6:32am PT by Thomas D. Selz
How the SEC Boosted the Potential of Crowdfunded Movies (Guest Column)
In the recent column "Crowdfunding's Next Bold Move? Allow the Fans to See Their Movies Before Anyone Else," authors Tim Wu and John Sloss write on the potential that crowdfunding has for the film industry.
Using the presale of movie tickets to committed fans as an example, the piece speaks to a “donation model” of crowdfunding. In this model, as the piece points out, individuals are solicited for money with the promise of any number of items in return - from t-shirts and screening invitations to advance tickets.
While individuals participating in a donation model do receive benefits, they are not considered investors — they aren’t offered a chance to get their money back and can’t profit from the eventual outcome. Providing more ways for filmmakers to garner additional, true investors via the Internet may in fact be the most promising model for the industry.
Enter the SEC.
Made effective in June of this year, the SEC adopted regulations that open up new potential sources of film financing via the Internet, known as ‘Reg. A’ of the Securities Act of 1933. Under the prior Reg. A, the maximum amount which could be raised in a 12 month period was only $5 million (with other restrictive requirements). Now, through a two ‘tiered’ system, filmmakers can raise up to $50 million depending on the case, and they can do so for a different film every six months.
In a “Tier 1” offering, a filmmaker can raise up to $20 million dollars for their project from both accredited and non-accredited investors (and, interestingly, with no limits on money from non-accredited investors). Filmmakers must file the offering with both the SEC and one state securities office (appointed to act on behalf of all 50 states).
Before undertaking the expense of such filings, a filmmaker can do a pre-offering Internet “solicitation of interest” to see who might want to invest, but no money can be accepted until after the filings have been cleared by the SEC and the chosen state’s security office. In a Tier 1 offering, a filmmaker’s production plan would need to take into account the time required to go through the filing process before funds could be accepted.
In a “Tier 2” offering, filmmakers can raise up to $50 million dollars for their project from, again, both accredited and non-accredited investors. With a Tier 2 offering, there are certain limits on what a non-accredited investor can put at risk, audited financial statements are required, and regular reports have to be filed with the SEC (but not the quarterly statements required for regular public companies). In many instances, those limits and requirements may make a Tier 2 less useful for filmmakers.
Donation models of crowdfunding will remain an option for filmmakers. Each of these funding mechanisms, however, open up different and interesting Internet financing opportunities in the industry. These new opportunities give more individuals than ever an avenue to become true investors in the industry, who feel they have a personal stake in the success of a film (word of mouth promotion) and stand to reap a financial reward by putting their money into a film – an incentive that may be far stronger than a t-shirt or an advance screening. Further, by reducing the time between offerings, the new Reg. A offers producers the opportunity to raise money for successive projects, particularly after they have become familiar with the filing processes.
Of course, simply putting something up on the Internet will not bring the money in. A producer would still need a plan to generate interest so that potential investors go to the website of the producer with the offering. Or, a producer could use one of the Internet funding platforms which are curating offerings. With the new regulations under Reg. A, however, the Internet can become a way for film producers to raise enough money to actually produce and support distribution of their films.
Thomas D. Selz is a founding partner of Frankfurt Kurnit Klein & Selz focusing on all aspects of entertainment law.