A Film Investment Primer

In my capacity as a production lawyer and a film producer, I have noticed a developing trend for greater levels of private investment in NZ films (and I mean real investment rather than the director’s aunt putting in $15k). And because some of that investment is coming from companies providing services to feature films (i.e you guys!) I thought it would be timely for a quick look at investment and how it works.

Usually, in your case, your investment will be linked to a commitment by the production company to spend a certain amount of the production budget on your services. That can be seen as one of the benefits of your investment. But nevertheless, you would still be hoping to get your investment back, plus a premium.

Most private investments of this sort are known as ‘equity investments’ in the film world. This is a little different to what the term ‘equity investment’ would usually refer to in the commercial world. In the non-film world an equity investment would normally mean you are buying shares in the investment vehicle. In a film investment though, you are not buying shares in the production company. What you are buying is a right to share in the film’s proceeds of exploitation.

Here is how it works. Let’s say you agree to invest $50,000 in the film as an equity investment. The first step is to document this transaction. There are two options here; either you can enter into a separate investment agreement with the production company, or you can be a party to the main production funding agreement issued by NZFC (usually called the interparty agreement’). The other parties to the interparty agreement (other than the production company and NZFC) will be the other financiers and investors in the film and the completion guarantor. (A completion guarantor is a company that, for a fee, guarantees to the investors and distributors of the film that the film will be completed and delivered. So if the production company falls over, the completion guarantor will either complete and deliver the film, or otherwise pay out the investors).

You will then be required to pay the investment amount into the production account on a set date (usually the finance closing date for the film, but sometimes later). In consideration for your investment you get to occupy a position on the recoupment schedule for the film. The recoupment schedule is a document that lays out who is getting paid from the proceeds of the film and in what order. As a private equity investor you will get to occupy a high position on the schedule (usually at the top). Any revenue from the film first goes to the distributor from which it deducts its commission and then money it has advanced to the production company (called a minimum guarantee) and any money it has spent on marketing the film. You (and any other private investors) will usually be next. The usual deal is that your investment is repaid together with a premium of 10% or 15%. After that you drop out and NZFC and the production company get to recoup their equity in the film. If it’s a simple structure the next stage of recoupment after NZFC has been repaid will be the profit section, which is where you will come in again. Typically, 50% of the profit will be allocated to the investors (including NZFC) and 50% to the production company (which usually will share that with a number of profit participants).

It is important to bear in mind that there is no guarantee your investment will be repaid, let alone that you will receive any profit. As an investor you have no rights of recourse against the production company if the proceeds from the film are not sufficient to repay you. It is worth bearing in mind that NZ films very rarely make it into profit. On the other hand, it is also rare for a film to do so poorly that the equity investors in first place don’t recover their investments. And although there is no guarantee that your investment will be repaid, there will be a number of mechanisms in place to protect your position while the film is being made. One of these is the completion guarantor, whose role I explained above. You will have the option of entering into a ‘completion deed’ with the completion guarantor, and that is something I definitely recommend.

If you do join the interparty agreement there are a number of protections in that document. It is, however, quite a complicated agreement and you will probably need to incur some legal costs in dealing with it. You will also be entitled to register a security against the production company which will be registered under the Personal Property Securities Act.

I do think you should get some legal advice before entering into any film investments (but then I would say that wouldn’t I). But in all seriousness, there are a number of decisions you need to make and I do think it is beneficial to get advice at the outset.

Finally, and speaking as a producer, I would just like to say thanks! It is great to see more private investment in film and great to get that support.