Independent Film Investing, a how to guide

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, a case of massive OVER supply and flat demand exists, and that doesn't bode well when you're trying to stand out in the crowd and recoup an investment of more than $5,000 or $10,000. Producers are quick to lure investors into financing their projects by citing the rare successes of movies 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 have a snowball's chance in hell of hitting a home run making an indie movie. In fact most indie movies don't even come close to breaking even. The selling of movies is normally driven by having star actors (with genuine box office draw power) attached to the movie, a big advertising budget, a big budget "look" that consumers have grown to expect, and a BIG company making the movie that has the time tested skills, know-how, established connections, etc.

This is not 1995 any more. The Internet revolution has essentially killed indie movie revenue. It used to be that Blockbuster and Hollywood video would order THOUSANDS of indie DVD's for their physical stores. Now these rental stores have been replaced by NetFlix which orders just 60 copies for the entire nation. Chain retailers like Wal-Mart and Best Buy that 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 to sell in stores, they now only order about 100 copies for their online store.

A simple search of Amazon.com's weekly "new releases" during the fall of 2009 reveals 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 FilmBaby.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, penny stocks, stock market puts and calls, or a few hours spent in a Las Vegas high roller room would be a better investment, not to mention MUCH less hassle.

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!!!!

YEAR	VHS, DVD, Blue Ray, HD sales and rentals by year: Revenue in millions
1999	13.3
2000	14.3
2001	17.9
2002	20.7
2003	22.2
2004	24.9
2005	24.4
2006	25.5
2007	23.7
2008	22.4
2009	?

Thinking about making money theatrically? 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. Going back over this 14 year period it doesn't take long until we get to indie filmmakers who released their movie at a local theater. Troma Films represents the stereotypical producer / releaser of independent horror films. Their best and only box office release Poultrygeist "raked in" a meager $13,804.00. 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 intensive purposes, the DVD 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 film is at a 50% disadvantage.

BOX OFFICE SALES DATA ONLY FROM 1995 - 2009 (not counting DVD sales & rentals)

RANK	Distributor	Number of movies released	Total Gross	Market Share
1.	Buena Vista	398	$21.5 billion	14.48%
2.	Warner Brothers	427	$20.9 billion	14.03%
3.	Sony	432	$18.3 billion	12.31%
4.	Paramount	298	$17.1 billion	11.49%
5.	20th Century Fox	311	$16.4 billion	11.02%
6.	Universal	293	$15.7 billion	10.55%

375.	Troma Entertainment	1	$13,804.00

457.	Capitol Films	1	$1,257.00
459.	Oilraq Productions	1	$912.00
460.	Lavender House	1	$402.00

Investing in a film is like giving money to a homeless guy and hoping that one day he'll pay you back. Still interested in throwing away your money? My last plea for your investment rationality is to at least adhere to what any knowledgeable, respectable, honest financial advisor will tell you, and that is never to invest more than 5% of your net worth in any one investment. Don't put all of your eggs in one basket. Understand also that nowadays films are financed by COMPANIES - not individual investors. So why are you wanting to venture down this complex path that you know nothing about? This is not the same as investing in stocks, bonds, mutual funds, and treasury bills. The securities and exchange commission will not be regulating your movie investment. This is an extremely high risk business venture as well as an "involved" one that requires lawyers, bullet-proof contracts with "teeth", checks and balances, day to day monitoring and head aches. Hopefully by reading about some of the traps to look out for (below) you will decide that this investment is just not worth it.

OK. First of all why do producers want to make movies anyway? Why are they in this business if it's such a long shot? 1) to build a resume of credits that will hopefully lead to other much bigger movie making opportunities in a glamorous industry, and 2) to make money, even though it's like trying to squeeze blood out of a rock. Some producers are ignorant of the fact that these days most independent low budget films don't have a snowball's chance in hell of earning a profit, while others are predators looking for an opportunity to creatively steal from investors who don't take the many necessary steps to protect their investment. Most notably was the MSNBC story of how 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 less blatant schemes.

Don't ever make a financial decision based on "the sale" being given to you by the person pitching the investment. In this case we're talking about a producer who is trying to enrich himself and / or his career.

NEVER invest in private equity without doing a background search! 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 bother contracting with them. Conversely just because they might have a long list of credits means absolutely nothing. Have you interviewed the executive producers who they worked for on ALL of these other projects? Were their past movies profitable? Were there any problems? Asking a producer for "references" is completely useless because they will only refer you to the people who have good things to say about them. NO producer will ever list a disgruntled executive producer as a reference!!! Furthermore there is a "code of silence" in the entertainment industry whereby nobody ever wants to "bad mouth" a producer for fear of losing work or being blackballed in a close-knit industry. This is especially true of crew workers and actors. 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. You will instead have to research court records to see if they have been involved in any litigation regarding movies they have produced? Have they ever declared bankruptcy? Are they financially stable? Can they be trusted? Are they dependable? Beware of anyone who is not financially stable, and note that even people who appear to be financially stable may be on the verge of bankruptcy. Pay for a background search online or walk into your local superior courthouse and use the case records computer (free of charge) to search their name for cases (statewide only) that they may have been involved in. You can even do records searches online in some states. You might be surprised to find some producers named multiple times as defendants. Now just imagine all of the other people who didn't want to be bothered with taking them to court. Where there is smoke there is fire. The best predictor of future behavior is prior acts.

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 profits earned up until the total investment amount is paid off. 2nd monies are all 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.

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. Here's some things that you will require.....

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. Otherwise 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 someone else to do all of his work, then declare the movie over budget and demand more money to get the movie finished. Or the producer could simply cannibalize production budget money that was earmarked for other things like set design, etc. Suddenly the look of your movie investment is getting seriously compromised!

Note in the contract any representations made by the the producer such as promises to provide various things for free (such as equipment, locations, labor, 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. Ideally you should be able to fire him 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's a rainbow assortment of conflicts of interest that you need to be contractually protected from. If left unchecked, producers may pay their friends, business partners and family excessive salaries. It could 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.

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 account - not the producer. 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.

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 without it the movie never gets 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 a bullet proof contract with "teeth" (drafted by an attorney) that covers everything from A to Z with no wiggle room for grey area or loophole interpretations.

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.

All film footage and copyrights including behind the scenes footage are legally 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.

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 be admissible in court. 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 partnered 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.

Who is directing the movie? How do you know if they're good? 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. Indie movies are shot on video because it's much cheaper and the Red One camera has a nice film look. Shooting on film will cost you perhaps a couple hundred thousand dollars more than shooting on hi-def video. Yes this 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 way too much extra money to recoup.

Understand that just 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.

Then actually getting PAID by that 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. Hollywood studios have sneaky accounting methods that are quite hostile to Johnny-come-lately third-party investors who don't know what to look out for. 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.

Realistically the only way to make an indie film that has a chance of breaking even or making money is to aim to shoot it for no more than $5,000 or $10,000. The only way to do that is if the key players (producer, director, DP, editor, etc) do all of the work and own their own equipment, in particular camera gear and editing equipment. Otherwise hiring people and renting gear just becomes cost prohibitive in this fragmented business that has been decimated by the Internet.

CONCLUSION: Even the best intentioned producer is NOT going to tell you the truth, which is that you're crazy to invest in a movie because you will probably lose virtually all of your money. Is that really worth having your name listed in a credit roll that nobody will care about? If you really want to invest in movies then invest in stocks like Lions Gate (LGF) or Dream Works (DWA). This way at least you know that it's not going to be a producer's Ponzi sceme.