PROTECTING FILM INVESTORS	By Mark Litwak, Esq
PART I

Films as investments have a bad reputation, and many times the promoters deserve to be criticized. There are instances where financiers have been cheated and lost their entire investment. Consequently, some investors simply refuse to consider film-related investments. This is unfortunate because an intelligent investment in a motion picture can earn substantial returns. While film investments are risky, the potential return from a hit can be enormous. Not only can the film earn revenue from box office receipts, but also there are many ancillary sources of income. These sources include revenue from television, home video, merchandising, music publishing, soundtrack albums, sequels and remakes.

As an attorney who represents investors as well as filmmakers, I have learned that there are ways to reduce the risk of film investments. Here is a checklist to guide investors. This article is presented in two installments.

DUE DILIGENCE: Thoroughly investigate the reputation and track record of any producer or distributor you contemplate doing business with. No contract can adequately protect you against a scoundrel. Speak to filmmakers and investors who have done business with a candidate. Check court records to see if the company has been sued. To research distributors, visit the Filmmaker’s Clearinghouse, which I sponsor. The survey form, and the responses, can be found on my Web site, Entertainment Law Resources, at www.marklitwak.com.

FULL DISCLOSURE: Federal and State securities laws are designed to protect investors. Offerings to the public generally require prior registration with the SEC or a state agency. Usually private placements are limited to persons with whom the offeror has a pre-existing relationship. Even if registration is not required, the anti-fraud provisions of the securities laws require that the offeror make full disclosure of all facts that a reasonably prudent investor would need to know in deciding whether to invest. The information disclosed should include a detailed recitation of all the risks involved in developing, producing and marketing a movie. Avoid any offering that appears to violate this requirement by making less than full and truthful disclosure. Carefully read the prospectus, and consult your own financial and legal advisors before making a decision to invest.

TRACK RECORD: Do not back a filmmaker or production team that does not possess the proven skill needed to make a professional-looking movie. Avoid first-time filmmakers. You are safer backing filmmakers who have completed at least one short film or a feature-length work. Partner with people of integrity who bring the skills, expertise and resources to the endeavor that you lack. For instance, if you don’t have the knowledge necessary to evaluate a script, bring aboard someone who has that expertise, or hire a script doctor.

IDENTIFY THE POTENTIAL MARKET FOR THE FILM: There is a very limited market, and modest potential revenue, to be earned from most short films, documentaries, black and white films, and foreign language pictures. CROUCHING TIGER, HIDDEN DRAGON and FAHRENHEIT 9/11 are the exceptions, not the rule. Distributors and exhibitors are also prejudiced against motion pictures shot on low-end videotape formats. They prefer films shot on 35 mm stock, although quality films shot on 16 mm or Super 16 mm film or shot using a High Def digital camera can obtain distribution.

Certain themes, topics and genres can be difficult to sell. Religion-themed pictures can easily offend audiences, although THE PASSION showed that there is a large potential market for some of these films. Cerebral comedies can be difficult to export because their humor may not translate well. Films with a great deal of violence may be shunned by European television, which is a prime market for independents. Films with explicit sex may not pass censorship boards in certain countries.

Independent films without name actors are difficult to sell. Of course, name recognition varies around the world. The star of an American television series may be a big name in the United State but unknown abroad. On the other hand, some actors have large followings aboard, yet are relatively unknown in the United States. There are several publications that can be consulted to determine the commercial appeal of actors such as the Hollywood Reporter “Star Power” guide.

DON’T BACK DIRECTORS WHO ARE ONLY CONCERNED WITH THEIR OWN VISION: The director of the film is the key person who will determine whether the final product is marketable. If a filmmaker shows no concern about making a movie with audience appeal, you can expect a film whose exhibition will be limited to the family and friends of the filmmaker. This is not to say that the only films you should invest in are lowbrow fare like DUMB AND DUMBER. A well-made “art” film like ELIZABETH can win awards and make a handsome return on investment. Filmmakers should give some thought beforehand as to the nature of the film’s intended audience. I once watched a wonderful “Lassie” type film spiced with four-letter words uttered by one character. I explained to the filmmaker that his film would never sell in the family market because of the vulgar language, and it was too soft a story to appeal to teens and adults.

CONGRUENCE OF INTERESTS: It is best to invest in an endeavor where everyone shares the same risks and rewards. A filmmaker who takes a large fee from the production budget may financially prosper from a picture that returns nothing to the investors. It is better to back a filmmaker willing to work for a modest wage and share in the success of the endeavor through deferments or profit participation. An investor can take some comfort investing in a motion picture on the same terms as a producer or distributor where all parties recoup at the same time. Beware of investing in a project where other parties benefit when you lose.

Next column: Part II, “Understanding the Parameters of a Fair Deal” will be presented in the December/January combined issue of IMAGINE.