In the world of perk-based crowdfunding, film and entertainment projects have been some of the most successful projects. But perk-based financing has its limits even in this glamorously attractive industry. Today my fellow panelists and I at the New York City Bar Association discussed some of the issues particular to this industry.
As a general matter, it needs to be understood that film and entertainment finance is not somehow a different genre from a company in any other industry raising money -- if you're offering either equity or debt, or some instrument that gives investors a financial return, it's a security and your offering is subject to the securities laws. Campaigns on sites like Kickstarter and Indiegogo are not offering securities and therefore do not trigger US securities laws. They can be rich sources of capital for funding projects, particularly because entertainment projects are uniquely placed to offer attractive incentives, but the true value of a perk-based campaign perhaps lies not in its ability to raise money, but rather in its ability to create a community. Given that perk-based campaigns do not trigger application of the securities laws, a possible effective structure for film and entertainment finance could be to do a perk-based campaign for some seed money and to develop a buzz and goodwill along the fan-base, either prior to or simultaneous with another securities-based financing either under rule 506(c) using one of the accredited investor Internet portal websites such as SeedInvest, or, in future, coupled with an offering under the final proposed Regulation Crowdfunding. Because the perk-based campaign is not subject to the securities laws, there are no "integration" issues between the two offerings that could jeopardize the exemption from the securities laws provided for the crowdfunding offering.
Film and entertainment may present some interesting issues for offerings under the proposed Regulation Crowdfunding due to the way in which projects are structured. A single producer, or production company for instance, may be engaged in raising money for multiple legitimately independent projects at the same time. Consequently, it's important to be able to clearly delineate who the issuer is for the application of the offering size limits under proposed Reg CF particularly in light of the provision that prescribes that all offerings by issuers will be aggregated with that of other issuers that it controls or that is under common control with the issuer for purposes of calculating the $1 million annual limit -- for example, will it be sufficient to set up an independent LLC for each of the independent projects, each with its own $1 million cap, or will the "issuer" be deemed to be the ultimate production company that owns all the LLCs thus subjecting all the projects to one aggregate $1 million limit? In the final release the SEC will hopefully revise the rule or provide commentary to clarify how the issuer criteria will be applied. I am considering submitting a comment letter to the SEC on this topic.