Film Financing In A VOD World

VOD distribution of films has turned film financing upside down, particularly by making the bet all or nothing: You either sell your film for a fixed profit to a VOD company (before or after production), or you go hungry. Long gone are the days when a film gets a bonafide theatrical release, with potential results that can range from a goose egg to a home run. So here are the current means of film financing in a VOD world:

1. Development Equity. The starting point for all film financing is the need for development funding to acquire underlying rights or hire a writer. This means either digging into your own pocket or digging into someone else’s, almost always in the form of equity financing from someone with deeper pockets than yours.

2. Pre-Sale

a. With Cash-Flow. Funding from VOD Company. In a perfect world, you pre-sell your film to a VOD company prior to production, and the VOD company directly funds production costs with a built-in profit to you as the producer, with the profit ranging from 10% to 50% of the budget, often referred to as a “premium” or “buyout.”

b. With Delivery Guarantee from VOD Company. In a less perfect world, you pre-sell your film to a VOD company, and the VOD company commits to pay the both the production cost plus the “premium” or “buyout” only on delivery of the film. Since the payment is a fixed amount with no back-end, equity financiers will have no interest, and production costs will need to be financed with debt – typically from one of the banks or commercial lenders that specialize in film financing.

3. Equity Financing if No Pre-Sale. If there is no pre-sale, then life gets trickier, and funding production is basically a gamble that the film will be sold to a VOD company after completion, typically by flogging it on the film festival circuit. In this case, the bulk of production costs will need to be financed with equity, and there are several key issues to keep in mind:

a. One of the most attractive elements for investors is getting some type of credit with the word “producer” in it, so be creative and give out credits like candy.

b. It is far better for a number of state law and tax issues to structure the investment as membership interests in an LLC rather than the “Investment Contracts” that are so often used.

c. Look out for the securities laws! Any time you are raising financing for a film, you are offering a securities, and you must comply with the securities laws, which generally means finding a valid exemption from registration.

4. Local Production Subsidies. State and foreign subsidies for local production are another great source of financing, although they will only provide at best up to about 25% of the budget. It takes a lot of paperwork and jumping through hoops, but it is definitely worth it if you can shoot in their jurisdiction.

5. Equity from Advertisers. Advertisers can be another source of equity financing for films, although the more they invest, the more they are inclined to insist on turning the film into one long commercial, even though that hurts the film. But Lego and Transformers sure pulled it off!

6. Utility Tokens and NFTs. A novel approach to raising film financing is to sell “utility tokens,” which give the purchaser the right to trade them for NFTs (non-fungible tokens) with clips from the film after it is completed. One recent animated feature sold NFTs featuring its lead character for more than the entire budget of the film!

7. Federal Tax Section 181. Forget about it. It doesn’t work.

But the best lesson I have learned from my clients that are successful in raising film financing is that they clearly follow Churchill’s refrain of “Never give in. Never give in. Never, never, never, never.”