Film Funds: It’s Not You, It’s Them

A lack of funding options is creating opportunities for new funds to enter the indie market; understanding their funding criteria is Job #1 for producers...

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Crowd Film Funding: Losers and Winners

by Jeff Steele

Crowd-funding has a future, but that future will not look anything like the present.  The current online crowd-funding models will soon be extinct, but it’s not too late for any of them to do a quick re-vamp of their business models to make them work.  Here are my predictions as to the future of the crowd/tribe financing institutions as they currently stand:

  • LOSER – Donations/Gifts fundraising is only mildly sustainable in social/issue and hyper-niche filmmaking.  Otherwise, it’s business as usual for raising money for a cause, where grant writing is replaced by signing up for a funding site. Is anyone really making $250,000 or even $25,000 online? Outside of Nigeria?
  • LOSER – Rewards in the form of gifts won’t work. It’s a passing fad and  the novelty will wear off. People will tire of swag, the exception being for fan-boy films that already have a cult following and for which an exclusive reward of some value can be earned (e.g. graphic novel based films), or an animated film where one could earn actual cells from the movie (assuming it’s animated old school.)
  • LOSER – Pre-selling DVDs as fundraising won’t last either.  First, this, too, is a novelty.  Second, people aren’t interested in owning DVDs any more.  DVDs as a sell-through are down 40%, whereas DVD rentals are up 7%.  But VOD is the fastest growing segment in home entertainment.  I own a Blu-Ray player and I think Blu-Rays look amazing (especially “Coraline”), but I don’t buy them, I only Netflix them.  The ONE except to this is family films/animation: kids love to pop in the same video and watch it over and over again.  That’s why their video takes are 100% higher than other genres.  But again, I use Netflix’s Watch Instantly feature for unlimited viewings of “Dora” and “The Wiggles.”  Pre-selling a video download won’t cut it either — it’s valueless.
  • LOSER – Building an audience as a way to appeal to investors/financiers might sound like a great idea, but having a bunch of YouTube hits does not translate into dollars and means almost nothing to the buyers or financiers.  Filmmakers need to remember that their job is to market to buyers and distributors, not to audiences.  It’s the distributors’ job to market to their audiences.  It’s easy to lose sight of this during the publicity phase leading up to your film’s release, because distributors use filmmakers to market to their audiences.  But you have to remember who is pulling the PR strings: the distributor.

If crowd-funding is going to have sustainable legs, it needs to appeal to the most basic of investor emotions: greed and self-interest.

In order to get disinterested investors to support a project, you’ve got to give them something back for their money – and it better be more than a sense of satisfaction. Think about it, what would you want in return?

I’ve been thumbing through the securities blogs for the past couple days (compelling reading) and the fundamental roadblock that crowds hit is the prohibition of “general solicitation and advertising” (unless it’s to accredited investors.) This clearly pulls the rug out from under the crowd concept. But where I do see a ray of hope is within the “intrastate exemption.” Following is an excerpt from a blog called Cutting Edge Capital Raising:

Intrastate exemption – this exemption is based on the premise that an offering that stays within a single state does not require federal regulation (it will be regulated by the relevant state). The business must be incorporated and do a significant portion of its business in the same state where the offering takes place (for example, if you are incorporated in Delaware but located in California, you cannot use this exemption). You must also take stringent measures to make sure all investors reside in your home state and do not sell their stock to anyone living outside that state. Because the statute is somewhat vague about how to qualify for this exemption, the SEC created a “safe harbor” for compliance. A safe harbor is a set of conditions that, if you comply with them, you can be assured that you will meet the requirements of an exemption. However, it is not necessary to comply with the safe harbor conditions to comply with the exemption. The conditions required to meet the safe harbor are as follows:

a. 80% of the company’s assets are located in the state in which the offering is made;

b. 80% of the company’s revenue comes from the state in which the offering is made; and

c. 80% of the proceeds from the offering will be used within the state in which the offering is made.

In short, if your film’s LLC is registered in the state where the film is going to shoot, then that is where you restrict your fundraising. While this isn’t as appealing as casting a net across the globe, it is perhaps more realistic for home grown filmmakers wanting to stay local.

Section A, above, is pretty straight forward if the film stays within the state.

Section C works if the film shoots in the state, while still leaving room to “post” elsewhere if your state does not have facilities.

Section B is a bit trickier, but not impossible…  Deriving 80% of your film’s revenues from within California or New York is certainly plausible, since most of the entertainment companies that you could sell to would be intrastate, but you would have to restrict yourself to a buyout arrangement for all non-California revenues, like foreign sales and domestic exploitations outside California.

Basically, the buyout works to shield the LLC from foreign and out of state revenues.

If you’re outside a major media center, then perhaps arranging a non-recourse “buy-out” situation with an intrastate entity (like a broker of some sort) might be the way to go.

I’m not going to presume that this buyout will be the model that sustains crowd-funding, but this is how filmmakers and crowd-site business models need to think about their financing.

People don’t want kitsch — they want cash.  And you should always give the people what they want.

POSSIBLE WINNER? – I’ll leave the details for the crowd sites to iron out; with the buyout. But this is one of my suggested possible frameworks I see most likely to succeed.

POSSIBLE WINNER? – The Biracy Project uses rewards as a deferred compensation model to motivate people to do actual work on behalf of the production.  Like any other low budget film, these deferrals would be paid out of the film’s profits (if any).  This may not let you “ride the upside” like an equity investment would, but at least they’re appealing to the right human motivation: self-interest.

POSSIBLE WINNER? – Another would be if local crowds could create local intrastate investment clubs that raise enough capital so that the club entity itself becomes accredited. This to me is a smart entrepreneurial move for the motivated business player.

POSSIBLE WINNER? – Offshore based crowd-funding business (like in the British Virgin Islands or Costa Rica), where income isn’t generally reported.  Many large production companies keep their projects’ intellectual property rights there.

POSSIBLE WINNER? – Crowd-funding for post production: finishing funds, visual effects, editing, sound track, etc. has merit.  Vlad Vukicevic of RocketHub.com mentioned this and I kind of like it.

This is crowd-investing, so the wisdom of the crowd will need to weigh in.

One of these crowd funding sites will get it right, but who it will be, I don’t know. The winner is the one I am waiting to work with as a future partner in alternative financing for indie films.

Note: I am not an attorney or a securities expert, so please don’t construe this blog post as legal or investment advice.  But I do welcome all attorneys and securities experts to join the discussion.

39 Responses leave one →
  1. April 12, 2010

    Nice writing style. I look forward to reading more in the future.

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  2. April 12, 2010

    I think a lot of the complexities of fund-raising, crowd and/or otherwise, go away if your project has a strong marketing platform. If not, you have to work those details. And, therein lies the rub. But I do admire those who approach the details with contemporary finesse.

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  3. April 12, 2010

    Interesting article Jeff. I can’t say that I agree with it but you make some good arguments.

    In particular, I think you’re defining the rewards too narrowly. At RocketHub.com, we’ve seen the rewards include physical goods (e.g. DVDs, CDs, etc.), services (e.g. lessons, writing a song for you, walk-on role, etc.), and experiences (e.g. movie premier, live concert, etc.).

    If crowdfunding is really a model that gives filmmakers the ability to raise a large sum of money through many small contributions – e.g. $10, $20, $50, even $100 – then the investment motivation falls apart. Since even if one could make 100% return, it’s still a pretty small amount of money at stake.

    I think the fundamental motivation is still similar to that of gifting but where the rewards offer a higher level of engagement.

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  4. April 12, 2010

    Jeff,

    Your comments on the SEC and interstate issues aside (I cannot give an opinion on these since I am not qualified to do so), it is way too early to call winners or losers in crowdfunding.

    I come from a similar background to you and it is hard not to frame the conversation in traditional distribution and financial terms. However, to understand crowdfunding, crowdsourcing and the crowd itself you need to open up your frame of reference.

    The powers that be no longer control the means of dissemination. A small player with the right technology and a motivated core audience can succeed. That success cannot be measured in comparison to the old media model. Old media will not disappear but new models will prosper.

    Your points are well taken and are not necessarily wrong. Although, then again, they are not necessarily right.

    All the best, Phil

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  5. Tre' McGriff permalink
    April 12, 2010

    I agree with Vlad and Phil. It’s waaaaaaaaaaaaay too early to dissect the merits of crowdfunding…It’s STILL a fairly new alternative concept to raising funds for films…Not only that, but I don’t think filmmakers are looking for crowdfunding to finance their ENTIRE film; or even MOST of it. My understanding is that it is regarded as MODEST, “supplemental” funding…nothing more, nothing less….

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  6. Martin permalink
    April 12, 2010

    Jeff I think you are right on target with this one!!!!!

    These predictions are very accurate. Your readers need to remember that you are not talking small pocket change in your version of crowd funding. You are looking for a winner in a significant way, one who can raise 20-25% of the budget for a 1m+ film. Or the finishing funds on the back-end.

    Great insight on the DVD market too (I see it being dead too). And the fundraising bit as donations you seemed to have learned through frustrated filmmakers like myself who say it doesn’t work on films with no social issues. Even your own family and friends don’t donate.

    I like that you give a kudos out to Biracy and Rockethub which I thought was cool. It shows you have done your homework not just on the problems, the SEC which nobody likes to look at and into what companies are currently doing.

    Very well written. One of my favorite blogs of all time and I’m a veracious blog reader.

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  7. Curran Engel permalink
    April 12, 2010

    I agree. The Howey test pretty much eliminates Crowd funding for any commercial venture. However, smaller projects and personal films will continue to benefit from the modest tax deduction enjoyed through fiscal sponsorship. When my students seek funds for their student films I explain that the’ll find the money from two sources: 1) People who love them and 2) people who love their story. These are not people committed to a successful business enterprise. They are making a charitable decision.

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  8. Fernando permalink
    April 12, 2010

    This article is based on pure speculation of what may happen and obviously biased towards the Biracy model, which although not mentioned in the article, shares most of the traits of the “Loser” models also explained above, but were conveniently omitted from the list.

    I like Biracy but in order for their model to be successful it would need millions of subscribers (to fund the caliber of movies they want to produce). After several months they don’t even have a thousand fans on Facebook. How are they going to get millions to sign up?

    Intrastate exemption sounds interesting but not appealing in today’s market. I’d rather go the traditional route of financing than going through the hassle of crowdfunding just to limit my efforts to the state where I conduct business.

    Wouldn’t be better to push for legislation to change securities laws and allow for profit participation on crowdfunded investments? Spain’s The Cosmonaut is living proof that crowdfunding can be successful with the right legislation and marketing strategy in place.

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    • April 12, 2010

      All predictions are based on speculation — after all it is the future we’re discussing and I no longer have a crystal ball.

      I hold no bias for or against any any of these companies. I merely looked at what was being offered online (which appeared to be a lot of the same: donations vs. rewards, including Biracy) and assessed them from a financially sustainable perspective. Biracy does offer a deferred compensation scheme that I thought was inventive and a step in the right direction.

      The traditional financing model still prevails, at the present time, both in terms of efficiency and predictability/reliability. The goal in this post and my last post

      http://filmclosings.com/2010/04/05/new-method-indie-financing/

      was to explore ways of creating a new hybrid that could work and open up the door for more indie producers.

      Obviously, legislative change would address the securities issues, but I also foresee (my crystal ball reappeared) rampant abuse by charlatans waiting to take advantage — which could overturn the legislation and tighten the regulatory belts even further.

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  9. April 12, 2010

    I think its obvious the dvd market is over. We can all see that. We dont need a Crystal ball for that!

    Agree and disagree with points. I think 95% of crowdsourcing will fade away when people see that the films they help dont go anywhere, so whats the point of being part of crap, or small quality but indie projects. I agree, the interest wil fade. People want to get involved with films for a bit of glamour, but indie filmmakers cant really deliver on that.

    However, I think people also invest in people, and if those people have talent, and they are entrepreneurial about building their personal brand, and can offer attractive, and yes, (Selfish) incentives that are fresh, exciting, then I think some individuals will grow large mailing lists and will fund their projects.

    Possibly even in the $2m or more range. (After 5-7 years of cultivating a fanbase) And providing their work continues to evolve. Offering investment cash incentives to crowds (And not saying this is what you are saying) will also fail.

    Why? You know by the time it gets back to a small investor we are talking nickels and dimes. Even if the film is a hit. You know as a whole, the film biz is one of the WORST ways to invest your money. Its not a biz for serious investing. If I was rich, I would never invest in Hollywood hits, Avtar, Batman, as I have to risk millions to get 2 or 3 times back.

    Its nuts to investment in movies, its really a bad way to invest. So why do people do it? Well, back to what I said. Its all part of the so called glamour of the biz, and the small filmmakers that do well, also need to have that sort of connection to offer attractive enough incentives to appeal to the selfish side of human nature. I am cool with selfish, as this is not a charity.

    The world has changed so much in such a short period of time that I dont think anybody can FULLY predict the new models. Although I can see what probably WONT work for the future. And you mentiuoned a few.

    Like your blog

    David

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  10. John W. Bosley permalink
    April 12, 2010

    The interstate concept works, but only if you generate a ton of interest. For instance, Jeff Daniels could probably do something like this in Michigan because he is a local celeb. You project would need to have a celebrity image about it. Thus, it would have to have something that wouldn’t just benefit someone’s pocket book but would be treated as a local benefit. Maybe seen as a possible great for of PR. I had pitched to some people in my home state of Maine that I wanted to do my next project The House, in that state and with the story really based on a location and giving that area and the state some much needed PR. This type of situation, with local investors seeing that they could benefit both financially (directly and indirectly with other local businesses) and also have some pride in seeing their area in a good light with a film.

    Biracy interests me. I’ve done some research on different sites like Indiegogo and Kickstarter, but none of them have any real potential like Jeff is pointing out. What Jeff is talking about isn’t raising funds for small micro-budget films but low to medium budget films

    I wouldn’t be so quick to dismiss that customers want to own a copy of something. What really happened what to much change all at once. Change from VHS to DVD to Blu ray to whatever comes next. What happened was a combination of things. One I believe is that the customer finally smartened up and said, “I’ll just wait around for the next thing” or they go to Walmart where the studios decided to down their libraries of unknown films into a $5 bin. What a way to completely devalue a product. What the studios needed to do was hold back. Maybe they should have created demand. Asked how many actual customers wanted to own a certain old film, instead of just printing thousands of copies for no good reason.

    What crowdfunding is doing is that people who truly want to support a certain film that wouldn’t attract investors, people are funding and they get a copy. It is working, but it can’t work for larger films.

    What Jeff is pitching isn’t crowdfunding but crowdinvesting. This would be interesting to see, but with the SEC regulations, it will be a long time coming. It can work, but the films would need to show some potential like creating an ongoing “Demand It” campaign to gauge who and where people want to see the film in theaters. Paramount did it for P.A. and it is possible with sites like OpenIndie.com

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  11. April 12, 2010

    Stimulating thoughts and instrinsicly important information for filmmakers. This is not about the super low budget indie. So, what Jeff says I think still stands correct. He is an open guy so I expect to see wonderful things develop on this front in the future. I’ll be following.

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  12. Myron permalink
    April 12, 2010

    Been following the indie film and “digital distribution” for 5 years now. And like all I’ve been waiting for the model that would raise to be the next thing for indie film and I think it’s here. I believe that anyone serious about indie filmmaking should start to looking into mobile app development. 2009 Mobile App industry $4 billion projected to be a $17.5 billion industry domestically and $30 billion globally by 2013, not to mention the constant new customers from Africa, China and India. Also with iAd you have another revenue stream that’s projected to rise from $500 million 2009 to $4 billion by 2012. Film’s are content, digital content consumption is set to continue rising in enormous bounds and leaps with continuous connectivity and the de-fragmentation of devices. We’re even seeing the rise of short films becoming the equivalent of “singles” in the music business and having the possibilities of generating a nice profit. It’s all about easy Points-of-purchases where the smartphone takes over the credit card (Paypal just announced 1 million mobile app downloads, that’s a lot of buying power at the tip of your fingers) Even with access to new revenue streams, the more things change the more they stay the same. With the openness of new Mobile App development will come the youtube effect where ever joe-blow will be building an app. The solution is the same solution we face now with filmmaking, Think Audience first. Your film (app) must cater to a definite genre, market, physio-graphic as well as demographic and be an event even if it’s an micro-event that resonates. I’m currently developing and opening conversations with fellow filmmakers regarding this new business model and would love for others to join so we could engage in a conversation that could be the biggest paradigm shift in the indie film industry since the 1948 United States vs. Paramount pictures anti-trust ruling.
    You can reach me at Facebook or on twitter at
    or email
    myronward1@hotmail.com
    This is NOT a recession in the Indie Film world it’s one of the GREATEST times and there is enormous audiences as well as wealth that will be generated. Like Peter J Dekom said “If you’re thinking outside the box….You lose. There is no box.”

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    • April 13, 2010

      Myron is correct, and his comment about mobile-shorts being analogous to music singles is something I’ve believed in for several years. I did embark on an endeavor of this sort about 5 years ago — the idea was right, the plan was solid, but it was too early for the technology.

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  13. April 12, 2010

    Jeff,

    It appears that this subject matter is getting you a lot of readers and comments. That must reflect the importance of the shift that is beginning to happen in the market.

    The Biracy Project is the pilot project designed to test our platform for crowdfunding called SoKap. We are pleased with the results that we have seen thus far and are even more pleased with the number of creative people who have stepped forward and offered us advice and insight as to what they would like to see and how we can improve.

    We believe that once we cross that technology chasm of early adoption we will have a system that will fund in whole for some, but more than likely provide the equity and early adoption fans that can then be coupled with traditional financing, and add to the list a much needed fan based marketing push on the finished product by those same fans that helped get it made.

    Our motto is “Make Movies. Make Money. Build an Audience.” There are people who like selling, and there are people who like creating. We’ve built a system to allow people of all types to engage in the business and art of filmmaking…even if it is in a transmedia application. Most people realize that its not the return on the money but rather the value they get from being involved in a project over 12 months for same price as cocktail at L’Ermitage.

    But hey….we’ve just opened our doors and we haven’t let everything out of the bag yet…so stay tuned.

    Jeff…great post…great blog.

    Cheers

    David Geertz
    Founder
    The Biracy Project

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  14. Darin Dumain permalink
    April 13, 2010

    Jeff…I agree with your assertion that “If crowd-funding is going to have sustainable legs, it needs to appeal to the most basic of investor emotions: greed and self-interest.” There are several key things to keep in mind regarding crowd-funding and first among them is if someone publicly offers or sells something appealing to greed and self interest, this instrument is probably related to an investment opportunity, and will likely be considered a security. The default rule is that securities must be registered in those jurisdictions in which they are offered and sold, unless an exemption applies. Securities are broadly defined by the SEC and state/provincial securities regulatory agencies. Essentially, if people (investors) provide money to an enterprise, do not actively manage the enterprise, and have an expectation of a profit, then that is in all likelihood a security (take a look at the “Howey Test” on Wikipedia for more information). To the extent that someone “invests in” (donates to) an enterprise for the chance to “make money” (earn rewards) that are LESS than the amount they invested, they’re making a foolish financial decision and, like your basic premise regarding donations, this isn’t sustainable in the long-run. To the extent that they’re doing this to make MORE money than they invested, it’s likely they’re investing in a security.

    Other bloggers have stated that several of these efforts (including Biracy) do not contain sufficient transparency. The main reason for this is that these businesses are trying to skirt the fact that they are indeed selling securities. When the SEC or state/provincial securities enforcement agencies catch up with them, I am certain that these efforts will be shut down and liabilities for the illegal sale of securities could arise. Just take a look at Biracy’s tag line – “Make Movies. Make Money. Build an Audience.” To induce others to make money in this manner, an investment in a security typically occurs. This also gives rise to the issue of whether one member who induces another to purchase a Biracy membership must register as a broker under Section 15(a) of the Securities Exchange Act. Many people in the film community promoting crowd-funding have said that they’ve done “due diligence” with the SEC, but none of them, to my knowledge, has ever gone through the “no-action” letter process. A no-action letter is a letter from the SEC stating that it will not seek civil or criminal penalties for a given activity. The SEC sends no-action letters in response to inquiries from organizations that request them. For example, if a company wishes to take a certain action but is uncertain as to its legality, it requests clarification from the SEC. Receiving a no-action letter equates to permission to take the action in question. My guess is that Biracy never requested a no-action letter. As an investor, a prudent course in the film crowd-funding space would be to stick with those projects that have registered their securities and provide a statutory prospectus. This way you know that the use of proceeds and disposition of any revenue relating to the project has been adequately disclosed (the risks and whether it’s fair or not would then be up to you to judge.) It is no small feat to register securities in the U.S. (or Canada), but if someone does it and you think the project is promising, then at least it would be clear how revenue would be considered in relation to your ownership position (i.e., the shares that you own).

    Good luck to all out there. The winners and losers may soon be apparent.

    Darin

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    • April 13, 2010

      Darin,

      Why you would spend so much time writing such drivel about something that you know nothing about is beyond me. Your comments here demonstrate your lack of knoweledge on the subject matter that is crowdfunding (all one word).

      Perhaps you should take some time and read our terms and conditions on the website. If you then have questions about what it is that we are doing and how it pertains to the SEC, I would be more than happy to answer them. I think you’ll find my answers to be short as they don’t pertain to the SEC nor will they ever.

      Before you think you know everything Darin, check your facts as you may end up with egg on your face.

      If I need an expert to advise me on how to structure a pump and dump oil and gas deal I’ll give you a call otherwise stick to what you know best (not crowdfunding) and stop adding to the noise of the internet with your baseless commentry

      Hey Darin…I own a coffee company too. If you want you can “Make Money” by “selling” my “product”. Its called sales Darin…give your head a shake.

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      • Darin Dumain permalink
        April 13, 2010

        David,

        Obviously, I struck a nerve and certainly didn’t mean to offend you – I see no reason for you to attack me. I was just commenting on what I see on your site, which is very confusing and certainly appears to be selling securities. Among krill, caps, prizes, points, merchandise, involvement in future projects, etc., I think you’re trying to obfuscate the fact that a large part of the motivation for people to partake in your scheme is to make MORE money (or gain more value – the SEC might not see as much of a distinction here as you think) than they contributed by doing very little actual work. Moreover, it sounds as though people can derive part of their return from the film’s actual profits. Here, the SEC will likely find that the “time and effort” people contribute (e.g. voting, polling, PR, submissions) is less than the direct compensation they would otherwise earn for their efforts. As such, their involvement likely won’t pass the Howey Test.

        Whether YOU think you’re selling securities or not is not terribly important. If educated people like myself believe you’re doing so, what will the SEC think? My advice (though I gather you’re too proud to take it) is to clear what you’re doing with the SEC by means of the no-action letter process. I applaud your attempts to revolutionize a stale business model, but you really might want to clear what you’re doing with the appropriate regulators before they receive a complaint. What would be the harm? The harm of not doing so could be significant to your members and your business.

        Your coffee example is irrelevant and incorrect. I never said you couldn’t sell ANYTHING without registering securities, but if what you’re selling may entitle the buyer to a profit (again, defined by the SEC, not you), then you’re playing in an extremely gray area at best. To say your business model doesn’t involve the SEC and “never will” is a confidence I don’t think you can afford. The bottom line is that the SEC has broad leeway to determine if what you’re selling is a security. Giving away DVDs and t-shirts is one thing, but your business model goes even farther by adding transaction based cash compensation into the mix. This also raises the question as to whether referring members would need to register as brokers under Section 15(a) of the Securities Exchange Act; a point that should be addressed in your request for a no-action letter.

        BTW – suggesting that my lack of knowledge is further punctuated by hyphenating the term crowd-funding also disparages Mr. Steele who uses the same spelling.

        Darin

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        • April 13, 2010

          Darin,

          You insist on calling something a security which is not being represented as one or even being offered as an investment. It is clearly indicated on the site.

          What is your background and frame of reference? You can clearly see all of the information on the project and the people involved on the site. You can also see exactly what members get for their membership fee.

          Are you a securities attorney or work for the SEC? If so, it would be better for you to site very specific rules that you think are being violated as opposed to just generalities and assumptions.

          If I go to a tailor and ask him to make me a suit and pre-pay for it, I would look pretty silly if I kept asking him what percentage of profit from his business I would be entitled to in exchange for buying the suit. How is pre-buying a DVD any different?

          This is why it would be good to know more about you.

          Furthermore, if you are a member of the project and you are entitled to a referral fee for someone else joining using your code, how is this any different than say multi-level marketing? By your theory, all MLM companies are securities, which I would say most are not.

          As for your assertion that “SEC will likely find that the “time and effort” people contribute (e.g. voting, polling, PR, submissions) is less than the direct compensation they would otherwise earn for their efforts” and thereby cause the SEC to cry foul, I am really confused at how you come to that conclusion. Please explain.

          Phil

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          • Darin Dumain permalink
            April 14, 2010

            Phil and David,

            You’re not doing your position any favors with your tailored suit example, which is merely the flip-side of the coffee example used earlier (one example suggests a security was not being sold, the other suggests a security is not being bought – both demonstrate a lack of articulation of the legal regime). As I said in reference to the coffee example, anyone can sell (and anyone can buy) virtually ANYTHING without it being a security. Something becomes a security when the purchase is made as a result of an inducement to earn profits from a venture (refer to Section 2(a)(1) of the 33 Act for the definition of security or investment contract).

            Sticking with your suit example, if you pre-paid the tailor for the suit and HE (not you) used the proceeds to launch a new line of clothing FROM WHICH YOU EXPECTED TO PROFIT, he’d be selling (and you’d be buying) a security. The only unclear part here is what constitutes a profit. The modern interpretation of the “Howey Test” requires securities registration in situations even where investors “participated to some extent in management” (i.e. voting, polling, PR, submissions) and even where the benefits derived by them were something “other than cash profits.” This means that the “Howey Test” cannot be evaded by investors contributing a modicum of effort to an enterprise. Furthermore, as determined by Mitzner v. Cardet International, Inc., the act of consummating a sale is essentially a ministerial task, not managerial one, and thus does not exempt a buyer from the requirement that he participate in the management of the business. This means that members referring other members would likely be an ineffective defense with respect to a charge of insufficient managerial involvement by members – as would the aforementioned voting, polling, etc. since they are not critical to the success or failure of the underlying business (i.e. making the movie).

            Your defense of your site being no different than a standard MLM business flies in the face of your Q&A where you say, definitively that you are not an MLM. In fact, one portion of your business is very MLM-like. And that’s not what concerns me. It’s the portion of your site where you say people are going to “get value” and “earn you payment, from the financial returns of the movie” that makes what you’re doing sound PRECISELY like a security.

            Again, whether you believe you’re selling a security or not or whether you call it an investment or something else is irrelevant. This is precisely why you lose NOTHING, but stand to gain much for your business and members by requesting a no action letter from the SEC. I am certain that you would want to avoid any sort of cease and desist and subpoena if at all possible.

            By the way, my “background and frame of reference” is that of an avid film fan and investor with a general knowledge of securities law (not to mention a law degree and an MBA); and that’s what makes your business proposition so worrisome. If I can poke holes in your model by citing a few glaringly relevant and well-known SEC rules and court cases, just imagine how the SEC and state/provincial regulatory agencies will respond. Please don’t be so cocky as to think you know it all. I can assure you, you don’t. You both state several times that everything on your site is fully explained. My uncertainty with your claim notwithstanding, disclosure in a statutory prospectus in accordance with Section 5 of the 33 Act (“Prohibitions Relating to Interstate Commerce and the Mails”) is what’s required to satisfy the SEC, not your assurance that your site is clear.

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  15. April 13, 2010

    For our animated short project “Combover for Dinner” I have found crowfunding to be a very useful and successful tool. The only issue we are having with it is time and effort. It takes a great deal of time to not only find the right network of people to market too but then convince them that your project is worth the 5-10 dollars. It can be an exhausting process!

    We are currently looking for some type of “celebrity” type endorsement, does anyone on this forum have any experience with this type of approach?

    -D

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  16. April 13, 2010

    I’m with you Myron!

    –and I might be a little ahead of you too, but that all depends on how far along you are with your mobile content distribution app…

    As for the article:
    Well-written! I appreciate the attention to detail and meticulous amount of research you committed to the subject Jeff. At the end of the day it’s all a bust if the ideal solution is an intrastate campaign with buyout safeguards–too complicated! However if you’re raising $ for a production budget inside of six figures then crowdfunding is ALL you need–run & shoot with that. Otherwise, we’re back on the same ol’ isht! I might as well find a film angel for 20-25% of a $1mil+ and save myself the headache and burnout.

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  17. benL permalink
    April 13, 2010

    Jeff, Great post.I agree, greed and self interest will be true long term drivers of crowdsourcing (in whatever form survives). I think offering some kind of experience or “ownership” in the filmmaking process will create the sizzle. There is a reason people continue to invest in film.Most of those people realize that it is more in line with a trip to Vegas vs a money mkt acct.To that respect, I predict the crowdsourcing model that survives, will have both the sizzle (experience/ownership)and the steak(greed)!

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  18. April 14, 2010

    Darin,

    Once again, the problem with your comments is that you have clearly not read the terms and conditions of our website, done any research on our company, or researched crowdfunding. You have made your own assumptions…which are wrong, and for that we know have to take some time to appease your inner basement dweller.

    What’s really interesting about you “Darin Dumaine” is that for a guy who makes a lot of noise the only reference that comes up when you are googled is this website and these comments and they only appeared in the index this morning.

    So let’s do this…you tell me who you are and why you are attempting to poke holes in our company in a public forum without offering transparency on your end and I’ll gladly tell you how we went about the legal process of setting up our platform. Let’s just say this Darin Dumaine – your not going to look good as an MBA and an attorney once we demonstrate that we are legitimate.

    Now…tell us who you are, because at the moment it is YOU that is being vague, unclear and hiding behind walls.

    Seeing that your such an astute investor in films its also very strange that can’t wrap your head around the idea that a person who buys a DVD for 25 bucks would need to hire a lawyer for 500 bucks to get an opinion on whether or not they should buy a DVD for 25 bucks that has no investment upside in the first place. Unless of course that is the reason you are trolling this site, and that indeed your purpose is to try and make our project a case for billable hours that would get paid to you.

    You see Darin Dumaine….I like having arguments with intermediaries like you. It’s the reason we built Biracy in the first place. The more lawyers that try and argue a case for unwanted and unnecessary middlemen just fuels our message that any one with a creative idea can now be funded directly by their fans without you.

    My emails attached Darin Dumaine. You can always email me directly if you feel squeamish about the next round.

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    • Darin Dumain permalink
      April 14, 2010

      David-

      I don’t know why you are getting so testy with me – and quite frankly, being so rude! I don’t see the harm in me asking a few questions and pointing out some areas you might want to look into (Isn’t that sort-of how crowd-anything works? I hope you’re not as dismissive of your member as you are of me.) I promise you, I have nothing to gain from this and am only trying to help. As Phil asked me to do, I was quite specific, citing rules, cases, interpretations, etc. I even quoted from your site several times (so don’t tell me I didn’t read your site.) There’s no need to make ad hominem attack on me for trying to help. Good luck with your idea. I hope for your sake it works.

      Darin

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      • April 15, 2010

        Darin,

        My comments toward you are as such as you are assuming that we are an investment that offers a return on that investment. The entire conversation has come to this as a result of you making broad statements about our business model that are false.

        In a nutshell Darin let me cover off our program again for you here in layman’s terms.

        1. You buy a product. The funds for that product are held in a third party account until the minimum amount for production is raised. If the amount is not raised, you are refunded your money.

        2. Once you are a member of the project you can sit back and wait for the film to arrive in the mail or you can watch it happen online.

        3. During the production of the film we offer tasks in “crowdsourcing” that are not compensated for during production in cash (just like so many other independent films and collaborative start ups and projects) and if the member wants to on his/her own accord, they can help the project by taking on certain tasks and we track those tasks and issue them points. This Darin is called sweat equity and does not fall under the SEC.

        4. During pre-production any member can refer a friend and earn a sales commission for selling product. This is commission based and there are thousands of company’s that do this everyday. It’s called affiliate marketing, word of mouth marketing, social media marketing, referral marketing, and so on and so on, and once again…has nothing to do with securities.

        5. Once the film is done, anyone who worked on the film is allowed to make earnings based on how much they worked on the film. Once again…sweat equity, not an investment that requires the letter you say I need or the Howey Test for that matter.

        6. Once the film comes out, the crowd can sell copies of the film and earn commissions. This…is also sales and in no way is an infringement of the SEC or any regulatory body anywhere on the planet.

        We have done our legal work. That work happened years ago when we began researching the model and building the framework within the letter of the law to satisfy the partners who support our project. Those partners required that this homework was done prior to the opening day launch of our website. Our site is hosted in North America, and our banking, transaction processing, legal and accounting is all based here as well.

        We have nothing to hide and we are proud of what we have built. In fact, the most satisfying day we had during our launch was when 2 SEC attorneys bought TITAN memberships, sent us personal messages, and best wishes on a successful model.

        I don’t need to take the Howey Test again…we did that years ago.

        Thanks to all others on this post who continue to support our platform as well as the other pioneers in this emerging space.

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        • Darin Dumain permalink
          April 15, 2010

          I don’t think I said your site DEFINITELY offers securities — I said it merely appears to, and that appearance might get the SEC riled up. I suggested you request a no action letter from them simply so you don’t run aground later and have to unwind the whole thing.

          Much of your site is fine and, in fact, I applaud your creativity in coming up with SoKap. The part that troubles me is that the value proposition for members is partly based on the success of the film. Simply calling their returns Kapitalist Currency and only allowing them to use this currency within your ecosystem doesn’t make it okay. For example, someone can put $25 into a project and “make” a lot more than that by doing what the SEC calls a “modicum” of work. Since the members don’t make the movie, they’re really not permitted to earn value based on how the movie does (without it being called a security). Simply calling what they earn Kapitalist Currency instead of U.S. currency, Canadian currency, or Namibian currency, doesn’t make it not currency. Someone could, for example, buy stuff valued at more than the cost of their membership. And that value is tied to the success of the film.

          Further, if someone chose to use their Kaps to support another project, that person could presumably earn further commissions, and those commissions would be based on their Kaps contribution, not on a cash contribution, making the Kaps work just like cash.

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  19. Micah Bagley permalink
    April 14, 2010

    Phil and David: I agree with Darinn. I’ve been to your site and I don’t totally get how it works or how I’d get profits from the movie (even if they weren’t cash) without this being a film investment. Sounds to me like Darinn’s just trying to help you out and you’re getting all nasty with him. Darinn’s been very specific with you (as you asked) and you guys just scream and rant (basement dweller, head shake, etc.) I don’t know much about securities but from what I read in your exchange (and I read the Howie Test on WikiPedia), I’d be careful if I were you. And just because someone isn’t easily Googleable, doesn’t mean they’re not important. I can’t find a single link to me, either.

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    • April 15, 2010

      Micah,

      If you would like a tour of our site or are having troubles with anything please send me an email and I will arrange a time to give you a tour and/or answer your questions regarding the system.

      What we are not going to continue to answer to is allegations on the idea that what we are offering is an investment. We’re an online film project. Not an investment. No one is buying shares, they’re simply pre-ordering a copy of the film.

      Thanks for your comments.

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  20. Scott Hillman permalink
    April 14, 2010

    I think your missing one of the potential benefits of the approach-publicity. Crowdfunding builds low level awarness of the film from the early stages of the production and creates an impitious for the ‘crowd’ to tell others about the movie. When the movie goes into production, you can thank the crowd and show that the movie has a grassroots approach and that it is obviously a sucess based on there hardwork.

    Note however i didn’t say that crowd funding actually meaningfully contributed to the production in anyway. If you get a 1000 from a cloud and 100,000 from german presales the movie can still be said to be grassroots crowdsourced.

    Howard Dean the first major politican to go to the crowd, was quick to suggest there effort. He was less willing to talk about his large corporate donors. To an extent PBS, and other donor organizations do variations on this. It gives your audience an ownership intrest in staying with you.

    Note that the above is a bit cynical i think, and i am not sure i would do this. However if you have a product that might attract something like this, such as Jeff Daniels attached(I did not know he was big in Michigan. Really thats quite astonishing), it might help diferentiate your product.

    This isn’t really film financing at this point but no part of the film process is really seperate.

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  21. April 22, 2010

    I’ve started receiving comments from securities attorneys claiming that Biracy is in violation of various securities laws. These comments do not appear to be legitimate so I have pulled the one that posted the other day and have spam-blocked the others. Basically, I’m getting the same emails but from different “attorneys”. I’m not going to opine on Biracy’s legalese, but I do know that they have gone the extra mile to setup proper client trust accounts for their funders, which means they’re doing their homework.

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  22. August 6, 2010

    Good article Jeff, you’re right that there are a lot of issues and experiments happening with crowdfunding at the moment.

    However, I think you miss the point in some areas. For example, in audience building. Audience building isn’t about getting ‘hits’ on youtube; it’s about developing a more intense relationship with your core audience/ fanbase. They will help promote your film, and their support will help your film be a success when released.

    Saying that it’s the distributor’s job to get your film to the audience is only true if you can get a distributor that will do that. For many indie filmmakers, we may not be able to get a distribution deal that will both adequately do that and also pay us enough to pay our investors.

    When there are many middle men between a filmmaker and the audience, only a tiny fraction of what the audience pays comes back to the filmmaker. On a film with a sizeable audience that might be fine, but for niche films it can make more sense to have a relationship direct with your core audience so you receive a bigger chunk of the pie.

    Further, many distributors are still too old school in their approach. They run one-size-fits-all campaigns rather than tailoring it to what your specific film needs. A four week advertising campaign in the lead up to release won’t yield much for a niche indie film, compared to building an engaged audience far in advance who will help spread the word. I recommend you check out “Think Outside The Boxoffice” by Jon Reiss for some good ideas and examples of what can be achieved without ‘leave it up to the distributor’.

    I would also point out that it is a big world, and some assertions are stuck in what is true for the US. For example, in Australia and many countries around the world people still buy dvds because a) downloading movies chews up our bandwidth, which is more expensive than in the US, b) downloading movies takes too much time, because our internet is slower, c) people want to…

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  23. August 6, 2010

    [My last post appears truncated?…. here’s the rest I was saying…[

    In Australia and many countries around the world people still buy dvds because a) downloading movies chews up our bandwidth, which is more expensive than in the US, b) downloading movies takes too much time, because our internet is slower, c) people want to own the films they love, d) core fans like the packaging and to have a physical object.

    Where I think crowdfunding does work is when a film targets a specific niche that isn’t properly serviced by the mainstream but is by the film topic matter, engages them in a way that gets them excited about the project, and involves them along the way. This core audience will buy the swag, because the swag is related to their interests, and as humans we often wear our interests like a badge of honour.

    However, hitting the wrong audience with your swag will never be successful – and I think that is where many filmmakers are getting crowdfunding wrong. That isn’t a flaw with the model, it’s a flaw with how it is executed.

    I would like to point one thing I think you’ve misunderstood about Biracy when you promote it. The ‘make money’ bit is through an affiliate type scheme. When you buy a membership you are given a unique link and code – when someone else signs up via that link/code you get a percentage of their membership fee. That is how you ‘make money’ with Biracy.

    Any actual film profits will be allocated to members as *virtual currency* (split determined by their involvement on the Biracy project) which members then nominate which new film project it be reinvested into. This virtual currency does not come back as cash to the members – but rather funds another film. I know it’s confusing, but I examined Biracy closely and wrote about it in detail here http://yetanotherstrugglingwriter.blogspot.com/2010/02/biracy-evolution.html
    and here http://yetanotherstrugglingwriter.blogspot.com/2010/01/crowdfunding-indie-film-biracy-case

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  24. Argo permalink
    September 24, 2011

    premise: No one wants to buy basically anything related to a movie at all: DVDs, VOD, schwag, etc.

    conclusion: the best thing to offer crowdfunders is monetary returns

    question: How are you offering a return to these investors, if no one out there wants to buy anything related to movies at all? What are you going to sell that’s going to make your investors so much money? You sure don’t seem very confident that there are reliable revenue streams out there.

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  25. Bradly Mccandles permalink
    October 31, 2011

    are you seriously legitimate?

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    • Jeff Steele permalink
      October 31, 2011

      100%

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