, LexisNexis(R) Forms FORM 556-13-1
Summary
The making of a motion picture involves the assembling of a variety of elements, including the original literary property, producers, stars, director, money, budget, shooting schedule, locations, completion bond and above- and below-the-line personnel. In assembling these elements, the production company may need to obtain preliminary letters stating the intent or interest of a particular party to provide financial backing or services. (Other types of letters of intent or interest may be sought from a potential highly regarded director or potential star-quality cast members.)
The letter of intent or interest is a document which, without absolutely committing the parties to proceeding, nevertheless states their non-binding intention of negotiating and executing an agreement containing certain to-be-negotiated terms and provisions. Without more, however, the letter of intent or interest will unlikely be held legally enforceable. While a broad variety of terms may be included, depending upon how specific the parties want to be at the outset, generally the provisions of an investment letter of intent or interest would include the elements in the following form.
(insert name, address, and email address of Production Company)
Re: Letter of Intent/(“insert title of motion picture”)
Dear (insert name of individual producer):
This letter will confirm our (“Investor”) intention of investing the sum of $ (specify amount of proposed investment) (“the Investment”) for the purpose of producing a feature length motion picture tentatively entitled (“insert title of motion picture”) (“the Picture”) based upon the screenplay entitled (“insert title of screenplay”) (“the Screenplay”), written by (insert name of writer or writers of the Screenplay) [, based upon (insert title of original property)] (“the Literary Property”) to be produced by (insert name of production company) (“Production Company”). The Investment will entitle the undersigned to participate in the equity of the Picture.
The letter should state the investor’s intent to invest a certain amount in a particular motion picture based upon a specified screenplay and/or underlying property. The name or names of the writer(s) should be included as part of the identification of the literary property.
The original story upon which the Picture is to be based concerns (describe general subject matter of story). The presently contemplated elements are as follows: (for example, specify names of director, writer, and performers, to the extent any have been identified and/or provided letters of intent/interest).
The letter should contain a general statement of the content of the motion picture and any elements which may have been established at the time the letter of intent/interest is obtained. It may be necessary to clarify that the elements are tentative and subject to change at the discretion of the production company.
In consideration of the Investment, Production Company will pay Investor the following: (specify proposed financial arrangement for the investor, e.g., 70% of Production Company’s net profits until Investor’s Investment is recouped, then 50% of Production Company’s net profits until Investor has received a 25% return on the Investment. Thereafter, Investor will continue to receive 25% of Production Company’s net profits from all sources.) For purposes hereof, net profits shall be generally defined as (insert a general definition of net profits that will be refined in a subsequent agreement for the Investor, e.g., Production Company’s gross receipts derived by Production Company from exploitation of the Picture, less all of Production Company’s costs, fees, overhead charges, interest and expenses incurred in connection therewith).
The financial arrangements for repayment and a profit from the investor’s investment should be spelled out. Typically, the investor participates in the production company’s net profits, recouping the investment first, sometimes with an interest factor and then a return on the investment. In the example, the investor will be paid back the amount of the investment from 70% of the production company’s net profits. Then, the investor will receive a 25% return on the Investment to be paid out of 50% of the production company’s net profits. Thereafter, the investor will continue to receive 25% of the production company’s net profits. If there is more than one investor, there will be an allocation of the net profits, usually prorated based upon the respective amounts invested. The production company’s “gross receipts” usually represents the amount received by the production company after the distributor deducts its fees and expenses; however, the gross receipts may be reduced by other deductions, such as deferments.
Various conditions precedent may be imposed on the investment. The investor will want as much security as can be obtained to protect the investment and assure that the motion picture will be produced and distributed. For example, the investor may insist that a distribution agreement be obtained before funding can occur. Such a requirement may impose a difficult condition to fulfill on the production company because the assembly of essential production components for an independently produced motion picture tends to require maximum flexibility while various pieces are juggled until the essential components of the motion picture are sufficiently assembled for production to proceed.
As a condition precedent to the Investment, production company will usually need to seek a distribution agreement with a responsible financial entity or distribution company or companies for the distribution and exhibition of the Picture in various media. The production company will not receive any fee or compensation above its expenses incurred in negotiating such agreement or agreements, except for any distribution rights which production company may retain and subsequently exercise itself.
Nevertheless, the distribution agreement, if obtained in advance by the production company, also provides assurance for the investor that the motion picture, if completed, will be distributed. For the production company, such a pre-sale may result in a lower advance or less favorable terms than could otherwise be obtained, since the price will have been established before an evaluation can be made of the product.
The Investment shall be delivered by cashier’s check made payable to (insert name of Production Company) upon delivery to Investor of a duly executed completion guaranty issued in Investor’s favor and a fully executed distribution agreement.
For further protection, the investor may require the provision of a duly executed completion bond. The completion bond provides additional security for the investor by assuring the completion of the motion picture. It is important to understand the way the bond operates. Besides providing additional funds for completion of the motion picture, the bond company can take over production of the motion picture and decide either to complete the motion picture, or not to complete the motion picture and pay off the investor or financier.
The budget for the Picture shall be based upon the budget dated (specify date of preparation of the applicable motion picture budget), submitted to Investor, reflecting a total production cost of $ (specify amount of motion picture budget), including a 10% contingency.
The parties will usually want to specify the amount of a production budget, to further assure the investor that the motion picture can and will be produced for approximately the amount which has been represented to be the motion picture’s cost.
The budget will usually include a 10% contingency factor based on the amount of the budget. The parties may provide that substantial changes cannot be made to the budget without mutual approval.
[If there are any tax credits or other benefits available for Investor’s Investment, Production Company agrees to cooperate in providing any information necessary for Investor to obtain such tax credits or other benefits.]
Production Company will further provide Investor, or arrange to provide Investor, with accounting and royalty statements during the period of exploitation of the Picture, such statements to be provided on a regular basis (specify frequency of accounting and royalty statements, e.g., no less frequently than quarterly for the first two years of distribution of the Picture), and Investor shall have the opportunity to conduct audits upon a reasonable basis with advance notice.
The parties may provide for the allocation of any tax credits or other benefits. The investment tax credit is no longer available under applicable law, but there may be other available tax benefits from time to time, especially in connection with subsidies provided by various jurisdictions.
In addition, the parties should provide for accounting statements and audit rights although the specific terms of such rights may not be set out. Statements may be provided on a periodic basis, such as quarterly or semi-annually. The generation and obligation of providing statements tends to be expensive and time-consuming, so the production company will try to provide such statements as infrequently as it can persuade the investor to agree to. Nevertheless, maximum revenues are generally expected during the initial two years of distribution of the motion picture.
Investor shall have the right to assign the right to receive any monies due to Investor as the result of the Investment.
The investor may want the right to assign any monies due from the investment.
Production Company shall warrant and represent to Investor, among other things, that it owns all rights, title and interests in and to the Screenplay [and the story upon which it is based] and that such Screenplay [and story] are free and clear of any liens and encumbrances.
The investor should obtain the production company’s representation and warranty that it owns the screenplay and story. This representation and warranty is also essential for the protection of the investment, since without such literary property, the production company may be unable to complete and distribute the motion picture and may even be open to litigation claims. As part of any due diligence, the investor should review the chain of title and obtain a copyright search report.
Investor and Production Company intend to enter into a formal agreement embodying the matters referenced in this letter of intent.
Finally, if the parties want to express a more serious level of involvement than merely interest, the parties should specify their intent to enter into a formal agreement.
(“Investor”)