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The market size of China¡¯s micro-drama industry reached RMB50.5 billion (USD7.16 billion) in 2024, overtaking film¡¯s annual box office for the first time to emerge as a vibrant new content category. Rising popularity has attracted substantial investment, which has also led to repetitive disputes.

This article examines typical investment conflicts observed in practice, providing basic recommendations to help investors manage potential risks.

Production disputes

Compared with conventional TV series, micro-dramas generally have shorter production cycles and lower costs, but their quality varies widely. If an investment agreement only covers basic terms such as investment shares and profit distribution, and fails to specify key requirements ¨C such as script originality, production quality, final cut acceptance criteria, and the timeline and platform for release ¨C while also omitting corresponding liabilities for breach, investors may find it difficult to hold the producer accountable if the project fails to launch or causes financial losses due to production issues.

It is therefore prudent for investors to ensure the investment agreement clearly defines essential elements: copyright ownership, content compliance (guaranteeing adherence to laws and absence of infringement or public morals violations), production quality, acceptance criteria for the final product, production timeline, and the intended release schedule and platform.

Acceptance criteria can be aligned with pertinent legal frameworks, the review policies of leading micro-drama platforms, or agreed by using similar market productions as a reference.

The agreement should also incorporate definitive liability terms for breaches. These could include the investor¡¯s right to seek a full investment refund, claim stipulated damages or compensation, or mandate that the producer rectify or remake the content without further charge.

Investors should systematically preserve all pertinent evidence throughout to substantiate potential claims.

Additionally, structuring the investment as phased payments tied to key production and distribution stages offers a practical safeguard. Should problems arise during production, this mechanism enables the investor to suspend subsequent payments to limit financial exposure.

Investment disputes

In practice, while an investment agreement is typically signed bilaterally between a producer and an investor, the financing may be more complex involving multiple investors. Producers sometimes introduce additional investors within their own allotted share without fully disclosing these arrangements to their co-investors.

In some cases, producers even withhold the project¡¯s true total budget or share inconsistent figures with different investors, which sows confusion regarding individual shares and becomes a frequent source of contention.

Therefore, existing investors should seek to include contractual terms ensuring that the producer must provide written notice or obtain consent before introducing any new investors. Any new investment must also be structured so as not to dilute or otherwise harm the existing investors¡¯ contractual rights and benefits.

Prospective new investors, on the other hand, are advised to undertake pre-investment checks. This involves confirming the counterparty¡¯s legal authority to sign the investment agreement. and reviewing documentation such as prior investor agreements to fully ascertain the project¡¯s capitalisation.

Such measures help pre-empt conflicts and safeguard interests against information gaps.

Revenue share disputes

The distribution of proceeds is a common flashpoint for disputes in micro-drama investment. Key controversies stem from ill-defined sharing arrangements, lack of clarity in a project¡¯s income and costs, and limited oversight options available to investors.

In practice, the most common method for allocating returns from micro-dramas is to share the net profit remaining after costs are subtracted from income. Yet, conflicts over distribution often arise from insufficient delineation of what precisely falls under ¡°income¡± and ¡°costs¡±, namely, what specific items should be counted towards distributable earnings and which ones are eligible to be offset as expenses.

Regarding income, many investors may also focus solely on distribution income, overlooking other streams such as merchandising or advertising sponsorship.

It is therefore advisable to specify in the investment agreement that all income generated by the micro-drama should be included in the distribution pool, tailored to the specifics of the venture.

As for costs, failing to set limits in advance may lead the producer to increase expenditure, directly affecting investor returns. It is recommended to establish a detailed cost budget in the agreement, stipulating that any overspend must be borne by the producer.

Should the budget show a surplus, the investor¡¯s equity share should be adjusted proportionally based on their contribution to the actual costs, or the surplus should be refunded by the producer.

It is also recommended that investment agreements grant investors the right to audit all documentation, invoices and payment records pertaining to revenue and cost settlements, thereby safeguarding their right to information.

Should an investor dispute any profit distribution, they must raise the issue promptly and retain supporting evidence to avoid a disadvantaged position in any subsequent dispute resolution due to lack of proof.

Key takeaways

To conclude, based on common issues observed in legal practice, the following precautions are recommended for micro-drama investors:

(1) Conduct essential due diligence prior to investing. Investigate the producer¡¯s qualifications and track record, scrutinise the project for copyright legitimacy and verify the planned release channels. Proceed with caution and be wary of ventures that offer assured principal repayment, fixed interest or exceptionally high returns.

(2) During contract negotiations, focus on key provisions detailing the capital commitment, ownership percentage, budget composition, revenue sharing, consequences of default, and methods for dispute resolution. Strive for a comprehensive grasp of the agreement¡¯s stipulations and inherent risks.

(3) Throughout the term of the investment, maintain diligent records. Preserve proof of fund transfers, all communication with the producer, and receipts or statements related to the project¡¯s income and costs. Such evidence forms a crucial foundation for protecting legal interests in the event of a dispute.

Quan Wei is a partner and Zhu Wenhan is an associate at Jingtian & Gongcheng