Crowd Sourcing & Legality
Let me start by saying, I hope I’m wrong about this. I wish them nothing but success with the project (they seem to be doing quite well on their raise with some days still to go). I’m just not sure what they’re doing is legal.
Here’s what Ted said:
Check out Amos “the avatar of no-wave cinema” Poe’s KickStarter page’s pledge incentives for his new translation of Dante’s “La Commedia” for an example of well thought out rewards. There are low ones that most will skip over so that they don’t think themselves cheap. There are high ones that feel out of reach but encourage you to also reach higher. They give a DVD (which frankly could have been a digital download) at the the second lowest level. Even if I didn’t know, like, and respect Amos and his work, I might be inspired to give (I did).
What Ted doesn’t mention is the top few reward levels:
- Pledge $2,000 or more: 1% of producer’s gross profit, Co-Producer credit, single card, name on poster, La Commedia DVD, a copy of Amos Poe’s former film EMPIRE II and 2 tickets for premiere.
- Pledge $5,000 or more: 2.5% of producer’s gross profit, co-executive producer credit, co-presenation credit, name on poster, 2 tickets for premiere, Red carpet invite Venice Film Festival 2010, plus an Amos Poe’s artwork.
- Pledge $10,000 or more: 5% of producer’s gross profit, executive producer credit, single card, R/T economy airplane ticket, 2 nights hotel at Venice Film Festival, 2 tickets for premeire and red carpet.
That seems an awful lot like a public offering and that, unfortunately, is a violation of SEC law. If you’re not careful, this can land you a heap of trouble down the road.
The SEC (Securities and Exchange Commission) has a very specific list of exemptions to the public offering rules. If you are selling an equity and you don’t have one of the following exemptions, then you must register with the SEC and qualify as a Public Offering (as opposed to a Private Offering – which most film prospectuses are). The exceptions are:
- Interstate Offering Exemption: Your offering must be only within the state your company is incorporated in (Kickstarter isn’t limited this way), carry out a significant amount of its business in that state (films don’t generally qualify since they sell all over) and your offer can only be to residents of that state (again, Kickstarter doesn’t qualify since it’s open to anyone). This rule is tied to the Commerce Clause of the Constitution that says the government can only regulate interstate trade.
- Private Offering Exemption: This is the exemption that most films use. In this case the key detail is that you must only offer investment opportunities to sophisticated investors (people who invest a lot and understand investment prospectuses). By announcing to the public that they can buy in, you are not limiting the offering to those investors.
- Regulation A: In this case you must register your offering with the SEC ahead of time which is costly and time consuming and thus something that most filmmakers don’t do.
- Regulation D: There are several variations of Regulation D but generally you are not allowed to advertise your offering publicly. Kickstarter would most likely be considered a violation of that restriction.
There are a couple other exemptions but those, too, don’t generally apply to films. This is a complicated area of the law and, when I teach producing, I always tell my students that when you get to the prospectus stage that you need to consult a lawyer because if you make a mistake, it can really cost you down the road.
I think that these laws likely need to be revised since there seems to be nothing wrong with what Amos is doing. Small raises for these types of projects shouldn’t fall under SEC jurisdiction but, unfortunately, they often do.