What is crowdfunding?
Crowdfunding is when a large group of people come together to fund a common goal, facilitated by the internet. There are several forms of crowdfunding; we will be discussing rewards-based and equity crowdfunding. Rewards-based crowdfunding is the most popular because it does not require regulatory compliance with securities laws: a person creates a project, let’s say opening a microbrewery, and people in his community submit donations online in return for non-financial rewards like free beer, t-shirts, and stickers. The brewmaster can also use equity crowdfunding: He solicits accredited investors (rich people who make over $200,000 per year) to invest in the brewery, and in return, those investors own a percentage of the company’s stock.
The beauty of crowdfunding is that fledgling companies that otherwise wouldn’t have access to the first moneys they need to start operating now have online platforms on which they can raise this money.
What’s the problem?
Crowdfunding is a new online form of fundraising, and the rules for how to regulate it are being written as we speak. The industry is very much in flux and evolving. As of this writing, the Securities and Exchange Commission (SEC) is debating how to write the rules for crowdfunding for equity for not-so-rich people.
Up until now, you had to be rich to invest in startup companies, because back in the 1930s, the SEC wanted to make sure that investing wouldn’t bankrupt the investor. Investors back then didn’t have as much information available to them as we do now and the SEC was afraid that investors were going to be victims of fraud. Though the SEC had good intentions, the result was that only the super-rich, people who make $200,000 per year (just 3% of Americans), can invest in early-stage companies. The middle-class is excluded from these investment opportunities, which doesn’t seem fair. Many people argue that these securities laws exclude the other 97% of Americans from valuable money-making opportunities. If everyone was allowed to invest, 1) the middle-class would have more opportunities to make money and 2) startups would have access to the seed money they need to get off the ground, allowing them boost the American economy and create jobs.
Set in the context of The Great Recession and The Occupy Wall Street Movement, Americans got excited about changing the old laws prohibiting middle-class people from investing. In April 2012, Obama signed the Jumpstart Our Business Startups Act (AKA: “The J.O.B.S. Act”), a rare bipartisan piece of legislation calling for the SEC to re-write the crowdfunding rules to allow for everyone to invest. But that’s easier said than done.
Where are we now?
The SEC, tasked with both protecting investors from fraud while also allowing middle-class investors to invest in risky startups, is struggling to regulate these seemingly opposite mandates. Right now, we’re in a “comment period:” The SEC has released its proposed rules--all 585 pages of them--and now it’s giving the public a chance to read the rules and comment on them. This comment period will end on February 3, 2014. It’s unknown whether the SEC will approve the rules at that time. Industry experts are predicting the first equity crowdfunding portal will open in mid-2014, but if the SEC goes back to the drawing board, it could be even later.
What will the rules allow entrepreneurs to do?
When these rules go into effect, companies will be able to raise up to $1 million dollars per year. Non-accredited investors with incomes of less than $100,000 will be able to invest $2,000 or 5% of their income (whichever is greater); accredited investors--people who have incomes greater than $100,000--will be able to invest 10% up to $100,000. The caveat is this: there are many burdensome regulatory requirements that the SEC has proposed to put in place in order to prove that investors are qualified to invest. These burdens may be too high (read too expensive) for the average entrepreneur to bear. The SEC is still debating how to best balance protecting investors while allowing crowdfunding.
What does this have to do with filmmaking?
Filmmakers are entrepreneurs too. Crowdfunding is already changing film financing--Kickstarter has raised $175 million for independent films since 2009. Famously, stars like Zack Braff, Spike Lee, and Veronica Mars have used crowdfunding to finance their latest projects. While these numbers are fantastic, crowdfunding for donation only raises small amounts--on average $5,000 or less--for film projects. By contrast, the average successful crowdfunding for equity projects raises more than $50,000, a much more practical figure for film budgets.
When the crowdfunding for equity rules are ironed out, filmmakers will be able to raise $1 million for film budgets per year and both rich and not-as-rich people will be able to invest in films.
In the meantime, filmmakers should continue to use crowdfunding for donation sites like Kickstarter. But keep your eyes peeled. Crowdfunding for film equity will redefine film finance, whether this year or the next.