In episode 5, I speak with Patrick Alach and Mick Longo from http://www.lallp.net/ on all legal aspects of filmmaking.
In this episode you will learn:
- Why do we need lawyers?
- Arent lawyers just stubborn and very expensive?
- What legal work do we need to have when making a movie?
- What is proper legal representation?
Full transcript of interview below
Thomas: Hello everyone and welcome to Podcast Episode number five of the Smart Film Income Podcasts and this is the Podcast where we speak to smart and innovative people in the film industry to talk about everything that film makers need to know, and today we’re going to talk about a subject that many people start rolling their eyes when you mention it. Or some people think that it’s a little bit of a waste of time but it’s nevertheless very, very important. We’re going to talk about legalities and the legal end of how to be a film maker. And to help me with that today I’m speaking to the people that I use, which are two wonderful gentlemen by the name of Mick Longo and Patrick Allack.
Guys thank you so much and welcome to the Podcast.
Patrick: Thank you Thomas and hi everyone.
Mick: Thanks for having us Thomas, hello.
Thomas: Hello. So – Legal and legalities. Is it true that people start rolling their eyes, or is it just my presumption about that?
Patrick: Well ah, just to clear the air here, I have to give an obligatory disclaimer! Which is that whatever the audience hears today from Mick and I, even though we are lawyers, is not intended to be legal advice and to the extent that you have any legal issues you should consult with attorneys that are in your jurisdiction to make sure that you are getting the proper advice. So yeah, I have to say that unfortunately which is probably an eye-roller right now!
Thomas: That’s a good start! That’s a good start! We live in a world – that’s funny, that’s a good start, the way to do it, because we live in a world where you have to have these disclaimers. We live in a world where you have to protect yourself and we can talk about this thing in the world, this is the right way to do things or not, but just by saying that, you have to do that because you have to protect yourself because otherwise someone comes and says ‘Well there’s this Podcast and these two guys said so and said so, and you could be in deep waters right?
Mick: Yeah, sure.
Thomas: Okay so let’s start from a film maker point of view. So most people – ah film makers, are – some are aware that they have to have a company but some don’t and I’m sure that some of the listeners don’t have their own legal entity set up so why do we need to set up a legal entity and why do we need to protect ourselves?
Mick: Yeah, well there’s — you know there’s a number of benefits Tom as to doing that. First and foremost, the legal entities such as a limited liability company or other forms of corporations are used as the vehicle to house the intellectual property rights that the film makers will be creating through the film making process. So that’s a huge piece of this, otherwise if you get into contractual relationships with people and you’re using your own name, you would have the intellectual property rights but nobody else would. So this is an important vehicle to establish who owns the intellectual property and often times there’s more than one person that would be claiming an ownership stake.
The second real benefit of having the corporate structure for film making is you can acquire a sense of protection from liability if you’re in the corporate formalities which means if you’re making sure that your corporation is well funded and you’re making sure that you honour the intent of the law as it pertains to corporations, you might – if you get sued unfortunately – you might have the ability to not have your personal assets jeopardised by the law suit. The Corporation itself would be the entity that gets sued.
Another benefit is when you court investors, you have the ability to have them finance the film through the operating agreement which is the governing document that spells out the relationship of the producing team and the investor team and you can then open a bank account in a corporate name where you can hold funds as well as entice investors by spelling out the relationship that they would have with the company in terms of the returns on investment and generally speaking, it’s a streamlined and more efficient way of conducting business than to do it without a corporation.
Thomas: Yes absolutely. So one of the things that I’ve heard is that some people when they do a crowd funding campaign and it’s typically first time film makers who haven’t ventured out into film making necessarily before and they go out and do a crowd funding campaign and they’re lucky or good enough to raise $50-$100-$150,000.00 and that’s – it’s a nice amount of cash for any human being of course and also for a company but if you start receiving that on their personal end, through their personal PayPal account and it goes into their personal account, the Tax Authorities, no matter what country you live in – most likely will say ‘Oh that’s a very nice personal income you’ve got there, now hand over ‘X’ amount of percentage because we’ve got to tax it against you whereas if you had it registered as company, it will go into the company and you have different Tax laws that takes different rules when it comes to a company.
Mick: Without a doubt.
Patrick: Yeah absolutely.
Thomas: Yeah so in terms of setting up a company to protect yourself and also to allow to share some – typically on a film you have multiple investors. This could be a deal you strike with a Director, it could be a Financer, it could be the cast and crew who all want to have a piece of the film depending on how you set it up, so it’s a way to structure that the film will have its own life that no matter what happens to you or happens to everyone surrounding the film, some legal entity will hold the rights to the film.
So let’s go a little bit deeper. So let’s talk about the financing part of it. Let’s say you do go out there and you find an investor. You have this great, amazing idea and you manage to attract one of several investors. What’s the right path and right approach to – you mention that you – you talk some about becoming part of the company, but what’s the right approach to do that?
Mick: Well, you know, the investor rules are somewhat complicated and they vary among States in the United States as well as some other countries in the world so one of the first things you have to keep in mind is complying with all the applicable laws. One of the big laws in terms of investment raises is the Security and Exchange Act of 1933 which governs the ability of how you go about raising funds. And now that there’s been a recent amendment to that which permits certain crowd sourcing capabilities which is actually very promising for independent film makers to the extent that you are approaching single large investors in the sense that you’re requiring multiple millions of dollars for your film, you have to be sure that you’re complying with the loose ‘Guide Laws’ as they’re called in each State as well as the SEC rules regarding investments and the best way to do that obviously, is to engage Counsel because there’s a lot of pitfalls if you don’t do this correctly.
Mick: And a number of which could be forfeiture of the investment, potential criminal liability, civil liability, you know, the SEC takes it’s regulatory schemes very seriously and the intent of those schemes is to prevent fraud. So one of the first things you have to keep in mind is to be very transparent with the investors. Do not mislead them. Provide them with as much material, information as you are aware of in terms of how the investment’s going to be treated; and engage Counsel, which usually entails, depending on the type of raise, you know, having them draft what’s called a Private Placement Memorandum which spells out the general project, the business structure of the entity that will be housing the intellectual property rights, the nature of the investment and how any types of return on the investment will be relayed back to the investor and it also spells out the number of risks, part of what film makers need to be cognisant of is when you make an investment pitch, you know, you have to disclose risks and the film industry, in terms of investment standpoint, is a high risk environment. There’s a high potential for return.
Mick: But it’s very high risk and the last thing you want to have happen is ensure an investor that ‘Oh we’re going to make ‘X’ number of dollars on this film’, have them rely on that advice and then realise that the film didn’t even get made and their investment is gone and there’s no chance of recoupment. It’s really important to be up front and frank with your investors/groups, and a lot of them, if they’re experienced in the film industry, are aware of these types of risks but it’s also important to make sure that’s on paper, that you have disclosed those risks to them.
Thomas: Absolutely. And this whole client – sorry this whole relationship with investors, it’s just as important that you have clear communication rules of not so much what you can say of course, it’s also important historically, that everything is spelt out in this private place memorandum that takes care of any things that might happen down the path so that people know what to do when certain things happen. Because, as you mentioned before, sometimes, despite the best efforts of everyone involved, the film never gets off the ground or does get shot, only gets half made or does get made but then you can’t find money for the post-production or goes over budget – I mean we’ve all heard, or been part of horror stories of the film making world because it’s making a film is such a huge collaborative effort with so many different moving parts and it’s just one part sometimes breaks down then the rest of the film can fall off. I mean it’s only as strong as the weakest link the chain.
Patrick: That’s absolutely correct and at the end of the day it’s not like a house. I mean if you purchase a house there is still some remaining value even if the market takes a dive, you will still have an asset that’s sellable. You know, film is essentially an empty asset until it’s completed. You know you can get a certain amounts of footage but until you put that together and edit it and splice it in a way that’s viewable, you really don’t have any value left aside from the raw materials that the company owns to make the film. So from an investment standpoint its unsecured and then that lends itself certain level of risk but also, and this goes back to why you need to be up front about these risks, if something does happen, and any number of things can happen during a film production to either prevent the film from being made at all or increase the cost of the making of the film substantially, if you are up front with the investor at the beginning about those contingencies that might happen, when they do happen, if they happen, you know, you’re not going to have egg on your face ‘what’s going on here.’ Go ahead Mick.
Mick: One very important thing to remember is — not that I’m pitching or on services or anything, but it’s really important to engage counsel at the inception of the project life in creating a film, because often times people will go and take in money from friends and family and several other investors that they may know at an arm’s length and they can get into a situation where, as it happened to one of my clients recently, they don’t have enough funds to actually finish the project, they get to a point where they start seeking real investors and they haven’t done things properly from the beginning and then the people who actually are, sadly, investors, and actually know what they are doing in the business world, will look at that setup as, you know, completely incompetent and they won’t give them the funds to finish their projects and like that said, you then you have this empty house sitting there and it’s all because people sometimes don’t really think that legal is all that important and they’re just like ‘Well I don’t want to spend the money on that now’ or ‘I don’t want to think about that now because I want to get this film off the ground’ but what ends up happening is they could end up shooting themselves in the foot down the road because they don’t have everything on line on what it needs to be.
Thomas: Absolutely, and this is why I want to do this Podcast because as boring as it can seem to some people, it’s such a necessary thing to do and it’s just making sure you get all the ducks in the row. So let’s talk about what investors can do or what the company can do to make sure that if the film, for some reason, hurricanes, storm, water, flooding, actors walk off the set, the Director has a mental breakdown, I mean, you name it, we’ve all heard the stories. So can you guys talk a little bit about Completion Bond Guarantees and how that puts in – what – you know anything about the cost and how that can help get a film made.
Patrick: Well the Completion Bond Guarantees is essentially insurance which allows – if there are contingencies that require the film to debort or increase the cost of making the film, you can get insurance policies against those contingencies which would essentially help you finish the film. So that’s a really important thing. I mean it’s obviously not a cheap insurance policy but it’s actually a very good way to protect yourself from the unforeseeable events that might arise that would prevent you from finishing the film.
Thomas: And many investors require a Completion Bond Guarantee – will not put money in unless there is a Completion Bond Guarantee because at least that makes sure there will a house at the end of the film making process as, saying, a symbolic value, there will be house, now whether it will be sellable or not, they will go in, they will take over the film and they will make sure that the film gets delivered that is in, you know, sellable or at least can get the level to all the potential partners and investors who put money into the film. Do you know anything of what it costs, approximately, for a Completion Bond Guarantee or does it vary too much?
Patrick: It really does vary Thomas. You know it really depends on the size of the budget so I think, you know it’s really hard to give you a hard number and different companies charge different fees.
Thomas: Yeah. Okay. So, yeah. So let’s talk about dealing with cast and crew and talent and how they are privy to the legal setup of a structure and also when you talk about setting up a company, you set up a company of course for whoever is out there, presuming you each have your own company, but then you talk about setting up a separate vehicle just for the film right?
Patrick: Yeah, typically each film itself, should have its own company. So you know, often times, a Producer or a group of Producers will form their production company, but in terms of the film itself, the film itself should have an actual entity that is holding all the intellectual property of the film as well as the entity that’s contracting with all the talent and crew. And another sort of core area – what Mick was saying about – it’s really important to get this stuff squared away upfront – is A) You have to have the rights to everything in the film, in the company’s name and anybody who contributes any type of creative input on the film is acquiring rights to that work. So if you have actors that are performing, their performances could be protected under copyright in their name and unless you get that assigned to the company, they may have a claim against the film on a copyright basis. Or even invasion of privacy basis, depending on the scenario, so for any type of creative contributions, and usually you just want to do this across the board for everyone, you have assignment of rights to make sure that the entity that owns the film has all the rights and needs to move forward.
And another issue that might happen, and we’ve been experiencing some of these situations, the film makers don’t like to pay for legal and that’s understandable. It’s not a glamorous cost, but the reality is if you shirk that cost upfront and complete a film, then you have a scenario where there’s a serious disparity in leverage. If you have a lead actor who hasn’t signed any contracts and then realises that the film has been edited and it’s ready to get distributed and the distribution company needs to see the chain of title showing that the production company has all the rights to the film, well what does that do to the actors, you know, leverage. They say ‘Well you know, you need my sign off in order to sell this film so I’m going to do whatever I can to get the most out of this deal and that leverage might not exist at the beginning if you make sure that the actor is signed off on the documentation prior to filming. Otherwise, if you do it after the fact then they can ‘hold the film hostage’ essentially and tie up the entire distribution scheme unless you’re willing to meet their demands. That’s really something to keep in mind. You do not want to put the production company in a scenario where it invests a substantial amount of money and then have a ‘loose end’ where somebody can hold the film hostage and sort of exact it or very higher fees than what they might have gotten otherwise.
Mick: Unfortunately it happens all the time Thomas.
Thomas: It does happen all the time.
Mick: All the time.
Thomas: And it happens more than you know and it’s scary and one of the examples that I have from my life is one of my friends who’s – a while ago he made a film with his friends and they were just mucking around, they were just shooting a little bit here and a little bit there but eventually it got turned into a film and two of his best friends, actually several of his friends, the friends happened to be Leonardo De Caprio and Toby MacGuire and what’s this guy name from Entourage, ‘E’ – what’s his name – anyway he’s – Kevin Connolly I think his name is.
Thomas: Anyways they were all hanging out because they were friends and my friend started shooting this film which got turned into 18:18 ‘Dylans Plum which is a famous film that – it got shot down because one of the bigger stars didn’t want the film out, the management – I’ve got to be careful what I’m saying here – I had nothing to do with it much so – but the management of one of these stars did not want the film to come out or as there were no paperwork because they were just mucking around, just having fun but it started turning into a film and not very – very well done, very nice film and one of the star’s representation shot the film down because there was no legal entity they could do that and because there’s no legal entity suddenly everybody started claiming they had the rights to the film and so it got stuck in this ‘legal limbo land’ and the film never officially got made because there was no legal entity to have it. But the film got finished outside the US and was allowed to be sold outside the US but could never be sold inside the US. So it got rescued but there is still a little bit of legal limbo land and well, it’s not ‘legal limbo land’ in the US because it’s actually forbidden, it’s absolutely illegal to have it in America so yeah, that’s a structural way, you start out as friends and everybody has the best of intentions but suddenly, because there is no agreement, in a written form, there might be a verbal agreement, there might have been agreements that had been set earlier on but that doesn’t count because you need to have something in writing and that was never set up and it cost friendship and it caused a lot of pain and agony and a lot of fees to fight and to protect and to – yeah. So that’s just a scary scenario.
Mick: One thing I always fear Thomas, from people who are starting off in the film industry, they’re usually doing projects with their ‘best friends’ and when they come to me and ask a question, like ‘Do I really need to set up this company, do I really need to have these agreements in place’, you know like ‘We’re best friends, we’ve always done things together’ I say ‘Listen, everyone’s best friends when there’s no money involved and nothing is going wrong in life.’ I said ‘Wait until this project becomes something and one of your friends either A) wants more money, B) doesn’t like how it turned out or C) just you know, for some reason, doesn’t like you anymore – then you’re going to have a major problem.’
Thomas: Or doesn’t like the film, or doesn’t like the way they’re portraying the film or doesn’t like the Senior Editor, they were promised this, they were promised that and they can say ‘Well I didn’t sign up for this, I was told something else.’ So yes.
Mick: We’ve seen so many friendships go under during that period of time.
Patrick: And that’s another point, you know especially with the town, apart from potentially to just seeking an opportunity to gain more financial benefits if you don’t have an agreement, they might not like the final cut of the film. You know, they might disagree with the editorial choices, they might disagree with certain aspects of the director’s vision and if you don’t have the freedom as an Editor and Director to cut the film as you see it, an actor without a contract can really actually give you a serious, serious amount of problems because you then have to recut the film, that costs money and you’re actually taking away from the Director’s vision. It’s super important to get that stuff paperworked.
Thomas: And this is what happened to my friend. In that case that’s yeah – anyway!
It is very important that things get set up the right way and my first film made which was – what I produced – I was underage and very naive and all that ‘happy go lucky.’ We made a film and we did not have the rights – did we have the right legal entities set up? I think we just – you know one thing we started shooting and then one thing lead to the next and suddenly we had feature film and suddenly we got some more serious public funders involved, we had to set up some the right legal structure because otherwise we could be in trouble further down the line because suddenly when you go in and you start doing deals with distributors, who have got to do deals with theatres or you can deal with a Sales Agent who then deals with other Distributors – they want to make sure that what they buy is a real product that cannot come back and bite them later on.
Patrick: That’s very true Thomas and for the film makers out there, in order to get distribution or even really engage Sales Agents, they do what’s called a ‘Chain of Title Search’ which is due diligence to make sure that all of the rights that need to be in the Production Company are in the Production Company. So that means every single person on the film has to have transferred all of their intellectual property rights and other rights to the Film Production Company and if they didn’t, you’re going to have really, really difficult, if not impossible time getting distribution which is obviously the end goal for all film makers. So, you know, you’re going to have to do it one way or another and the best way to do it is at the beginning.
And one more point regarding trade relationships, having a well drafted contract is actually functioning as a means to resolve disputes quickly and efficiently because if you anticipate certain issues that might arise throughout the film making process and even if there might be some dispute, you can point to the terms of the contract and often times resolve the dispute right then and there because it’s already spelt out. So it actually acts as a guide post in the event that something happens where two people disagree, then you can consult the contract and see what the outcome of that disagreement should be and, because both parties signed it. You know there’s no hard feelings. You know, Term Six says this and that’s how it’s going to be. You sign the agreement and that’s how it – and you just move on – so it doesn’t get into this more of this grey area where people think they getting ‘slighted.’
Mick: And the classic example of that – as like we talked about earlier with the final cut, I mean people always think they have more creative input than they actually do and it’s really good to have that spelt out properly in the contract so, you know, like Pat said, you just point to it.
Patrick: Right there!
Mick: I’m the Director, I have final cut.
Thomas: I’m the Producer, I’m the owner, whoever – has that final cut.
Alright, let’s talk about – let’s move on – let’s say we shot the film, the legal paperwork’s are in place. Can you talk about what’s ‘Errors and Omission.’
Patrick: Yeah, real quick Thomas if I can just go back to the cast and crew point. Just one more point to that and this is somewhat important. Actually it’s very important. If you’re dealing with any type of Guild, you know Actors or Directors or Writers, it’s very, very important to make sure that your contracts are consistent with the Guild requirements. So the Guild’s represents certain numbers of screen actors, for instance the Screen Actors Guild. And what they’ve done is engaged in collective bargaining with the producers of studios to ensure that certain SAG members get certain minimum scaled compensation. So, you know, it’s very important when you’re dealing with any type of Guild member to consult with your Counsel and to make sure that your contracts are reflecting the Collective Bargaining agreements that the Guilds have negotiated and to the extent that you don’t, you could have some very, very serious problems. I’ve become privy to a number of Yahtzee issues lately where Yahtzee represents a lot of the crew on films and to save a buck the producers don’t pay union wages on a film that should be paying union wages and Yahtzee will come in and shut down production.
Thomas: Yeah that’s not fun.
Patrick: No and not only is it a destructive situation to begin with but you can get a bad name for yourself. These things can haunt you especially if you don’t have the foresight to know that you need to make sure the Guilds are adhered to. So it’s really important to keep that in mind as film makers. If you do have Guild people or a film that should be unionized, you make sure you do that just so you don’t have any problems with the Guilds.
Thomas: Yes, and of course, when I was listening to this, it’s as Patrick said earlier, each country has its own rules and legislation and that’s why you need to have legal representation or can talk about what is current in your own country because what we’re talking about here is, of course, generally for the United States where Patrick and Mick operate. That’s a very good point, thank you for spelling that out Patrick.
Now could you talk about what Errors and Omission is?
Patrick: Yeah, Errors and Omissions is an insurance policy. It’s usually, if not always, required by Distribution Companies.
Patrick: And what it means is, in the event that there are gaps in the Chain of Title that weren’t discovered, meaning somebody didn’t get the rights that needed to get or if there was a competing copyright, for instance if your film is similar to some film that you didn’t know about it another country and the then sue against your film, that stuff is covered by Errors and Omissions insurance which essentially gives you the ability, for a premium you can get Counsel to represent you in the defence as well as liability coverage in the event that you lose the suit or have to settle a suit. A lot of times Distribution companies want a million dollar and three million dollar range on the Errors and Omission insurance. And it’s not terribly expensive to purchase that but you know it can range from $1000.00 to $2000.00 for a term and various companies offer that so it’s really important to make sure, when you get to the level of distribution that you get the Errors and Omission insurance.
Thomas: Yes, absolutely. And can you just mention the Chain of Title? Can you just talk about what that is actually?
Patrick: Sure. As I mentioned earlier, every person that works on a film acquires some rights in the film. You know, prominently the writers obviously have rights to the script, the director has his rights regarding the creative contributions with shooting. The Director of Photography also has rights because he’s pointing the camera. The Actors have their rights because they’re acting in the film and their performance is protected under copyright. So that a lot of individuals on the film, individually, have creative rights to the final product. So you have a group of people that each have pieces of the overall ‘intellectual property pie’ that you need to make sure it’s assigned to the company. And what the Chain of Title means is that you can look back through the production and make sure, along the way, that the production acquired all the rights so that once the production licenses the film to the distribution companies so that it can do what it needs to do because it ultimately needs the rights from the production companies to do that, it’s not going to be exposed to liability from the director or an actor, or director of photography, later on because they didn’t give up the rights to the film and then have rights to the film. So it’s making sure that all rights are transferred and when you get to the point of licensing the film to distribution companies, that they have the actual licence to the film and there is no loose ends.
Thomas: Absolutely. Absolutely. That’s very important. So let’s talk about getting distribution deals. So, of course, that’s – as you said before Patrick – actually well said – is that at the end goal of every film is of course get an audience. Find an audience whether it’s cinemas or through TV or its online or its in DVD’s or whatever platform there is out there that will be in the future. You need to get it out there. So there are certain companies that can help you sell it. There are certain companies that can help you manage it or agent in a film to get it in front of the right people. How do you protect yourself to make sure that A) you get money and also your investors are paid back? How do you make sure that the sales company don’t run off and all of a sudden they close or – how do you – what kind of things can you protect yourself just, it sounds like we have to protect ourselves all the time, but as a producer, a film maker, you have the responsibility to make sure that the film is protected the best way it can be?
Patrick: Yeah, there’s a number of points to unpack and I’m not going to be able to give an exhaustive list of everything you should be looking for but on a top level, you want to make sure that the term of the licence is not excessively long. One of the things you need to pay attention to in these types of scenarios, especially in Sales Agents scenarios, is not giving them the right for 15 years to sell the film because you might not think that they’re doing a good job but then you’re locked into another 15 year term. So, at least initially, and a lot of Sales Agents agreements provide for this, where they have the option to renew the term, but you want to try to get a smaller term, in the single digit years. And then, if you like what they’re doing then you have the option to renew that agreement as it is for another term and sometimes for a third term. So it’s really important to keep track of timelines especially given the scenario that you might not like the performance and another caution which, generally speaking, is whenever – a lot of times we get approached by people who say ‘Oh I don’t think anything is going to go wrong, he’s a great guy, I think it’s going to be swimmingly good and why do I need to worry about all this?’ Well, when you approach a contract you really do have to anticipate every possible nightmare that could possibly happen, even if it might not happen. A lot of contractual relationships go off swimmingly well but when you look at a contract you have to look at it as if the apocalypse is coming on your right now and prepare for it. That’s what that document is assigned to do. If the apocalypse happens, are you going to be able to get out of it or move on?
So terms are very important. The percentages, in terms of what they get paid, obviously are negotiated. But in terms of Sales Agents and Distribution companies, a good way to protect yourself, especially if you’re a United States film maker and doing foreign sales, is to use what’s called a ‘collection account.’ What the Collection Account does is to make sure that any distribution agreement that the Sales Agent doing foreign sales gets into, they direct all their funds into a neutral third parties collection account. So the Sales Agent isn’t the person handling the money. The Sales Agent directs the distribution companies of foreign countries to deposit those returns into a collection account and then the collection account management would actually enforce the terms of those foreign distribution deals which is incredibly good service. Any time you do foreign distribution as a United States film maker, you should always get a Collection Account. They usually a percentage on returns but it’s money well spent because otherwise you will be in a scenario where you are going to have to find a lawyer in Germany or some other country to bring a suit against somebody and that’s practically a very significant hurdle. But the collection accounts will make sure that you get paid.
Patrick: And then you avoid the issue of having a Sales Agent taking the money and absconding with it. So it’s a very important device to make sure that it’s in your contracts. So it does have the fee attached to it but really that is money well spent.
Thomas: Absolutely. I can – speaking as a former Sales Agent and as a Film Producer, I can definitely attest the – to agree with what you’re saying Patrick. This is something that people need to enforce or at least try and negotiate that there is this collection account management agreement and the using a third party collection agent because even the best time or worst of times, sometimes sales companies go under for one reason or another and suddenly you are – which I’ve seen happen in the end – the sales company cannot pay its bills even though on paper it might be successful, it might not be successful. And suddenly your rights to your film is stuck in the legal entity that is fighting to get away from his creditors or try not to go under and you can’t get your film back because before this whole mess has been cleared up from a legal point of view and that can take years and meanwhile you can’t sell your film, you can’t move it anywhere else. So that’s one scenario where at least if the money that arrives doesn’t go into that ‘hole’ that is a bankruptcy, the money will flow into a third party collection account and will get distributed upon the collection account management agreement that everybody set up in the beginning and there are several great third party collection agents out there and I’m a big fan of a company called ‘Fintage House.’ They’re based in the US and Canada. I think they’re originally from Amsterdam. They’re in Hungary, they’re in – actually they are everywhere! They’re really good and they charge between one and two percent, so that’s something that’s really worth looking into.
Speaking of Sales Agency Agreements. Absolutely! I would encourage everyone to – when they do start talking to a Sales Agent to first and foremost speak to some of their current clients and what you want to find out is do they pay on time? Do they do reporting on time? Because many Sales Agents are really good at selling but they’re not so good at reporting and what’s the point of selling you – getting the reports when you can’t get your money? So always get a couple of references that they point out but also investigate, find some of the films that they’re representing and contact those producers and ask ‘Can we trust this Sales Agent?’ because you’re literally giving your baby away to someone else and if they don’t do as they’re supposed to do then what do you do?
So that is the first thing I would definitely advise. The second thing is, normally when you sign with a Sales Agent, a foreign Sales Agency, normally between seven and ten years, some are a little bit less, some a little bit more. And seven years can be a long time if they don’t perform so you want to make sure in the contract that if they don’t perform – any sales agency company will come and tell you ‘Oh we think we can sell between this much and that much’ and they will basically pull out a spreadsheet with some numbers on it and they will put in some dollar signs for every country on the planet and there won’t be a lot of money on each country but suddenly you start adding up – it looks really nice and there’s a very convincing piece of document. So what you want to say is ‘Well this looks really good, we would like to sign with you guys but if you don’t perform 30% or 20% or 25% of these sales estimates within one year or two years – then the contract will automatically be void or we can cancel and walk somewhere else because the last thing you want to do is be – Sales Agents are – I can talk about this because I was a Sales Agent myself and I have a lot of friends with those Sales Agents, so what you need to be aware of is the way the Sales Agents operate. Sales Agents make money every time they sell your film. They make money from the minimum guarantee that the distributor will pay to your film and a Sales Agent typically brings between four and ten, twelve films to each market and there are a couple of markets throughout the year, distributing starts in Sundance or Rotterdam then it goes to Berlin then it goes to Cannes and then you go to Toronto, even though it’s not a real market but definitely there’s buying and selling is definitely happening up there. So you have all these places where you can sell your film but if your film is not among the ‘hot’ films in Berlin or Cannes or Sundance or wherever it’s happening, and you don’t make any sales in the first market, the second market you’ll probably make even less sales. By the time it’s the third market they’re not going to push you because they already have the next waves of films coming in. Next waves of films coming, suddenly you’ll be stuck in their library. When you’re stuck in a library, you can’t get out because you are just sitting there and they’ve already spent all this time and money and energy on you but they don’t want to spend any more time selling you because they’re not making their money back and you can’t get your film out so that way to protect yourself is to make sure that they perform. If they don’t perform, you can get your film back. And also a word of caution, because we live in a world that is very globalised now when it comes to the internet, and many Sales Agents are really good at handling theatrical rights, TV rights and DVD rights but they’re so good at handling internet rights because as soon as you get into the internet things, there are different platforms and if they start giving global rights away to – let’s say Netflix or to ITunes or whatever it might be – then suddenly they can’t sell Hungary because they’ve given away the internet rights and the Hungarian industry don’t want to buy it because the internet rights are gone. So it’s a very ‘mix and match’ of how to do it and so many Sales Agents won’t touch – they will take the legal rights away from you to the internet but they won’t sell it out, you know, pieces of – many times films are not fully monetised online the way it should be and one of the things we have the piracy, is that often – and I’m not in any way defending piracy here but many times people complain about piracy, you can’t even find their films sneakily online and you cannot complain about piracy if your film is not available in every territory on the planet, it’s not available online. So that’s just some of my thoughts when it comes to Sales Agents when it comes to dealing with your foreign rights. And it’s, I know this can sound a little bit boring or a little bit ‘Oh my God, all these worst case scenarios’ but it is really, really important if you want to have a career and you want to have a successful career where you go from one film to the next, is to make sure all your ducks are in a row. It is just extremely important, that’s why I’ve dedicated a whole Podcast to this very important talk.
Sorry, I just got a little bit of tension there!
Mick: I enjoyed it! I definitely did!
Thomas: Well thank you so much!
Patrick: Well as a fall plan and there’s two – there’s a few more really big points when you’re dealing with Sales Agents and Distribution Companies. And this goes back to your question of how you can start getting your investor returns as soon as possible. A distribution company sometimes offer what’s called a ‘Minimum Guarantee’ which is essentially their statement to you saying ‘We believe that we’re going to distribute this film successfully and we’re going to give you ‘X’ amount of dollars up front as an advance against future royalties on the film.’
So if you do get a Distribution Company involved in your film, always ask to see if they’re willing to provide you a minimum guarantee. And that also shows you their commitment level to the actual distribution of the film because if they don’t provide a minimum guarantee you might not be so convinced that they’re the right company for you. That’s something to look for if you do get to that point, you can ask for the minimum guarantee and see what they say.
Another major point – and this really huge, huge point – and I can’t underscore that enough – is whenever you’re getting into contracts with people that are going to be handling returns for you, always have an audit right and always have a book accounting right. What those mean is it obligates the other person to keep accurate books and records of what money is coming in and what money is going out so that you can see it and then also have the ability to audit their books and records so that you can verify that what you’re receiving is accurate.
So those two methods are very important to protect you and to give you some transparency on what’s going on with your money. And also if something turns up that’s wrong, you are going to be able to discover it otherwise you’re at the mercy of them giving you a report whenever they feel like it and you have no legal authority to go into their books and records to make sure it’s accurate. So that’s really, really important.
And the other thing would be that when you’re dealing with Sales Agents and Distribution Companies, they often times have a cost allowance. So it does cost money for them to do their jobs and that’s completely understandable and fair. But what you want to guard against is the potential for the costs to start running up to a point where it becomes economically not feasible to keep distributing the film and a lot of times to protect against that you tell a Sales Agent or a Distribution Company ‘I’ll give you a certain number of dollars to spend on marketing as well as travel etc, but you can’t spend anymore than that unless you get my prior written approval and explain to me why that’s necessary.’ And that allows you to have some control over how much is spent on your film because for some – especially in Indie films, having a prints and advertising budget of three million dollars for half a million dollar budgeted film makes absolutely no sense. So you’ve got to be very mindful of the cost expenditures.
Thomas: Yeah, I can only agree with you Patrick on that one. You really need to make sure that the Sales Agent has a ceiling of how much money they can spend because, on paper, they can produce a lot of receipts that shows this is the money they spent but they also have all these other films to spend the money on and how much was spent on one film, another film, it gets very complicated when you start going into that so we bought an app for this for a company, we have a booth, we had to fly in, we had this big dinner, we had this party, we had all these things, I mean costs can really escalate so have a ceiling in there, whether it’s $50,000, $75,000, $100,000 or whatever amount of money it is, that it’s fair in your budget range for your film to make sure they can’t spend anymore of that money because you could, potentially, be in a scenario – and I’ve seen this happen so many times – where you have a film, people really like it, it’s in the market, a lot of distributors are buying it and it’s selling pretty well. The Sales Agent take their fee which can go from anywhere to 10, 20, 30% 44:17 and then there’s all these costs associated with the film and what the Sales Agents – I’m not saying they all do – but can do, what has happened in the past, let’s put it that way, very diplomatically, has happened in the past is that they will put all the costs, all the other films, and the whole thing onto, of course, the film that’s performing the best because they want to recoup their money and so you end up in a situation where the Sales Agent is happy because they make money, all the distributors around the world are happy because they bought the rights to a film that they are very happy with but the people that actually made the film are not getting any money back because everything is stuck in this hole and they can’t get any money out and so there are – you just need to protect yourself. It’s just so, so important. I’m not saying that there are dishonest people in the film industry, that would be shocking to say it, but it has happened in the past, let’s put it that way that you are taken a little bit advantage of. So you want to – it’s tricky because we are passionate – film makers are very passionate human beings and with passion comes a lot of creativity, comes a lot of go-getter attitude to make things handle and then there might not be so business savvy when it comes to the contract side of the things. The same thing in the record industry. We’ve heard millions of stories of talented people who got caught in these contract deals because they signed them when they were very young and they didn’t have any legal representation and now they can’t get out of these deals. I saw the documentary the other day, ’30 Seconds to Mars.’ Brilliant documentary on how they were stuck with this company who just kept getting new owners all the time or investors and so everything changed all the time and they couldn’t get out of this record deal. And they were sued by the record label for $15 million dollars – $20 million dollars, whatever it was – it’s fascinating and really well done documentary. So if you want to learn more about this, at least from the creative – the artists point of view, definitely check it out – that documentary.
Yeah. I was just rambling there a little bit!
Patrick: And at the end of the day, especially when you get to the level of Sales Agents and Distribution companies, that is one of the most critical periods in the contractual timeline that you can possibly be in because that directly determines your investors return. And your return. So if you have people participating in the back end of the profit pool, the way to make a substantial amount of money is on the back end, but if you’re not going to get there unless you structure these deals properly and you also have to be very mindful to protect your investors. Not only because they took a risk with you, but if you can make your investors happy, you might have a career-long partner who is willing to get behind you and finance future projects.
Patrick: So it’s really, really – you really need to be mindful of your investors and really treat them as they deserve to be treated, which is something that’s being a philanthropist in the sense of financing the arts, helping you get your art made and try to get them as much money back as possible because if they’re happy, they’re probably going to continue to work with you in the future and as any Producer can tell you, raising money for a film is an incredibly difficult challenge so if you already have a stable of people that you’ve worked with before and had helped them become successful, that’s a huge, huge step up as you move forward in your career.
Thomas: Absolutely. And making a film is very complicated and very hard. Actually this whole thing is very, very hard. Why are we even talking about it!! No. It is a long journey —
Mick: Can I say one thing here for the investors out there, I highly doubt many investors like to be called ‘Philanthropists.’
Mick: Well maybe!
Patrick: That goes back to the extreme disclosures we need to make – that this a high risk effort.
Thomas: Extremely high risk! Absolutely, absolutely.
In terms of – I want to talk a little bit about deliverables and, again, this is the area that I spent some time in as a Sales Agent. What many Producers – this is just a little side note to the whole conversation, it might not be so much legally inclined but when you do a deal with a Sales Agent or Distributor, they will ask certain amount of things to be delivered and that’s a trailer of course, a poster that they approve. There is a soundtrack, using effects so that if you dub it in Spanish or Japanese or Portuguese then they can remove the sound, they can remove the spoken words, but they will still have all the effects and all the different sound effects still in there. And it costs a little bit extra from the sound effects point of view but it is very important to get done from post-production point of view. There are pictures, a lot of stills. You would be surprised how many breaks in the films have absolutely no stills when it comes to – and it’s hard to market a film that there is no stills. So there’s just all these things. Just be aware of early on. You got to deliver all these deliverables. You are going to have TV Masters. You are going have PALS. You going to have ATSC. You are going have all these different formats that each country requires. Just make sure that when you are in post-production, that when you barter for these things then you make sure that everything gets delivered because if you can’t deliver, then they can’t sell it, they can’t sell. You can’t make any money. And then you can’t return money to investors and then you will not have a life-long relationship with your investors, let’s put it that way!
Anything else you want to say on – in terms of if you are venturing out or you are in the middle of this – of being a film maker. You want to talk about, Patrick and Mick?
Patrick: Well aside from what we discussed, it’s just really important to budget for legal and engage legal at the earliest possible opportunity and I know that it sort of sounds self-serving but at the end of the day it really is important and a lot of film makers have the impetuous to go right in and start shooting and getting the project rolling. But that’s only going to cause problems downstream that could be far more expensive problems than making sure you have your ‘ducks in a row’ at the outset. So when you are doing your financial raise, be it through crowd-funding or investors, the first thing you really should be looking to do is cover your legal expenses first. That way you can be sure that moving forward you have your legal team in place and then they can make sure that the contractual relationships are good and you can also rest easy because you have a legal team looking over your shoulder. It’s going to be very hard to get taken advantage of because lawyers are adept at making sure that you don’t at least get a fair shake at a deal. So, that’s a really important thing to do first.
Thomas: And before signing with them you want also legal representation, again ask for some client referrals and dig into who they represent and speak to their clients – former clients and current clients. What they like, what they don’t like. And make a judgment call based upon what other people say about them and do they deliver? I mean, of course, like any business, there are good lawyers and there are bad lawyers and you want to find the ones that are really good for you and that other people recommend and they are very happy using. So yes, I just wanted to point that out.
Guys this has been a very, very interesting and good talk and I hope the people listening out there, that you take legal a little more seriously than some film makers do because it is so super important if you want to set yourself up for success. If you want to start off on the right foot because at the end of the day, a lot of stuff needs to be done in terms of getting a film out there and if you haven’t started doing the legalities to begin with, it’s going to be so much harder later on. Now that being said, you can still go and get legal representation halfway through or towards the end but the earlier and the sooner you do it that the better it certainly is for everyone else. But you definitely want to make sure that all – everything is covered otherwise it’s very hard to sell it, it’s very hard to deliver it, it’s very hard to get money in and it’s very hard to get control of your film.
Patrick: And Thomas, I just have one final point I just thought of and this is enticing for micro-budget film makers. You can shoot a film for a very modest budget nowadays, especially with the digital technology being the way it is and you don’t need to actually purchase celluloid film, which used to be a humungous cost.
Thomas: Oh yes.
Patrick: But a lot of the film makers now, you know, we’ve seen this happen, where they will go online and there are certain websites that have forms that proportability are legally valid forms that you can assign rights to companies through Actor Agreements and so forth. I have looked at those forms and they’re very problematic for any number of reasons but, to the extent that you’re trying to cut corners and use the free online forms, I would strongly encourage you not to do that because the way that these contracts need to be written is very specific. You don’t know who the author of these forms are. To the extent that you’re looking at actual contracts that were engaged by studios for instance, you don’t know what the first versions of those contracts looked like, so you don’t even really know what the opening 53.39??? in terms of the negotiation was so all you’re seeing is the finished negotiated contract so you might be missing a huge piece of the puzzle from your view. So it’s really important to get competent counsel and not really rely on the free forms that you might find on the internet or simply use the boiler plate that you might see on an executed Disney contract that might turn up. Because each deal has its own nuances, it’s own particulars and it’s really important just to avoid those traps.
Mick: Well I could definitely agree with Patrick there and one thing that I see often – one thing that actually drives me crazy as an Attorney is a lot of clients – even some of my very best friends who are film makers and know me, know what I do, we’ve been friends for 10-15 – many years longer sometimes. They’ll go on the internet, they’ll find forms because they don’t want to either A) deal with an Attorney, or B) hassle me, and then they’ll start pulling clauses from this contract, clauses from that contract, clauses here and they will come up with this, you know, Frankenstein agreement that they have created off the internet. They have no idea like how to explain who wrote it, where it came from, what jurisdiction it was for and they’ll put it together and then they usually give me a call and like ‘Hey Mick, I have this agreement, can you just look at and maybe like clean it up a little bit for me and I’ll just throw you a couple of bucks’ and I’m like ‘Are you kidding me!’ Like I get it and I’m like ‘Who wrote this?’ ‘Oh, I pulled it off the internet’ and I was like ‘No I can’t claim it for a couple of dollars, I’m going to tell you what honestly needs to happen as you need to trash that whole entire thing and I’ll write you something from scratch because it’s going to take more time, more effort and more money for me to rewrite this thing.’
Thomas: Yes. And so there’s amazing, beautiful things about the internet but there’s also things we’ve got to be wary of on the internet and like everything online, you can’t just take a picture, you can’t just take some music, you can’t just take a film down and use it, you have to have – everything has to be cleared as always and that’s why it comes down to guys like you guys and I’m thrilled to be working with you. I think you guys are very good. I’m very happy to have you here on this Podcast.
So how can people find out more about you if they want to get in touch with you after having listened and endured an hours long talk on legal things. If you’re still listening at this point obviously you must be very interested.
Mick: Yes, if their ears aren’t bleeding yet is the point! We do have a company website at www.lallp.net and on there there’s a contact section where you could write to us directly as well as make phone calls. So if you do need assistance or if you would like to chat further, feel free to contact us about your needs. We practice primarily in California, Florida and North Carolina now so within those jurisdictions we’d be able to assist you and on Federal issues we’d also be able to help you. But if you want to learn more, Mick and I always willing to take a call and help you out and see where you need to go so feel free to contact us if you want.
Thomas: Alright, and there you have it. So please them up on that if you need some legal help. So again, the website is www.lallp.net, that’s where you can find more information.
Thank you gentlemen. It was a pleasure to speak with you about the legal side of things of life and what need to be worry about. Now that being said, people need to go out there and make the best film that they can do and we learn from the time as Patrick just said where it is so cost effective now to make a film, so there’s no excuse anymore. We can shoot a film on an IPhone in 4ks, it’s insane what you can do but you’ve still got to make sure that you have the rights to this film when you’re filming people.
Alright guys. I’m going to hang up with you here and I’m going to continue speaking a little bit and then I’m going to speak to you a little bit later today right?
Mick: Yeah, thank you so much.
Patrick: Thanks a lot Thomas.
Thomas: Thanks, bye.
So there you have it, that’s the end of Episode 5 on Smart Filming Podcast. I really hope you’re enjoying listening to these. I’m sort of enjoying making them. I hope that you feel that my goal is really to share as much information to you, as many people as possible and this is one way to do it, through these Podcasts because I can to use some really smart people who can talk about various issues that we need deal with as film makers and one of my goals is to inspire you and to inform you on what you need to do and what you not need to do and I have many more Podcasts lined up with some amazing people so keep listening.
How can you find out more about me? You can go to my website called smartfilmincome.com and you can go watch one of my seminars where I talk in two hours about crowd funding and how to set yourself up hopefully to find money and how to navigate the internet order so-to-speak. It’s a free seminar. You can download it for free or you can donate what you want. Obviously I would like you to pay some money if you have no money, that’s fine, you can just download it for free. Please do that, learn some more. Or if you want to work with me I have several coaching programmes available. I have one at the moment where I can coach you for $97.00 a month. It’s 30 minutes a month. It’s not a lot but it’s sort of a way to help you and guide you through this changing world. I do have space for more clients but I do not have a lot of space and a lot time, there are only limited spots so please go and check that out at www.smartfilmincome.com.
Until next time we speak, please be good and go and make some amazing projects. Thank you so much. Bye.
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