Filmmakers who seek philanthropic or public funding to support their works may be considering fiscal sponsorship as a vehicle for obtaining such funding. In our first post on this subject, we covered the basics of fiscal sponsorship and on the qualifications of a sound fiscal sponsor. Here, we’ll discuss the fiscal sponsorship agreement and termination of the relationship between the filmmaker and the fiscal sponsor.
Fiscal Sponsorship Agreement
The Model Informs the Agreement
In our first post on fiscal sponsorship and films, we discussed the two most common models of fiscal sponsorship:
- Pre-approved grant relationship (Model C), and
- Comprehensive (Model A).
For filmmakers, who typically and understandably have a desire to own the intellectual property (IP) rights to the film they make, Model C is the more common form. The appropriate agreement to establish such a relationship is commonly called a Fiscal Sponsorship Grant Agreement.
For filmmakers who want a charity to own the IP rights to the film and simply want sufficient independence in creating it, a Model A fiscal sponsorship arrangement (or a variation in which the operation of the project is contracted out to the filmmaker as an independent contractor, also referred to as Model B) may suffice. The agreement to establish such a relationship is commonly called a Fiscal Sponsorship Agreement.
Contract or MOU?
In many cases, the intended difference is simply a matter of semantics. But it’s important to understand that if the parties want to be bound to an enforceable agreement, they are entering into a contract, regardless of what it is called. Because a Memorandum of Understanding (MOU) by its name suggests that it is only intended to memorialize the mutual understandings of the parties, it can lead some parties to create a document that may not be clearly enforceable. Accordingly, both the fiscal sponsor and the party contracting with the fiscal sponsor must be clear in documenting their understanding of the enforceability of the agreement. That is, they must agree that it’s a contract.
The Party Contracting with the Fiscal Sponsor
An individual filmmaker might be the sole party contracting with the fiscal sponsor. Alternatively, it may be a group of filmmakers and/or their colleagues contracting with the fiscal sponsor. If it’s a group, the group must consider whether they are contracting as a business entity or as an unincorporated (nonprofit) association. Alternatively, group members may be contracting with the fiscal sponsor as individuals, each in their individual capacity (but that can get more complicated and messier than a fiscal sponsor may desire).
If the party contracting with the fiscal sponsor (the “Other Party”) is an unincorporated association, the parties should understand the implications. An unincorporated association consists of two or more members. State laws may not provide for many default rules in how an association is governed and makes decisions, like entering into contracts. So, it would be important for the association to formally adopt some general governing principles and record it in the association’s bylaws. Some questions, the bylaws and supporting documents should address:
- Who are the members?
- Do the members govern the association or do they elect a board that governs?
- How do the members take action?
- How does the board (if any) take action?
- How can other members be added?
- How can members be terminated?
- Are there officers (e.g., president, treasurer, secretary), and if not, does any individual have the authority to sign contracts and bind the association?
It would be prudent for the fiscal sponsor to have a copy of such documentation and a covenant from the association that it will keep the fiscal sponsor updated of any changes. It’s not uncommon for such unincorporated associations to run into internal disputes that call into question their composition and leadership. It also may have important bearing on who owns the IP rights to the film.
It’s common for parties to a fiscal sponsorship relationship to refer to the Other Party as the Project. But that’s fundamentally wrong. The Project is the collection of assets, liabilities, and activities that is fiscally sponsored. In Model C, the Project should generally be defined as housed in, but not precisely the same as, the Other Party/Grantee. In Model A, the Project is an internal and integral part of the fiscal sponsor and is most certainly not the Other Party.
Who Does the Fundraising?
Generally, in the context of a fiscal sponsorship arrangement, only the fiscal sponsor can engage in fundraising. — That probably sounds contrary to what every fiscal sponsor states in declining any responsibility to fundraise. But when individuals or other entities are fundraising for a fiscally sponsored project, they are either doing so as agents (hopefully, authorized agents) of the fiscal sponsor or as independent fundraisers (which may require them to register with a state charity regulator if they are receiving any compensation). Because they must fundraise on behalf of the fiscal sponsor, and likely want the protections that the fiscal sponsor can provide to its agents, it’s more common for individuals associated with the other party to the fiscal sponsorship agreement to also fundraise as agents of the fiscal sponsor (and not as agents of the other party). The fiscal sponsorship agreement or fiscal sponsorship grant agreement should make this clear.
Fiscal Sponsorship Grant Agreement (Model C)
In the Model C fiscal sponsorship arrangement, the fundraising is done by agents for the fiscal sponsor (who concurrently serve as agents of the Grantee). Generally, the Grantee cannot raise charitable contributions and grants for itself, which is why it entered into the fiscal sponsorship arrangement. But that means there are several important provisions to include in the fiscal sponsorship grant agreement, including:
- Recitals that clarify the separateness of the fiscal sponsor and the Grantee, and state the specific purpose of the Project (which will define the restriction on the restricted fund housed within the fiscal sponsor).
- A statement that the fiscal sponsor shall not be responsible for the Grantee’s activities, assets, liabilities, and employees (when acting in such capacity).
- Statements that makes clear that the fiscal sponsor is solely responsible for its use of restricted funds associated with Project’s purpose. Note that the restricted fund cannot be held solely to be granted to the Grantee, even if that’s the intended goal of the parties. The fiscal sponsor must maintain variance power to spend its funds in any way it determines furthers the Project’s purposes, which it may choose to exercise if the Grantee is operating out of compliance with the fiscal sponsorship grant agreement or applicable law, particularly if diverting charitable funds from their intended purpose.
- A provision that obligations the Grantee to use any granted funds or other assets in a manner consistent with the specific purpose of the Project and not inconsistent with IRC Section 501(c)(3). For a film project, this may be a little tricky to evidence that the production was for a 501(c)(3) purpose and any economic benefit to the filmmaker was incidental to furthering such 501(c)(3) purpose. Some fiscal sponsors will seek to manage these issues by obtaining a license to show the film and/or adding provisions regarding the required distribution of the film.
- Provisions including or incorporating by reference the fiscal sponsor’s sponsorship policies, notably including how the sponsor will charge its restricted fund with an intraorganizational administrative fee before making any grants to the Grantee or any other party. While it is often framed as a fee paid by the Grantee, this is not the case, and the accounting books must not record it as a fee paid by the Grantee.
Fiscal Sponsorship Agreement (Model A)
In the Model A fiscal sponsorship arrangement, the fundraising as well as all of the programmatic activities are done by agents of the fiscal sponsor or contractors contracted by the fiscal sponsor. The Other Party (if a legal entity like an unincorporated association) generally should have no role in management or operations of the Project, even if individuals associated with the Other Party should. That may seem like a subtle distinction, but legally, it makes a big difference. Agents of the fiscal sponsor may find protection from potential liabilities through the fiscal sponsor’s corporate shell, indemnification provisions, and insurance. The Other Party may have no such protections and may even be a target of a lawsuit by the fiscal sponsor if the Other Party was negligent in its management of the Project, which resulted in harm to the fiscal sponsor. Here are some other provisions to include in a comprehensive (Model A) fiscal sponsorship agreement:
- Recitals and provisions that clarify the separateness of the fiscal sponsor and the Other Party, and state the specific purpose of the Project (which will define the restriction on the restricted fund housed within the fiscal sponsor).
- A statement that the fiscal sponsor shall be ultimately responsible for the Project’s activities, assets, liabilities, and employees (when acting in such capacity). For a film project, this can be an area of concern because the fiscal sponsor could terminate and replace the Project’s employees (even if they also are members, directors, officers, or owners of the Other Party) and give control to of the Project to another party. This makes the Model A arrangement untenable for many filmmakers seeking fiscal sponsorship, though there may be more complicated contractual protections possible to make it possible.
- A provision delegating management of the Project to a person or internal committee of the fiscal sponsor (but not the Other Party, if the Other Party is an unincorporated association or legal entity), subject to the ultimate direction of the fiscal sponsor.
- Statements that makes clear that the fiscal sponsor is solely responsible for its use of restricted funds associated with Project’s purpose.
- Provisions including or incorporating by reference the fiscal sponsor’s sponsorship policies, notably including how the sponsor will charge its restricted fund with an intraorganizational administrative fee.
Termination of the Relationship
The termination of the fiscal sponsorship should of course be governed by the provisions of the fiscal sponsorship agreement, but there may be additional considerations that would be helpful to know from the start.
- The fiscal sponsor may want the power to terminate the agreement unilaterally if it believes the Project is not being operated appropriately in compliance or the Other Party is creating a heavier administrative burden than the fiscal sponsor believes is reasonably acceptable.
- The Other Party may want the power to terminate the agreement unilaterally if it believes the fiscal sponsor is not providing the expected support of the Project or if it plans to spin off to a nonprofit entity with 501(c)(3) status it created.
- Each party may have some issue with the other party’s unilateral ability to terminate the agreement. For the Other Party, it may relate to how the Project will carry on after the termination and what happens with the remaining funds held in the restricted fund dedicated to the Project’s purpose. For the fiscal sponsor, it may relate to its responsibility (1) to use its charitable assets, including those in a restricted fund, in furtherance of the fiscal sponsor’s and restricted fund’s purpose, and (2) to protect those assets from misuse or diversion.
- Requirements for notice of the intent to terminate and qualifications of a successor to which the Project’s assets and liabilities will be transferred should be addressed in the agreement.
- Provision should be made if a mutually agreed upon successor cannot be found within a certain period of time. The fiscal sponsor must, in such case, continue to observe any restrictions impressed upon the restricted fund and assets associated with the Project.
Disputes over a fiscal sponsorship arrangement can lead to further disputes over the termination of the relationship. So, it’s critical for both parties to understand the termination provisions from the start.