The Prometheus actor will star opposite Domhnall Gleeson in the film.
Film4 will executive produce and co-finance the project, to be directed by Adam & Paul's Lenny Abrahamson.
Harry Potter actor Gleeson will play Jon, a young musician who joins a pop band led by Frank (Fassbender).
Frank is written by The Men Who Stare At Goats' Jon Ronson and Peter Straughan.
Regarding the subject of the movie, Ronson clarified on Twitter: "Hey! The film isn't a film about Frank Sidebottom. It's fictional, inspired by Frank but also by other great mavericks like Daniel Johnston.
"It's not a film about Frank Sidebottom! It's totally made up and - whilst inspired by Frank - is inspired by other people too.
"Daniel Johnston and Captain Beefheart are other inspirations. Bowled over that Michael Fassbender and Domhnall Gleeson are in our film."
TV star and stand-up Sidebottom - real name Chris Sievey - passed away at his home in Hale in June 2010.
Michael Fassbender is currently filming Ridley Scott's upcoming project The Counselor.
The Irish-German actor has been linked with a role in Natalie Portman's Jane Got a Gun.
Watch Michael Fassbender talk to Digital Spy about Prometheus below: