The Filmmaker’s Guide to Equity Financing and Compliance

Independent producers most times rely on outside financing—from equity investors, crowdfunding platforms, non-profits, and even friends and family—to fund projects. I recently wrote a post that details the basics of equity financing. Read that first if you’re new to the process. This post will go a step further, tackling important questions about the nuanced details of equity funding and the corporate responsibilities that go along with it.

Read on to learn:

• If there’s a limit to the number of equity investors you can bring in on a project
• Whether you’re allowed to combine different types of equity funds
• What your corporate compliance role and responsibilities are

Let’s start by talking about how many investors you’re able to work with on a single project.

Is there such a thing as too many investors?

Independent producers often ask: Are there rules around how many investors you can work with? The short answer is no. The longer answer is that while there's no hard and fast limit, there are several practical considerations that can help you determine the right number of investors to bring in on your project—starting with the amount of money you hope to secure.

Each investor that joins your project will impact:

• The Decision-Making Process: More voices at the table equals a more cumbersome decision-making progress. Anticipate that debating budget revisions, creative choices, or distribution plans will take more time and effort with each investor you add.  I usually remedy this challenge by making the producer the Managing Member of the enterprise who is solely responsible for making all the creative and business decisions on behalf of everyone involved.
• Administrative Complexity: As the project lead, you’ll be responsible for communicating with and providing financial reporting to your investors. Individuals may have specific expectations, and some may have specific requirements. While each investor may or not want to be involved in day-to-day operations, the decisions should be left to the Managing Member even though the financial reporting is still required.
• Likelihood of Disagreements: Individuals who invest in creative projects typically have a lot of opinions on what makes a movie or television show great. The more investors you have in the room, the more likely you are to run into disagreements throughout the production process. Whether there’s a misalignment of priorities or contradictory thoughts on the best way to manage a particular scene, these speed bumps can slow you down and potentially even impact the creative vision of the project, unless you mitigate this risk by leaving those decisions exclusively with the Managing Member.
• Profit Sharing:More investors can be a good thing to a degree because it mitigates risk, but it can also become problematic if a film doesn’t perform especially well and profit share returns are less than expected. The more investors you have, the more people you must be responsive to. Learn to be a good diplomat!
• Regulatory and Compliance Issues: No matter how many investors you have, you must ensure that your production is compliant with the relevant securities laws and regulations. It would be prudent for you to consult with a securities lawyer to make sure you understand what compliance issues exist. 

When you’re trying to secure a considerable amount of money, it can be tempting to work with potential investors who express interest in participating, but it’s best to be selective. Investors can have a strong influence over how your project plays out, so you should prioritize working with individuals you trust and who believe in you and your project.

Now, let’s talk about different equity sources you can receive funds from.

Combining equity funds with other financing: What’s allowed?

Producers can solicit funds for their film by offering individuals, venture capital firms, or private equity investors an ownership stake in the project itself or its production company. But can you combine equity contributions with funds from non-profits or crowdfunding platforms? You certainly can. And you can do so in any combination you see fit to support your project.

Here’s what happens if you leverage funds from all three popular financing sources:

• Equity Tranche:Equity investments from individual investors, venture capital firms, or other equity financiers fund a portion of the project. These investors receive ownership stakes in the film project or its production entity and share in any financial returns generated by the film's success.
• Non-Profit Contributions: Funds provided by non-profit grants or sponsorships are typically dedicated to supporting specific aspects of the project, as specified in the grant application and distribution documentation. For example, the grant may specifically support educational initiatives associated with the film's themes. Since there's no equity ownership component, there's no long-term commitment to distribute profits or other payments based on the film's performance.
• Crowdfunding Campaigns: Filmmakers launch a crowdfunding campaign on a platform like Kickstarter or Indiegogo to raise additional funds from individual supporters. Contributors pledge money to the project in exchange for rewards such as exclusive access to behind-the-scenes content, digital downloads of the film, merchandise, or credits in the film. Crowdfunding can supplement equity and non-profit funding and engage the film's audience directly in its development and promotion. The only long-term commitment is to deliver on any promised rewards detailed in the crowdfunding project. 

There are several benefits of combining funding resources. First, it allows filmmakers to diversify their funding sources, so if there are ever any issues along the way, there are other sources to rely on. Second, getting more visibility means you get to engage with a broader community of supporters. However, it's essential to carefully plan and coordinate these financing activities to ensure compliance and effectively manage investor expectations and relationships. 

Thinking through each area of impact listed above may help you narrow down the number of investors you’re comfortable bringing onto your project. 

It’s also important to understand what you’ll be expected to provide to each of your investors.

Corporate compliance: Your role and responsibilities

Independent film producers have various corporate compliance responsibilities they must fulfill to ensure legal and regulatory compliance throughout the filmmaking process. Doing so allows you to uphold high standards of integrity with investors throughout the filming process. Failure to comply can hurt your reputation as a producer and the reputation of your film. Noncompliance can result in legal complications—including fines and penalties.

Here are some critical corporate compliance responsibilities you’re responsible for:

• Business Entity Formation: Independent film producers often operate through a legal entity such as a limited liability company (LLC) or a corporation. They are responsible for properly forming the business entity and then registering the business entity according to the laws of the jurisdiction (or jurisdictions) in which they intend to operate.
• Tax Compliance: Producers must comply with applicable tax laws and regulations, including filing tax returns, paying taxes on income generated from the business, and obtaining any necessary tax permits or licenses.
• Contract Compliance: Producers enter into contracts with various parties involved in film production, including talent (actors, directors, crew), vendors, distributors, and financiers. They must ensure that these contracts are legally binding, accurately reflect the agreed-upon terms, and comply with relevant laws and regulations.
• Intellectual Property Rights: Producers need to secure the necessary intellectual property rights for the film, including copyrights, trademarks, and licenses for music, artwork, and other content used in the production. They must also ensure that the film does not infringe upon the intellectual property rights of others.
• Labor and Employment Laws: Producers must comply with labor and employment laws governing the hiring and treatment of employees and contractors involved in the film production. This includes adhering to minimum wage requirements, providing a safe working environment, and complying with overtime and other labor regulations.
• Permits and Licenses: Depending on the location and nature of the film production, producers may need to obtain various permits and licenses, such as location permits and releases for filming in public spaces or using specific props or equipment.
• Safety and Insurance: Producers are responsible for ensuring the safety of cast and crew during filming and obtaining appropriate insurance coverage to protect against liabilities arising from accidents, injuries, or property damage on set.
• Financial Reporting and Transparency: Producers must maintain accurate financial records and reporting systems to track expenses, revenues, and other financial transactions related to the film production. Transparency in financial matters is essential for investors, stakeholders, and regulatory compliance.
• Distribution and Exhibition: If involved in the distribution and exhibition of the film, producers must comply with distribution agreements, licensing requirements, and regulations governing film distribution and exhibition in various markets.
• Ethical and Social Responsibility: Producers should adhere to ethical standards and social responsibility principles in their filmmaking practices, including promoting diversity and inclusion, avoiding discriminatory practices, and respecting the rights and dignity of all individuals involved in the production.

Independent film producers have a broad range of corporate compliance responsibilities spanning legal, financial, contractual, and ethical dimensions. It's essential to stay informed about relevant laws and regulations and seek legal counsel when necessary.

Avoid overwhelm with help from industry experts

Reading about all the investor and compliance responsibilities that an independent producer is responsible for managing can be daunting. Though there are many things to consider, you don’t have to go it alone. EP’s team of in-house experts will help you set up the right business entity, consult on your best path to funding, manage hiring and employee compliance, verify tax compliance, help with distribution, and more. We've managed tens of thousands of productions and have spent decades helping producers like you make sure you're set up for success. When you're ready to discuss your next project, get in touch.

This article contains general information we are providing on a subject that may be of interest to you. Nothing in this article should be considered tax, accounting, or legal advice. You should consult with your own tax, accounting, or legal advisors regarding the applicability of this information to your specific circumstances.