Business Plans for Filmmakers

11. Risk Factors

148 11. Risk Factors Some business-plan consultants state that a “Risk Factors” section is required for a business plan. That is not true. A “Risk Factors” section is required for a securities disclosure document, and it is even required to appear in the “forepart” of that securities disclosure document, but there is no one with the authority to impose such a requirement on a business plan. Others may take the more moderated and accurate position that a “Risk Factors” section in a business plan is still a good idea, and that’s ok. It’s a good idea because it cautions investors in advance that there a number of specific risk factors involved in the proposed investment, and, thus, such investors are less likely to complain later that the filmmaker did not advise them of such risks. On the other hand, the risk factors section is quite negative and if actually read by a filmmaker’s prospective investors, it may discourage them from investing. In any case, if a filmmaker chooses to include a risk factors section in his or her business plan, he or she should not succumb to the temptation of watering down the risks or including his or her arguments against or plans to mollify the risks in that same section. The filmmaker should just state the risk factors in the “Risk Factors” section and use the rest of the business plan to show the investors how he or she hopes to reduce or avoid such risks. If again the securities laws serve as a guide as to what a “Risk Factors” section ought to include, here is what the SEC’s Regulation S-B says about risk factors at Item 503. The risk factors section ought to include a discussion of “any factors that make the offering speculative or risky.” Those factors, modified slightly to work with a business plan, may include, among other things, the following: 1. The lack of an operating history 2. The lack of recent profits from operations 3. The company’s poor financial position Risk Factors 149 4. Risks associated with the business or proposed business 5. The lack of a market for the shares or units being sold Again, these same securities rules state where the risk-factors section must appear: “The risk factor discussion must immediately follow the summary section. If you do not include a summary section, the risk factor discussion must immediately follow the cover page.” Once again, however, SEC rules do not apply to business plans, thus it may be presumed that if a “Risk Factors” section is to be included in a film business plan, it may be placed wherever the filmmaker chooses. [Note. These sample risk factors are for a development deal, not a production offering.] Sample “Risk Factors” Risk Factors Investment in the LLC involves various risks relating both to the nature of the financing vehicle (a member-managed limited-liability company) and the movie industry itself, and such investment is therefore suitable only for persons or entities with the financial capability of making and holding long-term investments. Prospective Purchasers should consider the following factors, among others, before making a decision to purchase interests: LLC Risks 1. Development stage company. The LLC will be a newly organized company with minimal assets and no history of operations. The LLC is being formed specifically for the purpose of financing the acquisition, development, packaging and promotion for production financing of a single motion-picture project. Although there are significant risks in the development, production and distribution of films generally, the LLC is subject to the general risks inherent in the establishment of a new business venture, including the absence of an operating history. 2. Lack of management experience. The original Member-Manager of the LLC (Larry Cawley) has limited experience in relation to managing the affairs of an LLC. The LLC’s success may depend in large part upon the services provided by other individuals not employed by the LLC. 3. Reliance on management. No assurances can be provided that the LLC’s management will perform adequately or that LLC operations will be successful. In particular, the LLC will depend on the services of the individual Larry Cawley, along with others associated with the LLC (see “Description of Business—People of the XYZ Film Production LLC” and “LLC Management”). Unit Holders will all participate in the management of the LLC. All decisions with respect to the management of the LLC will be made exclusively...