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.
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.”
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.”
“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.
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.
“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.
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.
Additional reporting by Graham Winfrey.