Updated March 24 at 8:24am

38 Studios previews Copernicus


PROVIDENCE – Still unable to pay its workers, 38 Studios LLC, the cash-strapped video game design firm founded by former Red Sox pitcher Curt Schilling, has released a video trailer for its new game, code-named “Project Copernicus.”

The gaming company, which was lured to Providence with a state $75 million loan guarantee, released the preview just a day after it managed to make an overdue $1.125 million payment to the state on Friday.

Executives from 38 Studios attempted to pay the state on Thursday, but, after finding out the check would bounce, the R.I. Economic Development Corporation refused payment.

The company managed a wire payment for $1,025,000 and a separate check for $100,000 on Friday, Gov. Lincoln D. Chafee announced.

The $1.125 million guarantee fee, which is 1.5 percent of the outstanding loan amount, was due May 1.

Global sales of 38 Studios’ first game - Kingdoms of Amalur: Reckoning - have reached 1.15 million at $60 each since its release in February, according to market research company VGChartz.

The $75 million in funds from the state did not go toward the development of Amalur, but toward the larger MMO – massively multiplayer online game – Copernicus, which is slated to be released in June 2013.

Chafee vowed to prevent the company from receiving any additional state assistance and said he would do anything under the law to make sure 38 Studios does not get the up to $14.1 million in film tax credits it has applied for over the last two years.

38 Studios applied for state film tax credits in 2011 and 2012. The 2011 request, which would be worth $2.1 million, is still being reviewed by the state film office, which has not identified any eligibility problems, state officials said.

The 2012 application – for $12 million – was pushed to the back of the line due to the fee-payment default.

Chafee said 38 Studios has been trying to sell proceeds of the film tax credit to investors in anticipation of receiving it.


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Here's the structural problem with the 38 Studios deal.

There are at least 4 LLCs or "partnerships" all domiciled in Delaware with physical offices there. We know the names of nine of the partners of 38 Studios, LLC because they are identified in Rhode Island Annual Reports. Several are venture capitalists. When these venture capitalists want to move money from one LLC to another the money passes through the venture firm.

In the case where say Mercury Project LLC gets revenue from the sale of the single player game from Electronic Arts, it does not just send it to 38 Studios, LLC. It must book the revenue as earnings and then "invest" in 38 Studios, LLC on an after tax basis.

Let's go the other direction: would it be possible for 38 Studios, LLC to pass proceeds of the loan guarantee or tax credit sales to 38 Studios Baltimore, LLC or Precision Jobs LLC? If this happens, it goes through the personal books of the venture partners, obviously as losses. Then these partners invest in the other LLCs. There could be accounting tricks like loans etc. but the bottom line is 38 Studios is not structured as a corporation with subsidiaries. If the bond documents show that 38 Studios was relying on the earnings from the single user game to fund the massive game there is a potential problem.

I don't get the "no eligibility problems" comment about 38 Studios applying for tax credits. 38 Studios is comprised of a group of "LLCs" -- basically partnerships -- all domiciled in Delaware with offices in Delaware. None of these entities are eligible for Rhode Island Motion Picture Tax Credits because they are not domiciled in Rhode Island.

When the current regulation went through its hearing process, the law firm for the EDC complained that the Rhode Island domicile for subcontractors would hurt the production of the movies. But this law firm did not bring up any problems on the domicile of the production company itself. So, one could make the case that the law firm for EDC endorsed the Rhode Island domicile requirement for film production companies -- including video games companies during the 2008 hearing process for the regulations now being used to validate tax credits.

How does EDC end up on the rocks on that point?

This 38 Studios fiasco is going to have ramifications with other bond offerings that EDC is working on, the I-195 Relocation and the airport stuff. Everybody is going to be looking at the revenue streams that are being proposed to support these other bonds. I-195 will rely on speculative land sales. RIAC will rely on unknown airport revenue streams based on additional fees to airlines -- who might fly away from all this nonsense.

At one point last week, EDC suggested that its landlord become the new executive director of EDC. That went a little too far and he withdrew his name. But he is still responsible to shepherd the I-195 real estate deal through EDC and get the loan to support this knowledge district effort. He should consider backing out of the I-195 Commission chairmanship.

RIAC needs to open up its process of dealing with the airlines. Its board always meets behind closed doors when dealing with this sensitive issue of how the airlines will pay for the safety improvements and runway extension. The grounds given is to protect the public from early knowledge of investing in public funds. 38 Studios proves that this kind of reason to meet in secret is an outrage.

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