What if Everyone Could Profit from Crowdfunding -- Even Backers?
What if all of you who backed my campaign to make Man-child could actually have a stake in the film, so that if it makes money, you make money? I couldn’t offer you this, because in America, such profit participation is illegal thanks to the Securities and Exchange Commission. In many other countries it’s legal (see: The Age of Stupid’s brilliant campaign in the U.K.). However, thanks to the U.S. House passing the Entrepreneur Access to Capital Act last week, it seems this profit participation may soon become legal. If it does, crowdfunding as we know it could change tremendously, as will the fundamental structure of raising equity for small businesses (and films).
From Portfolio, here are the broad strokes of the bill:
With a 407-17 vote, the House passed the Entrepreneur Access to Capital Act, which makes it easier for businesses to raise capital through “crowdfunding.” This technique uses the Internet to solicit small equity investments from large numbers of people. The legislation allows businesses to use crowdfunding to sell unregistered securities as long as the total amount raised is $2 million or less. The bill also limits individual investments in crowdfunded securities to $10,000 or 10 percent of the investor’s annual income.
An associated Small Company Capital Formation Act enables small businesses to offer up to $50 million in stock to the public without registering with the SEC (up from the previous limit of $5 million).
With crisis comes opportunity, and the fact that this bill has bipartisan support is surely due to the state of the economy in the United States (and everywhere else, for that matter). The Senate will have to pass the bill for it to become law, but given the 407-17 majority in the House, that seems likely.
These bills do not come without risks, however. The SEC established the original regulations — to invest with profit participation, you have to be a “qualified” investor, and you have to be within state lines — for good reason. Going forward one can imagine any number of scams that could be run thanks to relaxed regulations. Indeed, thanks to the financial industry, we have a recent and high-profile case study of what can happen with relaxed regulations. I hope the benefits for startups and small businesses — not to mention individual investors — outweigh the potential misuses, and as someone with a lot of ideas and little access to capital (Kickstarter notwithstanding!), I’m excited about the bill, to say the least.
That said, Lucas McNelly has some good thoughts on the issue as far as filmmakers and creatives are concerned:
Money changes everything. Tell people they can make money off something and it becomes all they can think of. Instead of giving a filmmaker $50 and then watching from afar as they make the work, people take a more active approach to following the progress. After all, that’s their $50, maybe their $100, maybe more. The entire expectation changes. They go from being benefactors to investors. And investors vote with their wallet.
Let’s say your film has 500 backers. You now have 500 investors to keep track of. 500 people who, on some level, want your film to turn a profit. 500 people who all have different ideas about how to do that. In short, you’re just like a studio filmmaker, only you have to answer to a lot more people and you have a lot less money to work with.
With change comes challenge. Anything new = different considerations, and while I get what Lucas is saying, I think profit participation is a necessary and inevitable part of crowdfunding. Some people are already reaching a level of schwag fatigue when it comes to these campaigns, and offering the potential for tangible cash rewards should help. There’s also nothing stopping you (I think, not having read the bill) from running a hybrid campaign wherein you offer rewards for lower levels and then kick in profit participation for high-level backers. Indeed, most businesses and project creators would not want to deal with profit participation at a $25 level, because paying hundreds of investors in a corporate structure takes takes a ton of paperwork. Imagine trying to pay out 0.02% of your profits to 500 investors each… quarterly.
Also of note, Lucas is currently running a second Kickstarter campaign for his commendable Year Without Rent project, wherein he spends a year on the road working on indie films for free. Despite our disagreements about my campaign, I’m a fan and supporter of AYWR, and would definitely welcome him to the Man-child set if it weren’t for the fact that his year will be up by the time we’re shooting this coming summer (more updates on that soon).
What do you think about profit participation and crowdfunding — could you see this changing your decision to back a project?
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