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 investing is film is such a risky endeavor, being able to spread that risk among many small investors may substantially increase the amount of financing available for indie films.
Essentially the new rules will allow companies like Kickstarter and Indiegogo to offer those who contribute funds to receive more than posters, T-shirts and the other swag they now get in return for a donation. For the first time, promoters will also be able to offer a share of the profits in a project. Previously, Internet platforms were limited to donations unless they complied with complex and costly SEC regulations governing investments. Under the new rules, however, if an indie film is a hit, the backers can share in its profits. This will likely encourage small investors who want to participate in film or other start up businesses but can only afford to make a modest contribution.
The new rules limit the amount of individual investments to relatively small sums but collectively they will constitute enough of an investment to make a big difference for many start-ups. Investors with annual incomes or a net worth of less than $100,000 can contribute up to $2,000 or 5 percent of their net worth or income, whichever is greater. Wealthier investors can invest 10 percent of the lesser of their annual income or net worth in these transactions, with a cap of $100,000 over a 12-month period. The rules will allow a producer to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period. While this cap limits investment to what amounts to the catering budget for major studio films, it will allow many indie filmmakers to raise enough to produce a film or pilot program.
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 without having to register with the SEC as brokers. Portals are required to register with the Commission and become a member of a national securities association (currently, FINRA).
The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016. Companies relying on the crowdfunding exemption are required to file an annual report with the SEC and provide it to investors.
The SEC press release can be read here.
You can download the complete rules here. Warning they are 686 pages long.
UPDATE 2021: The SEC has now raised the amount that can be raised to $5 million dollars.