Los Angeles Acting blog by David August: Individuals Investing in Film

Tuesday, November 02, 2021

Individuals Investing in Film

Back in about 2015, the SEC started to allow small investors to invest in public offerings (regulation crowdfunding), to invest in and own small pieces of things. The possibility for individuals who had not previously invested in films began to change, and now it seems to be getting people's attention more broadly:

The Fresh Kills offering is structured so that Upstream investors will be at the front of the line should the movie make money and receive a 110 percent payout on their investment before other shareholders in the film receive any dividends or returns. After the payout, the investors’ preferred shares will convert to common shares representing 25 percent of the copyright in the company/film. The remaining 75 percent will be owned by Horizon

(from AFM: Why Indie Filmmakers Are Betting on NFTs).

NFTs are often lumped in with cryptocurrencies in general, and unlike how some sell them, they are not a panacea or single solution to funding art, including movies. However, as the quote above suggests, crowdfunding equity combined with both traditional and non-traditional funding sources may be a more popular path to getting films funded now than ever before.

Film has always been a somewhat atypical investment instrument, and so it makes good sense that new-ish things like regulation crowdfunding, as well as new things like NFTs, have found their way to the film finance world. That said, film finance still by and large falls into certain types:

Equity - the investor owns a piece of the film, as intellectual property, and therefore profits as the deal describes if and when the movie makes money. Profit participation of people who are in or made the movie can be seen as falling into this category, they simply brought something (like themselves) to the movie instead of simple cash; they brought capital: the means of production.
Loans - money of borrowed and must be paid back to whomever or what ever loaned the money. Often, negative pickup deals fall into this category because someone, like a bank, loans the production budget knowing the film will be bought at a given price by a distributor or something or the loan is guarenteed by a studio or something like that.
Ad Fees - ad buys or other marketing fees paid to the production don't need to be paid back and give the buyer no ownership of the final film. All that's required is the agreed ad or product placement happen, and the final film see the light of day. Once the ad is published as agreed, the contract is satisfied and the producer and ad buyer can go on about their business happily and without any further obligations to each other.

Worth noting that the first 2 are by and large how any business is funded: equity or loans. The third is almost the whole business model of over-the-air TV. The third also gives the most flexibility to whomever owns the movie to do with it what they want. Selling ads, structuring a loan and getting investors are also different skills; being good at one may not translate to being good at the others. Having good investment contacts may not mean one also has good loan contacts of advertiser contacts, and so to all around.

NFTs somewhat unavoidably have to fall into the equity style fundraising: the buyer owns a unique piece of the project. However, perhaps NFTs allow segmentation of a film, or the transaction of its purchase to happen in ways we haven't quite seen exactly before. If an entire film is sold as an NFT, then unlike in previous decades, the transaction can be sort of recorded in the global ledger of the blockchain. Just like previous decades, the ownership of the film changes hands as intellectual property law dictates, especially copyright law. However, the auction process itself could be more efficient.

[Kevin] Smith noted, saying that the NFT auction for Killroy was essentially a high-tech version of what he did in 1994 when he took his debut film Clerks to Sundance and sold it to Miramax (AFM: Why Indie Filmmakers Are Betting on NFTs). So perhaps, in an NFT auction, multiple bidders can efficiently bid and arrive at a better valuation than an older and somewhat more fragmented offer/counter-offer technique that has typically been used before. Selling films as NFTs to their eventual distributors may make the purchase process smoother and one hopes better for both buyer and seller.

Regulation crowdfunding the partial or complete equity ownership of the film could open a film to get funding without needing major deep-pocketed investors to be interested. If both there is a big enough pool of small investors and the deal is put together as the law requires (and doesn't overextend those smaller investors who may be less able to safely risk larger sums) then this can be a new avenue to get funded. However, so far, there haven't been prominent successes from this model. While many films have crowdfunded their budgets, I know of none that have given the funders equity ownership and then have also have found their way to wide distribution, yet.

Yet is perhaps the key word here. Just because these new instruments and mechanisms do not yet have long track records, doesn't they mean can't or won't be part of successful films and wealth creation. As has often been the case, film finance is a risky situation, and risks both big downsides and tremendous upsides.

Creativity both with the creative work and how it's financed has always been, and will continue to be, the path to success.