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What if Everyone Could Profit from Crowdfunding -- Even Backers?

11.9.11 @ 3:23PM Tags : , , ,

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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  • I think it puts a lot of pressure on filmmakers to show the commercial viability of the project, but when we did raise funding for a scifi short we produced, the brief small business proposal we had definitely seemed to get people interested with the idea of a small silent ownership in the film.

    From the perspective of an investor, I think there’s a big opportunity for a “gambling” type of mentality coming in now, throwing $500 here or there on some hot idea. I certainly wouldn’t invest in films I had no creative say in, but I might invest in vendors, like software, stock libraries, custom equipment, basically anything that might lay the foundation for a community of ventures that support my efforts.

  • Actually Age of Stupid utilised a loan scheme. People gave money based on a loan, not profit participation thereby circumventing share issue legalities. They actually provide a copy of the loan agreement on their website so that other UK producers can do the same. I’m sure a loan agreement would work in the US as well.

  • I like the idea, but it would add some wrinkles to the process, since this would no doubt lead to more disagreements about (mostly) how much money the backer is entitled to.

    A tiered approach would be desirable, with it clear that (for example) backers below a certain level aren’t entitled to any profit sharing, backers between two dollar amounts are entitled to profit sharing but no input of any kind, and backers above a certain amount are entitled to profit sharing and some form of creative input.

    It seems like this would also necessitate the option on crowdsourcing sites for the backee to decline funding from anyone he doesn’t want to be “in business” with (maybe kickstarter already has this?). Potentially a lot of wrinkles, but some neat possibilities.

  • probably more useful for established directors than for those trying to start their careers

    I can easily see the likes of Kevin Smith benefitting from this; even Gareth Edwards (Monsters) may have a shot, now that he’s made a successful movie on the cheap
    http://boxofficemojo.com/movies/?id=monsters2010.htm

    but maybe it can also be helpful for beginners with an awesome demo, like Federico Alvarez (Panic Attack), if they can get a better deal out of crowdfunding than from the big studios
    http://www.wired.com/underwire/2009/11/panic-attacks-giant-robots-land-indie-director-a-deal/

  • You absolutely could have raised revenue through a crowd-funding option allowing ROI for investors. SEC limitations are for $5M available investment before it becomes a truly public offering. You can also work around these limitations through various VC setups as MANY private firms are bought/traded/sold in the public market (just not through IPOs or SEC regulated transactions). Crowd funding should provide shared equity in something like a 30/30/30 split (with 10% left for overages) for production, marketing and distribution. Check out FundMyFilms.com over the coming months for a proper solution to this crowd funding cluster-F.

  • Mark Saffron on 11.9.11 @ 9:18PM

    This measure was inevitable, and I’m not surprised that some people who regularly abuse the system are unhappy that the very nature of crowdfunding is about to change for them in such a dramatic way.

    As a business model for independent filmmaking, it’s just ridiculous and unsustainable. Why should I pay someone $50+ to make a movie, then pay him again to see the film, when I can pay a fraction of that to see a legitimate film that’s made it through the proper channels (i.e. the channels that are established to weed out junk)… ?

    Opening the door to investors is a good way to address this problem, and it’ll do wonders in filtering out those projects whose commercial potential is lacking.

    Crowdfunding does work… right now… because it’s so novel. That’s why independent filmmakers have both embraced and capitalized on it. But contrary to what some folks will have you think, you can’t build a career on it. Eventually, the well will dry out… most likely, when your fellow filmmakers realize their own efforts are stalling, and that the constant cycle of exchanging donations between friends is exhausting everyone of resources.

    Hollywood exists for a reason.

    So my advice is to get in while the gettin is good… because the free ride won’t stay free much longer…

    • I think some of what you are saying might be true. Crowd sourcing has the possibility of saturating. But I think it has a life even then. I notice a lot of successful projects are documentary and have subjects that are ‘worthy’, almost charitable if you like. Other success stories have an element that makes them attractive such as a core special interest group and so on. I think Koo’s film is an exception (apart from the basketball enthusiasts) and he worked very hard to bring people in.
      You’re argument about not chucking 50 dollars in and seeing the film at the cinema instead isn’t the reason why people don’t donate. It might be the reason you don’t but people like to be involved in something that they believe in or like. There is a psychological attachment beyond mere passivity. Not everyone is after a quick buck profit and if the reward for your 50 dollars is interesting enough then people will participate.

  • Also in Europe we are more used to multiple deals to make a movie. Co-productions with other countries are mostly a normal state of affairs whereas in the US it seems to me people are more used to raising capital independently and locally. The investment culture in the US is somewhat different.

    One thing though can be become very complex is the position investors take, from large amounts through to small. VFX houses are known to take a position these days if they believe a project will be successful. So what you have to be careful about is allowing for late investors that provide completion finance, gap finance and distributors positions, that their position in the queue is protected even BEFORE they come in. Some people have given such favourable terms to the initial investors that puts the film in jeopardy by making it unsellable. One thing I think indy filmmakers are lucky with is that they do not need stars to raise their money. Pay or play deals are hard to finance.

    Once we have profit participation come into the picture of crowdsourcing the complexity increases to an amount some people are not willing to deal with. The legal bill rises a great deal too. What we have to find is a simple business model that we as a community can share that allows us to use profit participation, loan agreements and so on and yet retain an open door to completion finance, bank gap finance, large investor deals etc. Every case will be different but the Age of Stupid guys made their agreements open so we can all utilise them. I would love to see the same happen in the US so we might be able to cross collateralise our investors internationally. I can see some healthy partnerships occurring.

  • What do you think about profit participation and crowdfunding — could you see this changing your decision to back a project?
    Yes. If for Instance it could have been implemented in Koo’s upcoming Film, I would have looked at his project a bunch closer. And if I thought it was money making material (didn’t look at it this way, this time) I would have invested more of my money there than I did. Also in disagreement with the first poster, I would NOT have wanted me, or any other investor to have a say in the Film itself. So I would literally be investing in the Film maker too!

  • Imagine you’re a filmmaker with 1000+ ‘funders’ who start filing lawsuits against you after a project earns a bunch of money and there’s suddenly a despute about % payout number$. Sounds like alot of contracts and lawyer involvement to avoid something like that if this concept of funding ever became available.

  • John Trigonis on 11.11.11 @ 12:28AM

    The bottom line is this: Profit participation defeats the whole purpose of crowdfunding, there’d be no difference between funding your project via crowdfunding and seeking out investors; the only difference is that the investors may be seeking you out, and for the “wrong” reason. Crowdfunding should be about helping fund a project, not about ROI. would it change my decision to support a project? Nope — I’ll still support projects & people worth supporting solely for the sake of the project.

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  • I think it is great because it gives the little guys a shot at some bigger investors, but with that comes the whole responsibility of making sure to turn a profit, but in the end that is what you need to do anyways, if you want to make movies all your life.

    My mind went right to the hybrid approach. I think you save profit sharing for those that are taking a true risk on you and your film, but not with anyone who is just helping out with a $25 donation. I don’t see it affecting too many campaigns because there will be something for every kind of film supporter.

    I am excited to see this. Thanks for sharing.

    Marty

  • This wil destroy the current ethos of crowd funding for non commercial art projects through this new wrinkle.
    This is going to make it impossible to get a project going now that the big boys can come in and copy your idea and destroy the little guy over time. What you will see is crowdsourcing will get destroyed ultimately. This is a top down strategy to make sure that the big guys stay on top as the economy fails even further. We aren’t even 50% through this foreclosure crisis, not even 1/2 the foreclosures slated have even happened, and we are about to run out of money to slow he effects. This is ultimately BAD legislation.

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