The financier has a prominent position in independently produced and distributed films.
In the independent film industry, participation of external financiers in the financing of films is crucial.
Nevertheless, despite of its role, it is a challenge for the financier to have control on production, distribution, and management of the film’s revenues.
In this article we will discuss six methods that the financier may look for, to protect its position in independent film.
Obtaining a Security Interest in the Film
The film financier can obtain a security interest in the film. A security interest is granted by the rightsholder, which is usually the production company.
A security interest gives the secured party a claim to specific property to enforce a contractual obligation of another party[1].
In the case of a film project, the property may include the rights of the film, distribution agreements, and the revenues generated by domestic and international exploitation.
Any form of film financing can be secured this way, which includes bank loans, private loans, and equity investments.
Should the contractual obligations not be complied with by the producers, the financier can enforce its security interest and, in the worst-case scenario, has the option to foreclose on the film.
Engagement of a Completion Guarantor
Producers and financier can agree to contract a completion guarantor for the film production. The completion guarantor issues a completion bond, also known as completion guarantee.
A completion bond is a contract that guarantees monetary compensation for the financier if the film is not finished, and provides protection if the producers run out of funds or any other budgetary issues come up during production[2].
In essence, the completion guarantee provides that, if the film encounters issues, such as production delay beyond the locked production schedule, increase of production costs more than as contemplated in the budget, the completion guarantor has the option to:
- Loan funds to the producers to finish the film; or
- Take over production of the film and finish it; or
- Abandon the film and repay the financier its loan or investment (including interest and incurred costs).
This way, the completion guarantee provides protection to the financier from over-budget costs, misapplication of the available financing funds, and various other issue thats may arise during production[3].
For an in-depth explanation as to how the Completion Bond works, please read this article.
Escrowing The Financier’s Funds
The film financier should make sure that all contractual obligations for financing are met before it remits funds to the production.
A way to deal do this is to put the financing funds in escrow, while the producers, financiers and other parties work towards financial closing.
In financial transactions, the term in escrow refers to a temporary condition of an item, such as money or property, that has been transferred to a neutral, trusted, third party to be held on behalf of all parties until a transaction is completed. In escrow is a type of legal holding account for items, which cannot be released until predetermined conditions are met. Items are generally held in escrow until the process involving a financial transaction has been completed[4].
To escrow financing funds, the financier, and the film producers – sometimes accompanied by other parties such as the completion guarantor – enter together with a third-party escrow manager, into an escrow agreement. The escrow agreement dictates the conditions that will need to be complied for prior to closing of the transaction.
Typically, a cut-off date is agreed. If on the cut-off date the contractual conditions in the escrow agreement are satisfied by the production, the transaction is successfully closed, and the financing funds will be forwarded to the production account.
However, if at the cut-off date, the conditions are not met, the escrow manager will return the escrowed funds to the financier and the transaction will not proceed.
Please check out this article, should you like to know more about escrow in the film industry.
Setting up a Collection Account for the Film
It is vital for a film financier involved in independent film production, is to have a collection account in place.
The collection account is a designated bank account, administered by a neutral, independent, trusted third-party, called the collection account manager or CAM.
On behalf of the film’s beneficiaries, the CAM receives in the collection account the revenues generated by international distribution of the film. Subsequently, the CAM allocates and disburses the revenues amongst the beneficiaries, including the financier.
All parties with a major financial interest in the film’s revenues, which typically includes the producer, the sales agent, and the financier, along with the CAM sign a collection account management agreement or CAMA. The CAMA is a stand-alone, multi-party agreement that deals with the allocation and disbursement of the revenues. It supersedes all other individual agreements with respect to the management of the revenues.
In the CAMA, the parties include the film’s recoupment schedule. The recoupment schedule sets out the manner and order in which revenues are paid amongst the beneficiaries of the film.
A collection account gives the financier a guarantee that the revenues received in the account and that belong to the financier, are accurately paid to the financier towards recoupment of its loan or investment.
For more information about how collection account management works, please read check out this article on Stage 32.
Hiring an Entertainment Lawyer
Proper legal representation for the film financier is just as important as the other topics mentioned herein. Hiring an entertainment lawyerspecialized in film financing can be seen as the first important step before starting to work on a financial transaction.
The entertainment lawyer can assist the film financier in the whole process of closing the film’s financing, drafting documentation such as the finance agreement, the CAMA, and the security agreements.
Proper legal representation protects the financier from potential legal pitfalls.
Compliance Protocol and Know Your Client
Another procedural step to protect the financier’s interest and prevent future issues, is to put together and apply a compliance protocol. The compliance protocol should include a Know Your Client or KYC policy.
KYC is the process of a verifying the identity of clients and assessing their suitability and the potential risks for a business relationship. KYC also enables businesses to better understand their customers, the kind of business they run, and the transactions they are involved in.
In the case of a film production, the film financiers should apply its compliance protocols to producers, sales agents, co-financiers, and all other parties involved in the film production and the financial transaction.
Information the financier may want to gather, includes organization charts (containing the full legal name, the registered address, description of business activities, and extract from a formal register, like the Chamber of Commerce), details of the Ultimate Beneficial Owner(s) (UBO(s)); the source of funds and / or wealth of the client and its UBO(s); and public office or government position(s) held by the UBO(s)[5].
The film financier often has a major financial interest in the film. Despite of this, it generally does not control the stages of film production (controlled by the producer), film distribution (controlled by the sales agent and / or producer), and distribution of the film’s revenues (without a collection account, controlled by sales agent and / or producer).
The film financier’s position can be protected, and control can be increased by obtaining a security interest, hiring a completion guarantor, escrowing financing funds, establishing a collection account for the film, hiring an entertainment lawyer, and applying a compliance protocol which includes KYC checks.
David Zannoni
[1] Schuyler Moore, https://www.forbes.com/sites/schuylermoore/2019/06/07/security-interests-in-films/
[2] https://www.investopedia.com/terms/c/completion-bond.asp
[3] Schuyler More, https://www.forbes.com/sites/schuylermoore/2019/06/23/the-importance-of-completion-guarantees-for-films/?sh=5296e3b1666b
[4] https://www.investopedia.com/financial-edge/0512/how-to-invest-in-movies.aspx
[5] https://en.wikipedia.org/wiki/Know_your_customer