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New Rules Allow Crowdfunding Campaigns to Offer Profit Participation

By Adam Beasley

President Obama signed the awkwardly named Jumpstart Our Business Startups (JOBS) Act on April 5, 2012. The JOBS Act seeks to encourage investment in small businesses by easing certain securities regulations. Title II is the first implementation of the Act to effect crowdfunding by giving birth to an "equity crowdfunding" market. Public solicitation of early stage investment has been banned for the past 80 years.

New SEC Rules will give filmmakers the ability to provide equity to investors through crowdfunding platforms. The new rules implement Title II of the JOBS Act and are set to go into effect on September 23rd. Currently, investment opportunities may only be presented to individuals through private offerings and cannot be publicly solicited because of perceived investment risk. The new rules allow those seeking funding to advertise investment opportunities on television, Facebook, Twitter, and basically everywhere else, including through crowdfunding sites. This development will greatly impact filmmakers, startup companies, and others utilizing crowdfunding platforms by giving them the ability to offer profit participation if the ventures are successful.

Title II applies to investment from "accredited investors," which are individuals with (a) a combined net worth, excluding the primary residence, in excess of $1 million, or (b) an annual income of $200,000 over the previous two years ($300,000 for couples). An estimated nine million Americans qualify. Title II creates a special type of offering called 506(c) allowing advertisement of fundraising opportunities.

The SEC Rules for Title III of the JOBS Act, which applies to non-accredited investors, are estimated to go into effect in 2014. Investors who make at least $100,000 annually will be allowed to invest up to 10% of their incomes. Investors who make less than $100,000 can invest up to 5% of their incomes or $2,000, whichever is greater.

Many companies are positioning themselves to move into the equity crowdfunding market, including Indiegogo, Slated, EarlyShares, and Crowdfunder, among others. Kickstarter, the largest crowdfunding platform, has stated that it has no current plans to offer equity investments.

It is estimated that the equity crowdfunding market could reach over $4 billion in the next four years. Due to the allure of the film industry and many filmmakers' early adoption of crowdfunding methods, it stands to reason that the industry would be a major beneficiary of these dollars. In fact, EarlyShares and Crowdfunder are already in talks with independent studios to set up projects, some seeking as much as $5 million.

Filmmakers will still be able to set their own rules for campaigns, including minimum investment and profit participation. In an article for THR, Earlyshares chairman Stephen Temes estimated that filmmakers would likely require minimum investments of at least $1,000 to much more from accredited investors but will set far lower minimums from unaccredited investors -- perhaps $100. The idea being that more investors will mean more marketing evangelists. As the market is currently embryonic, there will likely be various profit participation models ranging from basic 50/50 deals (investors/producers) to complex Hollywood-style definitions before industry standards emerge.

It will remain to be seen how popular equity crowdfunding becomes. It could completely change the world of independent film finance as more established players utilize the platform, and one can only anticipate the potential headlines if individual investors start making real money crowdfunding films.

The rules: https://www.federalregister.gov/articles/2013/07/24/2013-16883/eliminating-the-prohibition-against-general-solicitation-and-general-advertising-in-rule-506-and

Adam Beasley is an entertainment and intellectual property attorney in New York City. He can be reached at www.adambeasleylaw.com. A previous version of this post can be found here, at http://adambeasleylaw.com/new-rules-allow-crowdfunding-campaigns-to-offer-profit-participation/

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