Equity Crowdfunding Has Arrived: 5 Things to Know About the Future of Raising Money Online

Equity Crowdfunding Has Arrived: 5 Things to Know About the Future of Raising Money Online

Here's one: The perk-based crowdfunding you already know and love isn't going anywhere

Crowdfunding sites can now solicit select wealthy individuals to invest in their movies and pursue profits rather than trinkets and perks.

Though this is a major development, the evolution of film financing is far from over.

Also read: TheGrill: Indiegogo Co-Founder – Hollywood Will Permanently Adopt Crowdfunding

Title II of the JOBS Act went into effect late last month, allowing open solicitation of monies, but it will be several more months before the Securities and Exchange Commission approves regulations for Title III of the bill. This provision, passed last year, allows anybody — not just accredited investors — to actually invest in a product pitch, not just donate to it.

Indiegogo — a major crowdfunding platform that pioneered the practice — is waiting for Title III to go into effect before making any changes to its business model. Still, plenty of eager businessmen have jumped at the opportunity to serve as an intermediary between aspiring entrepreneurs and the millions of accredited investors living in the United States.

Here are five things you should know about the future of crowdfunding.

1. Be wary of brokers asking for your money.
Kickstarter and Indiegogo are household names thanks to their role in shepherding the crowdfunding revolution, yet neither of them are on-board for brokering investment in crowdfunding projects – at least not yet.

Several other smaller players have declined to participate as well, leaving a glaring hole in the market.  At least 1,6000 different companies have registered under the JOBS Act hoping to serve as an intermediary between investors and crowdfunding campaigns.

Also read: Director David Gordon Green: How Kickstarter, VOD Can Keep Indie Comedy Quirky

While the SEC has laid out rules about fraud and misbehavior, filmmakers and potential investors should still be wary.

“The issue right now is brokers and dealers,” Cinetic Media's Ross Fremer told TheWrap. “Who will the intermediaries be?”

There have been several lawsuits already over crowdfunding, and bringing investment into the equation only increases the likelihood. One prominent crowdfunding company declined to participate in this story for that reason, fearful that shady dealers would undermine this latest push.

“The film business has always had a pockmark on it from serious investors; film producers are unscrupulous and hoodwink people,” Michael Roban,  exec VP of financing at IM Global, told TheWrap. “This provides a vehicle for unscrupulous people.”

Also read: Spike Lee Hits $1.25 Million Kickstarter Goal, 3rd Biggest Film in Site's History

2. Fraud shouldn’t be an issue.
Like any investment opportunity, the introduction of equity crowdfunding will no doubt attract some dishonest folks. But both veterans of crowdfunding and film finance believe it will be hard for anyone to effectively propagate fraud on a mass scale.

“The hope is it will be easier for people to get information, easier for people to say, ‘Hey don’t do business with these guys,'” Roban said. “You can’t go to a restaurant without going on Yelp and seeing the last four people that went there say its terrible.”

Danae Ringelmann, co-founder and chief customer officer of Indiegogo, told TheWrap that her company has had no problems managing fraud in the past, and doesn't expect the introduction of equity to change that — providing Indiegogo decides to adopt the equity crowdfunding model.

“Indiegogo has been managing that exact risk for the last six or seven years now, and we've built trust and safety protocols and algorithms on our backend to address that risk exactly,” Ringelmann said. “So with equity crowdfunding, we'll just continue … when the regulations are final.”

3. Perk-based crowdfunding isn't going anywhere.
Many proponents of crowdfunding, including the founders of Kickstarter, have little interest in entering the investment business.

They want to support inventors and artists who could not raise money through traditional avenues. The true power of crowdfunding lies in its ability to foster a community around a project, and some fear that community may disappear as soon as there are financial incentives.

“Crowdfunding has created a true democratization of capital,” Emily Best, founder of Seed & Spark, told TheWrap. “There is no barrier of entry for people to start raising money. This put a barrier right back up.”

Ringelmann, however, believes the equity and perk-based fundraising will exist “side by side in harmony.” If anything, equity crowdfunding simply encourages more people to join the party.

“I don't believe equity crowdfunding will replace perks-based funding as Indiegogo has proven there's a vast customer segment motivated by what we call the 4 P's: passion, people, participation and perks,” Ringelmann said. ”By adding equity crowdfunding, Indiegogo would simply unlock a 5th P: profit.”

4. Filmmakers remain one of the biggest beneficiaries of crowdfunding.
Most filmmakers cherish control. They want to make their movie about what they want, when they want, and want to make it their way. The studio system, however, places most of the power in the hands of the studio and financier, who end up owning the rights to that piece of intellectual property.

Yet crowdfunding offers filmmakers a way to raise money on their own, all while retaining control the IP.

“Crowdfunding has created a true democratization of capital,” Best said.

The chance to raise money from more people creates a larger pool of potential capital.

Traditional crowdfunding has also allowed supporters to be involved in the filmmaking process from start to finish. Ringelmann calls this “emotional ownership,” but says equity crowdfunding simply opens the door to ”actual ownership.”

In short: It's never been easier for filmmakers to find funds, or for people with money to become producers.

Also read: Kickstarter, Superman and James Wan: The 5 Best Decisions of Summer (Video)

5. A lot more will change over the next year.
While parts of the JOBS Act went into effect Sept. 23, the rules will be subject to frequent tinkering as regulators and crowdfunding sites search for the best formula. That’s one reason Best said that she won’t be sampling equity crowdfunding until the rules become a bit clearer.

“Who is going to flock to the equity-investing platforms?” Best asked, noting that most people who participate in crowdfunding — both the filmmakers and the contributors — have checkered financial portfolios.

Most filmmakers don't have great credit scores, and most initial donations come from friends and family.

“If you can still walk into a casino and drop whatever percentage you feel like on 23 Black, it seems silly to regulate something that works so well,” Best said.

Best is also one of several crowdfunders who wants to solicit those aunts and uncles for investment.

“There’s a whole debate about the way the JOBS Act has been constructed and whether it will impact that world way you hope it would,” Matt Mazzeo of Lowercase Capital told TheWrap. “In an ideal world you would have a new set of investors who can participate in these huge movies. But a lot of the wealth created by technology hasn’t been spread out evenly.”

Why not? Plenty of people who want to invest aren’t accredited investors — and thus can’t invest in companies (or films) early on.

  • Reid Rosefelt

    AngelList is sort of a crowdfunding site that looks for investors for startups. https://angel.co/

  • Grace

    Thanks for sharing this. This is definitely an interesting time as we take steps closer to democratizing startup finance! It'll also be interesting to see who uses general solicitation and who doesn't. My personal opinion is that startups don't since the SEC hasn't come out with their final ruling. In the meantime there's also a “Crowdinvesting Mythbuster” series for all the naysayers out there. http://blog.returnonchange.com/category/crowdinvesting-mythbuster/

  • mibtp

    There are also great books on hitting the appropriate notes to maximize success with crowdfunding. One on Amazon is: “Hacking Kickstarter, Indiegogo, How to Raise Big Bucks in 30 Days (Secrets to Running a Successful Crowd Funding Campaign on a Budget)”

  • http://outinthestreetfilms.com/ Out in the Street Films

    You need to establish a fan base first. One way is to get a huge Facebook and Twitter following so you can transfer them over to your crowdfunding. By the way, stop by and LIKE me http://facebook.com/creditrisk