House Republicans have embraced at least one proposal in President Barack Obama’s jobs package: changing the Securities and Exchange Commission (SEC) rules to make it easier for small filmmakers to raise money without all the formalities (and expense) of filing a registration statement. On Nov. 3rd, 2011 the House passed the Entrepreneur Access to Capital Act, which (if it gets through the Senate and is signed by the President) would make it easier for filmmakers (and others) to raise capital through crowdfunding.
This new law - the version that passed in the House is also known as HR 2930, before it goes through the reconciliation process with the Senate, where changes may emerge - would create a registration exemption from the Securities Act of 1933 for securities issued through internet platforms via crowdfunding.
Unfortunately, the bill that passed in the House is also likely to open the door to scam artists and con-men: Jack Herstein, president of the North American Securities Administrators Association Inc. says: "If I'm a crook, I'd be licking my chops over this."
Will low-budget filmmakers benefit from new access to funding under HR 2930? Or will a tide of fraud and inept wannabes (unleashed by naive lawmmakers - who wanted to help but just didn't understand the film business) make it even tougher for legitimate filmmakers to make their case to investors?
Are any real filmmakers supporting this revision to the law? And how might this new law create new opportunities for fraud?
Ordinarily, when investors purchase ownership stakes in a company in exchange for a share of the company's future profits, the SEC requires extensive disclosure about the offerings and the parties to the offerings. These so-called "securities" regulations are intended to reduce the risk of fraud and to protect investors. Crowdfunding is an increasingly popular method of capital formation, where, according to SEC Chairman Mary Schapiro, "groups of people pool money, typically comprised of very small individual contributions, to support an effort by others to accomplish a specific goal." Current SEC regulations impede crowdfunding - by prohibiting general solicitation and advertisements for non-registered offerings.
The objective of HR 2930, the Entrepreneur Access to Capital Act, is to create a new registration exemption from the Securities Act of 1933 for securities issued through internet platforms via crowdfunding. To use this new exemption, the issuer's offering cannot exceed $1 million, unless the issuer provides investors with audited financial statements, in which case the offering amount may not exceed $2 million. An individual's investment must be equal to or less than the lesser of $10,000 or 10 percent of the investor's annual income. By exempting such offerings from registration with the SEC and preempting state registration laws, HR 2930 intends to give entrepreneurs easier access to capital from potential investors.
As Kent Hoover observed about this legislation when he wrote on Nov. 3rd, 2011 for portfolio.com, "it's foolhardy to predict what the Senate will do with any legislation" but the chances for some sort of crowdfunding exemption look good. Opposition from Republican Senators could materialize (e.g., to thwart President Obama, who has endorsed legislation to make crowdfunding easier in the interest of cutting “the red tape that prevents many rapidly growing startup companies from raising much-needed capital”). But the Entrepreneur Access to Capital Act passed with broad bipartisan support (407-17) in the House and a similar (better?) bill was recently introduced in the Senate - by a prominent Republican Senator - Brown of Massachusetts. I like the changes to HR 2930 in Senator Brown's bill (e.g., requiring companies raising capital under this exemption to 1) do business through an intermediary like Kickstarter or indiegogo, and 2) that the intermedaries positively identify the issuers and their principals, and 3) that the crowdfunders disclose risk, incorporate pursuant to state law, and register with the SEC). I'm hoping that when the House and Senate bills are reconciled, the protections against fraud will be strengthened. Because of the broad support HR 2930 had in the House, it seems likely some sort of crowdfunding exemption to securities law will be signed by the President before the end of the year.
While some low-budget filmmakers see easy access to cash as a great boon, it should be noted - government efforts to support investment in filmmaking often encourage con-men and scam artists - who take the money with no ability (or intention?) of making films.
Some commentators are predicting a flood of new "movie business" scams if HR 2930 (or something like it) becomes law: "Sophisticated fraudsters will utilize fake IP addresses... setting up dozens of fake companies which they could cross-capitalize with their own funds for credibility, only to solicit tens or hundreds of thousands more from unwitting idealistic crowdfunders. It is a fantastic business model. Even if a fraudster is caught, the victimized investor must not only plead fraud, but prove it at trial. This burden is the opposite of current registration and disclosure requirements, which place the burden on the capital-soliciting companies..."
Having seen how government subsidies and tax incentives for filmmakers have been abused, there is obvious cause for concern. HR 2930 - as it stands - is going to attract a lot of flim-flam. In my view, a much better law would limit the size of the investment (10% of annual income is too high, why not start with $1,000 per investor?). A smaller maximum investment was part of the rival bill S.1791.IS proposed in the Senate (after HR 2930 passed in the House) by Senator Brown of Massachusetts. That change (limiting how much each investor could have at risk via crowdfunding) - coupled with more robust sanctions for "entrepreneurs" who take money and never make a marketable film and the very simple registration requirements that Senator Brown's bill suggests - would go a long way toward improving this (well-meaning but flawed) piece of legislation.
There's an even more fundamental problem when it comes to making crowdsourcing easier for wannabe filmmakers: Opening up "investment" to anyone who has a website and calls themselves a filmmaker does nothing to address the collapse of distribution models (places that will play and pay) for independent films.
Without a revenue model for finished films - HR 2930 could actually hurt legitimate filmmakers.
Consider this: If HR 2930 becomes law 1) more economically-unjustifiable films will be made - further glutting the market and making it even harder for professional filmmakers to get a fair price for their finished films and 2) HR 2930 will attract the worst kind of con-men and grifters - ultimately making it harder for professional filmmakers to do business.
HR 2930 doesn't address why even prize-winning feature length films are not paying back their investors. In fact, HR 2930 is likely to make that problem worse, by encouraging more unsustainable filmmaking (filmmaking for which there is no revenue model). There are already more completed non-studio films than the market can handle.
Instead of championing HR 2930 (a rollback of investor protections that appeals primarily to people who don't understand the economics of professional filmmaking and crooks), I think real low budget filmmakers should focus on developing new revenue streams for finished films.
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