North Carolina is developing a reputation as a nurturing ground for new, independent filmmakers. Jim O’Brien, an attorney with Poyner & Spruill, L.L.P., is one of the few attorneys in the Southeast who has an established practice in the area of entertainment law. The following are a series of questions presented to Jim with respect to when and under what circumstances an independent filmmaker should engage the services of an attorney. The questions, along with Jim’s answers, appeared in an issue of Behind the Scenes, a national magazine devoted to the filmmaking industry.
1. Independent filmmakers can obtain forms from books and revise them to fit their production. Why should an independent filmmaker spend so much of his or her budget to have a lawyer do this?
Almost all form books contain the warning that a form contract must be tailored to the particular facts and circumstances of the transaction. This caveat should be respected because forms are prepared in a factual vacuum and cannot address all of the details surrounding your film project. Also, legal forms seem to contain simple concepts that are readily understandable, but this apparent simplicity may be deceiving because the legal meaning and consequences of the language may differ vastly from the non-legal interpretation. Also, most forms are based on the laws of a particular state (i.e., the state of the author), and do not take into account differences in the law from state to state, and form books are often not revised quickly enough to address changes in the law.
The lawyer’s job does not end with preparing drafts of documents. All of the agreements, whether initially prepared by a lawyer or pulled from form books, are subject to negotiation. The lawyer brings to those negotiations his experience in the industry and his knowledge of the law to help ensure that the parties are actually achieving their desired result. The lawyer also understands how the agreements work together (from the acquisition of rights through distribution) and how changes to one document may affect another.
Probably the most complex and least understood documents prepared by the lawyer are the offering documents used to raise money for film projects. These “private placement memoranda” must contain certain information required by state and federal securities laws. These laws are frequently revised and, therefore, the information requirements often change. Failure to make the proper disclosure in these documents may result in personal liability for the producer, and the lawyer can help ensure that such liability is avoided.
Finally, apart from preparing and negotiating contracts and other documents, the entertainment attorney serves numerous other purposes, including advising on matters of corporate structure, distribution, general business matters, copyright and music clearance. Also, since the lawyer is handling the legal and certain business issues involved with the film production, the creative participants are free to focus their time and energy on their artistic endeavors.
2. How early in a project should an independent producer contact an entertainment attorney?
A lawyer should be involved as soon as possible in any film project because it is generally less expensive and time consuming to hire a lawyer to help prevent problems than it is to hire a lawyer to solve a problem after it arises. Also, the lawyers involvement in the development stage may be only peripheral and, therefore, more cost effective.
3. What is the first legal document an independent filmmaker should have prepared?
The first document prepared by the attorney will probably be either an option agreement to acquire the underlying literary property or screenplay, or the organizational documents for the production company. Many times, the screenplay is already owned by an individual filmmaker who will become the principal owner of the production company. In such a case, the lawyer’s first act will probably be forming the production entity. Most North Carolina films are produced through limited liability companies, which are hybrids between corporations and limited partnerships and have many of the favorable attributes of each. A limited liability company is formed in North Carolina by filing Articles of organization with the North Carolina Secretary of State. Other documents, such as an operating agreement, which governs the operation of the company and how funds are allocated and distributed, will be prepared later.
4. How much does it cost to have all the legal work prepared and executed by a lawyer on an independent film?
Legal costs for serving as production counsel and preparing and negotiating all the agreements involved in producing an independent film may range between $10,000 and $30,000 (and higher). Most low-budget filmmakers, however, cannot generally afford amounts at the higher end of this scale and, therefore, the filmmaker should look for an attorney who is willing to agree to a reduced fee, for instance, between $10,000 and $20,000, plus perhaps a percentage of profits. The filmmaker should keep in mind that the lower the fee up front, the larger the profit participation will be. The filmmaker should also recognize that the attorney may invest substantial time and effort in a project that may never be produced or distributed, and the attorney may not receive any compensation above his up-front fees.
5. What scale project (e.g., short, feature, etc.) should constitute hiring an attorney?
This is usually a matter of personal risk aversion. Of course, a micro-budget short, while raising the same basic legal issues as a feature, does not generally warrant the expense of an attorney. However, if you are raising money from private investors, a good rule of thumb is that a lawyer should be involved if you cannot afford to pay back those investors out of your own pocket. This is because raising money from private investors usually involves the sale of securities, and sales of securities are highly regulated. If you sell securities without complying with the securities laws, and your investors are not repaid through the exploitation of the film, they may sue you personally and collect against your personal assets.
6. Does the filmmaker have to pay taxes on money raised that will be paid back?
Cash raised from private sources that is invested in a production company is generally not taxable since such money is considered a contribution to the capital of the production entity.
7. Are most loans through private parties interest-free?
Commercial loans on independent film projects are not common. Many lenders require collateral for their loans and most independent producers do not have sufficient collateral to secure debt. If a commercial loan is obtained, it will almost never be interest free. Many filmmakers do obtain loans from family and friends, and these loans are often unsecured (that is, no collateral is required) and interest-free. However, if the repayment period exceeds one year, the IRS will generally “impute” some interest and such imputed interest is probably taxable to the lender. Interest-free loans from outsiders–people who are not family or friends–are generally not interest free.
8. Can a North Carolina-based production utilize an entertainment attorney whose practice is outside of the state?
Using an attorney who is not licensed to practice law in North Carolina for a North Carolina production carries risks for both the attorney and the production company. First, an attorney who is not licensed in North Carolina is prohibited by statute and ethical standards from practicing in North Carolina. Any unauthorized practice of law may lead to sanctions against the attorney both in North Carolina and the lawyer’s home state.
Second, lawyers from outside the state are almost always less qualified to advise on matters of North Carolina law than attorneys licensed in North Carolina. A North Carolina production often enters into numerous contracts, each of which will likely be governed by North Carolina law, and a lawyer from New York or Florida is not qualified to advise the production company on the effects of North Carolina law on those contracts. Furthermore, most production companies in North Carolina are organized as North Carolina limited partnerships or limited liability companies, and the rules surrounding the formation and operation of these entities are governed by North Carolina law.
A North Carolina attorney also has the advantage of knowing what local investors are looking for in making investment decisions. Local lawyers are better equipped to know of changes in North Carolina law that affect filmmakers and their contracts. They know how to identify and qualify local filmmakers and their investors for state tax credits and other investment incentives, all of which may not be known to attorneys from other states.
At the very least, the outside attorney should associate with a local attorney, and all questions relating to North Carolina law should be presented to the North Carolina lawyer before action is taken.
9. In what way should an independent filmmaker expect an entertainment attorney to become involved in the actual soliciting of funds for production?
Outside of a few entertainment attorneys in New York and Los Angeles who “package” films projects (and receive huge fees for such services), few attorneys engage directly in soliciting funds, particularly if the money is being raised through the sale of securities. As many filmmakers know, raising money can be a full-time endeavor and an attorney’s time is usually better utilized advising clients on legal matters than seeking to obtain financing on behalf of clients. However, some attorneys are involved in recommending projects to distributors in hopes of obtaining financing through pre-sales or negative pick up deals, and other attorneys may recommend projects to funding sources who have expressed an interest in film investments.