New U.S. Law Could Change Hollywood Crowd-Funding

The measure could give filmmakers access to $300 billion from regular Joes with net worth over $1 million who can own part of the movies they fund — unlike Kickstarter

By Paul Bond for The Hollywood Reporter

Like many filmmakers, Spike Lee is using Kickstarter, in his case, to raise $1.25 million for his next project. A $10 donation gets you an autographed postcard, for $1,000 you can be an extra, and for $10,000 he’ll take you to dinner and a Knicks game. But one thing Lee and others who raise money through crowdfunding cannot offer — because it is illegal — is a share of profits should the movie be a hit. That, though, is about to change, paving the way for a revolution in “equity crowdfunding” that could give filmmakers access to big money from small investors hoping to make a buck in a glamorous industry.

The change is coming courtesy of the Jumpstart Our Business Startups Act, which President Obama signed into law in April 2012 with the hope that removing some Depression-era restrictions on how fledgling businesses raise money could boost the economy. The first of the new rules is set to go into effect Sept. 23, and several players are gearing up for them.

While Kickstarter has no plans for equity crowdfunding, rival Indiegogo does. It will have competition from upstarts EarlyShares, Crowdfunder, Slated and several others.

Critics might balk at novices investing in film, especially considering Hollywood’s notoriously opaque accounting practices. But Jennifer Anderson, COO of crowdfunding player Slated, says sufficient safeguards still are in place. “Some people view the restrictions as onerous, so anyone going through the trouble of meeting them will probably be viewed as legitimate,” says Anderson. “Most people don’t want to voluntarily engage with the SEC.”

Still, filmmakers basically can set their own rules, including minimum investments and the structure of profit participation. Some could choose simplified metrics such as paying investors based on box office, while others might draft more complex profit definitions typically used by Hollywood studios.

EarlyShares, based in Miami, already has partnered with 5X5 Media, a film and TV studio that will use EarlyShares to equity-crowdfund two microbudget movies this year. 5X5 CEO Guy Zajonc envisions at least two per year for the foreseeable future, with investors offered 50 percent of profits in perpetuity.

In the future, predicts EarlyShares chairman Stephen Temes, “The audience will see a trailer and not only say, ‘Wow, that looks great. I’d like to see it,’ but also, ‘That looks like such a great movie, I want to invest my hard-earned money into it.’ ” Temes says most filmmakers will require that accredited investors put up a minimum of $1,000 or much more but will set minimums far lower for unaccredited investors (perhaps $100) in hopes of attracting 2,000 investors who will become marketing evangelists. His firm will take up to an 8 percent fee for the movies it crowdfunds.

This is an excerpt. Click here to read the full article by Paul Bond for The Hollywood Reporter.