Film financing is the act of raising funds for the production costs of a film. Such production cost could include without limitation script writing, editing, production set, casting, and cinematography.
Admittedly, the music sector of the Nigerian entertainment industry has recorded significant growth in a relatively short time with Nigerian artists and other industry stakeholders firmly staking their claim in several award-winning categories both locally and internationally. In the past six years, the growing numbers of new production studios and artists springing up have paved the way for a more vibrant and self-sustaining industry. For the foreseeable future, this industry will continue to attract more investments. Conversely, the Nigerian film industry also known as Nollywood, which has been in existence for a much longer period than the entertainment industry curiously has not recorded similar success. The reasons are several but, chief amongst the reasons is finance.
Nollywood is considered the largest film producer in the world, with an estimated contribution of 2.3% (NGN 239 billion) to the nation's Gross Domestic Product (GDP). It is one of the priority sectors identified in the Economic Recovery and Growth Plan of the Federal Government of Nigeria, with a planned $1billion in export revenue by 2020. 1 Thus, buttressing the dire need for finance in Nollywood. Notwithstanding, the general principles of finance must find a home or take root in Nollywood culture. For this to happen, one must consider the several facets of filmmaking in Nollywood, which include without limitation, production, distribution, and skilled manpower. This article focuses only on the financing of a Nollywood project with a distribution agreement in place.
Types of Film financing
Film financing ranges from simple to complex structures.
Simple Financing Structure
It is a simple structure if a distributor acquires the rights to distribute the film for a sum equal to the production budget, also known as the "Minimum guarantee", this could either come during production or after production when the film's production is completed and delivered to the distributor. However, most distributors in a bid to avoid completion risk, enter into a presale agreement which guarantees to pay the film production cost upon completion and delivery of the film. Third-party funding would not be required, if the distributing company pays the minimum guaranteed sum and agrees minimum guaranteed sum be used during the course of production. However, where the guaranteed sum is to be received upon completion and delivery of the film, the production company would have to source for third party funds. Where this is the case, there will be a formal agreement between the producer and third party which gives the latter the right to claim payment of the minimum guarantee either against the distributor if delivery is effected or the production company if the film was not delivered. The rights to distribute the film remains in the production company until the minimum guarantee is fully paid, subject to the third party's first ranking security.
Funds had always been the major setback for film producers because, over the years, the general complaints filed by most investors in the Nigerian film industry is that they never get good returns for their investment. Some investors do not even get back their principal. Although, some Investors have experienced situations where producers or production companies misappropriate funds given to them, and do not deliver the project as at when due or agreed on by parties, declare irregular returns or losses to their investors, and even divert investments received for movie projects to personal use. These issues faced by investors could be mitigated if there is a finance agreement between the production company and the financier (third-party), where such investment is guaranteed by the distributor. The nuances which distinguish film financing from regular business financing is the security tied to the loan. The major security in film financing is the intellectual property rights of which the lender must ensure that the borrower possesses the rights required to create the content. The lender's Counsel must ensure the borrower has acquired all the rights concerning the said production, as such, a chain of title opinion is usually required, such as reviewing the various agreements which includes the script writers' agreements, and all the necessary rights required to ensure all right in respect to the film production were properly transferred.
This does not differ substantially from a credit facility in favour of any other business, although there are some nuances which distinguish film financing from a regular financing deal. The lender will typically take security over the borrower's present and after-acquired personal property which, importantly in this context, includes the intellectual property rights in the content.
In a way to boost Investors' confidence, mitigate risk and monitor returns on investment, a production company would be required to create a special purpose vehicle ("SPV") basically for the production and exploitation of the film. Its only asset will be the film and the sum derived from the exploitation of the film. This necessitates the importance of a film production company securing a distribution platform before sourcing for a film financier, doing so would boost investors' confidence as their return on investment is guaranteed.
Parties involved in Simple Financing Structure are;
- Production Company/Company
To produce and deliver the film by the stipulations in the presale agreement with the distributor, the Production company/Producer engages the screenplay writer, prepares the film production schedule and budget, and engages all facets of production such as the cast and crew members. The proper practice in engaging all these components of production is to enter into a written agreement with each of them, with each party's rights and duties spelt out. Examples of such agreements include Film Actor's Agreement, Film Director's Agreement, Film Crew Member's Agreement etc.
- A distributor
After the Producer has successfully met with conditions stated in the presale agreement such as the delivery date and the approved screenplay starring named individuals, the distributor takes on the quality and performance risk and is expected to pay the minimum guarantee in full. Examples of Nigerian film distributors are FilmOne Distribution, Blue Pictures Film Distribution, Silverbird Film Distribution, and Genesis Deluxe Film Distribution.2
- A financier
The Financier provides funds on certain terms and conditions to the Producer which enable the latter to fund the production costs and deliver the completed film to the distributor as when due. In most cases, the financier provides a loan that does not exceed the minimum guarantee. The producer and the financier enter into a loan agreement where the following or more terms and conditions are expressly stated;
- The Producer has all the rights to produce and exploit the film, has engaged all other components of film production and has an assignment of rights and waiver from each of them.
- The financier's security over the film to be produced ranks in first position over other parties involved. To secure the priority of its security, the financier enters an agreement with the distributor and completion guarantor. This agreement is called Notice of Assignment.
- A laboratory is engaged to process and hold the materials created through the course of production and to hold the completed film
- The finance transaction is authorized by each of the party
- The completion guarantor has approved the screenplay, the production schedule and the budget.
- All conditions precedent under the distribution agreement except the delivery of the film have been satisfied or waived.
- How parties intend to resolve disputes arising from the transaction.
- A Completion Guarantor
Upon delivery of the completed film, this activates the right of the production company to be paid the minimum guarantee and for the distributor the release schedule of the film. The role of the completion guarantor comes to play when there is a third-party funding i.e a financier involved in the whole transaction.
The completion guarantor is paid a fee for issuing the completion guarantee. He guarantees that the film will comply with the agreed standards, and be delivered on the agreed date and where this is not done, he will refund the financier's loan. He will also guarantee to either fund the additional costs or abandon the film and repay the financier's loan if the cost of completing and delivering the film exceeds the budgeted cost.
Before the completion guarantee is issued, he must have carried out extensive due diligence to check the budget including contingency costs covers the costs for the completion and delivery of the film in line with the required standards.
- A laboratory
The film materials are being processed and held at the laboratory. There will be a laboratory pledge holder agreement between the production company, the fancier, the laboratory and the completion guarantor in which the security of the financier is acknowledged and the laboratory agrees not to release the film materials to any party without the financier's consent, that the producer will pay the laboratory charges and the distributor will be granted access to the film material once the minimum guarantee is fully paid.
Complex Financing Structure
The complex structure has similar features with the simple finance structure except that the amount payable as the minimum guarantee by the distributor and by way of a tax credit is not sufficient to finance the budgeted cost. Thus, the production company sources additional funds secured by the film's unsold right i.e the distribution rights which remains unsold at the date of the completion of the financing of the film. Because of the complex nature of this transaction, more parties and more risks are involved. Although, this structure may not be popular in Nigeria compared to developed countries.
Parties involved in Complex Financing Structure include;
- A Production Company
The Company will deliver the film to the sales agents in respect of a sales agency contract and will also deliver it to the presale distributor under the presale distribution agreements. Since it is possible to shoot a film in more than one location, the production company may take advantage of any related tax incentives in these locations. Thus, more than one production company may produce the film, as a separate production company may be established for each location. In this instance, all the companies enter into a co-production agreement stating the rights, interests and roles of the parties in the financing, production and exploitation of the film in respect of each party's location. The production company will usually claim the tax credit available for the film, and this depends on the applicable laws. Tax credits are payable after the production costs have been paid. Most of the time, a loan secure by tax credit is obtained to finance the production costs.
- Presale Distributors
Each Distributor enters into a distribution agreement with the producer and exploits the distribution rights in the film under the jurisdiction(s) for which it is responsible and agrees to pay a minimum guarantee on the delivery of the completed film.
- Sales Agent
The production company engages the sale agent to publicise the film, market the distribution rights and make arrangements for the sale of the film to the distributors as stated in the Sales Agency Agreement.
Just like the simple structure, the debt financier makes a loan available to the production company for the production costs of the film. This loan is secured by a minimum guarantee to be paid by the distributor. Since the amount payable by the distributor and the tax credit available will not sufficiently cater for the production expenses, loans may be provided by other financiers usually known as gap and equity financiers and this loan will be secured by the film's unsold distribution rights. It should be noted that the debt financier will be repaid first from the minimum guarantee payable. If it is not sufficient, the debt financier will recoup any shortfall first before the gap and equity financiers.
- Completion Guarantor
The duties of the completion guarantor are similar to his duties under the simple financing structure but it includes the guarantee that the film will be delivered featuring the elements stated in the sales agency agreement if the unsold rights in the film will be worth less without the elements.
- Collection Agent
The collection agent is appointed to collect and administer receipts of the money made from the exploitation of the film. In the Collection Agreement, the parties i.e the financiers, production company, sales agents, completion guarantor and the collection agent will agree on account the money made should be paid to (this is usually in the collector agent's name) and the order in which the collected receipts are applied.
The responsibilities of the laboratory are similar to the simple financing structure except that the laboratory will only be able to grant the distributors access to the film materials based on the sale agent's instructions unless the financiers state otherwise.
Some of the Vital Documents in Film financing includes:
- The master film production financing agreement
- The distribution agreement and, or the guarantee Agreement.
- Screenplay or Scriptwriters' agreement
- Security Agreement between the Production company and the film
- A loan Agreement between the Financier and the Producer
- A Laboratory Pledge Holder Agreement
- Notice of Assignment
- Guarantee Completion Agreement
- It is recommended that before such a Project commences, offtakers (distributor/ distribution platform), should have been identified and an agreement should have been reached.
- Where an offtaker has been identified, it is expected that the project handlers should conduct viability research and ensure that the project complies with the standards of the offtaker.
- A special purpose vehicle should be set up to raise funds for production before production commences and a clear contract should be entered into by the producers and investors or between producer, distributors and Investor to guarantee the return on investment and also ensure distribution of production as to rather sourcing for investment without guaranteeing a distribution platform and thus delaying the return on investment which at such would discourage investors from financing more project.
- Government should also encourage competition with respect to local distribution companies and cable providers as this will encourage competition and discourage market monopolization. The existing monopoly can be attributed to the lack of adequate regulations in the industry. The pricing system is set by the distribution company and there is no regulatory body to review this system even when there is an undue hike in prices. This affects both the consumers and the producers and highlights the need for adequate regulation of the distribution companies
- Government has commendably created some funding schemes for film makers in recent times, thus it has a duty to ensure that film makers met certain prerequisites before they can benefit from such schemes to ensure that funds are channeled effectively and the productions met global standards.3
- Foreign platforms such as Netflix, Amazon, who have gradually gained increased popularity amongst Nigerians should make their platforms more accessible to local film makers and invest in the production and distribution of content in Nigeria to ensure a fair playing field where Nigerians are also benefitting from their presence and not just them from our content.
1 https://www.pwc.com/ng/en/publications/spotlight-the-nigerian-film-industry.html accessed 5th May, 2022
2 https://massmediang.com/five-biggest-film-distribution-companies-in-nigeria-2020/ - Accessed on 17th June 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.