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Equity Crowdfunding is Here – And It Could Be Terrible For Indie Filmmakers

Equity Crowdfunding is Here – And It Could Be Terrible For Indie Filmmakers

As of May 16, equity crowdfunding is legal – and anyone can become a real investor in an independent film. More money for filmmakers sounds like potentially great news, but top voices in the crowdfunding community are sounding notes of serious caution.

Yancey Strickler, CEO and co-founder of Kickstarter, makes it clear that his company will not offer equity crowdfunding. It’s more important, he said, to maintain a space where “art and creativity do not have a profit motive and to be in a universe where artists own and have creative control over their work.”

To understand what’s at stake, you have to go back to 1933. After the 1929 stock market crash brought on the Great Depression, Congress enacted strict regulations designed to protect individual investors; the new laws made it virtually impossible for companies to raise funds directly from the public.

More recently, lawmakers responded to complaints that these rules were out of step with the modern internet economy and created the JOBS (Jumpstart Our Business Startups) Act. Designed to democratize investing, it received rare bipartisan support in Congress and was signed by President Obama in 2012.

READ MORE: 5 Things You Need to Know About the JOBS Act and Equity Crowdfunding

For filmmakers, the key element of the JOBS Act is Title III. Prior to its passage this week, it was illegal for “unaccredited investors” to invest in private companies. Accreditation was accorded only to those who earned more than $200,000 a year, with a net worth of more than $1 million. With Title III, private investment is open to anyone. (Investors whose net worth or income is below $100,000 can invest up to $2,000 or 5% of their annual income or net worth, whichever is lower.)

Crowdfunding has injected millions into indie film, and the equity version has the potential to be transformative. In theory, equity crowdfunding could lead to a new wave of mid-range budget films like “Veronica Mars,” which raised $5.7 million on Kickstarter before Warner Bros. agreed to give it a theatrical release.

However, Emily Best, CEO and founder of the crowdfunding and distribution platform Seed&Spark, says for the overwhelming majority of indie films, it’s dangerous to treat them as investments.

“Right now, crowdfunding backers for film see success as the completion and delivery of the film and rewards,” said Best. “Equity crowdfunding would make success completion and delivery of film and rewards as well as financial return.”

To put it another way: It’s hard to see indie films as a good investment when only a tiny percentage turn a profit. According to Best, fewer than 2% of independent films make their money back.

Said Best, “I think it’s insane to introduce this as anything other than a really fast way to burn through new investors.”

READ MORE: Cannes 2016 – Meet Dan Schoenbrun, Documentary Film Outreach Lead At Kickstarter

Kickstarter’s Strickler believes introducing an investor mentality wouldn’t be good his platform, with the desire for profits limiting the kinds of projects crowdfunding allows to flourish. He said Kickstarter’s core value lies in helping creatives take on more challenging projects and explore social issues, “where no one is trying to make money.”

“One of the goals with Kickstarter was to create a universe where ideas could find support just because people wanted them to exist,” he said. “The motivators were a mix of fandom and altruism. It’s very much a modern sense of patronage.”

Strickler leaves open the possibility that an investment mentality could attract a new type of backer and says he’ll be cheering them on from the sidelines. However, he doesn’t see a clear connection between what has made Kickstarter one of the 300 most visited websites in the world – “the dynamic of collective action and celebrating in the creation of something new” – and financial reward.
As for the inevitable “Veronica Mars” counterargument, Strickler said even though the film was the intellectual property of a major studio, it still represents the classic Kickstarter model of people supporting something because people want it to exist – not because they expect to see a financial return.

“For seven years people wanted another ‘Veronica’ story and Warners told them ‘no’ and then they finally got the budget they needed to make a movie,” Strickler said. “Would those fans have given more money if they could have an ownership stake in that movie? I don’t think so.”

Still, it’s reasonable to speculate that if a movie is able to tap into a fan base of more than 91,000 backers, that’s a project with a path to commercial viability. According to Jeff Lynn, whose equity crowdfunding platform Seedrs is the largest in the UK and has been used to launch a number of movies like “The Sleeping Room,” a project like “Veronica Mars” is a good fit for equity crowdfunding.

“Equity crowdfunding can work very well for entertainment vehicles so long as there is a real business case there,” Lynn said. “If the film is a purely creative project with no meaningful likelihood of commercialization, then it’s probably better on Kickstarter. But if there is a path to meaningful profitability – even if it’s a risky path – then many investors will want to participate.”

Based on the success of equity crowdfunding in Europe, Lynn sees a potentially huge market in the United States. Since its launch in 2012, his Seedrs platform has helped raise over $170 million for new ventures. That kind of money could go toward funding the type of midrange movies that Hollywood rarely makes.

Lynn looks forward to bringing Seedrs to the U.S. market. His company acquired San Francisco-based Junction Investments, which specialized in working with entertainment companies, with the intent of taking advantage of the opportunities offered by the JOBS Act. Nevertheless, he believes the early days of equity crowdfunding under Title III will be problematic and for now he plans to wait.

“I think Title III of the JOBS Act is highly problematic for a number of reasons, and that equity crowdfunding will kick off with a whimper rather than a bang,” he said.
According to Lynn, who has testified before Congress and has met privately with a number of Congressmen, the Title III rules are too restrictive. Lynn believes the only way equity crowdfunding will take off in the U.S. is if Title III is reformed along the lines of what Republican Congressman Patrick McHenry has proposed with his “Fix Crowdfunding Act.” Key elements include raising the cap for equity crowdfunding to over $1 million and limiting a platform’s liability if an investment turns out to be illegitimate.

“My message has been that they should look to how equity crowdfunding has worked in Europe,” said Lynn. “We’re five years ahead of the U.S. here in the UK, and we have huge amount of information about what works and doesn’t, and how regulation can best be tailored to the space.”

It’s likely the films that pioneer equity crowdfunding in the U.S. will use Indiegogo, which publicly supported the JOBS Act and had company representatives in attendance at the White House when President Obama signed the bill in 2012.

“We are definitely very excited about the prospects of equity crowdfunding and we are now looking at specific ways to implement it into our business model and we hope to make an announcement in the coming months,” said Indiegogo CEO Dave Mandelbrot.

However, the passage of Title III doesn’t answer every question. For example, what will be the minimum investment allowed? In Europe, some equity crowdfunding sites have entry points under $50, while some set the bar at $2,000. And while the most common use of Title III is expected to be early investment in tech startups, film investment is far more complicated with contracts that must account for future distribution partners and the order in which investors are paid out.

Attorney Mark Hiraide, a partner at Mitchell Silberberg & Knupp, believes in the potential equity crowdfunding; he testified in front of the Senate on the JOBS Act. But even he believes that filmmakers may discover the burden of entry for equity crowdfunding will be too restrictive.

“The main criticism is the cost to apply,” said Hiraide. “You have to supply financial statements that are reviewed by an accountant. The review is a very prescribed procedure that an accountant has to undertake and issue a report. It’s not as onerous as an audit, but there are standards and it’ll cost real money.”

Based on the cost of other accounting services, Hiraide speculates the initial accounting fees will be in the neighborhood of $10,000. And unlike a lawyer, an accountant is not allowed to defer his fees until the campaign has raised capital.

Another concern raised by Hiraide is a Title III restriction that precludes general solicitation. The SEC wants all information disseminated about an investment to be in one place –  i.e., the platform hosting the campaign. This runs wildly counter to social media, which has been key to successful crowdfunding. If potential backers have to click on a link, sign up for the portal, and supply financial information before learning about a campaign, that could seriously inhibit their ability to gain traction and build word of mouth.
He has drafted a bill, sponsored by San Francisco Assemblymember David Chiu, which would change the rules in California. It’s yet another aspect of Title III that remains in limbo, which is why it will likely take a while before the film industry what to do with equity crowdfunding.

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