hire someone else, the duped investor was forced to shell out the extra money.

 

Control the money!

In fact, as long as you control the money in your account and write all checks, the worst producer fraud can be stopped in it's tracks. If you are foolish enough to trust a producer with the money, it should be invested in increments as the work is done, and as a full accounting is provided. A producer may want to verify that you indeed have sufficient funds to finance the movie. This is OK as long as you control the money in your bank account. Note that it is fraudulent to represent that you have the money if you don't. If the producer is putting up some of his own money, be sure to verify that they have the money in a special escrow account too.

 

As previously stated, don't trust anyone with large amounts of money. If you do, stipulate that all money spent must be accounted for in a timely fashion. Hiring your own independent accountant to work on set during the fast pace of filming is a sound idea so that money spent can be accounted for as it's spent. Better yet have your accountant cut the checks. Be extremely wary of any producer who gets irritated over your way of doing things, or if he says that "things are never done this way" or that it just can't be done unless he handles the money. You don't want a producer left to be judge and jury with your money. There's no reason why it can't be done your way, especially on a low budget (less than $750,000) indie film. It isn't complicated. You're the one with the money, and chances are without your money the movie will never get made.

 

Without a bullet proof contract and control of your money, a shady producer may arbitrarily bill the production for things like gas for his car, day care for his kid, his phone bill, a new computer, 3 restaurant meals a day during pre-production and post-production, a visit to the chiropractor, etc, etc. Or worse he may arbitrarily elect to pay himself a huge salary as "location scout" or "editor" or whatever excuse he can manufacture to explain away essentially stealing from the production budget. He might hire his wife as makeup artist, location scout and wardrobe director at the full union rate of salary times three!!! You need to stop this type of thing in it's tracks before it happens with an attorney drafted, bullet proof contract with "teeth" that covers everything from A to Z with no wiggle room for grey area or loophole interpretations.

 

No cash transactions

Do not allow any producer to pay for crew, equipment, locations or other expenses in cash. Never. They may try to tell you that by paying in cash they are able to negotiate better deals, presumably because the people accepting the money want to commit tax fraud by not reporting the income or only reporting a portion of it. However a movie may be audited by the IRS. Exactly how much each person is paid must be documented in writing. You don't want someone claiming that they were never paid when in fact they were paid in full. Therefore paying people in cash is just one more method for a shady producer to find a way to steal money or "forget" how much he paid everyone. You don't ever want this to happen.

 

Automatic transfer of copyrights, physical possession of footage

All film footage and copyrights including behind the scenes footage should legally become the property of the investor from the moment they are created and must be physically turned over to the investor (or an associate of the investor) at the end of each shoot day. After each shoot day, backup safety copies must be made, with the originals delivered to you the investor (to store in a secure and separate location). Those release forms must transfer and assign copyrights to you the investor - not the producer. Any breach of this should have stiff legal remedies laid out in the contract between you and the producer. Copyrights to the script must also be exclusively licensed to or owned by you the investor. Do not accept any sort of joint ownership with the producer or anyone else. Copyright law is very specific. It must be transferred in writing. Any failure to solidify copyright ownership or licensing rights in writing can suddenly prevent the movie from being distributed and cost tens of thousands of dollars in court expenses to hopefully resolve.

 

Control other aspects of the movie

Stipulate how long it shall take to complete the various stages of making of the movie. You may wish to stipulate that the producer cannot work on other movie projects until his work is done on the movie.

 

You should control how the movie shall be sold. It is often in the producer's best interest to run up expenses by hiring a "sales rep" (AKA "producer's rep") to sell the movie, because the producer wants to sell more units (to boost his career) but while the investor ultimately earns less money. Or worse the producer may secretly earn a "finder's fee" from the sales rep if he lets that particular sales rep sell the film. By the way there are very few producer's reps (AKA sales agents) in the world that are worth dealing with. With the emergence of online distribution, it actually makes more and more sense not to use a producer's rep. If your movie ultimately only gets distributed online then you have really thrown money away with a producer's rep.

 

Release forms must be copied and the originals given daily to you the investor for your possession.

 

Be clear as to how the producer and various crew shall be credited and what the remedies are if they fail to complete their job.

 

Verbal promises don't exist. Note in the contract any representations or promises that the producer may have made. Beware of producers who make representations over the phone but always seem to avoid communicating them via email. Emails are evidence that can often be admissible in court (even though emails generally aren't). If the producer makes promises, representations, or breaches of the contract then memorialize them by sending the producer a certified letter and email that rehashes what was discussed. Make sure he acknowledges the facts stated in your email with a reply back to you. Better yet, have him sign a document memorializing it. For example if the movie runs over budget, have him memorialize why he said this occurred and what consideration (compensation) is being conceded to you the investor for his breach.

 

You (the investor) are not liable for anything. You are legally not part of or partners with the production company or producer. Examples: Grip falls off a ladder and drops dead. Caterer sues the production for sexual harassment. Trademark lawsuit over use of product in the movie.

 

A "script clearance" must be performed before shooting the movie to check for legal issues. Producers are not lawyers. Don't assume that they know the law.

 

Did Mr. Producer include the cost of insurance in his proposed production budget for various things that can kill your investment? If not then this is a red flag which tells you that either they don't know what they are doing or they just plain aren't looking out for your best interests. Worker's comp is a must. Completion insurance is also a must, otherwise if a key actor dies, quits, becomes disfigured or disabled halfway through shooting, then all of that actor's scenes would need be reshot all over again with a new actor. All footage should be duplicated. Then the copied tapes or drives should be stored in a separate location.

 

Who is directing the movie? How do you know if they're good at what they do? The proof is in the pudding. Look at their demo reel of work they've done. Is it visually exciting? Does it look high budget or does it look more like... uhhh... an independent film. How does the sound compare to other movies that you watch on your TV set? Have you shopped around and compared at least 30 other directors? Keep in mind that some directors don't know their **s from a hole in the ground, and the real reason for their eye popping reel is actually a great director of photography who sets up all the shots.

 

Don't shoot an independent movie on film. Nowadays indie movies are shot on HD video (with footage stored on hard drives). Yes shooting on video can hurt chances of getting theatrical distribution, but as previously mentioned, indie films never make it to theaters anyway. They go straight to video. In the game of extremely high risk independent filmmaking the cost of shooting on film is just plain too cost prohibitive. It's too much extra money to recoup.

 

Distribution

Understand that getting a movie successfully made without any hiccups is only step one of the journey. Getting a movie sold to a distributor is difficult and takes time. Again the producer must be kept in check. Left in charge of controlling profits that the movie earns, indie producers can again be sneaky about arbitrarily paying themselves for various expenses. As just one example, a shady producer might subtract from the movie profits all expenses incurred during his trip to the Cannes Film Festival.

 

In order to get a movie distributed a "producer's rep" or "sales rep" is typically used. Unfortunately there are only about 5 reps in the world that are worth dealing with. The rest of them will gladly ask for and take $5,000 to shop your movie to distributors, further putting investors in the hole. As previously discussed, "distribution" usually does not entail any theatrical release. What's left is hard copy (DVD, Blue Ray) and digital distribution, which anyone can find on their own through non-traditional distribution routes. That's when filmmakers realize that they basically just threw away $5,000.

 

Actually getting paid / "Hollywood accounting"

Then actually getting paid by a distributor, rather than ripped off, is yet another hurdle to cross. Media distributors are notoriously nasty when it comes to paying vendors in full for product sold. Some operate like Ponzi schemes. Hollywood has sneaky accounting methods that are quite hostile to Johnny-come-lately third-party investors who don't know what to look out for. No matter how well your movie may do, Hollywood always has a way of having zero net profits.

 

"It made so much money that the studio couldn’t hide it fast enough"

-- David Zucker, one of the creators of the hit movie Airplane

 

As previously mentioned, movies are made by big companies. They are constantly releasing movies. The fact that they always have new movies on the horizon to release gives them leverage to get paid. Distributors want to keep their established vendors happy, by paying them so that they can share in the profits of future releases. You are at a severe disadvantage if you have just one movie to offer.

 

An indie film cannot be shot like a big production

Any producer who wants to shoot a $10,000 to $500,000 indie film with other people's money is doing it for his/her own interests. They have no interest in the investors recouping their investment. These days the only way to make an indie film that has any chance of breaking even is to do so on a shoe string budget of perhaps $10,000 or less. You must cut corners in every way. For example the producer(s) must do the work of many (script writer, producer, casting director, location scout, director / DP / camera operator / gaffer, editor, etc) and already own much of their own equipment, such as camera gear and editing system. They have free locations to shoot at. They have cast and crew who are volunteering on the movie (for credits and experience). Otherwise, running it like a major production by hiring all sorts of crew and renting gear just becomes cost prohibitive. Shooting everything within 30 days might be too exhausting to pull off as well. The indie movie Open Water was shot on weekends by a husband and wife team who were basically "the film crew". Unfortunately taking a long time to shoot begins to pose the risk that a major cast member might become unable or unwilling to continue on your sporadic schedule.

 

CONCLUSION

Even the best intentioned producer is not going to tell you that you're crazy to invest in a movie because in all likelihood you will lose most if not all of your money. If you decide to invest then never invest more than you are willing to lose. But is that really worth having your name listed in a credit roll that nobody will care about? If you want to rub elbows with celebrities then go hang out at the Roosevelt Hotel Teddy's Club or the BOA Steak House in West Hollywood. Bring your camera, shoot some video of your visit and stick it up on YouTube. You'll probably get more views from that rather than from any indie movie that you invest in! If you really want to invest in movies then invest in bellwether publicly traded companies like Lions Gate (LGF) or Dream Works (DWA) or a leisure ETF like PEJ that are tightly regulated by the Securities and Exchange Commission. This way at least you know that it's not going to be a producer's Ponzi scheme or quasi-fraud scheme, and at least you know that it's not as dicey as a pump and dump penny stock. And you won't suffer a heart attack due to the stress of having to police day to day production activities.

 

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