Are "investors" a joke?

[Chamber005]

Thought this would be an interesting topic.

IMO "investors" are a joke. Either you know people with money who like your stuff and want to help you out or you don't.

If you don't know people with money, DONATIONS is what filmmakers should be soliciting. I think it's much more prudent for the average filmmaker to know how they can actively track down doners (and all the legalities that come with it, which are FAR lesser than the legalities of dealing with an "investor" and are 100% creatively non-intrusive).

Filmmakers need to know who they can and cannot call or write to for 25, 50, 100, 1,000 dollar donations and how to explain the appropriate tax write-offs to their doners.

Name your feature-specific-LLC something charity-sounding, make your film sound as if it applies to SOME kind of an issue (as all films should have some issue regarding SOMETHING whether it be relationships, politics, religion, etc -- The Bourne Identity? That's a film about government intervention right there!)

You then get on the phone or rush to the post office with your "scrubbed" list of potential doners and sell, sell, sell. People with money LOVE to GIVE AWAY money; they love to be charitable because they know it balances their success. Asking them to become an "investor", though, switches on a different aspect of their personality -- an aspect you as a novice salesperson will almost assurdely fail at soliciting.

Ask a millionaire to donate to your film about "the importance of parents being present in their kid's life" (Home Alone), and there's a good chance, if you pluck those strings just right, you can grab a hefty chunk of change.

We should be learning about the legalities and how to obtain DONATIONS, not in a PASSIVE sales stance, but literally picking up the phone and dialing for dollars.

In any business, the only person more wealthy than the salesman is the one who employs him. If you're already wealthy, get your salespeople active. If you're not, pick up the phone and start making it happen for you and your film!

From my experience, "investors" are just wealthy friends. Donations is what the indie filmmaker should be aggressively pursuing.

 

[Gary Huff]

I'm sure there's something illegal about all of this...

 

[Chamber005]

I'm sure there's something illegal about all of this...

About soliciting donations? That's my point, as filmmakers we should not be so (legally) well-versed on obtaining potential investors as we should be concerned about being granted donations.

As I understand it you can solicit donations so long as you're not posing as a charity. The tax write-offs are the more perplexing aspect, as I know the laws were in flux regarding donations to film being 100% tax-deductible.

 

[Gary Huff]

As I understand it you can solicit donations so long as you're not posing as a charity.

Name your feature-specific-LLC something charity-sounding, make your film sound as if it applies to SOME kind of an issue

I would say the best advice is to consult with a lawyer first and foremost.

However, let's be realistic here. It's going to be hard to come up with a proper budget based on donations alone. If it would be successful, someone would have done it already. With donations, there's not really any risk taking on your part to deliver a financially viable film, thus leading to a lot of abuse and therefore less money overall for truly talented individuals.

Think of it this way: why do you not want to deal with investors? Is it simply because you feel like it's going to be "too hard" to learn the ins-and-outs? Maybe you don't want to put up the cash to hire a lawyer or an account to make sure everything is on the up-and-up? If you don't want to put in the effort to do it right, then why should your idea be made in the first place?

 

[Dick Campbell]

Ah, "The Producers" comes to mind.

Several thoughts on this. You film is a business money making proposition. If its not, its just a hobby, or your volunteering for a cause. Sure, you can make a socially conscious film story, and get a number of people to give money without any expectation of a return, but to what end? Do you get paid? Does your organization get distribution money? And if you are not a designated charity (401c3), you cannot offer the tax-deductible way.

On the other, there are plenty of venture capitalists out there who are happy to part with their money for the right business plan, and the expectation of a good ROI. For most of us, tho, to do this we are no longer filmmakers, we are business entrepeneurs, and now your perspective changes.

So, it just depends on what side of the street you want to be on.

 

[Chamber005]

I would say the best advice is to consult with a lawyer first and foremost.

However, let's be realistic here. It's going to be hard to come up with a proper budget based on donations alone. If it would be successful, someone would have done it already. With donations, there's not really any risk taking on your part to deliver a financially viable film, thus leading to a lot of abuse and therefore less money overall for truly talented individuals.

Think of it this way: why do you not want to deal with investors? Is it simply because you feel like it's going to be "too hard" to learn the ins-and-outs? Maybe you don't want to put up the cash to hire a lawyer or an account to make sure everything is on the up-and-up? If you don't want to put in the effort to do it right, then why should your idea be made in the first place?

I don't need investors. I already have them for my project (see my first line about knowing people with money).

The problem I see rampant on these boards (and other indie sites) regards people asking "How do I get funding?" I'm simply saying those people should start looking harder at the aggressive soliciting of donations rather than sitting in the corner waiting for an angel investor to come into their lives.

Here's my short list of the problems with investors who are not friends or family:

1) Unless they are that 1 in a million stranger, most investors will want creative input -- almost always a bad.

2) Profit margin. The more money you have loaned to you, the more money (and percentage points) you have to pay back. For instance if I invested 100K in your 110K budget film, not only would I make sure my 100K came back to me first, I would then demand the second 100K come to directly to me and then 50% moving forward. As a STRANGER to the filmmaker I'm working with and as a business person, this would be my agreement as an "angel/silent investor".

3) The legalities involved in soliciting investors is that YOU CAN'T DO IT. It is 100% illegal to solicit investing of any kind in your film. Cut and dry, done and done.

Which brings us back to donations vs investors. Donations is something YOU CAN DO -- donations is something that gives you the ability to TAKE ACTION. Investor relations require years and years of networking and establishing money contacts and being close to and friends with money. For a lot of the guys here, they just aren't associated with high finance on a daily basis, thus donations is something they can aggressively attack as salespeople -- which is what every filmmaker should be once their film is finished.

Heck, even if you already have a completed budget you can think about aggressively soliciting donations in your city (after looking into all of the necessary legalities). If you've already raised 50K via credit debt and a HELOC that can be part of your sales pitch -- that you've already raised 50K locally. The pack mentality is a good a tool as any in sales.

 

[Chamber005]

Ah, "The Producers" comes to mind.

Several thoughts on this. You film is a business money making proposition. If its not, its just a hobby, or your volunteering for a cause. Sure, you can make a socially conscious film story, and get a number of people to give money without any expectation of a return, but to what end? Do you get paid? Does your organization get distribution money? And if you are not a designated charity (401c3), you cannot offer the tax-deductible way.

On the other, there are plenty of venture capitalists out there who are happy to part with their money for the right business plan, and the expectation of a good ROI. For most of us, tho, to do this we are no longer filmmakers, we are business entrepeneurs, and now your perspective changes.

So, it just depends on what side of the street you want to be on.

I disagree. I think you can play both sides effectively so long as the two sides never cross. You can be successful in business and successful in the arts without one having anything to do with the other. IMO money only matters to money matters. Everything else in life should be kept separate.

And, again, I think the idea of a "venture capitalist" is the icon of the passive, idle, inactive filmmaker and is so much of the time a horrible creative and business structure even if you happen to land one. Most of the time an investor will either want to have creative input, marketing input and will want double their investment back up front and an additional 50% of all profits moving forward (or more, depending on the size of their investment). And forget about hoping to package your production or show it the way your vision intended -- the investor will most likely be making those decisions for the filmmaker.

I'm saying filmmakers should get ACTIVE and start researching state laws on obtaining donations for their film. I see lots of people putting their stuff on Indie Gogo and putting up donation buttons (heck, I have like three myself!), but I don't hear people buying call lists and directing people to their donations-dedicated site for online credit card donations. Or, heck, having fundraisers at their local movie or stage theatres.

For the average filmmaker the money they need for their next project is just sitting there waiting to be GIVEN away, no strings attached, if they have the gumption to stand up and go grab it.

 

[Gary Huff]

I don't need investors. I already have them for
1) Unless they are that 1 in a million stranger, most investors will want creative input -- almost always a bad.

Plenty of movies have been made with money raised by private investors where creative control is still in the hands of the filmmakers. Hell, look at "Evil Dead".

2) Profit margin. The more money you have loaned to you, the more money (and percentage points) you have to pay back. For instance if I invested 100K in your 110K budget film, not only would I make sure my 100K came back to me first, I would then demand the second 100K come to directly to me and then 50% moving forward. As a STRANGER to the filmmaker I'm working with and as a business person, this would be my agreement as an "angel/silent investor".

More the impetus on you to make something financially viable and not something that yells "talentless hack".

3) The legalities involved in soliciting investors is that YOU CAN'T DO IT. It is 100% illegal to solicit investing of any kind in your film. Cut and dry, done and done.

Yes, which is why you should make the effort to hire the people who are legally able to do so. Which is where I suppose most "filmmakers" balk. They don't want to spend the money necessary to start raising funds.

Which brings us back to donations vs investors. Donations is something YOU CAN DO -- donations is something that gives you the ability to TAKE ACTION.

I'm sure there is legal problem somewhere when donations start climbing into film budget territory. $10,000, then yeah, probably. But I don't want to make a film for ten grand, I want to make a film for $100,000+. Why? Because a) I want to get paid so that I can afford my rent b) I want to compensate the people I bring along on the journey for the talents and skills they bring c) I want to shoot on a viable format, whether Red or 35mm or what have you. If I'm going to put in the blood, sweat, and tears to put together a 90+ minute film, I'm not going to half-ass it.

Investor relations require years and years of networking and establishing money contacts and being close to and friends with money.

Again, just more work for the filmmaker! Oh woe is us!

For a lot of the guys here, they just aren't associated with high finance on a daily basis,

Not every successful filmmaker had those associations.

thus donations is something they can aggressively attack as salespeople -- which is what every filmmaker should be once their film is finished.

Again, what kind of budgets have been raised solely by donations? And how long did it take to raise them? And what sorts of tax/legal issues were brought about from donations in the tens of thousands of dollars?

 

[Barry_Green]

Well, to back up a bit --

There's nothing illegal about asking people to support your film. There is something illegal about panhandling, in many (most? all?) jurisdictions. But asking them to support your film or your art is not illegal.

If you promise them nothing in return other than the warm fuzzy feeling of knowing that they've helped you on your way... there's nothing illegal about that.

The thing Chamber005 is tapping into here is -- many filmmakers don't have a clue about the business side. They don't know how to write a business plan, they don't have any sort of plan for their business, their whole plan is "I'll submit it to festivals and pray it gets picked up." It may, it may not -- but if you're asking people to invest in you, it's terribly difficult if you can't show them exactly what you're going to be doing. For many, many reasons, some of which are not obvious here, but I'll point out a few:

1) If you're a jerk, creep, or slimeball, and they invest in your business, then they expose themselves to liability for any potential illegal actions you may commit. Ownership or shared ownership in an entity that gets sued, exposes the investor to being sued. And there's pretty much no way that's worth the risk to them.

2) "Investing" makes their tax return more complicated. Now they have to get a Schedule K from you, they have to report this new business on their tax return, and they open themselves up to any potential auditing hassles.

3) on and on...

So for someone to invest in you, you had better have your act together, SOLIDLY. But if you do, if you have a great track record, a demonstrated ability to make money in this business, etc., then you can raise hundreds of thousands or millions of dollars from private investors.

Now, let's contrast that with donations:
1) You don't have to have any idea what you're doing, business-wise. You only have to know how to beg.

2) The "investor" isn't "investing", so they have no liability whatsoever. No hassles. No exposure. No due diligence necessary.

3) No tax complications.

4) No real reason for them to say no. No areas to get confused in. Only question is: do they have enough dough to spare?

If they have the dough to spare, and you're likable, then maybe they'll donate. But the problem with donations is -- you're very unlikely to raise much real dough this way. You can get a few hundred dollars, maybe a thousand, but that's about it. Watch "The Celebrity Apprentice"; there they have celebrities arm-twisting mega-rich people, celebrities and whatnot, and usually the most they can get out of them is $5,000 or so -- and that's with the promise of television coverage and all the attendant goodwill, plus the promise that all the money raised goes to charity.

So going after donations is likely to lead you to pennies rather than dollars. But if you don't know what you're doing and you don't have a track record, the dollars are out of your reach anyway! (unless we're talking about parents, etc).

Look at "Ink" -- can you make a film that good? Really? I mean, really, honestly, can you make a film as good as "Ink"? And then consider that they couldn't raise a dime; they shopped it around forever, and then eventually they took out a mortgage on their house and paid for it themselves. Look at Robert Duvall and "The Apostle" -- here you have a major star who shopped around his own film for years, and couldn't get the money for it. He ended up paying for it himself; fortunately he had the $5 million it took, and he made a great film and even got himself an Academy Award nomination. Raising money from investors is hard, and if you don't have a proven plan for getting their money back, it's pretty much impossible.

So going after donations makes sense.

Put putting up a paypal button on your website saying "please support us" -- that's not gonna get you anywhere. A few hundred dollars maybe. If you want real money, you've got to do what Chamber005 is saying, go out and sell sell sell.

One thing that helps *enormously* with getting donations, is being a nonprofit or working with a nonprofit. If you're approaching a wealthy/high-income person, to make a donation, the difference between being a non-profit is probably worth about 45%. Meaning: if I, Mr. Wealthy, give you $1,000 -- I'm out $1,000. But if I give that same $1,000 to the non-profit Domestic Violence Shelter, I'm only out $550 (because I won't pay 35% federal income tax and 10% state income tax). So if you're approaching a high-income individual, you can get twice as much money from them if you're a non-profit.

But, registering as a non-profit and getting your certification from the IRS is not easy. And, ideally, you don't *want* to be non-profit, you want to make a huge profit, right? Well, fortunately, this is a case of where you can have your cake, and eat it too. Partner with a registered nonprofit to have them extend you "Fiscal Sponsorship" and you can then solicit tax-deductible donations for your for-profit film! Look into a group like Fractured Atlas; they extend fiscal sponsorship for a very reasonable 6% fee.
http://www.fracturedatlas.org/site/fiscal/

If accepted for fiscal sponsorship, they establish a separate account for you. Your wealthy individual makes a tax-deductible donation to Fractured Atlas in the name of your project. Fractured Atlas takes 6% for themselves, and writes you a tax-free check for 94% to do with what you will.

For micro-budget filmmakers, this might be a reasonable way to raise funds without the hassles of running afoul of SEC regulations, writing a business plan, etc.

 

[Barry_Green]

3) The legalities involved in soliciting investors is that YOU CAN'T DO IT. It is 100% illegal to solicit investing of any kind in your film. Cut and dry, done and done.

This is absolutely untrue. You totally absolutely CAN solicit investors for your film, as attested to by every reasonable-budget indie film ever made. You just have to do things in the right order, which means complying with SEC rules and regulations, limiting the number of investors you solicit, etc.

 

[Gary Huff]

Thanks for the info, Barry. I think my ultimate point is that if a 20-something college student from Michigan (Sam Raimi) could end up with $100,000 in investments for his little 80 minute horror film, then why piddle around with the pennies donations would bring in?

 

[Barry_Green]

Again, what kind of budgets have been raised solely by donations?

Someone else would have to answer that; I'm sure that for nonprofit works tens of thousands of dollars are raised on a regular basis.

And what sorts of tax/legal issues were brought about from donations in the tens of thousands of dollars?

If run through a Fiscal Sponsorship, none.

If going person to person, the US Tax Laws state that an individual can freely give up to $13,000 to another individual with no tax implications for either side. A married couple can combine their gift tax exemptions to give a total of $26,000 to one individual. You can gift as much as you want to as many people as you want, but the limit is $13,000 to one individual.

 

[Barry_Green]

Thanks for the info, Barry. I think my ultimate point is that if a 20-something college student from Michigan (Sam Raimi) could end up with $100,000 in investments for his little 80 minute horror film, then why piddle around with the pennies donations would bring in?

A) because it was a different world then, and back then they actually stood a chance of making a profit.

B) because one in a million does it successfully, doesn't mean the other 999,999 will be able to.

C) I'm not sure how legal the Raimi brothers were in their fundraising. I'm pretty sure the Coen brothers' boiler room was in complete violation of SEC laws.

D) Those stories are all from 20-30 years ago. If someone has a more recent example, we're all ears.

The great thing about the Raimi brothers/Campbell example is that they went and made the Within The Woods film first, and demonstrated the ability to make a great creative watchable film. Then they put on some suits, got some briefcases, and proceeded to conduct themselves professionally in the way they raised their money. I don't know what type of plan they told their investors they had for recouping their investment, but I can tell you from years of negotiating with the wealthy, that's the #1 concern. They don't care to hear about your pie-in-the-sky "millions" that you're gonna make... they want to know how you're going to protect their money and how guaranteed it is that you're going to give them their money back. And then the millions after it. If you don't have a plan for how to protect or guarantee their money, then you're not gonna get it. Plain and simple.

As for "piddling around with pennies" -- that's what the "donate to my film" paypal button is, and I've never understood that. That's piddling around for pennies. But I believe Chamber005 is talking about getting a thousand dollars or more per person. If you work it and work it hard, I think it's entirely reasonable to think that you could get something substantial ($30k or so?) to happen over a hefty enough period of time.

 

[Gary Huff]

Someone else would have to answer that; I'm sure that for nonprofit works tens of thousands of dollars are raised on a regular basis.

I'm sure a 501C3 nonprofit can rake in the donations, but I fail to see much being raised in Chamber005's scenario where people are just giving away money without being able to take it off their taxes, or have much hope that anything will even be done with it (given that the filmmaker in question has yet to deliver anything like a feature film to that point).

 

[Barry_Green]

Then get a 501C3 nonprofit to extend fiscal sponsorship to you. Have it both ways, and rake in the donations.

 

[Gary Huff]

Then get a 501C3 nonprofit to extend fiscal sponsorship to you. Have it both ways, and rake in the donations.

In those kinds of instances, do you have to have some kind of "message" film to get the 501C3 to partner with you?

 

[Chamber005]

This is absolutely untrue. You totally absolutely CAN solicit investors for your film, as attested to by every reasonable-budget indie film ever made. You just have to do things in the right order, which means complying with SEC rules and regulations, limiting the number of investors you solicit, etc.

From a legal forum I visit:

If your investors are passive investors, you need to comply with the security laws. Whether you do this as a limited partnership, an LLC, or some other method, it doesn't much matter. Complying with the security laws is what is expensive. You do this as a limited offering under Reg. D of the federal and various state analogous statutes, you would be limited to 35 unaccredited investors, you cannot do any public solicitation. Whether your corporation signs contracts with investors, or whether the investors are members of an LLC, the security laws apply either way. For a $20,000 film, it's hard to justify the legal work necessary to comply with the law.

For the guys sitting on the sidelines, I think this is what's important. Essentially, just to be able to SOLICIT an investor you need to raise on about 20K. That's 20K that you just raised on your own that you now have gambled away in hopes that one out of the 35 persons you're legally allowed to approach will give you a shot.

And, like you said, most people here aren't making Ink and don't have Robert Duvall in their movie.

I firmly believe that if a lone filmmaker (and hey, maybe their friends would help out?) spent an entire year on the phone, knocking on doors and setting up fundraisers they could combine that 20K they already raised and could come up with a pretty significant figure -- for which they'll receive 100% of the profits and will have gotten a heck of a teaching in selling their film as well as having a long list of people who they can then send a free copy of their film to with that person's name in the thank you credits.

The Guild, an internet-based show that's now sponsored by Sprint and is the only property Microsoft has ever picked up for its Independent line of downloadable video content made it's entire first season solely by soliciting donations.

Sure, if your budget is a million dollars, none of this applies to you because you've obviously already made and sold a couple 100K+ movies and are deeply vested in the business. But for the guys trying to get that first low budget thing off the ground and are surrounded by broke a$$ relatives and broke a$$ friends, there IS something they can do about it. It IS in their control to obtain the micro budget they need to start filming.

(also cool advice on Atlas, too!)

 

[Gary Huff]

Well, I'm interested in Barry's advice of partnering with a 501C3, as it allows people to get something back with their donations (i.e. tax break). If you could pull off such a partnership, I think that'd be great! I just don't see people donating any significant amount of money if they don't get to take it off their taxes.

 

[Barry_Green]

In those kinds of instances, do you have to have some kind of "message" film to get the 501C3 to partner with you?

I'm sure that depends on the particular 501(c)3 organization you're talking to. If you want to look into Fractured Atlas*, here's a list of the films they've provided fiscal sponsorship to:
http://www.fracturedatlas.org/site/fiscal/?do=browse_projects&category=Film

*I have no relationship to, and am not a member of, Fractured Atlas; I am not endorsing them, I really don't even know that much about them, other than that I found them through a link on Mark Harris' page and they're an organization that does the job we're talking about here.

 

[Barry_Green]

If your investors are passive investors, you need to comply with the security laws. Whether you do this as a limited partnership, an LLC, or some other method, it doesn't much matter. Complying with the security laws is what is expensive. You do this as a limited offering under Reg. D of the federal and various state analogous statutes, you would be limited to 35 unaccredited investors, you cannot do any public solicitation. Whether your corporation signs contracts with investors, or whether the investors are members of an LLC, the security laws apply either way. For a $20,000 film, it's hard to justify the legal work necessary to comply with the law.

Agreed. But the point is, it's in no way illegal. You absolutely can structure things in such a way that you can comply with the law. Impractical, perhaps, but not illegal. Film investment solicitation is done all the time, and if you comply with the laws it's a perfectly legit way to go, and can result in raising millions of dollars for independent film. But only if the plan and individual track records justify such an investment.