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1005 DS Alternative Funding

1005 DS Alternative Funding

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Published by Stu Pollard

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Published by: Stu Pollard on Aug 10, 2012
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CROWD FUNDING:What You Should Know About The Legal Issues Of Crowd Funding
By Daniel M. SatoriusSatorius Law Firm, PLLC
These days anyone attempting to fund their independent film andtelevision projects realizes we are in a new financing era. Traditionalmethods of financing are far harder for independent producers toaccess than even a couple of years ago. There was a time when anindependent producer could tap into equity markets, commercial loans,presales, and co-production agreements, but most of these sources arepresently not available to independent producers.Certainly the failing economy is partly to blame. Financing resources forthe entertainment industry and the broader economy are scarce. Butthere are several other factors contributing to the scarcity of financing.Consumer consumption patterns are shifting. Consumers now consumemore entertainment online and buy fewer hard goods such as DVDs.And consumers have an expectation that entertainment content shouldbe free to them. Finally, there is a glut of product in the market makingit difficult for any production to get noticed. This glut of product iscaused by easy and affordable access to quality production andpostproduction equipment and software and low barrier to distributionafforded by the Internet.In an effort to fund their projects producers are turning to alternativefinancing. These alternative methods include soft money from state andfederal incentive programs generally based on tax credits and taxrebates; deferral agreements with vendors and suppliers; productionand postproduction services; grants; and product placements andsponsorships. This article focuses on another emerging alternativesource of financing: the crowd.
What is crowd funding?
Crowd funding is the use of fans as financiers.Funds are collected in small increments from many people using online
 
CROWD FUNDING: What You Should Know About The Legal Issues Of Crowd Funding
 
Daniel M. Satorius | Satorius Law Firm, PLLC Page 2
social media tools such as Facebook, Twitter, MySpace, YouTube,Kickstarter and IndieGoGo. Funds are generally donations, not loans orinvestments, and are not repaid. The funds may be provided inexchange for membership, pre-ordering product, credits, merchandise,invitations to screenings, copies of the film, etc. Amounts raised usingcrowd funding typically vary from a few thousand dollars to as much as$100,000. Most donors providing funds to independent projects in thismanner have no prior experience in financing entertainment projects.Here are examples of crowd funding:http://www.neithertheveilnorthefourwalls.com/ Well presented anddignified. Beautifully executed.
The advantages:
There are many advantages to crowd funding. Crowdfunding is relatively easy to access although the amounts raised aresmall. These funds can be used for development funds that canbootstrap the production into a position to attract larger and moretraditional sources of funding. Perhaps the biggest advantage is thatfunds from crowd funding (if the deal is structured properly) aretypically not repaid to the donors.There are also intangible benefits to crowd funding. The effort to raisemoney from the public through crowd funding if successful candemonstrate the viability of a project. By involving many people in thedevelopment of a project a producer can
tap into “the wisdom of the
crowd,"
get the crowd’s fe
edback and its endorsement. The process of crowd funding may also have the effect of promoting and marketing theproject. It creates awareness of the project. Donors become
invested
 in the project. Also e-mail addresses can be collected for later marketingpurposes. The funding process can be used to involve communities whohave a particular interest in a topic or cause such as environmental andsocial issues. These communities can act as collaborators with theproducer in developing the project. These communities can later beused as street teams to help market the film on a grassroots level.Finally, when crowd funding involves the sale of tickets, copies of thefilm, or merchandise the effect is to eliminate distributors and retailersthereby keeping the larger percentage of the revenues for the producer.
 
CROWD FUNDING: What You Should Know About The Legal Issues Of Crowd Funding
 
Daniel M. Satorius | Satorius Law Firm, PLLC Page 3
Disadvantages.
There can be disadvantages to crowd funding as well.Crowd funding when done incorrectly may create violations of lawsrelating to the sale of securities, charitable fundraising, and consumerfraud.
SECURITIES LAWS ISSUES
. If crowd funding involves the offer of sale of securities, one must comply with both federal and state laws. On theother hand, if crowd funding is done in a way that does not involve theoffer or sale of securities then there is no violation of the securitieslaws.What is a security? A security is any contract, transaction or schemewhereby a person invests money in a business and is led to expectprofits from the efforts of the business in which the money is placed.(Securities and Exchange Commissioned v. Howey Co., 328 U.S. 293, 66S. Ct. 1100, 90 L.Ed. 1244 (1946)).When might crowd funding involve the offer or sale of securities? If afan gives money to a producer to support the production of anindependent film and the fan has an expectation that he or she willshare profits and the fan does not actively participate in themanagement of the business, then a security is involved. The sale of securities must comply with state and federal securities laws andrequires the assistance of a knowledgeable and experienced lawyer.It is illegal to offer or sell securities without filing a registrationstatement with The Securities and Exchange Commission and theappropriate state authorities unless the securities or the transactionqualify for an exemption from registration. Failure to comply withsecurities laws can result in severe penalties. A violation of SecuritiesAct of 1933 is a felony punishable by up to five years in prison and a$10,000 fine for each violation. The Commissioner may also seek civilpenalties up to $500,000 per violation. The Securities Act also permitsinjured parties to bring civil actions seeking rescission of the transactionand also damages, penalties and other remedies. States have similarpenalties.To avoid a claim that your crowd funding activities involve the sale of securities, you should not promise any return
of the fan’s money in any

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