INDUSTRY INSIGHTS: Latest Update on Crowdfunding

"Crowd Funding" (as know as crowd financing, equity crowdfunding, or group funding) describes a group effort by supporters of a project who network and pool their money, usually via a website/Internet to fund efforts initiated by other people or organizations.

Crowdfunding has arguably revolutionized the way in which low budget films are sourced, financed and supported. 

The two biggest crowdfunding sites are Kickstarter and Indiegogo.   Kickstarter uses the “all or nothing” funding model, whereby projects receive money pledged only if their total fundraising goals are met.  Indiegogo offers two different options:  1. the same “all or nothing” model or 2.  “Flexible Funding” campaign that allows users to keep money raised, irrespective of whether their funding goals are met. There are many other crowdfunding sources available.  These include sites such as Pozible, Peerbackers, RocketHub, Speed&Spark and USAprojects (as examples). Though, Kickstarter is the leader in the pack. 

There is little doubt that crowdfunding works. To date, Kickstarter has successfully funded over 9,000 films.   

Even more, these projects are noteworthy in their own right.  The short documentary “Inocente” became the first Kickstarter-funded film to win an Oscar.  Other Kickstarter-funded films nominated for Oscars include the live action short “Buzkashi Boys” and the documentary shorts “Kings Point,” “Incident in New Baghdad,” “Sun Come Up” and “Barber of Birmingham.” 

Recently, Rob Thomas’ “Veronica Mars” Kickstarter campaign shattered Kickstarter records when it raised $1 million in just four hours and 24 minutes, and $2 million in 10 hours.   At the time of this writing, over $3.7 million has been pledged by more than 56,500 people. 

These crowdfunding sites generally operate on a reward basis.   Prospective supporters can pledge money flat out, or they can give money in exchange for pre-determined non-monetary rewards.  These rewards may include items such as DVDs, signed movie posters or scripts, tickets to red carpet premieres, Executive Producer credits and the like.    

A key point is that, under the current crowdfunding model, potential supporter will never see or should expect a financial return on their investments.  Their financial contributions do not buy them any ownership in a film, any right to recoup what they've invested, or any right to share in the profits that a film may make.     

Crowdfunding participants do not own any equity in the project. So if it ends up doing very well, the producers and stars also stand to earn a decent amount of money since there will be no need to repay the production and investment costs.  

An additional option to raise funds through the Internet will be available via Obama's JOBS (Jumpstart Our Business Startups) Act.  The JOBS Act is set to fundamentally change how crowdfunding works by allowing sites like Kickstarter and Indiegogo to sell to its members equity – or ownership - stakes in films.  This is known as “equity crowdfunding.”     

President Obama signed the JOBS Act into law on April 5, 2012, and at Congress’ instruction, the Securities and Exchange Commission (SEC) is monitoring the new changes before they take effect, which is expected to occur at the end of 2013.    

Before the JOBS Act, filmmakers were prohibited from publicly soliciting, via calls, email blasts, or websites, for funds in exchange for equity.   Additionally, they were only allowed to take such investments from accredited (generally meaning wealthy investors), or up to $1 million from unaccredited investors they had a "substantive" (such as friends and family) relationship with. 

The JOBS Act lifts the ban on general solicitation and advertising, and allows, with certain protective guidelines, a filmmaker to take funds in exchange for equity from anyone, regardless of their financial status or their relationship to the filmmaker.

You should work with a experienced entertainment/securities attorney to make sure you are properly within the guidelines of the JOBS Act. 

With the combination of Crowdfunding and the JOBS Act, filmmakers and producers have a better chance to build a project to success and independently control its fate.  

(c) Entertainment Law Partners and Tifanie Jodeh, Esq.