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Crowdfunding for Dummies

posted Jun 20, 2014, 2:14 AM by Siamak Ebarhimi

The term “crowdfunding” is being bantered around as the latest savior of those seeking independent film financing (referred to as film companies in this article).  There are several different types of crowdfunding, 
and it is helpful to be clear on which type is being discussed, so here is a course 101 summary of the 
different types:crowdfunding marketing

Donative Crowdfunding.  One kind (think Kickstarter) is basically a donation model, where wannabe entrepreneurs with bright ideas (for Kickstarter, it is limited to “creative ideas,” which basically means the arts) submit the ideas on the website and solicit funding from the public, usually in exchange for some small goodie, like a free copy of whatever the product to be produced is, but the contributors do not receive any equity or ownership in the project.  The good news is that this type of crowdfunding is not subject to the federal or state securities laws, because it is not offering any investment opportunity, since the contributors do not receive any economic return.  The bad news is that the cash paid is immediately taxable to the film company, since the only arguable exemption (a gift) doesn’t work because of the small goodie the payors get, and the payors can’t deduct the payments as a charitable contribution, since the film companies are not tax-exempt 501(c)(3) organizations.crowdfunding advertising

$1 Million Limit Crowdfunding.  Another type of crowdfunding is based on a law that permits equity or debt offerings of not more than $1 million through “funding portals,” envisioned as web sites that match investors to investments.  The good news is that this type of crowdfunding is exempt from registration with the SEC, but the law actually makes this type of crowdfunding a chimera because it adds so many hurdles and restrictions that it makes this type of crowdfunding cost more than the money raised.  Because of these restrictions, very few brave souls have attempted this type of crowdfunding.indiegogo marketing

Aggregator Web Sites.   A third type of crowdfunding, which is gaining popularity, is based on a recent law that permits equity or debt offerings that accept only “accredited investors” to be advertised (which was prohibited before 2013).  The film company has to obtain verification that all the investors it accepts are “accredited investors,” which includes:

  • A natural person who had an individual income in excess of $200,000 (or $300,000 if married) in each of the two most recent years, and who reasonably expects an income in excess of that amount in the current year; andkickstarter project
  • An entity that has over $5 million of gross assets that was not formed for the specific purpose of making the one investment.CrowdFunding advertizing
These offerings can now be publicly advertised on a website, either one put up by the film company or, more commonly, by one that aggregates offerings and acts as a marketplace for companies and investors to meet, such as for film offerings.  Previously, these type of aggregator websites had to register as broker-dealers, but the recent law that permits advertising also permits web sites to avoid registration as long as a couple of requirements are met:  First, the web site must either not receive or pay any compensation in connection with the sale of listed investments.  Second, the web site cannot have possession of customer funds or investments.  If these requirements are met, the web site may provide ancillary services, such as (a) the provision of due diligence services, so long as such services do not include, for separate compensation, investment advice or recommendations to the film companies or investors; and (b) the provision of standardized documents to the film companies and investors, so long as the web site does not negotiate the terms of the issuance for and on behalf of third parties, and so long as the film companies are not required to use the standardized documents as a condition of using the service.A natural person whose net worth (together with his or her spouse, if any) exceeds $1,000,000 at the time of the purchase (excluding the investor’s principal residence);kickstarter marketing

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 By David Khorram