Thursday, March 3, 2011

Crowdfunding: Film Company Pioneers Micro-Stock Approach

Posted By on Thu, Mar 3, 2011 at 3:10 PM

A new film company in Washington, Audience Productions, has found a way to make crowdfunding work for small business through a micro-stock model and is currently raising capital for its first project, Lydia Slotnick Unplugged.

In November 2010 BW reported on crowdfunding, a new fundraising technique artists are using to fund their work through large numbers of small donations, similar to the way political campaigns are funded. The catch is that although the artists often make money with the completed projects, they are legally prohibited from using crowdfunding to sell stock in their ventures because of Securities and Exchange Commission regulations—regulations that a group of activists are working to change so small businesses can better access start-up capital.

According to Jay Schwartz, president of Audience Productions, instead of trying to circumvent SEC regulations, the film company worked to be in full compliance with public filings and registration in 19 states (note: Idaho isn't one of them).

Audience Productions is selling shares of their movie at $10 apiece. The long-range goal is to continue making films in which thousands—potentially hundreds of thousands—of $10 "shareholders" take a personal stake in the process through voting by electronic proxy.

"We're doing this just like IBM would or any other public company," said Schwartz.

The technique manages to combine proven management and production strategies of a traditional film venture, in which there are several large investors, with the more populist consumer involvement of crowdfunding.

Audience Productions isn't the only company taking this approach. MediaShares is pursuing a similar model, though it's attempting to broaden the scope and get audiences to invest in nearly anything of which they're fans rather than limiting themselves to filmmaking.

But Jenny Kassan, co-director of the California-based Sustainable Economies Law Center, which is working on the campaign to change crowdfunding law, doesn't feel this is the sort of thing that will work for start-ups on a wide scale.

"The cost to do what they did could be easily $100,000," said Kassan. "So it is really great that they did it but it is not feasible for 99.9 percent of entrepreneurs. That's why we are looking for exemptions."

Schwartz doesn't entirely disagree. He said they were able to afford that system by doing most of the work in-house, something certainly made easier by having several Cornell MBAs on their management team.

But he still feels that their model is superior to the current crowdfunding scheme because it offers a higher-quality result. For one, Audience Productions will offer a completion bond, ensuring that the film will be made or the stockholders will be reimbursed.

"In the donation model, they never know what happens with their money," said Schwartz. "And even if something comes out of it there's no guarantee it's commercially viable. And even if it is, they don't get anything out of it."

Schwartz says that alternatively, Audience Productions will offer vetted projects with a higher probability of commercial success, and they do so with the ability for people to benefit financially from the process. While no investment is without risk, Audience Productions is projecting a 7 percent preferred return with additional profits split between different classes of investor.

"With our model, the shareholders have the power," said Schwartz. "They can vote on the project. Technically, they could vote out the directors."

This is key because Schwartz points out there is a huge difference between a $1 million movie and an $8 million movie, and that it wouldn't be fair to shareholders to promise one and make the other.

But perhaps Schwartz's biggest point is that state regulations are often more complex than SEC rules, and that if the campaign to change crowdfunding law is successful, it will only get small businesses mired in what are potentially more expensive and complicated processes.

Kassan agrees.

"They are right that even if we get the federal exemption, state law will still be an issue," she said.

That's why she's already at work on a campaign to reform state level securities laws as well.

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