Written by Michael R. Barnard FILMMAKERS, IT’S 2013. DO YOU KNOW WHERE YOUR JOBS ACT IS?
Part 2 of 3 parts.
For the definition of “Accredited Investors,” see http://www.sec.gov/info/smallbus/secg/accredited-investor-net-worth-standard-secg.htm
In simple terms – explanations that are more complex require attorneys – the process to raise money for your movie by legally offering securities is referred to generally as a “Private Placement Memorandum,” which usually costs about $15,000 or more in time and fees.
When you have your expensive PPM, what can you do with it?
Under Rule 506 of Regulation D, you can only show your expensive PPM to, simply put, millionaires. This audience, legally known as “Accredited Investors,” is allowed because of the presumption that people with lots of money can’t get destroyed by a single bad investment, and are smart enough to properly evaluate the realistic potential for any investment.
According to attorney Dan DeWolf, attorney with the New York law firm Mintz Levin Cohn Ferris Glovsky and Popeo (see http://www.martindale.com/Daniel-I-DeWolf/499422-lawyer.htm), “As a matter of public policy, the courts really do not want to get involved in investments with someone where, if it was disclosed it was a risky investment, and they are wealthy, and they can afford good counsel. If they have a million dollars net worth and they’re making these types of investments, they can afford to pay counsel or their accountant to look this up. The courts really don’t want to interfere in this type of capital formation.”
The definition of “Accredited Investor” is very specific, and was updated in 2011 to exclude the value of one’s home because of the destructive volatility of the mortgage crisis. It includes those with a net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of their primary residence, or those with income exceeding $200,000, or $300,000 with the spouse, in each of the past two years and the reasonable expectation of the same income level in the current year. (See the description of Accredited Investor here: http://www.sec.gov/info/smallbus/secg/accredited-investor-net-worth-standard-secg.htm)
“What the courts don’t want, and the SEC doesn’t want,” continues DeWolf, “is people preying on widows, orphans, and others where these types of high-risk investments are totally inappropriate. That is why they limit it to only Accredited Investors, because they can bear the risk.”
It’s a closed community. Only after you find an Accredited Investor can you then pitch your expensive PPM. Generally speaking, you cannot legally let anyone other than Accredited Investors have access to your project for evaluation (there is an allowance for those with prior relationships, but that is not in the scope of Title II of the JOBS Act), nor can you allow anyone other than accredited investors to invest in your project.
These facts commonly frustrate new filmmakers.
Of course, the spirit of artistry and story-telling still burned under the collapse caused by the Great Recession. Filmmaking never died. Even in the worst times of the Great Recession, when distributors, hedge funds, foreign presales, and bank credit started to disappear, filmmaking found support. Even with the tremendous downward pressure on budgets for production and distribution, filmmakers continued to strive to make movies.
At the same time, audiences clamored to help the arts of filmmaking. The spark of creativity was nurtured by a new process of perks-based donor crowdfunding to fund filmmaking.
The process is like an egalitarian version of the ages-old concept of “patron of the arts,” when wealthy benefactors provided money to support their favorite artists for the sake of the art.
With today’s perks-based donor crowdfunding, filmmakers, instead of seeking equity investment in their movie project from a few people in exchange for profit participation, simply ask everyone for outright contributions, usually offering perquisites as a return gift. There is no equity participation; this means that none of the donors will receive any ownership in the movie project. Supporters give money to filmmakers solely for the sake of helping get the movie made. They cannot receive any possible profit. They usually cannot even receive a tax deduction, since perks-based donor crowdfunding is rarely set up for qualified donations to registered non-profit organizations, such as 501c3 entities.
“Any resource that allows artist and audience to link directly and strategically is a great thing,” said Sean McManus (see http://www.filmindependent.org/sean-mcmanus/)about crowdfunding. McManus is co-president of Film Independent, the largest organization serving independent filmmakers in America. He added, “They crowdfund pre-production, production, post-production, and even festival runs and distribution.”
“Crowdfunding also enables filmmakers to develop direct contact with potential viewers once the film is available,” added Josh Welsh (see http://www.filmindependent.org/josh-welsh-co-president/), also co-president of Film Independent.
Perks-based donor crowdfunding is probably just as hit-or-miss as seeking equity investment. Many projects launched on crowdfunding sites fail to reach their goals. However, Kickstarter, the biggest player in the field of crowdfunding sites, rightfully brags about some fascinating and exciting results on their blog at http://www.kickstarter.com/blog/100-million-pledged-to-independent-film. Kickstarter alone has brought together nearly 900,000 people who supported independent filmmakers, pledging more than $100 million to features, documentaries, shorts, web-series, and other film and video projects over the past three years. Rentrak, which tracks such things, reports that almost one hundred Kickstarter-funded films were in more than 1,500 North American theaters, and another dozen or more have theatrical premieres slated for 2013.
There are many crowdfunding sites; another popular crowdfunding site for filmmakers is Indiegogo and a newer one is CrowdZu.
The term “crowdfunding” refers to a subset of the term “crowdsourcing,” a recent term to describe the use of social media, primarily, to obtain information and maybe even consensus from the crowd of people accessible by one’s online and offline social circles (see http://www.merriam-webster.com/dictionary/crowdsourcing). “Crowdfunding” is the process of using crowdsourcing for the specific purpose of raising funds. Curiously, the most popular crowdfunding site, Kickstarter, does not use the term “crowdfunding.” It calls itself, simply, an online funding platform. Considering the U.S. Government’s definition in Title III of the JOBS Act of “CROWDFUND” as an acronym of the contorted “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure,” it’s easy to side with Kickstarter’s dislike of the term.
Some investment professionals are only aware of the term in the context of the forthcoming Equity Crowdfunding, which is not yet legal, as well as some closed-to-the-public investing sites that now exist, and they might express confusion or concern when people talk about “crowdfunding” as it is popularly used today.
This confusion is likely to grow when perks-based donor crowdfunding and Equity Crowdfunding both become fundraising tools for filmmakers and other entrepreneurs.
Perks-based donor crowdfunding has been legal and immensely popular. Public use of “Equity Crowdfunding” under the JOBS Act has not yet been implemented and is still illegal. Existing closed-to-the-public equity investing sites are limited to only Accredited Investors.
DOWNWARD PRESSURE ON BUDGETS
The perks-based donor crowdfunding efforts that are successful commonly provide only a bare minimum amount of funding for making a movie. In an industry where ‘flying by the seat of your pants’ and being ingenious in cheap ways to create movie magic has always been the lifeblood of making movies, there is now a new lower threshold as many crowdfunded projects raise barely enough money to pay for extremely reduced expenses. Although it’s now the assumed reality for our new generation of filmmakers, this new lower threshold often results in shorter production schedules, lower or non-existent wages, fewer cast and crew, no rental of equipment to increase production value, avoidance of location fees and even insurance, presuming ‘word-of-mouth’ instead of crafting a marketing budget, and other critically minimized expenses. The Great Recession’s downward pressure on budgets that had already been small has hindered the infrastructure of the independent film industry in America, making competitive production value, consistency, opportunity and livelihood difficult. This is particularly unusual, given the tremendous growth in the quantity of independent movies being made. For instance, more than 2,000 feature films made in America were submitted to the Sundance Film Festival 2013.
“There is now a strata of filmmaking where they get their fifty grand and do whatever they can possibly do with it,” says Richard Abramowitz of Abramorama.
In the modern independent film industry in America, Ted Hope of the San Francisco Film Society considers three levels of independent feature film budgets: about $20 to $25 million, which might be considered as Oscar-worthy films; about $3 million for independent films that attract a lead actor who had a significant role in prior feature films grossing in the range of $100 million; or, otherwise, budgets of about $500,000 or less.
“That breakdown is a simplification made for the sake of clarity,” says Hope.
Several industry experts agree that a filmmaker can now craft a feature-length movie for a production budget under $1 million that is competitive in theatrical production values.
“Absolutely,” says Abramowitz.
“1,000 percent agree,” says Hope, and adds, “It’s been a long time since we had a ‘Napoleon Dynamite.’ On the other hand, Oscar-nominated ‘Beasts of the Southern Wild’ is only marginally above that $1 million figure and is nothing short on the theatrical production value, and well-positioned in the marketing, too.”
Regarding the downward pressure on production budgets, Steele adds, “I would say a $15 million film from a few years ago is now the $3 to $5 million film. The crunch brought the budgets down to where they should be.”
Stacey Parks of Film Specific (see http://www.filmspecific.com/public/department86.cfm), which works with filmmakers to properly package their film projects, frequently advises her clients to reduce their original budgets. “If you have started with a $5 million budget,” says Parks, “You’re really only going to make your film for probably no more than $2.5 million.”
There are new opportunities because of the ‘correction’ in filmmaking budgets. More can be done with less. The trick will be to rise out of poverty and rebuild the infrastructure of the independent film industry.
The new generation of filmmakers, and those filmmakers who can quickly adapt, face exciting opportunities for funding their movies.
THE MONEY IS OUT THERE.
Yes, there is cash available for investing. Lots of cash.
Cash is being hoarded by the very wealthy and by your friends and family. The notorious mindset of “stuff the money in the mattress” eight decades ago, borne from the fears of the Great Depression and the fear of banks collapsing, returned again in the Great Recession.
Individual Americans have missed almost $200 billion of stock gains by hoarding cash rather than investing it (see Bloomberg’s “Americans Miss $200 Billion Abandoning Stocks” at http://www.bloomberg.com/news/2012-12-24/americans-miss-200-billion-abandoning-stocks.html).
Corporations and institutions have done the same; trillions of dollars have been sitting idle instead of creating jobs and building business infrastructure (see NPR’s “Companies Sit On Cash; Reluctant To Invest, Hire” at http://www.npr.org/2011/08/17/139703989/companies-sit-on-cash-reluctant-to-invest-hire, Forbes’ “Super Rich Hide $21 Trillion Offshore, Study Says” at http://www.forbes.com/sites/frederickallen/2012/07/23/super-rich-hide-21-trillion-offshore-study-says/, and PolitiFacts.com’s “Obama says companies have nearly $2 trillion sitting on their balance sheets” at http://www.politifact.com/truth-o-meter/statements/2011/feb/10/barack-obama/obama-says-companies-have-nearly-2-trillion-sittin/).
The FINANCIAL TIMES reports that equity funds have seen the strongest inflows in more than five years because of boosted investor confidence. Net inflows into equity funds monitored by EPFR, the data provider, hit $22.2 billion in the week of January 9, 2013 – the highest since September 2007 and the second highest since comparable data began in 1996. (See http://www.ft.com/intl/cms/s/0/195ed762-5bd7-11e2-bf31-00144feab49a.html)
“Access to capital is essential for success,” says Salute.
Tomorrow, in Part 3, we look at the JOBS Act’s provisions for specific opportunities to access that capital.
Michael R. Barnard is a writer and filmmaker who has been researching the American JOBS Act since it was first proposed. Barnard is currently working on creating an independent feature film, A FATHER AND SON (http://AFatherAndSon.wordpress.com). Barnard lives in Brooklyn, New York, and is the author of the historical novel NATE AND KELLY. You can reach Barnard on Twitter at @mrbarnard1 and on Facebook at michael.barnard.
This article is an overview and observation, not legal advice.