The financier has a prominent position in independently produced and distributed films.

It may be safe to say that the majority of independent films would not get made, if there was no involved of an external film financier investing equity or providing a production loan.

However, despite of its essential role, generally the film financier’s control on the film’s production, distribution and receipt and disbursement of revenues is limited.

The producer controls the production. Typically, the sales agent controls the sales, licensing and revenue flow of the film, unless the producer closes a worldwide distribution deal with a studio or a streamer like Netflix or Amazon. If the latter is the case, the producer also controls the distribution and revenue collection process.

How can the film financier protect its position on independently produced and distributed films?

Below are six tools to be taken into consideration (subject to location of and the jurisdiction of the financier, producer and other parties involved).

Security Interest

The film financier can negotiate to be obtain a security interest in the film. A security interest is granted by the rights-holder, which is generally the production company.

In general terms, a security interest gives the secured party, in the case of film financing being the film financier, a claim to specific property in order to enforce a contractual obligation of another party.

The property may include the rights of the film, distribution agreements, and the revenues generated by the exploitation of the film.

Although often associated with loans, any contractual obligation can be secured. This includes any form of film financing, including bank loans, private loans, bridge loans and equity investments.

If contractual obligations vis-à-vis the financier are not met by the production, the financier can enforce its security interest and even has the option to foreclose on the film to secure its interest.

Completion Bond

Depending on the size of the film’s budget, the parties can agree to engage a completion guarantor. The completion guarantor issues a completion bond, also known as completion guarantee, for the film.

A completion bond is a contract that guarantees monetary compensation if a given project, in this case a film (but it could be any other audiovisual project as well), is not finished. It provides protection if the contractor (the film producer) runs out of funds or any other budgetary issues come up during the project.

In film financing, the completion guarantee essentially provides that, if the film encounters issues, such as production delay beyond the agreed production schedule, increase of production costs in excess of the budget, the completion guarantor has the option to:

• Loan funds to the producer to finish the film; or
• Take over production of the film itself and finish it; or
• Abandon the film and repay the financier its financing funds (including interest and incurred costs).

In this manner, the completion guarantee provides protection to the financier from over-budget costs created by the producer, misapplication of the available financing funds, and various other issue thats may arise throughout the production process.

Escrow

Another layer of protection for the film financier is to first make sure that all initial contractual obligations are met, before effectuating the commitment of financing and payment of funds to the production.

The financier can do so by escrowing its funds in anticipation of financial closing of the film.

As a general definition, in financial transactions, the term "in escrow” indicates a temporary condition of an item, such as money or property, that has been transferred to a third party to be held on behalf of parties involved, until a transaction is finalized. "In escrow" is a type of legal holding account for items, which can't be released until predetermined conditions are satisfied. Typically, items are held in escrow until the process involving a financial transaction has been completed.

To escrow financing funds on a film production, the film financier and the film producer – sometimes accompanied by other parties such as the completion guarantor, depending on the complexity of the financial transaction – enter together with a third-party escrow manager, into an escrow agreement. The escrow agreement stipulates the conditions that will need to be met before the transaction can be closed and the financing funds can be released towards the production.

Typically, a cut-off date is agreed. If on the cut-off date the contractual conditions in the escrow agreement are met by the production, the transaction is successfully closed, and the financing funds will be forwarded to the production account.

However, if at the cut-off date, the conditions are not met, the escrow manager will return the financing funds to the financier and the transaction will not proceed.

Collection Account

Absolutely vital for a film financier involved in an independent film production, is to have a collection account in place.

The collection account is a designated bank account, managed by a neutral, independent, trusted third-party, called the collection account manager or “CAM”.

In the collection account, the CAM will receive all worldwide revenues generated by distribution and exploitation of the film. The CAM is the only party that controls the revenues, and allocates and distributes the revenues amongst all beneficiaries, including the film financier.

All parties with a major financial interest in the film’s revenues, which typically includes the producer, the sales agent, and the financier, together with the CAM sign the so-called collection account management agreement or “CAMA”. The CAMA is a multi-party agreement and exclusively deals with the allocation and disbursement of the revenues, superseding all other individual agreements in that respect.

Especially if the financier’s financial contribution to the film is substantial, it is essential that the film financier becomes a signatory party to the CAMA.

In the CAMA, the parties include the film’s recoupment schedule. The recoupment schedule sets out the manner and order in which revenues are distributed amongst the beneficiaries of the film.

From the film financier’s point of view, a collection account provides for a guarantee that all revenues received in the account and that belong to the financier, are accurately paid to the financier towards recoupment of its loan or investment.

For more information about the benefits of collection account management, please read check out my article on Stage 32.

Legal Representation

Proper legal representation for the film financier is just as important as the tools described above. In fact, in today’s independent film industry, engaging an entertainment lawyer specialized in film financing is the first important step for the financier before starting to work on a financial transaction.

The entertainment lawyer can assist the film financier in the whole process of closing the film’s financing, drafting documentation such as the finance agreement, the CAMA and the security agreements.

Proper legal representation protects the financier from potential (future) legal pitfalls.

Compliance

Another procedural step to protect the financier’s interest and prevent future issues, is to carry out a proper compliance protocol. The compliance protocol includes a so called “Know Your Client” or KYC policy.

KYC is the process of a verifying the identity of clients and assessing their suitability and the potential risks in the business relationship. KYC also enables businesses to better understand their customers, the kind of business they run, and the transactions they carry out. This helps a company to mitigate risk.

In the case of a film production, the film financiers should apply its compliance protocols to producers, sales agents, co-financiers, and any and all other parties involved in the film project and the financial transaction.

Information the film financier may look for to receive from their its partners in the film, can include organization charts (containing the full legal name, the registered address, description of business activities, and extract from a formal register, like the Chamber of Commerce), details of the Ultimate Beneficial Owner(s) (UBO(s)); the source of funds and / or wealth of the client and its UBO(s); and public office or government position(s) held by the UBO(s).

Conclusion

The film financier generally has a major financial interest in the film. However, in principle it does not control the stages of film production (controlled by the producer), film distribution (controlled by the sales agent and / or producer), and distribution of the film’s revenues (without a collection account, controlled by sales agent and / or producer).

The film financier’s position can be protected, and control can be increased by obtaining a security interest, contracting a completion guarantor, escrowing investment funds, setting up a collection account, retaining legal presentation, and carrying out compliance by means of a know your client policy.

Do you want to know more about protection of the film financier’s position? Feel free to reach out!