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CROWDFUNDING FOR FILMMAKERS
RAISE A MILLION DOLLARS OVER THE INTERNET
Although Republicans and Democrats rarely agree on anything these days, Congress has passed and President Obama signed on April 5, 2012 the JOBS (Jumpstart Our Business Startups) Act, a collection of laws that dramatically relaxes regulations on raising capital for startup companies. The law was backed by Republicans, as well as tech companies and their venture capital backers. While encouraging independent filmmaking was not on the mind of Congress when it passed this law, it promises to dramatically expand the ability of filmmakers to raise financing for their projects.
In Silicon Valley, entrepreneurs often raise large amounts of capital for risky start-ups. However, the number of Initial Public Offerings is much less than it was before the dot com bubble burst. In 1996, there were 791 Initial Public Offerings (IPO) while from 2001 to 2008 the average was a mere 157 a year. Of course, this reduced activity may be due to investors assuming a more prudent investment strategy after losing their shirts in the dot com crash, or it could be a reaction to new regulations. Among other changes enacted, Wall Street firms are prohibited from promoting stocks with their own questionable research, an obvious conflict of interest.
The new Act relaxes some restrictions for smaller emerging growth companies. It seeks to encourage entrepreneurs because most new jobs are created by small businesses, not large ones. Consequently, this new law could be the impetus for an economic boom - at least that is the hope of its backers. No doubt, some of the "reforms" in the Act are of questionable merit and could open the door to new abuses. However, the current laws governing the raising small amounts of capital are unduly onerous for entrepreneurs, and have been for many decades. Furthermore, these laws have clearly not kept pace with technological change and the methods we use nowadays to communicate with one another. If anyone understands the potential of the crowd, it should be President Obama. In the last presidential election, he raised nearly three-quarters of a billion dollars from Internet solicitations, mostly small donations.
Most promising for indie filmmakers, the JOBS Act contains provisions that for the first time will allow internet crowdfunding for the production of films. Crowdfunding is a method of raising capital by obtaining small amounts of money from a large number of investors. Although existing companies like Kickstarter.com and IndieGoGo currently enable filmmakers to raise funding through donations (i.e., gifts), this new law, when it becomes effective, will allow filmmakers to raise up to one million dollars in equity investments by soliciting the general public without the prior restraints.
The prime restriction that hampered filmmakers from raising funds using the internet was the prohibition on public solicitation for what are called private placements. Public solicitation is any form of advertising or approaching strangers such as by putting leaflets on their car windows. Up until now, the law has required a "pre-existing relationship" between the filmmaker and the potential investor. It was not always clear how much of a relationship was required. There are filmmakers today who have thousands of "friends" on Facebook. Some of these connections may be fairly tenuous and the filmmaker may have never met some friends in person. Do these contacts count as a pre-existing relationship if the extent of the bond is merely accepting an invitation to connect? Fortunately, these kinds of issues don't seem to matter much anymore with the passage of the JOBS Act.
For many businesses, a million dollars is not a lot of money, but for filmmakers it can be more than sufficient to produce a feature film. Indeed, with the use of digital cameras and a laptop with Final Cut Pro, many films are made for less. Moreover, about 40 states now offer production incentives, enabling producers to stretch their funding. And by spreading the risk among a large pool of small investors through crowdfunding, no one gets burned badly if the movie flops.
The major problem with film investments has always been their extreme risk and the expense involved in complying with the laws that regulate investments. Filmmakers were free to go after an unlimited number of high rollers they had relationships with, plus up to 35 middle class investors. But most aspiring indie filmmakers don't hang around the craps table in Vegas and don't know many wealthy individuals. So they often relied on friends and family, or their own resources, including borrowing money against one's house, or at least in one celebrated instance, selling their blood. Other filmmakers used various subterfuges to reach potential investors and hoped the SEC would not notice. Most of the time the authorities paid them no mind as they had bigger fish to fry. I once spoke to a federal prosecutor on behalf of a client who had been defrauded of several hundred thousand dollars in a fraudulent film investment. The prosecutor confessed that unless at least a million dollars was at stake, the case was just too small for him to pursue. There are just too many bigger crooks out there.
Crowdfunding may hold another advantage for filmmakers unrelated to raising money. One of the major problems facing independent filmmakers is how to market and distribute their completed movies. Today it is a buyer's market and distributors have thousands of films to choose from when deciding what to acquire. Of course, self-distribution is always an option, and anyone can put their film up on YouTube or other portals. But without effective promotion the film may just sit there undiscovered. However, if a film is financed by a crowd, one starts with a community backing the project, and each member has an incentive to spread the word about the film. As the major studios have seen, a film that receives bad word--of-mouth on opening weekend falls faster and harder than ever before, while at the same time, an unknown title can quickly catch fire and become an overnight sensation. Moreover, funds could be used for advertising and distribution provided that use is disclosed to investors.
The SEC has 270 days to implement additional regulations, and it is not clear at this time how restrictive or liberal these rules may be. The SEC is inviting the public to send in comments on each of the seven titles of the law including the crowdfunding provision, which is Title III. This is an opportunity for filmmakers to express their concerns about the rules that will be adopted to enforce provisions of the JOBS act. Filmmakers can submit comments via either email or on the SEC website.
More details about the Act and its full text can be found on my blog:Litwak Blog
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Volunteer Lawyers for the Arts, New York presents:
Risky Business: Financing and Distributing Independent Films with Mark Litwak, Esq.
When: Friday, May 4, 2012: 10am - 5pm
Where: DLA Piper, 1251 Avenue of the Americas
(at 50th Street), New York NY 10022
This comprehensive seminar -for new attorneys, attorneys transitioning to entertainment law, and filmmakers- explores how independent films are financed and distributed. Topics include financing via pre-sales, debt and equity investors, negotiating tactics, typical contract terms, cross-collateralization, creative accounting, and ethical concerns. Particular attention will be paid to how producers and filmmakers can protect themselves by: investigating distributors; watering down warranties; adding contract provisions covering performance, termination, and alternative dispute resolution; getting errors and omissions (E&O) insurance; and using lab access letters and schedules of minimums. Other topics will include: criteria for selecting a distributor; new media distribution; which contract terms are negotiable; compliance with state and federal laws regarding investors; retaining an attorney, producer reps and publicists; and confirming awards and enforcing judgments. Extensive handouts will be distributed via email in advance of the program, including a distribution contract, articles, and a self-defense checklist. Finally, the lunch hour will provide a great opportunity for networking.
Mark Litwak
is a veteran entertainment attorney based in Beverly Hills. He has lectured at UCLA Extension for more than 20 years, and at Harvard and other top universities. He is the author of six books including: Reel Power: The Struggle for Influence and Success in the New Hollywood, Dealmaking in the Film & Television Industry (winner of the 1996 Krazna-Kranz award for best book in the world on the film business), Contracts for the Film & Television Industry, and Risky Business: Financing and Distributing Independent Films. He has executive produced 6 feature films and successfully arranged for the distribution of more than 50 features as well as serving as production counsel on several TV series. Mark also functions as a producer rep, assisting filmmakers in the financing, marketing, and distribution of their films. He is AV Peer Review Rated and has been named a Southern California Super Lawyer multiple times.
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Fees:
Filmmakers, Artists, or Non-Law Students:
$120 on or before April 23, 2012
$150 April 24, 2012 thru May 3, 2012 at Noon
Attorneys (including 7 CLE credits) or Law Students:
$275 for VLA Young Associate Members (at any time)
$295 on or before April 23, 2012
$350 April 24, 2012 thru May 3, 2012 at Noon
To register, please download and complete the registration form
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Mark Litwak is an entertainment attorney, author and expert witness based in Beverly Hills, California. His practice includes work in the areas of copyright, trademark, contract, multimedia law, intellectual property, and book publishing. As a Producer's Representative, he assists filmmakers in arranging financing, marketing and distribution of their films. His filmmaker clients have had award winning films in Cannes, Toronto, Telluride and other festivals.
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Congratulations
To our client Brian Wendel whose film Forks Over Knives is the number one documentary DVD on Amazon.
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