Film Fund-amentals: JOBS Act and Crowdfunding

I was wrong. I thought the congressional debate on the JOBS (Jumpstart Our Small Businesses Act — and yes, the acronym is screwy) would take a bit longer than it did. Heck, here lately Congress can’t even agree if it’s a nice day without lots of heated accusations and a threatened government shut down.

But the bill is signed, sealed and delivered, which means that crowdfunding is about to get a major overhaul. A key part of this act completely rewrites the structure of crowdfunding, but does so in a manner that leaves an odd range of unanswered questions. It’s a reminder of what Will Rogers once said about a baby with a hammer.

As I explained a few weeks ago, the JOBS Act places crowdfunding under the control of the Securities and Exchange Commission. A lot of people who were involved in the original development of crowdfunding were really hoping to avoid this, since it drastically alters the framework of the process. The intent of this act is to make crowdfunding available for use by entrepreneurs looking to jumpstart funding for a small business. The pressure for this revamp has largely come from the silicon realm, where a virtual generation of Steve Jobs wannabes are anxious to take their digital visions to the marketplace. This sounds all fine and dandy.

However, the short history of crowdfunding has largely been that of folks engaged in much more limited, single-focused projects. This has been the primary concern of crowdfunding during its brief but successful run. Ironically, this is the one issue that the JOBS Act largely ignores, as it leaves open a faint hint that certain exceptions may be made to the new regulations and then orders the SEC to work out the details.

So where does this act leave the young indie filmmaker who is hoping to raise around $10,000 for a small documentary about, let’s say, the environmental issues related to a small stream? Up the creek without a paddle? Maybe. Certainly when the JOBS Act kicks into full gear in 2013, the prospect of simply raising money via crowdfunding for a relatively small project looks dim. It is possible that the SEC will carve out some type of safe zone where the old model of crowdfunding can still operate. Oddly enough, this would be a bit surprising, since this really isn’t how the SEC does business. They regulate things. They don’t normally tell people to run wild and have a good time.

This is one of the reasons why some people are having a negative reaction to these changes. Most people who have been using the crowdfunding approach have not been trying to start a business. They are only trying to complete a single project. Most likely, once the SEC is done figuring out the new rules, people pursuing crowdfunding in this manner will have to deal with greater regulatory demands as well as some form of a more defined business structure and investment model. The reason for this is simple: Congress views crowdfunding exclusively as a form of investment.

The old model avoided this issue altogether. People who gave money to a project through a crowdfunding site were in no way making an investment. They were simply handing out money. The process wasn’t a charity either, since that would have involved the IRS. So it was a one-way street of strangers giving other strangers money for the thrill of it.

But it is now a form of investment, and that is a whole new game. New websites built upon the investment model are already forming (even though it will be later in the year before they can start operating). Other sites such as Kickstarter are sticking with the old model until the government tells them otherwise. Nobody really seems to have a clue how this new process will develop, and the SEC is still sorting out what they are supposed to regulate as well as what they are supposed to deregulate.

Which brings up the other major problem with the JOBS Act. In order to convert crowdfunding into an investment model for business start-ups, a lot of key SEC regulations have been altered and/or dropped. This makes it easier for the average Joe to jump in and invest. It also makes it possible for the average Joe to lose his shirt (and pants and socks and shoes).

The old crowdfunding model was remarkable for its relative lack of “problems.” I suspect that this was due in part to the outrageously simplistic nature of the system. Short of floating a totally bogus project, there wasn’t much room for monkey business. But many people feel that the new investment model will result in massive acts of fraud. To be honest, I do not have either the legal or financial qualifications for assessing this issue. But my gut instincts tell me that it will trigger a fraudsters stampede.

The reason is obvious. Most financial fraud is based upon playing fast and easy with the rules and regulations of any given business. The more regulations you have, the more room to play. The JOBS Act is seemingly designed to create a vast board game for the fraud crowd. I have no doubt that they will rise to the new challenge.

So be careful out there.

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Comments (1)

  • J Reid

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    Hmmm…well, I think we can fix it.

    Reply

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