An average independent film project shows a variety of financial transactions, to finance, produce and distribute the film.
For example, investors pay producers money as an investment in the film, with the aim to earn the investment back and receive a return on investment, if the film performs sufficiently.
Another scenario is a co-production, between several countries. The co-producers jointly produce the film and each of them provide a financial contribution to cover their share of the production costs. The contributions will go towards the production account, from which the production of the film will be paid.
And as a third example of a financial transaction, a distributor pays a minimum guarantee for the film’s distribution rights in return for the delivery material of the film, in accordance with the terms and conditions set forth in the distribution agreement entered between the distributor and the producer of the film.
Financial risk in the film business
All these transactions imply a certain level of financial risk. What if the investor pays to the production company but the film cannot be made? What occurs when one co-producer remits its part of the production budget to the production account but the other co-producer defaults? And what happens if a film distributor pays a minimum guarantee for the film distribution rights, but delivery of material does not take place on time, or the materials are not in line with the conditions agreed in the distribution agreement?
A common solution for these kinds of potential dilemmas on an independent film project, is to carry out financial transactions through a so-called escrow account, using an independent escrow service.
Here is how it works.
Escrow account arrangements explained
Both parties involved in the financial transaction agree not to directly exchange product / asset / service for payment, but to rather escrow the payment until the transaction is successfully concluded.
Let’s take the example of the distributor who wants to buy certain distribution rights of a film, and the producer who is looking to sell such rights. Both parties run a financial risk if they do the transaction directly.
If the distributor is the first to act, it runs a financial risk: it pays a royalty for the distribution rights and subsequently, the producer may default and may not deliver the materials, or the materials are delivered but may not meet the conditions set forth in the distribution agreement. For example, a certain actor is mentioned as essential element but it turns out that the actor was eventually not engaged for the project.
On the other hand, also the producer run a risk: it delivers the materials of the film to the distributor but then the distributor breaches the distribution agreement and does not pay the royalties for the distribution rights.
The solution is setting up an escrow account in the name of a neutral third-party escrow manager.
So how does it now work, with an escrow account manager involved?
The distributor pays the royalties for the distribution rights of the film into the escrow account. The money will be temporarily retained in escrow account by the escrow account manager.
Then it is up to the producer to delivers the film materials to the distributor before a jointly agreed cut off date, and the materials meet the conditions as pre-agreed between producer and distributor. The producer and the distributor enter into an escrow agreement with the escrow account manager, and in the escrow agreement the conditions are set forth for release of the escrowed money.
If the conditions under the escrow agreement are met by the producer, the escrow account manager will remit the royalties to the producer and the financial transaction is successfully concluded.
On the other hand, if delivery does not take place ultimately on the cut off date or the delivery materials do not meet the pre-agreed conditions as set forth in the escrow agreement, the money in the escrow account is returned by the escrow account manager to the distributor and the financial transaction is cancelled.
How to set up an escrow account?
An escrow account is opened in the name of the escrow account manager at a bank familiar with the film industry.
As already mentioned, all parties involved in the financial transaction together with the escrow account manager enter into an escrow agreement. In the escrow agreement, the parties describe and agree on the conditions and the cut off date.
It is also pointed out in the escrow agreement that, although the account is opened in the name of the escrow account manager, the money in escrow account is not part of its assets and is hold on behalf of the beneficiary(ies).
Would you like to know more about escrow account arrangements?
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David Zannoni