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5 Reasons Why Letting the Public Fund Movies May Be Bad for Hollywood

When mainstream investors lose their money, or get bilked and sue, it’s going to make trouble for the film biz

The public can bankroll movies now and count on getting rich doing it, thanks to the approval of a key provision in President Obama’s JOBS Act this week that allows nearly every American to invest in films and other startup businesses.

But the new regulations approved by the Securities and Exchange Commission aren’t necessarily a good thing for the public. First, they may not be able to afford qualifying. And if they do qualify, they’re far more likely to lose money than they are to get rich in the extremely high-return, higher-risk film business.

While lowering the standards that formerly restricted film investing to the wealthy in order to protect the little guy creates a new revenue stream, both indies and the studios could be hurt in the long run.

“It is a very treacherous path to go down that could have negative consequence for all involved — filmmakers, studios, fan investors and movie institutions,” said Seth Willenson, an industry consultant with decades of film funding experience.

There are several reasons that going mainstream for movie investments may not be a great idea for John and Joanne and the movie industry:

Most Investors Will Lose Their Money
“Like giving money to a homeless guy and hoping he’ll return it,” is how film investing is described by consumer watchdog site InvestingAdviceWatchdog.com. That the vast majority of movie projects fail to make money, and a good number never get made, is a harsh reality known by the pros and about to be learned by the amateurs.

It’s not that most movie producers are trying to bilk investors. But thousands of movies are produced every year with earnestness, sincerity, and absolutely no hope of finding a market. With funding more available, there are sure to be more movies made, and the last thing the industry needs is more movies without audiences.

“Fast forward two years, and you’ll see losses, fraud and failures, that’s the reality of investing in movies,” said Crowdfunder.com founder Chance Barnett, an early advocate for the new regulations. “A key will be how the industry responds. And it will be disappointing if people say ‘equity was a bad idea,’ because that won’t be the problem.”

Bad Actors Will Play Key Roles
Hollywood and film financing has always attracted its share of “Music Man” types. And in addition to the bad actors that populate many of the movies that lose money, there are “bad actors” – as in con artists – in the crowdfunding world as well. The new regulations are sure to bring out more of them.

“There will be lawsuits and fraud, on both sides of the table,” Slated.com chief executive Duncan Cork told National Public Radio. Filmmakers looking to fund their projects often have to defend Hollywood’s notoriously opaque accounting methods, and if the new regulations produce a spate of suits, it’s going to make it tougher for everyone to fund their movies, crowdfunding or old-school.

And if there are enough consumer lawsuits, Hollywood could well find itself the target of a high-profile probe by headline-seeking prosecutors and trust-busters in Washington D.C.

High Art Will Not be the Priority
No one wants to be a snob, but if pop culture becomes the driving force behind film funding, which movie will be more likely to be made, the one by Ariana Grande, or the one from John Ridley? Having a camera and film does not make someone a filmmaker any more than having a pencil and a paper makes someone as poet, but the risk involved is considerably different.

The Details Are Devilish
“The qualification requirements include items more onerous than those required for even a simple private placement,” notes David Albert Pierce of the Pierce Law Group, which specializes in film financing.

“For example, certified financial statements must be produced by a CPA every year. No small company can ever afford to put out certified public accounting statements each year — they hardly have enough cash to have simple tax returns filed by an accountant,” said Pierce, an advocate of the current donor-based system.

And while the new regulations appear to take the individual states out of the qualifying process for those seeking financing and investors, there will be nothing stopping zealous attorney generals from prosecuting after the fact if requirements aren’t met.

“The non-legal entities popping up promising to put together slick materials for your crowdfunding efforts, but which lack compliance with federal and state securities laws, place producers utilizing such services in peril,” said Pierce.

The Blame Game
So the movie doesn’t work and the investment is lost. What happens then?

“When sophisticated investors lose money on a deal they think, ‘What did I miss?’ and then they move on to the next opportunity the wiser for it,” said Cork. “When unsophisticated investors lose their money they think, ‘Who can I blame?'” That could result in an explosion of litigation in which only plaintiff attorneys will win.

But not everyone agrees. “I have heard all those negative concerns, the SEC heard them too and still moved forward,” said Gregory Parker, co-founder and chief executive at IndieCrowdFunder.com “If you’re risking $25, I don’t think you’re going to sue. The donation crowdfunding model is cheating people out of more than that with little repercussions. At least there are some safeguards in equity.”