After a four year wait, as of May 16, 2016, crowdfunding portals can finally begin to operate and raise investment funds for film and other enterprises.  For the first time, producers will be able to offer funders a share of the profits of a project, including low budget films. Until today, internet platforms like Kickstarter were limited to seeking donations and could only offer T-shirts and other swag to those who donated funds. The new rules make crowdfunding cheaper and easier but there is a $1 million cap on the amount that can be raised in a 12-month period.

Crowdfunding refers to the process of raising money to fund a project or business through numerous small donors, often using an online platform or funding portal to solicit their investment. Because film investments are so risky, the ability to allocate that risk among many investors should increase the amount of financing available for indie films.

Anyone can invest in crowdfund offerings subject to limits on the amounts invested. The entity raising funds must be American and cannot be an investment company.
Funding portals are platforms that provide investors with information about investments being offered.  These portals are designed to allow internet-based platforms or intermediaries to facilitate the offer and sale of securities.  Portals are required to register with the Securities and Exchange Commission and become a member of the Financial Industry Regulatory Authority (FINRA). FINRA’s standards can be reviewed here.

Under FINRA rules, funding portals communication cannot include in their communications any false, exaggerated, unwarranted, promissory or misleading statement or claim; nor omit any material fact or qualification which would cause the communication to be misleading.

The SEC has issued an investor bulletin on Crowdfunding, portions of which are reproduced below:

Can I make a crowdfunding investment?

Anyone can invest in a crowdfunding securities offering.  Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions.  The limitation on how much you can invest depends on your net worth and annual income.
If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000. 










Joint calculation.  You can calculate your annual income or net worth by jointly including your spouse’s income or assets.  It is not necessary that property be held jointly.  However, if you do calculate your income or assets jointly with your spouse, each of your crowdfunding investments together cannot exceed the limit that would apply to an individual investor at that annual income or net worth level.

How do I calculate my net worth?

Calculating net worth involves adding up all your assets and subtracting all your liabilities.  The resulting sum is your net worth.
For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation.  In addition, any mortgage or other loan on your home does not count as a liability up to the fair market value of your home.  If the loan is for more than the fair market value of your home (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.

Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well.  The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.

How do I make a crowdfunding investment?

You can only invest in a crowdfunding offering through the online platform, such as a website or a mobile app, of a broker-dealer or a funding portal.  Companies may not offer crowdfunding investments to you directly—they must use a broker-dealer or funding portal.   

The broker-dealer or funding portal—a crowdfunding intermediary—must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA).  You can obtain information about a broker by visiting FINRA’s BrokerCheck or calling FINRA’s toll-free BrokerCheck hotline at (800) 289-9999.  You can obtain information about a funding portal by visiting the SEC’s EDGAR website.
Keep in mind that you will have to open an account with the crowdfunding intermediary—the broker-dealer or funding portal—in order to make an investment and all written communications relating to your crowdfunding investment will be electronic.

What should I keep in mind?

Crowdfunding offers investors an opportunity to participate in an early-stage venture.  However, you should be aware that early-stage investments may involve very high risks and you should research thoroughly any offering before making an investment decision.  You should read and fully understand the information about the company and the risks that are disclosed to you before making any investment.
The following are some risks to consider before making a crowdfunding investment:

• Speculative.  Investments in startups and early-stage ventures are speculative and these enterprises often fail.  Unlike an investment in a mature business where there is a track record of revenue and income, the success of a startup or early-stage venture often relies on the development of a new product or service that may or may not find a market.  You should be able to afford and be prepared to lose your entire investment.
• Illiquidity.  You will be limited in your ability to resell your investment for the first year and may need to hold your investment for an indefinite period of time.  Unlike investing in companies listed on a stock exchange where you can quickly and easily trade securities on a market, you may have to locate an interested buyer when you do seek to resell your crowdfunded investment. 
• Cancellation restrictions.  Once you make an investment commitment for a crowdfunding offering, you will be committed to make that investment (unless you cancel your commitment within a specified period of time).  As detailed in the box below for Changing your mind, the ability to cancel your commitment is limited.
• Valuation and capitalization.  Your crowdfunding investment may purchase an equity stake in a startup.  Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult and you may risk overpaying for the equity stake you receive.  In addition, there may be additional classes of equity with rights that are superior to the class of equity being sold through crowdfunding.
• Limited disclosure.  The company must disclose information about the company, its business plan, the offering, and its anticipated use of proceeds, among other things.  An early-stage company may be able to provide only limited information about its business plan and operations because it does not have fully developed operations or a long history to provide more disclosure.  The company is also only obligated to file information annually regarding its business, including financial statements.  A publicly listed company, in contrast, is required to file annual and quarterly reports and promptly disclose certain events—continuing disclosure that you can use to evaluate the status of your investment.  In contrast, you may have only limited continuing disclosure about your crowdfunding investment.
• Investment in personnel.  An early-stage investment is also an investment in the entrepreneur or management of the company.  Being able to execute on the business plan is often an important factor in whether the business is viable and successful.  You should also be aware that a portion of your investment may fund the compensation of the company’s employees, including its management.  You should carefully review any disclosure regarding the company’s use of proceeds.
• Possibility of fraud.  In light of the relative ease with which early-stage companies can raise funds through crowdfunding, it may be the case that certain opportunities turn out to be money-losing fraudulent schemes.  As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.
• Lack of professional guidance.  Many successful companies partially attribute their early success to the guidance of professional early-stage investors (e.g., angel investors and venture capital firms).  These investors often negotiate for seats on the company’s board of directors and play an important role through their resources, contacts and experience in assisting early-stage companies in executing on their business plans.  An early-stage company primarily financed through crowdfunding may not have the benefit of such professional investors.

​How do I get informed?

Broker-dealers and funding portals that operate crowdfunding platforms are required to offer educational materials to help investors understand this type of investing.  These materials further detail the risks involved when making a crowdfunding investment.  You should take advantage of this resource to educate yourself and understand the risks of making crowdfunding investments.  Remember, this is your money that you are putting at risk, and you should only invest after careful consideration of the risks.
Read the full Investor Bulletin.
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About Mark Litwak: Mark Litwak is a veteran entertainment attorney and producer’s rep based in Los Angeles, California. He is the author of six books including: Dealmaking in the Film and Television Industry, Contracts for the Film and Television Industry, and Risky Business: Financing and Distributing Independent Film. He is an adjunct professor at USC Gould School of Law and the creator of the Entertainment Law Resources (www.marklitwak.com). He can be reached at [email protected]