Written by Michael R. Barnard for ReelGrok.com “Where Filmmakers Get It!”
President Obama signed the JOBS ACT into law on April 5th, 2012. Called the ‘‘Jumpstart Our Business Startups Act,’’ the goal is to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies. It will make it easier for small businesses to raise money so they can create jobs and rebuild the American economy by amending the Securities Act of 1933. It can have a profound impact on the independent filmmaking industry.
President Obama said, “We are a nation of doers. We think big. We take risks. This is a country that’s always been on the cutting edge. The reason is, America has always had the most daring entrepreneurs. When their businesses take off, more people get employed.”
That’s a boost the independent filmmaking industry needs. “I think we’ll see the $1 million range and down to $100,000 or so flourish with this new model,” says entertainment attorney Gordon P. Firemark.
Slava Rubin of popular filmmaking crowdfunding site Indiegogo.com, and very active in the process of crafting the Crowdfunding part of the JOBS ACT, expects this bill to create more startups and jobs for indie filmmaking.
“This is the first major change in securities regulations in about 80 years,” says Rubin of the landmark law signed today by President Obama. Slava’s part in helping craft this law over the past couple years led to his invitation to be at the White House today when President Obama signed the Act.
The JOBS ACT contains several parts that are not likely applicable to low-budget independent filmmakers, but one part of the JOBS ACT, its Title III, Crowdfunding part, is an expansion of the current crowdfunding concept that has already invigorated parts of indie filmmaking.
While crowdfunding is the sexy environment of the moment for filmmakers, the politicians building on it for the new method of equity investment created the tortuous and unsexy acronym, “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012.” We’ll call it, simply, the Crowdfunding Act.
Growth of Popular Non-Equity Crowdfunding
The popular and young method of using the Internet to attract gifts for filmmakers so they can exercise their art and craft sprang up as most filmmakers were lamenting the collapse of the indie filmmaking industry, which was hurt more than many other parts of our economy. Over the past few years, many distributors went belly-up, financing dried up, and the promise of digital distribution provided no predictability or measurable metrics.
Crowdfunding surged as filmmakers and their supporters found each other online and recognized the need to keep filmmaking as a vital part of our culture.
Another popular crowdfunding site for filmmakers, Kickstarter.com, offers a value exchange between creators and backers who pledge financial support to a project. In exchange for pledging, backers receive creative rewards, one-of-a-kind experiences, and behind-the-scenes access to the creative process as the project comes to life.
New Opportunity of Equity Crowdfunding
There is a difference between the current popular Non-Equity Crowdfunding and the new Equity Crowdfunding that was signed into law today.
The common dream of aspiring filmmakers often began with a script and some actors, and then an effort to raise money to make the movie by asking everybody to invest in their project. Ads were placed, bulletins posted, and Internet messages were spread asking for people to invest. The aspiring filmmakers then would be told how illegal that is, shocked to learn that they were offering “securities” which had to be registered with the SEC. They learned that any offering to the public of any kind of ownership in future possible profits is a security. That’s “equity.”
Michael Shuman, an economist, described it this way: “The real reason small public offerings and local stock exchanges do not flourish today is that the Securities and Exchange Commission (SEC) has essentially banned them. Existing laws place huge restrictions on the investment choices of small, “unaccredited” investors—a category in SEC vernacular that includes all but the richest two percent of Americans. The regulations prohibit the average American from investing in any small business, unless the firm is willing to spend $50,000 to $100,000 on lawyers to prepare a private placement memorandum or public offering—thick documents with microscopic, ALL CAPS PRINT that no human being has ever been observed actually reading.”
The stock market crash of 1929 that led to the Great Depression, and the surge in deliberate deception and ignorant claims to exploit the new economy and social access of the early 20th century, led to strong restrictions in America to protect individuals from fraudulent and poorly-conceived investments that could destroy families. The Securities Act of 1933 and the creation of the Securities and Exchange Commission followed, and have worked ever since under the commandment to protect the public from the ignorant and the conniving who offer securities to the public.
The Internet has enlarged the playing field for securities offerings, whether valid or not, and potential investors, whether knowledgeable or not.
The common dream of aspiring filmmakers these days has included new knowledge of fundraising methods. During our current economic collapse and the difficulty to fund new projects using traditional methods, the new approach of crowdfunding sprang up and proved popular. Non-Equity Crowdfunding combined the ubiquity of the Internet, clarity and transparency of the artists about their projects, and the ages-old concept of arts patronage.
Although growing – a handful of recent projects have raised $1 million and more – the film projects are commonly passion-driven and rely on the cash from a Non-Equity Crowdfunding campaign, volunteers, borrowed equipment, YouTube-style distribution, and word-of-mouth marketing, an approach that does little to build the infrastructure of the independent filmmaking industry.
Still, these are powerful resources. Rubin notes that Indiegogo.com has hosted more than 5,000 successful campaigns since its beginning in January 2008 and distributes millions of dollars per month to projects. He describes some of the motivations of people who choose to participate in funding indie filmmaking projects; they include those who care personally about the filmmaker, those who value the perks and gifts that come from supporting the project, those who want to be in the vital community surrounding indie filmmakers, and, of course, those who prefer profit participation.
Profit participation has not been available as part of the current popular Non-equity Crowdfunding process because of the stringent regulations of the Securities Act of 1933.
Today’s Crowdfunding Act within the JOBS ACT relieves many of those burdens for smaller projects of up to $1 million.
One Million Dollar Movies
This is good news especially for indie filmmakers. Because of the explosion of new accessible technologies and techniques and new digital distribution possibilities, a million dollars can create a movie of high production values competitive in the feature film marketplace.
“Without a doubt,” says Lloyd Kaufman, legendary producer and head of Troma Films which, covering four decades, may be the longest-running independent movie studio in the nation, “A filmmaker can make a competitive motion picture for one million dollars.”
Attorney Firemark agrees. “Developments in technology have really leveled the playing field for low-budget filmmakers.”
With the signing of the JOBS ACT by the President today, the Securities and Exchange Commission will now have about 9 months to create a regulatory structure to enable the goals of the ACT. We can expect implementation of the JOBS ACT and Equity Crowdfunding at the beginning of next year.
The goals of the Crowdfunding Act within the ACT appear to allow a filmmaker (or any entrepreneur) to offer securities of a maximum of $1 million in any 12-month period for all of the entities controlled by the filmmaker.
It appears the filmmaker’s offering of securities will be made only through a broker or a newly-described “Funding Portal” registered with the SEC. Funding Portals might be similar to the existing crowdfunding sites, and will be responsible for educating the public about investing, protecting the public from fraud, vetting the people offering the securities, distributing to the SEC and potential investors any information about the securities, and holding in escrow all proceeds prior to reaching the offering amount. Portals will also protect the privacy of investors and cannot purchase from any finders or brokers any personal information about potential investors. Filmmakers will not be allowed to be officers, partners, or directors in the Funding Portal servicing their projects.
In order to offer equity shares in their project, it appears filmmakers will need to provide a traditional Business Plan and Financial Projection, which was common before the collapse of the independent film industry, that includes the purpose for the offering and the target offering amount and its deadline, as well as the description of the ownership and capital structure of the issuer. The Business Plan and Financial Projection will also include the name, legal status, physical address, and website address of the issuer; the names of the directors and officers and anyone with more than 20 percent of the shares of the issuer. A description of the financial condition of the issuer including all other offerings of the issuer within the preceding 12-month period is also required. The filmmaker will need to make regular updates about progress meeting the target offering amount. There will be rules about describing the price, value, terms and class of the securities offered. Annual reports will be required.
Above all, the SEC is charged with the protection of investors and the public interest, which means that transparency and accountability from the filmmaker will be its primary goal.
Who Can Invest and How Much Can They Invest?
Requirements about approaching only “accredited investors” (a term that is loosely defined as “experienced rich people,”) and those with previous relationships to the filmmaker are loosened by the Bill. Once the new SEC regulations are in place in about 9 months, filmmakers can expect to be allowed to approach anyone via their Funding Portal. If you pay someone bring people to your project on a Funding Portal, you will be required to expressly declare that the person is being paid to do so.
Expect that those potential investors whose annual income or net worth is less than $100,000 will be allowed to invest up to 5% (capped at a maximum of $2,000) of their annual income or net worth. Anyone with annual income or net worth of more than $100,000 will be allowed to invest up to 10% of their annual income or net worth, capped at a maximum of $100,000. These maximums will apply to all of the investments made by the individual to all issuers in any 12-month period.
The securities they invest in will be barely liquid. Your investors will likely not be allowed to resell their securities for a period of 12 months except to people such as accredited investors and family members, or through a registered public offering if one is developed.
A POSSIBLE FLY IN THE OINTMENT
Getting to that one million dollar mark will be challenging for the filmmaker. The Bill seems to require that offering amounts of $500,000 to $1 million will require audited financial statements. This requirement might be significant because such an audit could easily cost perhaps $10,000-$20,000 in upfront costs. It could also be hard to find a Certified Public Accountant to provide such a statement.
“Smaller boutique-style CPAs can’t justify offering certified audits because the Sarbanes-Oxley Act of 2002 says we can’t then do taxes or consultation for firms that we’ve audited,” says Todd Miller of Miller & White, a Certified Public Accounting firm outside Fresno, California. Although CPAs are licensed to issue opinions on financial statements, many smaller firms do not practice that because of overhead expenses, malpractice insurance, and ongoing licensing requirements. “If you go to a big city and larger firm, they are likely to charge 2-3 times what a smaller firm would charge, because of much greater overhead,” added Miller.
An advantage that filmmakers could have is the normal process of creating a new single entity especially for an individual movie. “It would seem simple to create an audited financial statement for a brand new entity without a history,” said Miller. “It depends on what the SEC ultimately rules. Perhaps they’ll be happy with a financial checklist of disclosures, a litany of notes such as appear in Annual Reports. Perhaps that type of statement could run, say, $2,000 to $5,000.”
Filmmakers, of course, are notorious for always seeking to cut a deal, to trade services for participation in their film project. That’s not possible for the audited financial statement; it is against the law for the CPA to trade a statement for shares in the company. The filmmaker will pay for the audit whether or not any money is successfully raised.
However, the Bill seems to clear the way for using any other fundraising method while also offering an Equity Crowdfunding investment. Perhaps a Non-Equity Crowdfunding campaign could raise the money to cover expenses for launching a $1,000,000 Equity Crowdfunding campaign.
Will Equity Crowdfunding co-exist with Non-Equity Crowdfunding?
Indiegogo’s Rubin points out that equity or non-equity “is not a limitation of the platform. Indiegogo,” he says, “is a place for filmmakers to find an audience that cares. Some have gone on to become For-Profit entities.”
Even with the relaxed rules of today’s Crowdfunding Act within the JOBS ACT, the amount of time, effort, expense, and risk required to offer equity shares in a project will likely be beyond the desires and abilities of many of the indie filmmakers who have made Non-Equity Crowdfunding such a success. When the difference is perceived to be as simple as expressing one’s passion on a clever video and spending one’s time promoting the Non-Equity Crowdfunding project with tweets and Facebook messages, rather than all of the details of creating budgets and business plans, of revealing tax returns and business dealings, of being intimidated by Federal agencies … the two approaches will likely quickly split into two different and healthy camps.
The reason the SEC and the Securities Act of 1933 exist is to protect citizens from fraud and ignorance. Many people have expressed concern that fraud will become a significant outcome of Equity Crowdfunding.
Indiegogo’s Rubin disagrees. “Our site’s 5,000 campaigns are proven case studies to predict that there is no significant worry about fraud. The fraud rate in our case studies has been about 1 percent.” He notes that when e-commerce was new on the Internet, people also predicted huge increases in fraud. However, eBay.com and Amazon.com proved that online fraud risk is no greater than every other risk we face every day.
The Crowdfunding Act has fraud prevention woven into it, which is why there are limits on how much investors can invest, why there are registered intermediaries to handle the offerings, and why transparency and accountability is demanded of the issuers.
Attorney Firemark says, “Loosening restrictions on the number of unaccredited investors and how they can be approached is only a small part of the fraud equation. The anti-fraud rules haven’t changed. It’s still necessary to make full and complete disclosure of all material facts that would affect a prospect’s investment decision. Equity Crowdfunding offerings will still need to comply in all other respects with the securities laws.”
When the Crowdfunding Act was passed from the House to the Senate, the Senate added only a single amendment to the House version of the bill. That amendment requires even stricter reporting requirements for issuers obtaining capital from Equity Crowdfunding.
Troma’s Kaufman also disagrees that fraud will be significant. He believes investors attracted to Equity Crowdfunding of independent feature films are not likely targets for get-rich-quick schemers and other cons. “People want to invest in movies. They want to be part of that. They know the risk of independent filmmaking, that art is the key. They are here because of the soul of the artist, not because they believe this is going to make them rich.”
THE BOTTOM LINE
The independent film industry has taken a hard hit during the bad economy. If filmmakers with great projects that need $1 million for production can now raise that money and use it to hire talent and crew, to rent equipment, and to market their movie, it will help rebuild the infrastructure of the independent film industry.
The JOBS ACT is one of the most bi-partisan and broadly supported efforts of our current political environment. It imposes no costs on taxpayers, and is even supported by the National Taxpayers Union as well as President Obama, and both the Republicans and the Democrats in the House and the Senate.
The new Equity Crowdfunding made possible by the ACT signed into law today by President Obama could help you begin a real career in filmmaking.
No matter how an independent film comes into being, “Art is the key,” says Troma’s Kaufman. “The movie should be driven by the soul of the artist.”
The Securities and Exchange Commission is accepting comments on how it will formulate rules for the new equity CROWDFUNDING act that was included in the JOBS ACT.
This is important for indie filmmakers, since the ability to reasonably raise up to $1,000,000 from investors could reinvigorate the indie film biz.
SEC rule-making in the spirit of the Act should protect investors without unreasonable burdens on the filmmakers. Right now, there is an assumption that the rules will follow the extremely stringent and anti-fundraising requirements of “private placement memorandums,” with their huge demands that cost filmmakers tens of thousands of dollars in legal fees and time and effort.
Ask the SEC to protect investors while allowing filmmakers to access the Crowdfunding Act provisions without onerous restrictions. If the demands and expense common for the current “Private Placement Memorandum” continue, requiring tens of thousands of dollars and months of effort be spent prior to crowdfunding, the spirit of the CROWDFUNDING ACT will be thwarted for most indie filmmakers. Ask the SEC to find ways to protect the investors without thwarting the filmmakers.