The Legal Side of Filmmaking

The Legal Side of Filmmaking

Gregg P. SkallWomble Carlyle Sandridge & Rice LLC

Choosing and Entity For Raising Capital

C Corporation• Double taxation• Many set laws and rules for structure and governance; very little flexibility• Most familiar to VCs and institutional investors

S Corporation• Pass-through tax treatment• There can be no more than 100 individual shareholders (no corporate shareholders)• No foreign investors permitted• There can only be one class of stock (although voting and nonvoting classes are permitted)• You must elect to be taxed as an S-corp. (IRS Form 2553)

 Limited Liability Company

• Pass-through tax treatment (though can be taxed as a corporation or partnership)• Very flexible form• Foreign and corporate investors permitted• Certain types of business may not be permitted to operate as LLCs

Friday 9:00a – 10:20a

Workshop: The Business of the Industry

• How to package your project so that it attracts financiers, backers. and an audience.

• Bernard H. Coleman Jr., Womble Carlyle Sandridge and Rice, PLLC

Private Offerings

Private Offering Overview

• All securities offerings are regulated by federal law and the securities laws of each state in which an offering is made

• Offerings must be registered with the SEC or qualify for a registration exemption

• Four key variables in an offering impact the availability of registration exemptions

– The nature and size of the offering – Persons (or entities) who sell the security– Disclosures made to investors about the security– Required investor qualifications

• The person (or entity) selling must be registered with state and federal governments as a broker-dealer • unless the offering qualifies for an exemption

 • State and federal anti-fraud laws • Issuer must make available “material” information to

prospective investors to enable investors to make an informed decision

• Failure to provide information (an “omission”) can be material

Best Course: An Exempt Offering

• SEC registration is extremely expensive and time consuming

• The issuer has the burden of establishing an exemption• Failure to satisfy even one element of an exemption

could destroy the availability for the exemption for the offering

• The issuer must take care in its analysis and verification procedures to qualify investors against the requirements of its exemption

State Limited Offering Exemption• All States: Variation on the a similar theme• State of Georgia: Limited Offering Exemption

Limited Offering Exemption Requirements:The sale and offer must be part of a single issueNot more than 15 purchasers are present in this state during any 12

consecutive months No general solicitation or general advertising in connection with

the offer to sell or sale of the securities;No commission or other remuneration is paid or given, directly or

indirectly, to any person for soliciting a prospective purchaser in this state; and

Reasonable belief that all the purchasers in this state are purchasing for investment.

Investor’s State of Residency Governs Offering for that Investor

Variety of Federal Exemptions

• Rule 504 - $1M Rule 504 provides an exemption for the offer and sale of up to $1,000,000

of securities in a 12-month period.• Rule 505 - $5M

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period.

unlimited number of "accredited investors" and up to 35 "unaccredited investors" who do not need to satisfy the sophistication or wealth standards associated with other exemptions.

• Rule 506 - Unlimited Unlimited amount of capital; unlimited number of “accredited investors” and up to 35 other purchasers.

Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated

that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

Who can buy the stock under Rule 506?

• Accredited investors – Individuals can be “accredited” by meeting one of the following

standards:• Net worth (with spouse) of $1 million• Individual income for past 2 years, with reasonable expectation for the current

year, of at least $200,000 (excluding spouse)• Joint income with spouse of at least $300,000 for past two years and

expectation of such income for current year• Be a director or executive officer of the Company

– Entities such as corporations, partnerships and trusts can generally be accredited by meeting one of the following standards:

• All equity owners are accredited• Has assets of $5 million and was not formed for purpose of making the

investment • Is an IRA of an accredited investor• Is an employee benefit plan and meets special conditions• Is a bank, savings and loan, or insurance company

• An issuer must reasonably believe that each non-accredited investor has (or, with a “purchase representative”, has) enough knowledge and experience in financial and business matters to evaluate the merits and risks of the investment

• Non-accredited investors – Recommend against offering to non-accredited

investors

• Higher burden for satisfying registration exemption• Increased disclosure required to be distributed to all

Disclosure Obligations

• The issuer must provide investors with full, fair, and complete disclosure of all material facts about the offering and issuer, its management, business, operations, and finance

•  • Material = a reasonable investor would consider the information important in making

an investment decision •  • Issuer disclosures typically address, using a Private Placement Memorandum (PPM) •  

• Business description• Background of the organizers and management• Risk factors• Offering terms and issuer organization• Financial information• Rights of investors• Transfer restrictions• Related party transactions

• Anti-fraud provisions apply to the issuer’s offering

• Offering documents are ultimately the Company’s responsibility, not the accountants or the attorneys, so you must make sure you are satisfied with the disclosures

• PPMs serve two conflicting, important functions:– Marketing the Company and the stock– Protecting the Company from being sued if the investment is not successful

• The protective value of a PPM can be diminished if representations are made in the selling effort that conflict with those made in the PPM

•  If a PPM is discovered to have inaccurate information or new material information occurs, the PPM immediately must be amended and updated

Disclosure Obligations

Prohibition on General Solicitation

• Rule 502(c) of Regulation D states:

“Neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following: (1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media broadcast over television or radio; and (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising…”

Issuers cannot engage in mass mailings or conduct certain types of informational meetings with potential investors

Working With Creative

Fundraising• Raising the funds, Must have an orderly business plan:

• Who will raise the money to fund production, or finding the studio.

• Delineate how the money raised is to be shared among the tasks.

• Define the actual nature of the relationship

• Will anyone be paid salary or fees from the production budget.

• These fees may be in place of salary and/or overhead, or may be in addition to those items.

• If the budget is overloaded with fees and salaries for the producers and executive producers, it will be difficult to find financing.

Ownership• Will the production be owned by Producer or Creator, or by co-production.

• How will profits be paid: Percentage – 50/50% or Commission basis?

Working With Creative Owners

• Assigned copyright? Acquisition of Rights• Preexisting rights

• All Rights

• Only Exclusive Motion Picture or Audio Visual Rights

• For how many features or programs?

• Share of other rights, i.e. characters, merchandising, sequels etc.

• Commissioned Works• Make Clear “Work-for-Hire”

• Talent may retain some rights: e.g., novelization or stage adaptation

• Derivative Rights• Creator’s rights: the extent a creator may continue to control over the creation.

• Berne Convention: droid moral: Could prevent a producer from altering the underlying work.

• Right to Exploit in Any Medium• Particularly important with pace of new disruptive technologies

• Right to Create Derivative Works Based on the Derivative Film or Program• Prequels, sequels, remakes, episodic TV etc.

Working With Creative OwnersDoing the Deal

• Who will assume production responsibilities?

• “Escape Clause?" If unable to jointly develop and finance the production within a reasonable

period of time, should we provide for a dissolution of the joint production, and settlement of any property right secured as of the date of such dissolution.

• Is it more a Finder arrangement? Are they looking for “Contacts?” Finder Producer is to introduce Production & Creative to third parties for

investing financing all or a portion of development, production and/or distribution of the Picture and actual distribution.

If so, what would be the compensation arrangement?  A percentage?  What percent?

• How will the merchandising rights and profits be allocated?

Working With Creative

• Directors• Define level of control in Shoot and Post-Production

• Right to make the Final Cut • Director’s Cut

• First recut

• Right to Control Release (Usually Producer/Director)

• Compensation• Typically a combination of

• fixed fee based on duration of service

• Contingent Fee based on Commercial Success, reuse & residuals

• Director Guild benefits

• Per Diem expenses

• Credits• Screen credit, publicity credit, additional credits (e.g. a John Doe Production)

Working With Creative• Actors

• Length of time for actor’s services

• Performance Conditions• Living Conditions

• Support staff

• Control Over Performance• Agrement to or not perform in a certain way

• Script Approval – Role is the same as agreed to perform

• Producer wants flexibility based on budget, new ideas, other claimants to script control

• Postproduction Performance Issues• “Films are made on the cutting-room floor.”

• Assurances role not altered or diminished in editing

Working With Creative

• Actors• Use and Exploitation

• Producer seeks title to any copyright interests that may exist in the performance under the “works-made-for-hire doctrine

• Waiver of the droit moral

• Waiver or transfer of rights of publicity/privacy and unfair competiton

• Right to edit, reedit, alter, amend, or revise the performance or any part.

• Use and exploitation in any medium

• Use for clips and advertising

• Screen Credits• On screen credit location: “first position”, “above-the-title”

• Form and size

• Merchandising and Commercial Tie-Ins• Limits on what is allowed

• Compensation

• Use of name and likeness for licensed goods

• Quality

Working With Creative

• Actors

• Compensation

• Majority – Minimum scale wages

• Stars – Share of net proceeds or gross receipts

• Defining Proceeds• Distributor’s Gross

• Adjusted distributor’s gross – Gross less distributors expenses

• Net profits -

• Net proceeds –

• recapture of production costs, interest and financing expense, distributor charges and other expenses.

• Audit & Collection Rights

Preliminary Agreements

• Non-disclosure Agreement• Term Sheet

– Set out the nature of the project– Ownership rights for the various copyright and forms of intellectual property

• Creative elements• Performance Rights• Merchandising rights and ancillary products• Animation rights, if any• Characters• Production elements

– Roles for each major player (e.g., Executive Producer, Director, Creative Director) and descriptions

– Nature of the capital budget• Amount• Who will raise it• How it will be spent• Salaries, or exclusion therof

Staff Employment Agrements

• At Will• Works for Hire• Description of Duties• Salary and Bonus provisions• Covenants not to use or disclose confidential data• Covenant not to compete

– Limited duration (e.g., 2 yrs)– Limited activities (e.g., Employee shall not directly or indirectly solicit any

Customer in the United States for the purpose of providing video and film animation services that are competitive with those provided by Employer)

– Not to solicit employees

Gregg P. SkallWomble Carlyle Sandridge & Rice LLC

Washington, D.C.

(202) 857-4441

[email protected]