Encouraging independent filmmaking wasn't Congress' intent. However, President Obama's signing of the JOBS (Jumpstart Our Business Startups) Act on April 5 promises to dramatically expand filmmakers' ability to raise financing for their projects.
JOBS is a collection of laws that dramatically relaxes regulations on raising capital for startups. Most promising for indie filmmakers: The JOBS Act contains provisions that, for the first time, will allow filmmakers to raise up to $1 million in equity investments via online crowdfunding. This is entirely different from the current crowdfunding activities of sites like Kickstarter and Indiegogo, which allow users to solicit funding through donations. Under the JOBS Act, a filmmaker could treat online contacts as actual investors who have the right to recoup their investment and share in profits.
The primary restriction that hampered filmmakers from raising equity funds using the internet was a prohibition on public solicitation; the law required a pre-existing relationship between the filmmaker and the potential investor. It wasn't always clear how much of a relationship was required. There are filmmakers today who have thousands of “friends” on Facebook. Some of these connections may be fairly tenuous and the filmmaker may have never met some friends in person. Do these contacts count as a pre-existing relationship if the extent of the bond is merely accepting an invitation to connect? Fortunately, these kinds of issues don’t seem to matter much anymore with the passage of the JOBS Act.
For many businesses, $1 million is not a lot of money. For filmmakers, it can be more than sufficient to produce a feature. And by spreading the risk among a large pool of small investors through crowdfunding, no one gets burned badly if the movie flops.
The major problem with film investments has always been their extreme risk and the expense involved in complying with laws that regulate investments. Filmmakers were free to go after an unlimited number of high rollers (as long as they had a pre-existing relationship) plus up to 35 middle-class investors. But most aspiring indie filmmakers don’t hang around the craps table in Vegas and don’t know many wealthy individuals. So they often relied on friends and family or their own resources, including borrowing money against one’s house — or at least in one celebrated instance, selling their blood.
Other filmmakers used various subterfuges to reach potential investors and hoped the SEC would not notice. I once spoke to a federal prosecutor on behalf of a client who had lost several hundred thousand dollars in a fraudulent film investment. The prosecutor confessed that unless at least a million dollars was at stake, the case was just too small for him to pursue. There are just too many bigger crooks out there.
Crowdfunding may hold another advantage for filmmakers, unrelated to raising money. One of the major problems facing independent filmmakers is how to market and distribute their completed movies. If a film is financed by a crowd, one starts with a community backing the project, and each member has an incentive to spread the word about the film. Moreover, funds could be used for advertising and distribution, provided that use is disclosed to investors.
Crowdfunding based on donations — the Kickstarter model — is not affected by the new law. Here donors have no expectation of sharing in any financial return, but have the satisfaction of supporting a project they believe in. Incentives include T-shirts, a DVD of the completed movie, a screen credit or an invitation to the wrap party or premiere screenings. These benefits are not considered an equity interest and therefore not subject to state and federal security laws.
However, filmmakers need to be cautious with crowdfunding. They need to make sure they do not overpromise what investors may receive or they could be liable for fraud. One of the major safeguards in the legislation for investors is that offers to investors need to be made through a broker-dealer or a funding portal registered with the SEC — intermediaries responsible for trying to keep the fraudsters out of the system — and the rules overseeing this are still to be developed.
The SEC has 270 days — until early 2013 — to implement additional regulations. The SEC is inviting the public to send in comments on the law's seven titles, including the crowdfunding provision (aka Title III). If you want to express your ideas and concerns for the JOBS act, filmmakers can submit comments via either email or on the SEC website.