Although President Obama, who was just inaugurated for his second term, signed the Jumpstart Our Business Startups (JOBS) Act more than eight months ago, the independent film industry remains in waiting to see the law bear fruit.
Created to help burgeoning small businesses, the JOBS Act is comprised of a collection of laws that would make it easier for startup companies — including independent film productions — to raise money up to $1 million, particularly through the new phenomenon known as equity crowdfunding. While sites such as Kickstarter and Indiegogo allow outsiders to donate money to projects, the JOBS Act would allow a whole new stratum of investors to put money into films.
Previously, financial laws restricted filmmakers from raising funds because of a prohibition on "public solicitation" — any public call, whether wild-posting, email blasts or web pages, that asks for money. But under the JOBS Act, filmmakers can now accept money from anyone, as long as it comes through a funding portal that is registered with the U.S. Securities and Exchange Commission (SEC). But such frameworks have yet to be worked out.
To help navigate the new law, Indiewire reached out to a handful of experts who also are trying to make sense of the new landscape. Here are five things you need to know about the future of equity crowdfunding.
1. The JOBS Act is actually not in effect yet, and nobody knows when it will go forward.
Like everything else in Washington, the implementation of the JOBS Act is moving very slowly. The SEC was given until January to hammer out the rules of the act but missed that deadline. According to the Wall Street Journal, FINRA, an independent regulator that covers "broker-dealers" (equivalent to the "funding portals"), was also required to set its own equity crowdfunding rules. But it has no deadline. An SEC spokesman recently told The New York Times, "We will continue working hard amid a busy rule-making agenda to get these crowdfunding rules done as soon as possible and to get them done right — with the appropriate investor protections in place."
According to several industry insiders, the rules may not be fully known until 2014. Duncan Cork, CEO of Slated.com, a website that already matches accredited investors with film projects, though not through the kind of crowdfunding model associated with the JOBS Act, hopes that at least the General Solicitation rules will be lifted in the middle of this year. That way, filmmakers could start soliciting funds publicly from accredited investors.
But not everyone is waiting for the funding portals to materialize.
"I am telling my clients I'm giving the SEC until the end of the month, and then I'm going to go forward with it," says entertainment attorney Corky Kessler, who conducted a financing seminar at the Sundance Film Festival Monday, Jan. 21. "I have drafted the PPMS (private placement memorandums) and the LLCs, and we're all ready to go on some of my clients' projects. What are we going to do: Wait until 2014 or 2015? At some point, we have to say I'm firing my gun now. That'll force the SEC to do something."
2. Filmmakers should be preparing ways to advertise their projects to investors on a wider scale since they won't have to rely on family members who are dentists, doctors and lawyers anymore.
One of the biggest benefits of the JOBS Act will be to allow filmmakers to solicit funds from a wide and diverse group of sources. The current rules state that a filmmaker cannot tell anyone about their investment opportunity unless they can prove a substantive relationship with the investor prior to making the offering. But under the JOBS Act, no prior relationship is necessary.
Before the JOBS Act, filmmakers were only allowed to take investments from accredited investors (meaning investors that have a high net worth) or up to $1 million from unaccredited investors with whom they have had a "substantive" relationship. Under the JOBS Act, a filmmaker can take funds from anyone, regardless of financial status or relationship to the filmmaker — albeit with protective guidelines.
"This move will maximize the number of investors available to a filmmaker," says Slated's Cork.
These non-accredited investors — earning less than $100,000 a year — can invest a maximum of $2,000, or 5% of their income, whichever is greater. (If their income is more than $100,000, they can invest up to 10% of their income.)
"I think it’s a very good thing," says Kessler. "There's a lot of money sitting out there, and now filmmakers have the opportunity to reach out."
If filmmakers begin to accept anonymous investors via the Internet, however, these new investors will need to come through one of the SEC-registered-and-regulated funding portals, which will do some work to vet investors and make sure they are legitimate. Funding portals, however, are likely to be held up because of further oversight (see points 1 and 3).
“In a world of social media, the chance to advertise an investment opportunity is truly a game-changer,” says Cork. "The important thing to note though is what hasn’t changed. The filmmaker is still responsible for knowing who is investing in their film and the size of the investment the investor is allowed to make."
3. Beware the glut of crowdfunding portals.
Once funding portals become sanctioned, they will be a large and entirely new industry that will need to be closely scrutinized. According to the Wall Street Journal, there were 8,800 web domain names registered in the U.S. and Canada in November 2012 that used some form of the term "crowdfunding," up from 900 in January 2012. According to a recent article in The New York Times, several proposed crowdfunding businesses have either set up shop or already moved on from the space.
"In an impending market of hundreds of crowdfunding portals covering all manner of business verticals," Cork says, there will be hundreds of thousands of opportunities for investors. "In that paradigm, it’s a buyer’s market, and the investors will end up where they have access to the best deals," he says.
The funding portals will need to be registered by the SEC and monitored by FINRA or some other similar regulator to keep them honest. But how much will they actually be regulated? Is too much better than not enough? In any case, the specific nature and requirements of the portals remain a mystery.
"Who will be allowed and who will not be allowed?" wonders Indiegogo CEO and co-founder Slava Rubin, who intends to be part of the new crowdfunding paradigm. "I'm somewhat concerned that the SEC is going to stamp a few sites and say, ‘these are the sites that are allowed to be used.’ But if they do that, it's going to damage competition. No one said Amazon.com was the only online retailer that you could use and X.com is one that you can't use. The free market figured it out."
4. Beware the unsophisticated investor.
"Unsophisticated" doesn't necessarily mean stupid — but it could. Many industry insiders agree that the biggest potential problem that will arise as a result of the JOBS Act is the rise of the "non-accredited" or "unsophisticated" investor, which means someone who doesn't have a lot of experience with equity investments.
"Even prior to the SEC ruling on the JOBS Act, raising money from people you don’t know and who are unsophisticated can cause enormous problems down the line," says Cork. "When sophisticated investors lose money on a deal they think, 'What did I miss?' and move on to the next opportunity with greater awareness and insight. When unsophisticated investors lose their money they think, 'Who can I blame?'"
Rubin agrees. "Unsophisticated investors might not understand what it means to invest in a movie. If they do invest in a movie, they might expect their money back in two weeks or two months. But lots of movies don't even get made, and even the ones that are successful, there is sometimes no money back. And that can lead to a lot of frustration, where people get upset."
In this new financing world, it will require lots of due diligence from both filmmakers and investors to avoid those kinds of outcomes. Fledgling investors will have to educate themselves to understand the risks involved, and filmmakers and producers will have to make it clear to those investors what those risks are as well as make sure financiers and funding portals are on the level.
"There will be lawsuits, and there will be fraud, on both sides of the table," adds Cork. "And not necessarily when a film loses money. Headline-grabbing Hollywood lawsuits usually happen when a film makes money. So taking investments from an unsophisticated investor for a high-risk/high-return/high-profile investment, such as film, should be a very calculated and careful decision by the filmmaker."
5. The rules remain in flux. Stay on top of them, and work with experienced lawyers and accountants to know what is required.
"There are a lot of moving parts inside these rules," says Rubin. For example, the JOBS Act currently calls for a maximum limit on investors of $10,000 per person and $1 million per entity. "But how is the SEC going to track the $10,000 per limit per person? Is it going to be self-reporting? Or is there going to be a real-time database that is going to see if you've gone over your limit? The difference between the two is massive," says Rubin. "One takes no work; one takes years of work to implement."
Rubin also notes that investor perks could present challenges for both filmmakers and funding portals. If film productions are offering investors credits on a film, such as "executive producer," or tickets to a premiere or advanced copies of a DVD, will this perk-based fundraising be handled by a portal separate from an equity-based funding portal?
"Can you offer an equity share of the profits in a movie and a movie download at the same time?" asks Rubin. "That's hairy, nitty-gritty stuff we're talking about."
According to the currently proposed rules, film productions seeking more than $500,000 through crowdfunding must also provide audited financial statements, which is a costly process for filmmakers, and could prove "very onerous, almost a deal-breaker," says Rubin. "That's real money and a dent into your crowd-fundraise. You'd probably have to be raising money just to get audited statements."