The allure of Hollywood brings with it visions of parties, hobnobbing with the rich and famous, awards shows, and dressing up to the nines. There used to be a time when the only people who could put their money into movie-making ventures were powerful entertainment moguls. But not anymore. There may be a way for you to get in on the action.

Investing directly in a movie may sound glam, but it can be a risky endeavor. Scouting the right talent, managing production costs, and finding the right distributor are only a few of the hurdles investors share as production moves forward. The hardest thing to gauge, though, is the personal whim of the moviegoer. After all, taste is fickle. A story with a broad appeal in one decade could fall flat in the next. If a movie does well, it may open the possibilities of a franchise, but if it flops, it could claim a number of casualties—from studios to the careers of actors.

Read on to find out more about what you'll need to consider before shelling out your hard-earned dough, and how you can get in on the action.

Key Takeaways

  • Investing directly in a movie may sound glam, but it can be a risky move. 
  • Before investing in any project, do your due diligence and research the project, the producers, the talent, and the potential for return.
  • Ask yourself if the film will appeal to the mass market or if it's just meant for a niche audience.
  • Consider private equity, hedge funds if you have a lot of cash to invest, or crowdfunding sources for general projects.
  • Hedge funds use slate financing, which invests in a portfolio of films, to manage risk and generate returns.

Considerations Before Investing

Before you even consider investing your money, make sure you do your due diligence. Ask yourself the following:

  • What is the producer's reputation?
  • What experience does he or she have?

Backing someone who doesn't have a proven track record is akin to investing in a mutual fund with rookie portfolio managers. But don't forget about the project itself.

Ask yourself whether the film will appeal to a broad market. If it's only intended for a niche audience, there's a good chance you may sink your money. Blockbusters tend to have a broad appeal, while foreign films, documentaries, and small pictures tend to have less. There are, of course, notable exceptions like Spike Lee's "She's Gotta Have It" and the 2016 Academy Award Best Picture winner, "Moonlight." Films with a religious message or ones with more intellectual humor could be a hard sell to the distributor, as well, since their audience is typically quite narrow.

What if the film has no A-list talent? That could be a problem, though sometimes the film itself is the talent—think "Slum Dog Millionaire". Name recognition could vary, too, depending on where the film is targeting its release. Learn about the director's vision. An outsized ego can prove fatal, as was the case with "Heaven's Gate," which came nowhere near to recouping the runaway costs its perfectionist director Michael Cimino incurred.

Are the interests of the filmmaker properly aligned with the distributor and investors, or does much of the revenue inure to the benefit of the filmmaker? Is the investment a fair arrangement?

Investment Vehicles

If you've got a lot of money at your disposal, consider the private equity and hedge funds. These investment vehicles appear to be the most common for direct investment in cinematic ventures. Sadly, this usually means one thing: Unsophisticated investors need not apply. The risks of such an enterprise can be substantial and often are better suited for the family office or institutional investor. If you can—and do—go this route, congratulations. But be sure to check any offering documents, which must accord with applicable securities law.

But that isn't the only way. Crowdfunding has become a very popular form of investing for many movie-mogul-wannabes, and a great way for filmmakers to raise capital. Filmmakers who may not have had ready access to capital now do by raising small amounts of money from a very large group of people. Movie Investor and The Movie Fund are just two examples of film-related crowdfunding sites that are running right now.

Before you promise your millions to a film project, you should also do your due diligence here as well—just like you would with any other investment. After all, a project may sound good on paper, but you still have to look at the fine details. Research the project(s), the personnel, and their track records. And be sure to check what the filmmaker promises as a return. Some may just pass on some film merchandise as a thank you instead of a big reward.

You can, of course, invest in the traditional way. Entertainment-related stocks are a great option in which to invest, but remember, you won't get that producer credit. Companies like Viacom, Netflix, Disney all produce big-budget films. And because they're generally diversified in their offerings in the entertainment industry, there's a good chance you can mitigate some of the risk of a stock market investment.

The Way Forward

On its own, film appears to be an asset class unto itself—uncorrelated to the other types of investments. Movies are somewhat recession-resistant because even in hard times, people still go need entertainment. so they will not stop going to the movies or streaming them online.

Slate financing is the hedge funds' approach to risk management and return generation. This approach simply entails investment in a portfolio of films, rather than a single production. Through diversification comes a more proper balance of risk and return. What films are included in the portfolio may be a function of how the fund's co-financing efforts with the production and distribution company work through the film studios. Part of the challenge is untangling opaque financial accounts through due diligence in the quest for greater transparency.

Slate financing is an investment strategy which uses a portfolio of films to cut out risk and generate returns.

There are plays in the movie industry itself, in the form of common shares. But individual investors need to understand where in the chain of production the companies lie and to what risks those companies are subjected to. For example, is the investment in a studio like Lionsgate—which nearly doubled its share price since the beginning of 2012—or in distribution like Netflix or Coinstar?

Clauses and Returns

Any investment proposals should be in writing and contain an arbitration clause for a more cost-effective dispute resolution. Filmmakers may find it useful to have such a clause when dealing with financially stronger distributors in order to protect the former's interests.

The producer should have a completion bond, which is a surety bond that kicks in to pay for cost overruns, rather than having the investors shoulder the burden. Different fundraising options should be considered, depending upon the script and budget. Tax incentives properly pursued are another revenue-generator, so long as the incentive tail does not wag the movie dog.

The filmmaker should escrow funds during the fundraising stage of the film. This helps to ensure transparency and accountability. If insufficient funds are raised, then they should be returned to investors. All of these considerations point to the need for an investor to work with a professional with experience in the film industry.

As for returns, film revenues are used to repay investors all of their investment and debts incurred first. The process is akin to a return of basis or of the principal investment. Profit-sharing, or the return on the investment, is the next link in the chain. The split is often even between the producer and investors. The film's stars, writers, and director are paid from the producer's profits.

The Bottom Line

Have movies been commoditized? Consider how easy it is to access a favorite movie. The theater is but the first of several distribution channels which include cable television, the internet, and other streaming outlets. The ready availability of content has stolen a march on the movie theater experience and created more revenue streams and greater profitability.