
In my 30-year practice as a securities/entertainment attorney, working with independent film producers seeking to obtain film finance from private investors, some of these producers have from time to time raised the question (or possibility) of financing some or all of the production costs of their film through foreign pre-sales. This method of film finance has been around for many years and, in fact, is actively (and sometimes aggressively) promoted by certain people in the film industry because it is financially beneficial for them. These people include (1) individuals who work for the banks that make such loans (entertainment lenders), (2) individuals who work for the completion bond companies (since all of the entertainment lenders require completion bonds on films financed in this manner), (3) the foreign pre-sales agents who represent the independent producer’s film package at the film markets (e.g., Cannes in the South of France, the American Film Market in Santa Monica, the European Film Market in Berlin and the Toronto Film Festival and Market, among others) and (4) the territorial distributors themselves. Sometimes, entertainment attorneys and/or producer’s reps may also play a role in helping a film producer put together the pre-sales package designed to attract the interest of these territorial distributors.
All of these folks have a financial incentive to promote foreign pre-sales. They are regularly and actively involved in writing articles and books, along with giving lectures or appearing on film finance panels, promoting how wonderful the foreign pre-sale transaction is for financing some or possibly all of your proposed film’s production budget. They tend to overlook the disadvantages of this form of film finance. It is not in their interest to point that out. And unfortunately, most independent producers are not sophisticated enough or willing to ask the more difficult questions relating to foreign pre-sales. Thus, this article presents the other side of the issue, in an effort to counter-balance this ongoing wave of information, and sometimes misinformation, offered to filmmakers every year by the foreign pre-sale crowd (i.e., you don’t hear much about the downsides of foreign pre-sale financing in film school, or even in Hollywood for that matter, because most people with expertise in foreign pre-sales benefit from such transactions and are interested in persuading filmmakers to pursue this approach to film finance, even though the results do not necessarily benefit the producer, or any others who rely on or participate in the producer’s share of a film’s revenues).
Financial Conflicts of Interest – One of the earliest problems to be encountered by the independent film producer in seeking foreign pre-sales financing for their films is the fact that all of these people want to be paid and, of course, should be paid, but they all get paid before the producer, and anyone else relying on a share of the producer’s profit participation. In other words, all of these people benefit financially from the foreign pre-sale transactions before the film’s producer ever sees a dime in profit participations, so their financial interests are not necessarily aligned with that of the producer. In many instances, they could care less whether the actual release of the film generates any profits, since they’ve already made their money. Thus, all of these people have a financial reason for promoting foreign pre-sales that is quite independent of whether the film deserves to be produced in the first place, or whether the film will result in a profit for the producer.
Development Costs – Secondly, putting together a film package that will attract the interest of territorial distributors typically requires a significant expenditure of money. There may be costs associated with acquiring the underlying rights to a story, or rights to a script. In order to get a professionally-prepared and reliable production budget, a fee may need to be paid to an experienced line producer.
Attachments – The most expensive item of all, however, is the cost associated with attaching elements to the project. It is extremely difficult to attract the interest of territorial distributors in a film project without recognizable names attached, either for the lead roles and/or the film’s director. If these individuals have enough name recognition to add value to the film project, they are also most likely to be at a point in their careers to demand at least a non- refundable deposit in exchange for the commitment of their time. In other words, if they are actually committed to appear in or work on your film, they have to contractually block out a specific time period on their own calendars, and turn down any other work opportunities that conflict with that time commitment. They and their agents want to be compensated for that commitment. And typically, if there is no money at risk (i.e., the producer is subject to losing the non-refundable deposit if the production costs of the film are not ultimately raised) then there is no attachment – no firm commitment), and it is horribly inappropriate to run around Hollywood saying you have some name actor attached, when you really do not.
Most independent film producers do not have the cash on hand to cover these preliminary (i.e., development costs). That’s one of the reasons why we often see wealthy individuals get involved in helping to finance this stage of a film project. They have the money and are willing to assume the risk – at least somebody was able to talk them into assuming this risk. In the alternative, an independent producer could conduct what we refer to as a “development offering” to investors, where the money needed for the development costs, script, budget, attachments and other expenses are raised from passive investors. This allows the producer to avoid having to pay out of pocket for these development costs and tends to spread the risk amongst a larger group of passive investors. Such offerings typically however, involve the sale of a security, and the producer will need to associate with a securities attorney in order to properly conduct such an offering. That’s another article.