22 Mar Film Fund-amentals: Crowdfunding 2.0

Will Rogers once observed, “This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.”

Thanks to Senate Bill 1933/H.R. 3606 (Reinvigorating the Capital Markets for Emerging Growth Companies), some indie filmmakers are feeling as if it’s hammer time in the halls of Congress. Actually, the reaction among indie filmmakers is pretty mixed because the issue is so utterly confusing (in reality, what is currently going on regarding Congress and crowdfunding involves numerous bills in both the House and the Senate) that most folks are having trouble keeping track of the debate. Not surprising, since the debate is all over the map, and for most low-budget filmmakers, it might as well be coming from another planet. Heck, the only immediate achievement in these debates is the official agreement that “crowdfunding” is to be used as a single word.

I’ve been trying to follow these various bills and debates. I’m also largely confused about various points regarding the full implementation of these “reforms.” The whole thing sounds like a run through of the Who’s on First routine. A well-informed and detailed breakdown can be found at The Wrap website, courtesy of Jeff Steele’s columns. A lively sense of outrage can be located on Twitter via Lucas McNelly. All I can give you is a very general overview. This is already more than Congress can do, so please bear with me.

Several years ago, crowdfunding made its first soft stirring as an alternative funding venue for extremely low-budget movies. The rules were simple: you posted your proposed project, offered some kind of gift at the end of the project (e.g., a DVD of the finished film) and hoped that a network of people would be willing to donate the funds needed for the movie. It all seemed pretty straightforward.

Despite some doubts and misgivings in certain circles about this approach (admittedly, I had some doubts), it took off and by the end of 2011, crowdfunding had become a major success story. Unfortunately, success not only has a thousand fathers but also a million paternity suits. A process that began with the low-key drive of a Girl Scout Bake Sale was suddenly the focus for “investors.” Investors are very different from donors, and the somewhat nebulous nature of crowdfunding had no clear demarcation line between the two. This is the reason that Congress felt the need to jump in. Too bad. A lot of low-budget indie filmmakers were just starting to enjoy the bake sale.

In my earlier blog piece, I expressed some concerns about the peculiar nature of the crowdfunding system. The people who donated money through crowdfunding were not really donors in any legal sense (which is why they were not entitled to any form of tax write-offs for the money given). Likewise, they were not investors. To even treat them as investors would have been illegal under the rules of the Securities and Exchange Commission. So basically they were simply generous givers who handed out their money in lieu of flushing it down the toilet. I’m not saying that to be snarky. I’m just being blunt. They would give money to a project for no other reason than the sheer thrill of it all.

Amazingly enough, it worked. Not always, but more often than many of us thought possible. However, this type of success has attracted attention from many other quarters, especially people involved in web development who are trying to create a start-up company and are looking for various types of investors but are not able to pursue this approach under current financial structures. The one element shared by all of the bills in Congress is the intention to refashion the core concept of crowdfunding into a forum for investment in small start-up companies. From that perspective, the Congressional debate is absolutely essential.

However, the average low-budget indie filmmaker is not looking to develop a start-up company. Most of their projects are one-shot jobs. They are simply trying to get enough money to make a single movie. If and when crowdfunding is reformed, the new rules and structures would undoubtedly leave a lot of these folks feeling screwed. In fact, they will be screwed. Heck, a lot of indie filmmakers would be better off running a bake sale than dealing with all of the legal paperwork needed for the SEC. It is possible that Congress will enact a dividing line between low-budget crowdfunding efforts and those designed toward start-up companies. But that line will undoubtedly be a difficult mark for many filmmakers who will be working with budgets that are either too little or too much.

Unless a new approach is created for filmmakers dealing with the “reformed” version of crowdfunding, in most cases, it would be useless or even impossible for the majority of indie filmmakers to deal with the new SEC requirements. But it is possible that companies and service providers will be created that can do the job. They wouldn’t really be production companies in any traditional sense of the term. As a rule, they will not be particularly involved in either the production, distribution or promotion of the film. They will be the company dealing with the new rules and regulations of what we can now call Crowdfunding 2.0. There really are no such companies at the moment. But as soon as Congress acts (which could be by this summer, though I suspect it will be later simply because we are talking about Congress, for crying out loud), these companies will appear.

No matter what, crowdfunding will undergo a radical change. Some aspects of this change will be a royal pain in the rear. But I will try to keep in mind what a friend once told me: “There are so many ways this could go right.”