The 401st Blow :: Thoughts On Media

Crowd Sourcing & Legality

Posted in Uncategorized by Noah Harlan on June 8, 2010

Ted Hope linked to a Kickstarter page for Amos Poe’s newest project, a new translation of Danté’s La Commedia.

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.

Note: Jeff Steele has done some good writing on this subject on his blog, Jeff Steele’s Film Closings, here and here.


8 Responses

Subscribe to comments with RSS.

  1. Brian Newman said, on June 8, 2010 at 5:50 pm

    It is illegal. Both Kickstarter and indiegogo know this which is why it is discouraged. They probably aren’t yet aware. I’m not saying what should be legal, but am 100 percent sure this isn’t and I don’t even have a law degree. For now, someone should tell them off the record so their campaign can continue and be a success.

  2. Noah said, on June 8, 2010 at 6:01 pm

    It appears that no one has taken any of those ‘rewards’ yet so they’re still ok but yes, this would be a problem for them.

    I’m sure they’ll remedy this quickly.

  3. amos poe said, on June 8, 2010 at 6:42 pm

    thanks noah… we didn’t know this issue existed when we posted, we’ve changed it.

    we’re currently finding new rewards to add to all the categories, for the home stretch

    … & the digital download is a great idea, much preferable in some ways, though the dvd will likely have some bonus material for the hard-core…

    this is a DIY experiment, a documentary of sorts and we’re a small group w a lot on our plates to get the film ready for opening night at the palazzo del cinema in venice sept 1st

    un abbraccio da firenze


  4. Miles Maker said, on June 8, 2010 at 6:50 pm

    Scary isht!

    This can generate some undue and altogether unnecessary bureaucratic scrutiny on the crowdfunding process–so I hope this oversight gets nipped in the bud real quick before it becomes a much larger issue that may ultimately affect all of us.

    [Miles Maker is a story author, auteur and thought leader among the new creative class whose dynamic media ventures converge mobile, social and real-time interactions @milesmaker on Twitter. He is the Group Director @IndieClubNYC, the Executive Producer @directingActors, a Raindance New York affiliate and the Producer of Marketing & Distribution @SpareChangeFilm]

  5. Scott Macaulay said, on June 8, 2010 at 7:12 pm

    This is already changed.

  6. Noah said, on June 8, 2010 at 10:07 pm

    Hey Amos, I didn’t mean for this to be a “call out” more of a warning to others. I just contributed and I hope you get to your goal – seems like you’re close…

    Let me know if there’s anything else I can do.

  7. Noah said, on June 8, 2010 at 10:08 pm

    Miles, I don’t think it brings extra scrutiny in an undue way. There are rules that we need to be aware of. Frankly, we do ourselves and the community a disservice if we ignore or circumvent those rules as it would only stand to reinforce the belief that film investing isn’t a “serious business”.

  8. […] 6/9: It has been pointed out that offering profits via KickStarter may not be legal, so get your lawyer to weigh in on that […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: