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UPDATE: Tribe-Funding, SEC Change?

by Jeff Steele

SEC logoWe’ve talked a lot about crowd-funding and the SEC here at FilmClosings.com, and on the Huffington Post, including my post Tuesday in the Tech section, “Independent Films’ New Path to Financing,” Just got the following message from Paul Spinrad about a “crowd-funding campaign to change crowd-funding law.” This is a perfect opportunity for the indie film tribe to support its best interests:

Hi Jeff– we’ve never met, but I’ve started something that I’m excited about and think you might be interested in: the Crowdfunding Campaign to Change Crowdfunding Law:

The main enabling news is that the Katovich Law Group, a top-notch law firm that’s devoted to “Cutting Edge Fundraising,” has agreed to petition the SEC in support of legalizing crowdfunded securities for a basically token payment of $1,000 raised through crowdfunding.

This is great!

What’s more, the petition will be posted online on the SEC’s website, along with any comments they receive from the public on their proposal. I think it’s a real recipe for showing some crowd political power.

So now I’m raising the $1,000 via the crowdfunding site IndieGoGo, with their strong interest and blessing, and after that goal is met, Katovich will need about three weeks to draft the document.

Contributors’ names will be included on this hopefully influential
document
(“This petition was funded in part by contributions from the following individuals…”), thereby inscribing them in financial history (SFX: thunderclaps).

I’d be delighted to discuss– and also, of course, if you wanted to donate or spread the word!

Thanks!

Best regards,

Paul Spinrad

11 Responses leave one →
  1. April 29, 2010

    Does crowd funding require a completion bond? If so, I think you inferred in one of your other blogs that the two remaining completion bond companies (Film Finances and IFG) would not bond movies less than $2M. Will funding sources consider guarantors like Ed Meyer’s Film Completion which issues warranties, not bonds? Thanks.

    Keith Warn, Ibex Productions

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  2. Bob permalink
    April 29, 2010

    I have a feeling hell would freeze over first, before the SEC would ever entertain a proposal like this. This concept smacks at the very reason why securities laws exist in the first place.

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    • Paul Spinrad permalink
      April 29, 2010

      Yes, securities laws exist to protect investors, which is fundamentally good!

      But I see it as a numbers issue. I’ve heard $100 proposed as a cap for investor protection, and that’s what I predict this campaign will wind up petitioning for– but maybe that’s too high. Would the SEC be OK with deregulating investments where the legal maximum that anyone could ever lose is $20? Or what about $1 — would that afford enough protection? And should the SEC be spending its resources regulating investments where people are risking amounts between $0.01 and $1? Would they even want to?

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  3. Bob permalink
    April 29, 2010

    Deregulation is this “micro finance” area would open the flood gates for every scammer, fraudster and huckster out their to exploit – not to mention attracting the attention of organized crime. $20 max loss per person doesn’t sound like much, but multiply that by 500,000 participants and there is a sizable loss.

    This “capital raising” concept for investment is no different than doing a junior public listing on the OTC stock exchanges. The is the very area the SEC aggressively attacked after organized crime, and overnight broker dealers made fortunes on scamming people for small amounts of dollars. Pump and Dump investment schemes are as old as the hills and the SEC has done everything in their power to control it.

    Also – why just crowd funding deregulation for the film business? If this was a legitimate, deregulated way to raise capital, why not for Joe’s variety store, or Anne’s retail store? Bottom line – tough securities laws that require registration, reporting and disclosure are needed to keep the flood of criminals that would descend on this away.

    Do up a Private Placement Memo – apply for registration exemption with the SEC and go out and raise money – and make a great film!

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  4. Bob permalink
    April 29, 2010

    Deregulation is this “micro finance” area would open the flood gates for every scammer, fraudster and huckster out there to exploit – not to mention attracting the attention of organized crime. $20 max loss per person doesn’t sound like much, but multiply that by 500,000 participants and there is a sizable loss.

    This “capital raising” concept for investment is no different than doing a junior public listing on the OTC stock exchanges. The is the very area the SEC aggressively attacked after organized crime, and overnight broker dealers made fortunes on scamming people for small amounts of dollars. Pump and Dump investment schemes are as old as the hills and the SEC has done everything in their power to control it.

    Also – why just crowd funding deregulation for the film business? If this was a legitimate, deregulated way to raise capital, why not for Joe’s variety store, or Anne’s retail store? Bottom line – tough securities laws that require registration, reporting and disclosure are needed to keep the flood of criminals that would descend on this away.

    Do up a Private Placement Memo – apply for registration exemption with the SEC and go out and raise money – and make a great film!

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    • Paul Spinrad permalink
      April 29, 2010

      As I understand it, SEC regs rely on lots of canned statements to be included in reports, prospectuses, etc., which is why you always see “past performance is not a guarantee…” etc. These are there for a reason.

      For the scammer problem, I see the same approach– required language that basically says, “WARNING: Do not invest in anyone you don’t personally know and trust, or at least know of, and use other channels to verify that this solicitation is actually coming from them.”

      Ensuring that the “user experience” includes being shown this kind of statement can be a requirement for the exemption. It’s certainly a trivial thing to include from a technical standpoint.

      Totally agree about Joe’s Variety Store– this is for that, even more than for big-budget films.

      You say:

      > The is the very area the SEC aggressively attacked after organized crime, and
      > overnight broker dealers made fortunes on scamming people for small amounts
      > of dollars.

      This is heartbreaking, important to study, and something I wish I knew more about– can you recommend a good reference? Of course the exemption should be designed to make this kind of scamming not worth the effort. My hope is that there can be more checks against this today, so it’s possible now where it wasn’t previously– but the devil’s in the details, and if there’s still really no way to prevent massive scams based on small-dollar investments, even with instantaneous and near-ubiquitous communication networks, then it’s not a good idea.

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      • Paul Spinrad permalink
        April 30, 2010

        Forgot to include: a crowdfunding exemption should also cap the total aggregate value of the offering, make it something low like $10K or $20K, so it’s even less appealing to scammers who might otherwise be tempted to expend the effort that mass deception requires.

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        • May 6, 2010

          Paul,

          I like the idea of the cap on the offering. That’s what we do over at our project. We don’t allow for over subscription. I’m going to throw my support into this today, as I do see a need for people who wish to participate in the film’s revenue. That being said we are already providing this through a deferred compensation program that we have implemented online and its great for people who like to get involved, but I do see a need to have this exemption to pass the Howey Test.

          Danae had mentioned that she was going to do this and suggested that perhaps we should meet. I would really like to discuss some of the things that we are doing with you as well as it may provide some detail and help support this much needed change.

          thanks

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          • Paul Spinrad permalink
            May 6, 2010

            Thanks, David– much appreciated! I would love to find out more about how Biracy is doing this, and will contact you offline– looking forward to it!

            Meanwhile, as this comments page is turning into a handy one-stop discussion of these issues, I want to float another way to prevent scamming: the SEC itself runs the database of offerers, funders, and transactions, and you can only get the exemption if you offer your security through their infrastructure. The SEC would publish an API that front-end crowdfunding platforms like Biracy, Kickstarter, and IndieGoGo would talk to in order to support low-value public offerings on their sites. To pay for running this service, the SEC would of course take a cut of all the money invested– and I think it could be a real cash cow for them!

            Under this setup, the SEC would have the identity, credit card info, merchant account info, digital signature, etc. of all participants, and they could freely follow anyone’s activity and cut them off immediately. Furthermore, with the government running the back-end for the only legitimate market, scammers would have to simulate the whole thing, including making it look like it’s tied into Amazon, Paypal, VISA, etc. in order to make tiny amounts of money off of the insanely clueless.

            Crowdfunding is by nature transparent, referral-based, collaborative, and widely-seen, so to the extent that the public understands how it works, I believe it would be difficult to use as the framing for a successful scam.

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