Financing (small) commercial theater

INTRODUCTION

Raising the financing for any theatrical production is a challenge, even in the best of times. With the current economic climate (which I suspect will remaim the norm for some time), it's even more difficult to convince investors to fund production of a stage production.

For every cloud, though, there is a silver lining. Many investors' traditional notions of risk/reward have been turned topsy-turvy by the volatility historically “conservative” investments. So, clever producers may indeed be able to persuade financiers to put their money into projects they believe in from the heart.

FINANCING MODEL FOR L.A. PRODUCTIONS

I'm often asked by clients about the prevailing model for financing commercial theatre projects in L.A.'s small theatres of 99 seats or less.

Typically, the investors in a show contribute (as a group) the entire ‘going-in' production budget, and in exchange receive 100% of the net profits from the production until their initial investment(s) have been repaid in full (called recoupment). From then on, until the closing of the production, the investors share in 50% of the show's net profits.

So what, you ask, happens when the L.A. Producer later produces the same show off-Broadway or on Broadway in New York? Uusually, the investors' contributions to the L.A. Production afre ‘rolled into' the entity used to raise funds for the New York Production, with the L.A. production's investors receiving a share of the New York production's net profits equal to that proportion which their original investment bears to the funding raised for the New York Production and the L.A. production combined.

So, for example, if the L.A. production received $50,000 and the New York production is budgetted at $450,000, the New York production would be capitalized at $500,000, with the original investors receiving 10% of the total investors' returns.

It is increasingly common for the authors of a new show to give the L.A. investors a small percentage (e.g., 2-5%) of the “subsidiary rights” in the show for a limited period of time following the original production. Thus, if the show is adapted as a film or TV show, or is published, or produced elsewhere, within, say 5 years after the original production, the initial investors would recieve 5% of the Authors' earnings from those other exploitations of the material. Typically, the subsidiary rights participation is triggered only after the L.A. Production has reached some milestone of commercial success, such as running for a certain

DEAL STRUCTURES

The deal structures used for financing shows using the above-model don't vary greatly from those used for larger scale projects. I always recommend that each production be structured as its own entity, either as a Limited Liability Company, Limited Partnership, or a Corporation.

Each of these entity types offers some benefit and some down-side, and no one type is ideal for every production. Consulting with an experienced theatrical entertainment attorney will help determine what's most appropriate for the circumstances.

SECURITIES REGULATIONS

Unless the investors are on-board before formation of the entity, it will likely be necessary to comply with some securities regulations. If all investors reside in the same state, that state's laws will control. If, however, investors are located in several jurisdictions, the U.S. Securities laws will apply.

Unless an exemption applies, this involves a complex, costly and time-consuming securities registration with the SEC.

Exemptions exist for small, limited, private offerings of shares/interests, provided that the opportunity is not advertised, and is kept limited to a small number of offerrees. (usually 35 non-accredited investors).

Even if the project is subject to one of the available exemptions from registration, it is important that the producer fully disclose all material information which might influence a prospective investor's decision to participate. This document, the Private Placement Memorandum (sometimes called an offering circular), is a lengthy discussion of the project together with the financial structure, projections and risk factors.

The Private Placement Memorandum should be prepared by a lawyer experienced in entertainment financing. No two deals are the same, so it is unwise, even for a seasoned producer, to rely on forms, models or previous projects' documentation.

CONCLUSION

It's always been difficult to raise financing for commercial theatre projects in L.A., but the perceived riskiness of the current investment climate for ‘conservative' investment might actually be a boon for producers who can infect investors with their passion for worthwhile projects. The help of an experienced entertainment lawyer is invaluable in navigating this exciting territory.