Presentation on the legal issues in forming a film company, shooting and marketing a film

1. The Legal Side of Filmmaking
Gregg P. Skall
Womble Carlyle Sandridge & Rice LLC

2. Choosing and Entity For Raising Capital
C Corporation
• Double taxation
• Many set laws and rules for structure and governance; very little flexibility
• Most familiar to VCs and institutional investors
S Corporation
• Pass-through tax treatment
• There can be no more than 100 individual shareholders (no corporate shareholders)
• No foreign investors permitted
• There can only be one class of stock (although voting and nonvoting classes are permitted)
• You must elect to be taxed as an S-corp. (IRS Form 2553)
Limited Liability Company
• Pass-through tax treatment (though can be taxed as a corporation or partnership)
• Very flexible form
• Foreign and corporate investors permitted
• Certain types of business may not be permitted to operate as LLCs

3. Private Offerings
Friday 9:00a – 10:20a
Workshop: The Business of the Industry
• How to package your project so that it attracts financiers, backers. and an
audience.
• Bernard H. Coleman Jr., Womble Carlyle Sandridge and Rice, PLLC

4. Private Offering Overview
• All securities offerings are regulated by federal law and the
securities laws of each state in which an offering is made
• Offerings must be registered with the SEC or qualify for a
registration exemption
• Four key variables in an offering impact the availability of
registration exemptions
– The nature and size of the offering
– Persons (or entities) who sell the security
– Disclosures made to investors about the security
– Required investor qualifications

5. • The person (or entity) selling must be registered
with state and federal governments as a broker-
dealer
• unless the offering qualifies for an exemption
• State and federal anti-fraud laws
• Issuer must make available “material” information to
prospective investors to enable investors to make an
informed decision
• Failure to provide information (an “omission”) can be
material

6. Best Course: An Exempt Offering
• SEC registration is extremely expensive and time
consuming
• The issuer has the burden of establishing an
exemption
• Failure to satisfy even one element of an exemption
could destroy the availability for the exemption for the
offering
• The issuer must take care in its analysis and
verification procedures to qualify investors against
the requirements of its exemption

7. State Limited Offering Exemption
• All States: Variation on the a similar theme
• State of Georgia: Limited Offering Exemption
 Limited Offering Exemption Requirements:
 The sale and offer must be part of a single issue
 Not more than 15 purchasers are present in this state during any 12
consecutive months
 No general solicitation or general advertising in connection with
the offer to sell or sale of the securities;
 No commission or other remuneration is paid or given, directly or
indirectly, to any person for soliciting a prospective purchaser in
this state; and
 Reasonable belief that all the purchasers in this state are purchasing
for investment.
 Investor’s State of Residency Governs Offering for that
Investor

8. Variety of Federal Exemptions
• Rule 504 - $1M
 Rule 504 provides an exemption for the offer and sale of up to $1,000,000
of securities in a 12-month period.
• Rule 505 - $5M
 Rule 505 provides an exemption for offers and sales of securities totaling
up to $5 million in any 12-month period.
 unlimited number of "accredited investors" and up to 35 "unaccredited
investors" who do not need to satisfy the sophistication or wealth standards
associated with other exemptions.
• Rule 506 - Unlimited
 Unlimited amount of capital;
 unlimited number of “accredited investors” and up to 35 other purchasers.
Unlike Rule 505, all non-accredited investors, either alone or with a purchaser
representative, must be sophisticated
 that is, they must have sufficient knowledge and experience in financial and business matters to
make them capable of evaluating the merits and risks of the prospective investment;

9. Who can buy the stock under Rule 506?
• Accredited investors
– Individuals can be “accredited” by meeting one of the following
standards:
• Net worth (with spouse) of $1 million
• Individual income for past 2 years, with reasonable expectation for the current
year, of at least $200,000 (excluding spouse)
• Joint income with spouse of at least $300,000 for past two years and
expectation of such income for current year
• Be a director or executive officer of the Company
– Entities such as corporations, partnerships and trusts can generally be
accredited by meeting one of the following standards:
• All equity owners are accredited
• Has assets of $5 million and was not formed for purpose of making the
investment
• Is an IRA of an accredited investor
• Is an employee benefit plan and meets special conditions
• Is a bank, savings and loan, or insurance company

10. • An issuer must reasonably believe that each non-
accredited investor has (or, with a “purchase
representative”, has) enough knowledge and
experience in financial and business matters to
evaluate the merits and risks of the investment
• Non-accredited investors
– Recommend against offering to non-accredited
investors
• Higher burden for satisfying registration exemption
• Increased disclosure required to be distributed to all

11. Disclosure Obligations
• The issuer must provide investors with full, fair, and complete disclosure of all
material facts about the offering and issuer, its management, business, operations,
and finance
•
• Material = a reasonable investor would consider the information important in making
an investment decision
•
• Issuer disclosures typically address, using a Private Placement Memorandum (PPM)
•
• Business description
• Background of the organizers and management
• Risk factors
• Offering terms and issuer organization
• Financial information
• Rights of investors
• Transfer restrictions
• Related party transactions

12. Disclosure Obligations
• Anti-fraud provisions apply to the issuer’s offering
• Offering documents are ultimately the Company’s responsibility,
not the accountants or the attorneys, so you must make sure you are
satisfied with the disclosures
• PPMs serve two conflicting, important functions:
– Marketing the Company and the stock
– Protecting the Company from being sued if the investment is not successful
• The protective value of a PPM can be diminished if representations
are made in the selling effort that conflict with those made in the
PPM
• If a PPM is discovered to have inaccurate information or new
material information occurs, the PPM immediately must be amended
and updated

13. Prohibition on General Solicitation
• Rule 502(c) of Regulation D states:
 “Neither the issuer nor any person acting on its behalf
shall offer or sell the securities by any form of general
solicitation or general advertising, including, but not
limited to, the following: (1) Any advertisement, article,
notice or other communication published in any
newspaper, magazine, or similar media broadcast over
television or radio; and (2) Any seminar or meeting whose
attendees have been invited by any general solicitation or
general advertising…”
 Issuers cannot engage in mass mailings or conduct certain
types of informational meetings with potential investors

14. Working With Creative
Fundraising
• Raising the funds, Must have an orderly business plan:
• Who will raise the money to fund production, or finding the studio.
• Delineate how the money raised is to be shared among the tasks.
• Define the actual nature of the relationship
• Will anyone be paid salary or fees from the production budget.
• These fees may be in place of salary and/or overhead, or may be in
addition to those items.
• If the budget is overloaded with fees and salaries for the producers and
executive producers, it will be difficult to find financing.
Ownership
• Will the production be owned by Producer or Creator, or by co-production.
• How will profits be paid: Percentage – 50/50% or Commission basis?

15. Working With Creative Owners
• Assigned copyright? Acquisition of Rights
• Preexisting rights
• All Rights
• Only Exclusive Motion Picture or Audio Visual Rights
• For how many features or programs?
• Share of other rights, i.e. characters, merchandising, sequels etc.
• Commissioned Works
• Make Clear “Work-for-Hire”
• Talent may retain some rights: e.g., novelization or stage adaptation
• Derivative Rights
• Creator’s rights: the extent a creator may continue to control over the creation.
• Berne Convention: droid moral: Could prevent a producer from altering the underlying work.
• Right to Exploit in Any Medium
• Particularly important with pace of new disruptive technologies
• Right to Create Derivative Works Based on the Derivative Film or Program
• Prequels, sequels, remakes, episodic TV etc.

16. Working With Creative Owners
Doing the Deal
• Who will assume production responsibilities?
• “Escape Clause?"
 If unable to jointly develop and finance the production within a reasonable
period of time, should we provide for a dissolution of the joint production, and
settlement of any property right secured as of the date of such dissolution.
• Is it more a Finder arrangement? Are they looking for “Contacts?”
 Finder Producer is to introduce Production & Creative to third parties for
investing financing all or a portion of development, production and/or
distribution of the Picture and actual distribution.
 If so, what would be the compensation arrangement? A percentage? What
percent?
• How will the merchandising rights and profits be allocated?

17. Working With Creative
• Directors
• Define level of control in Shoot and Post-Production
• Right to make the Final Cut
• Director’s Cut
• First recut
• Right to Control Release (Usually Producer/Director)
• Compensation
• Typically a combination of
• fixed fee based on duration of service
• Contingent Fee based on Commercial Success, reuse & residuals
• Director Guild benefits
• Per Diem expenses
• Credits
• Screen credit, publicity credit, additional credits (e.g. a John Doe Production)

18. Working With Creative
• Actors
• Length of time for actor’s services
• Performance Conditions
• Living Conditions
• Support staff
• Control Over Performance
• Agrement to or not perform in a certain way
• Script Approval – Role is the same as agreed to perform
• Producer wants flexibility based on budget, new ideas, other claimants to script
control
• Postproduction Performance Issues
• “Films are made on the cutting-room floor.”
• Assurances role not altered or diminished in editing

19. Working With Creative
• Actors
• Use and Exploitation
• Producer seeks title to any copyright interests that may exist in the performance under the
“works-made-for-hire doctrine
• Waiver of the droit moral
• Waiver or transfer of rights of publicity/privacy and unfair competiton
• Right to edit, reedit, alter, amend, or revise the performance or any part.
• Use and exploitation in any medium
• Use for clips and advertising
• Screen Credits
• On screen credit location: “first position”, “above-the-title”
• Form and size
• Merchandising and Commercial Tie-Ins
• Limits on what is allowed
• Compensation
• Use of name and likeness for licensed goods
• Quality

20. Working With Creative
• Actors
• Compensation
• Majority – Minimum scale wages
• Stars – Share of net proceeds or gross receipts
• Defining Proceeds
• Distributor’s Gross
• Adjusted distributor’s gross – Gross less distributors expenses
• Net profits -
• Net proceeds –
• recapture of production costs, interest and financing expense, distributor
charges and other expenses.
• Audit & Collection Rights

21. Preliminary Agreements
• Non-disclosure Agreement
• Term Sheet
– Set out the nature of the project
– Ownership rights for the various copyright and forms of intellectual property
• Creative elements
• Performance Rights
• Merchandising rights and ancillary products
• Animation rights, if any
• Characters
• Production elements
– Roles for each major player (e.g., Executive Producer, Director, Creative
Director) and descriptions
– Nature of the capital budget
• Amount
• Who will raise it
• How it will be spent
• Salaries, or exclusion therof

22. Staff Employment Agrements
• At Will
• Works for Hire
• Description of Duties
• Salary and Bonus provisions
• Covenants not to use or disclose confidential data
• Covenant not to compete
– Limited duration (e.g., 2 yrs)
– Limited activities (e.g., Employee shall not directly or indirectly solicit any
Customer in the United States for the purpose of providing video and film animation services
that are competitive with those provided by Employer)
– Not to solicit employees

23. Gregg P. Skall
Womble Carlyle Sandridge & Rice LLC
Washington, D.C.
(202) 857-4441
gskall@wcsr.com