crowdfunding in entertainment and media
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Current Issues in US Film Financing:
1. Crowdfunding2. Regulatory Framework3. JOBS Act: Title II4. JOBS Act: Title III5. JOBS Act: Title IV6. Use of Finders
1. Crowdfunding: What’s all the fuss?
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1.1 High profile success stories
1.1.1 Veronica Mars - $5.7M WB Backing, Kristen Bell
• Over 91,500 backers
Zach Braf sequel to Garden State - $3.1M
• Over 46,500 backers
Positive – build audience excitement
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1.1.2 Negativesa) Disappoint donors –
• Changes to t-shirt design
• Dedicated employee to respond within 30 minutes
• Cost of fulfillment
b) Taxes – need correct structure re: ownership
c) Access to lists – NYC Opera – October 2013 tried to raise $1M to avoid bankruptcy. Raised only $301,000 from 2,108 contributors (average under $150)
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1.2 Kickstarter (all or nothing); fees including payment processing – US 7.9% plus per transaction charge (rebate based on volume); UK – 8-10%
Rocket Hub worldwide – 8% if you hit your goal, 9% if you don’t. Use as you go. Partnership with A&E.
Indiegogo worldwide (per transaction fee outside US) 7% if you hit your goal, 12% if you don’t (higher fee if use as you go, with 5% rebate)
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1.3 Kickstarter Statistics (as of 1/29/14)
• Almost 131,000 projects launched
• Almost 44% success rate
• 10% don’t raise anything (over 12,000 projects)
• Unsuccessful projects• 15% film and video
• 9% music
• 8% publishing
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• Successful projects (over 55,000)• 26% music
• 23% film and video
• 10% art
• 9% publishing
• 6% theater
• 5% games
• Over 63% of successful campaigns raised between $1,000 and $10,000
• Raised $1Million or more• Film and Video – 3 projects
• Games – 29 projects
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Prizes Adam Carolla film “Road Hard” on Trump site
Fund Anything:– $1.36M raised; Prizes
• End Credit - $20 – 827 pledges
• Follow on Twitter for 12 months - $65 – 89 pledges
• Associate Producer credit - $5K – 3 pledges
• Private party with Carolla performing at supporter’s residence - $15K – 2 pledges
(Variety on-line, 8/19/13)
2. Regulatory Framework for Crowdfunding Investments
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2.1 Securities Act of 1933
2.1.1 Requires regulation of securities offered in interstate commerce
2.1.2 What is a “security”?
2.1.3 Sec. 4(a)(2) exempt transactions not including public offering of a security
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2.1.3 SEC Regulation D; safe harbor to sell securities in a private placement, but no general solicitation or advertising
2.1.4 Rule 506 under Regulation D – no limit on amount raised
2.2 Securities Exchange Act of 1934 requires registration of brokers: offering securities for the account of another
3. JOBS Act: Title II
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3.1 July 10, 2013 SEC Issued Regs permitting issuer to use Internet to raise money from accredited investors; 3.4 Effective 60 days from publication in Federal Register – Sept 24, 2013
3.2 Buyers must be accredited investors
3.3 Issuer must take responsible steps to verify that purchasers are accredited
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3.3.1 Self certification no longer acceptable
3.3.2 No safe harbor given
3.3.3 Must confirm investment not financed by third party
3.3.4 Records retention
3.3.5 More required if use Internet solicitation than using a database of accredited investors
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3.4 Possible single offering donation/accredited investors
3.5 Reg D is non-exclusive: can rely on Sect 4(a)(2) of ‘33 Act (private placement offering) BUT NOT IF USING CROWDFUNDING: then must comply with rules under Reg D and file a Form D (Sept 23 new proposed rules re: Form D)
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3.7 Proposed regs re: changes to Form D requirements (still open for comment). Would require:
3.7.1 File Form D before beginning crowdfunding solicitation and upon conclusion of offering;
3.7.2 Require filing of solicitation material which must contain specified legends and other disclosure to be mandated by the Regs.
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3.7.3. One year bar from doing a crowdfunding solicitation if don’t follow the filing requirements.
3.7.4. Will require disclosure of method(s) used to determine investors are accredited investors.
4. JOBS Act: Title III
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4.1 Permits offerings via the Internet to small investors, with limits on the platforms, the issuer, and the amounts raised.
4.2 SEC issued proposed Regs on Oct 23, 2013; currently still in comment period (90 days from publication in Federal Register)
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4.3 Under Proposed Regs:4.3.1 Dollar caps on issuer: Maximum from all crowdfunding in a 12 months period is $ 1 milliona) Compare benefit with requirements and costs for
platform and issuer
b) Possibility to combine with Rule 506 offering, offering under Title II, and crowdfunding for donations or gifts, in one offering
c) Issuer must file tax returns as part of offering information (and as annual reports) if amounts to be raised are less than $100,000; or reviewed financial statements if amounts to be raised are over $100,000 up to $ 500,000; or audited financials if amounts to be raised are over $500,000
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4.3.2 Dollar caps on investors: maximum per issuer in a 12 month period:
a) Greater of $2,000 or 5% of annual income or net worth, if both income and net worth is less than $100,000;
b) 10% of annual income or net worth, whichever is greater, if either income or net worth is $100,000 or over, not to exceed a maximum aggregate amount purchased of $100,000 per year
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4.3.3 Would authorize use of the Internet to:
a) Promote commentary on the offerings between potential investors and the issuer of the offering;
b) Permit funding portals to meet registration requirements by registering on line with both the SEC and FINRA;
c) Permit an issuer to file on line the offering materials meeting specified requirements which must be filed with the SEC, FINRA and on the websites of the Intermediaries;
d) Permit an issuer to file online required amendments to the offering materials each time there is a material change during the course of the offering;
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e) Permit the platforms (broker/dealers and funding portals) to use electronic communications to send out a variety of notices to be delivered to potential investors, and permit investors electronically to rescind their commitment until 48 hours before a scheduled or rescheduled closing (reviving such rescission right each time there is a material change, and requiring a committed investor to recommit in order to keep the commitment alive -- in effect continuing to opt in, rather than opting out, of an investment commitment);
f) For US based issuers, access foreign investors and use foreign based broker/dealers or funding portals which have registered with the SEC and with FINRA.
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4.3.4 Must use intermediary registered as a broker or a “funding portal”. The Regs would require the funding portals to:a) Do due diligence on the offering materials before posting in order to avoid 10b-5 liability;
b) Use a bank to hold investor funds until a closing of an offering or the offering is terminated or abandoned;
c) Register with the SEC and with FINRA;
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d) Have a surety bond covering the platform and its employees for $100,000;
e) Perform record keeping in accordance with standards and requirements issued by the SEC
f) Use a bank as escrow agent to hold investor funds until the closing of an offering or return of funds to investors if an offering does not close or is abandoned.
5. JOBS Act: Title IV
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5.1 SEC published proposed Regs in Federal Register Jan 23, 2014. 60 day comment period.
5.2 Increases amounts which issuer can raise under Reg A offering to $ 50 million (from $ 5 million) in a 12 months period
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5.3 Proposed 2 Tier structure: Tier 1, no change. Tier 2 pre-empts state securities laws, and creates reduced registration, reporting regime for publicly traded securities
5.4 Permits pre-registration solicitation to “test the market”
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5.5 Offering materials must be filed with SEC and can only make a sale after materials reviewed and qualified by SEC; pre-qualification, can request confidential treatment of sensitive information
5.6 Must use audited financials – av audit cost for offerings up to $50M is $114K
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5.7 Must file annual, semi-annual and current reports.
5.8 No limits on advertising and promotion; can be sold publicly:5.8.1 Positives: access to capital
5.8.2 Negatives:
a) Periodic earnings pressure
b) Difficult to reverse
6. Use of finders for a % of capital raised
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6.1 Why an issue?
6.1.1 1934 Securities Exchange Act – Sec 15(a) requires brokers to register with the Commission: unlawful to use interstate communications to sell or attempt to sell any security unless registered with the SEC as a broker or dealer
6.1.2 A “broker” is anyone engaged in the business of selling securities; examples include a variety of ways to raise capital for others for a percentage or other “transaction related compensation” – one-off vs. “business”
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6.2 What if use person not registered as broker dealer to raise funds – Act targets people who are finders but don’t register:
6.2.1 Rescission right for 1 year from discovery or 3 years from date transactions, whichever is earlier. Issuer must note on Form D if issuer paid compensation to anyone to sell securities covered by Form Da) Whichever earlier upheld in Maher
b) Sup. Ct. in Merck v. Reynolds
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6.2.2 Preclude issuer from future Reg D offerings
6.2.3 Whistleblower awards: ‘34 Act (10% - 30% of award by court or administrative judge)
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6.3 Activities making someone a “broker”
6.3.1 No-action letters: Paul Anka (1991) (checked to see if friends interested, and then gave names; percentage commission on closed sales) vs. BMW (2010) law firm introduces investors with possible interest, got percentage commission – names and addresses of only investors with possible interest suggest pre-screening and pre-selling, so no-action denied; percentage legal fee?
6.3.2 Anything more than giving names and addresses to issuer: no contact with investors
