One of the inevitable challenges faced by independent entertainment entrepreneurs, such as film producers or videogame developers, is obtaining financing for the development, production and eventual delivery of their project. However, attempting to “raise” money for a project by asking strangers to contribute funds to it in exchange for participating in the potential success of the project engages a variety of legal concerns, not the least of which is whether such solicitation is a violation of securities laws. There are also mechanical impediments to raising financing, such as the ability to “broadcast” the potential project to a sufficient number of interested “investors” and inherent transaction costs which mean that it is not always practical to obtain small dollar amounts from multiple investors – it would be great if you could find 100,000 people each willing to contribute $10 to your project, but how do you go about doing that? (And if you’re a securities lawyer, you might start getting hives thinking about the implications of all those people residing in different jurisdictions, entailing the need for compliance with multiple sets of securities laws.)
One innovation which has attempted to harness the power of the internet and social media to solve these problems is “crowdfunding”. (For a nice backgrounder on crowdfunding, see Nathan Monk’s “Crowdfunding: Is it Right for Your Start-up?”.) Prominent examples of crowdfunding websites include Kickstarter (which bills itself as a “funding platform for creative projects”) and Indiegogo. To avoid securities law concerns, crowdfunding sites often operate on a donation/reward model: creators set different donation levels of increasing monetary value which are coupled with increasingly valuable/desirable “rewards” matched to the donation levels. So, for example, if we were interested in crowdfunding the recording of an epic spoken-word rendition of all of the posts here on the Signal, we might say that if you contributed $20 you would get a copy of the entire set of DVDs, for $40 you would get the DVDs plus a signed and personalized poster of our entertainment law group (actually more valuable than you’d think), for $100 you’d get to come hang out in the recording studio while we did the recording and for $1,000 we would re-name the blog in your honour.
There are some Canadian crowdfunding platforms out there: the nice folks at the Hot Docs festival run Doc Ignite, which describes itself as “a crowd-funding site for Canadian documentary works-in-progress”. The FAQ will answer everything you could want to know about crowdfunding in general and how Doc Ignite in particular work. At the time of writing of this post, the current Doc Ignite project is called “The Secret Trial 5”, they’re looking to raise $15,000, they’ve received $7,725 from 57 supporters and they offer rewards ranging from, among other rewards, attendance at a sneak peek screening of the completed film (at the $25 level) to, among other rewards, on-screen credits, attendance at editing sessions and the chance to vote on creative decisions (at the $500 level).
Of course, while interesting and fun in their own right, the need for entertainment projects seeking crowdfunding to shoe-horn their efforts into the donation/reward model can be unduly limiting: not all projects will be suitable for that model, and not all creators will want to avail themselves or their projects in a way which matches the expectations of the “reward” model. Since the “problem” with using crowdfunding to raise money in exchange for an “ownership” interest in the project (such ownership usually taking the form of participation in the “back-end” profits) is that it might trigger securities law obligations, what about modifying securities laws so that they facilitate (or at least don’t impede) crowdfunding?
In the United States, the JOBS Act (Jumpstart Our Business Startups Act) was enacted in April 2012, and it will modify existing securities laws to allow equity-based crowdfunding for up to $1,000,000 – in other words, rather than forcing crowdfunders to rely on the donation/reward model in order to avoid securities law entanglements, crowdfunders will be able to offer equity positions in the potential success of their creative projects. (For further details on how the JOBS Act changes will operate, with particular reference to entertainment industry projects, see the posts of Mark Litwak (and again) and Ronald L. Barabas.
In Canada, or at least in Ontario, the Ontario Securities Commission (OSC) is currently seeking public comment on whether to modify Ontario securities law in a manner which would allow for equity crowdfunding: in December 2012 the OSC released Consultation Paper 45-710. The Consultation Paper is worth reading for a number of reasons, not least of which it neatly summarizes existing securities law in a manner which is easy to understand. As Nathan Monk points out, some of the proposals the OSC is considering are:
- crowdfunding websites (or “portals”) would be required to register with the OSC
- investors would have to sign a “risk acknowledgement” form and would enjoy a two-day “cooling off” period which would them to back out of an investment
- investors would be capped at contributing $2,500 to any single investment request and $10,000 overall in any calendar year
- companies would be capped at raising $1.5 million in any 12-month period;
- companies seeking funding could use social media to attract the attention of potential investors, but would be restricted to advertising the offering only on their company website or at the funding portal’s website
- companies would have to provide investors with an “information statement” about the business, including a description of the potential risks
- financial statements would need to be provided, and if more than $500,000 is sought, they would need to be audited financials
This would be a significant change to Ontario securities law, with potentially wide-ranging impact for entertainment entrepreneurs. The OSC is seeking public feedback by February 12, 2013 – details on where to submit comments can be found on page 44 of the Consultation Paper.