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Crowdfunding in Entertainment and Media
1. Current Issues in US
Film Financing:
1.
2.
3.
4.
5.
6.
Crowdfunding
Regulatory Framework
JOBS Act: Title II
JOBS Act: Title III
JOBS Act: Title IV
Use of Finders
3. 1.1 High profile success stories
1.1.1 Veronica Mars - $5.7M WB Backing, Kristen
Bell
โข
Over 91,500 backers
Zach Braf sequel to Garden State - $3.1M
โข
Over 46,500 backers
Positive โ build audience excitement
3
4. 1.1.2 Negatives
a) Disappoint donors โ
โข
Changes to t-shirt design
โข
Dedicated employee to respond within 30
minutes
โข
Cost of fulfillment
b) Taxes โ need correct structure re: ownership
c) Access to lists โ NYC Opera โ October 2013 tried
to raise $1M to avoid bankruptcy. Raised only
$301,000 from 2,108 contributors (average under
$150)
4
5. 1.2 Kickstarter (all or nothing); fees including
payment processing โ US 7.9% plus per
transaction charge (rebate based on volume); UK
โ 8-10%
Rocket Hub worldwide โ 8% if you hit your goal,
9% if you donโt. Use as you go. Partnership with
A&E.
Indiegogo worldwide (per transaction fee
outside US) 7% if you hit your goal, 12% if you
donโt (higher fee if use as you go, with 5% rebate)
5
6. 1.3 Kickstarter Statistics (as of 1/29/14)
โข Almost 131,000 projects launched
โข Almost 44% success rate
โข 10% donโt raise anything (over 12,000
projects)
โข Unsuccessful projects
โข 15% film and video
โข 9% music
โข 8% publishing
6
7. โข Successful projects (over 55,000)
โข 26% music
โข 23% film and video
โข 10% art
โข 9% publishing
โข 6% theater
โข 5% games
โข Over 63% of successful campaigns raised between $1,000 and
$10,000
โข Raised $1Million or more
โข Film and Video โ 3 projects
โข Games โ 29 projects
7
8. Prizes
Adam Carolla film โRoad Hardโ on Trump site
Fund Anything:
โ $1.36M raised; Prizes
โข End Credit - $20 โ 827 pledges
โข Follow on Twitter for 12 months - $65 โ 89 pledges
โข Associate Producer credit - $5K โ 3 pledges
โข Private party with Carolla performing at supporterโs
residence - $15K โ 2 pledges
(Variety on-line, 8/19/13)
8
10. 2.1 Securities Act of 1933
2.1.1 Requires regulation of securities offered in
interstate commerce
2.1.2 What is a โsecurityโ?
2.1.3 Sec. 4(a)(2) exempt transactions not
including public offering of a security
10
11. 2.1.3 SEC Regulation D; safe harbor to sell
securities in a private placement, but no general
solicitation or advertising
2.1.4 Rule 506 under Regulation D โ no limit on
amount raised
2.2 Securities Exchange Act of 1934 requires
registration of brokers: offering securities
for the account of another
11
13. 3.1 July 10, 2013 SEC Issued Regs permitting
issuer to use Internet to raise money from
accredited investors; 3.4 Effective 60 days
from publication in Federal Register โ Sept
24, 2013
3.2 Buyers must be accredited investors
3.3 Issuer must take responsible steps to verify
that purchasers are accredited
13
14. 3.3.1 Self certification no longer acceptable
3.3.2 No safe harbor given
3.3.3 Must confirm investment not financed by
third party
3.3.4 Records retention
3.3.5 More required if use Internet solicitation than
using a database of accredited investors
14
15. 3.4 Possible single offering donation/accredited
investors
3.5 Reg D is non-exclusive: can rely on Sect
4(a)(2) of โ33 Act (private placement offering)
BUT NOT IF USING CROWDFUNDING: then
must comply with rules under Reg D and file a
Form D (Sept 23 new proposed rules re: Form D)
15
16. 3.7 Proposed regs re: changes to Form D
requirements (still open for comment). Would
require:
3.7.1 File Form D before beginning
crowdfunding solicitation and upon conclusion of
offering;
3.7.2 Require filing of solicitation material which
must contain specified legends and other
disclosure to be mandated by the Regs.
16
17. 3.7.3. One year bar from doing a crowdfunding
solicitation if donโt follow the filing requirements.
3.7.4. Will require disclosure of method(s) used
to determine investors are accredited investors.
17
19. 4.1 Permits offerings via the Internet to small
investors, with limits on the platforms, the
issuer, and the amounts raised.
4.2 SEC issued proposed Regs on Oct 23,
2013; currently still in comment period (90
days from publication in Federal Register)
19
20. 4.3 Under Proposed Regs:
4.3.1 Dollar caps on issuer: Maximum from all
crowdfunding in a 12 months period is $ 1 million
a) Compare benefit with requirements and costs for platform
and issuer
b) Possibility to combine with Rule 506 offering, offering under
Title II, and crowdfunding for donations or gifts, in one
offering
c) Issuer must file tax returns as part of offering information
(and as annual reports) if amounts to be raised are less than
$100,000; or reviewed financial statements if amounts to be
raised are over $100,000 up to $ 500,000; or audited
financials if amounts to be raised are over $500,000
20
21. 4.3.2 Dollar caps on investors: maximum per
issuer in a 12 month period:
a) Greater of $2,000 or 5% of annual income or net worth, if
both income and net worth is less than $100,000;
b) 10% of annual income or net worth, whichever is greater,
if either income or net worth is $100,000 or over, not to
exceed a maximum aggregate amount purchased of
$100,000 per year
21
22. 4.3.3 Would authorize use of the Internet to:
a) Promote commentary on the offerings between potential
investors and the issuer of the offering;
b) Permit funding portals to meet registration requirements
by registering on line with both the SEC and FINRA;
c) Permit an issuer to file on line the offering materials
meeting specified requirements which must be filed with the
SEC, FINRA and on the websites of the Intermediaries;
d) Permit an issuer to file online required amendments to
the offering materials each time there is a material change
during the course of the offering;
22
23. e) Permit the platforms (broker/dealers and funding portals)
to use electronic communications to send out a variety of
notices to be delivered to potential investors, and permit
investors electronically to rescind their commitment until
48 hours before a scheduled or rescheduled closing (reviving
such rescission right each time there is a material change,
and requiring a committed investor to recommit in order to
keep the commitment alive -- in effect continuing to opt in,
rather than opting out, of an investment commitment);
f) For US based issuers, access foreign investors and use
foreign based broker/dealers or funding portals which have
registered with the SEC and with FINRA.
23
24. 4.3.4 Must use intermediary registered as a
broker or a โfunding portalโ. The Regs would
require the funding portals to:
a) Do due diligence on the offering materials before posting in
order to avoid 10b-5 liability;
b) Use a bank to hold investor funds until a closing of an offering
or the offering is terminated or abandoned;
c) Register with the SEC and with FINRA;
24
25. d) Have a surety bond covering the platform and its employees
for $100,000;
e) Perform record keeping in accordance with standards and
requirements issued by the SEC
f) Use a bank as escrow agent to hold investor funds until the
closing of an offering or return of funds to investors if an offering
does not close or is abandoned.
25
27. 5.1 SEC published proposed Regs in Federal
Register Jan 23, 2014. 60 day comment
period.
5.2 Increases amounts which issuer can raise
under Reg A offering to $ 50 million (from
$ 5 million) in a 12 months period
27
28. 5.3 Proposed 2 Tier structure: Tier 1, no
change. Tier 2 pre-empts state securities
laws, and creates reduced registration,
reporting regime for publicly traded
securities
5.4 Permits pre-registration solicitation to
โtest the marketโ
28
29. 5.5 Offering materials must be filed with SEC
and can only make a sale after materials
reviewed and qualified by SEC; prequalification, can request confidential
treatment of sensitive information
5.6 Must use audited financials โ av audit cost
for offerings up to $50M is $114K
29
30. 5.7 Must file annual, semi-annual and current
reports.
5.8 No limits on advertising and promotion;
can be sold publicly:
5.8.1 Positives: access to capital
5.8.2 Negatives:
a) Periodic earnings pressure
b) Difficult to reverse
30
32. 6.1 Why an issue?
6.1.1 1934 Securities Exchange Act โ Sec 15(a) requires
brokers to register with the Commission: unlawful
to use interstate communications to sell or attempt
to sell any security unless registered with the SEC as
a broker or dealer
6.1.2 A โbrokerโ is anyone engaged in the business of
selling securities; examples include a variety of ways
to raise capital for others for a percentage or other
โtransaction related compensationโ โ one-off vs.
โbusinessโ
32
33. 6.2 What if use person not registered as
broker dealer to raise funds โ Act targets
people who are finders but donโt register:
6.2.1 Rescission right for 1 year from discovery or
3 years from date transactions, whichever is
earlier. Issuer must note on Form D if issuer
paid compensation to anyone to sell securities
covered by Form D
a) Whichever earlier upheld in Maher
b) Sup. Ct. in Merck v. Reynolds
33
34. 6.2.2 Preclude issuer from future Reg D offerings
6.2.3 Whistleblower awards: โ34 Act (10% - 30%
of award by court or administrative judge)
34
35. 6.3 Activities making someone a โbrokerโ
6.3.1 No-action letters: Paul Anka (1991) (checked to
see if friends interested, and then gave names;
percentage commission on closed sales) vs. BMW
(2010) law firm introduces investors with possible
interest, got percentage commission โ names and
addresses of only investors with possible interest
suggest pre-screening and pre-selling, so no-action
denied; percentage legal fee?
6.3.2 Anything more than giving names and
addresses to issuer: no contact with investors
35