The Australian film industry is notable for the fact that successful films consistently involve the top tier participants in a very small industry.
In order to encourage investment in film production, the Australian Government provides Screen Production Incentives of 40% of allowable costs. This means that if a film costs $10 million to produce, the Australian Government will provide a rebate of $4 million, meaning that the film only needs to generate revenues of $6 million to break even.
For investors in Australian films, this means that the risk profile of any project is effectively reduced by 40%.
Our client was involved in the production of a moderately successful Australian film and now has an option to purchase the script for a sequel.
We have had the script reviewed and have obtained an anchor investor, who is also a major participant in the Australian film industry. We have also secured one of Australia’s leading post-production houses, KOJO, as a confirmed participant in the project.
KOJO is a world class provider of production services to the film and television industry and has been involved in a number of Australian and international feature films, television programs and advertisements.
The project budget is be $3.5 million and it is our view that the addition of KOJO to the project team, and the associated confirmation that the finished product will reach a defined standard, will enhance the project to the point where it “punches well above it’s weight”.
We have allocated 50% of the notional equity in the project special purpose vehicle (company)(“SPV”) for investors. The balance of the project SPV will be owned by the producers.
All investor funds will be contributed to the project SPV through the purchase of Class A Preference Shares and those investors will receive ordinary shares on a proportionate basis. For example, an investor who purchases 50% of the total Class A Preference Shares will also receive 25% of the total ordinary shares in the SPV.
As project revenues are derived, including the 40% Screen Production Incentive, the Class A Preference Shares will be retired, meaning that the investor now has received 100% of their original investment back and still holds their ordinary shares.
For the avoidance of any doubt, all investor funds will be repaid before there is any allocation of dividends on ordinary shares held by the producers.
Accordingly, if the total revenue for the project is $3.5 million then the investors will be repaid in full with no dividend to shareholders.
If the total revenue (including the 40% rebate) is $5 million then the $3.5 million investment would be returned via Class A Preference Share retirements and the $1.5 million profit distributed as dividends to ordinary shareholders.
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