Hollywood Produces an Early Equity Crowdfunding Hit
Published on September 29, 2016
Editor’s note: Legion M calls itself the first “fan funded” Hollywood studio. It is an early success story of Title lll (Reg CF) investment crowdfunding, attracting $1 million, the maximum amount the law allows. In the article below CEO Paul Scanlan describes how equity crowdfunding has changed the game for some big screen projects.
Paul Scanlan, co-founder, Legion M
Over the last few years, the crowdfunding phenomenon has been a boon for fans to get involved in projects—financing their favorite new campaigns and even resurrecting properties that would otherwise have disappeared. As of April 18, 2016, Kickstarter alone had raised in excess of $2.3 billion for more than 100,000 different projects. This year, thanks to the Title lll of the JOBS Act, crowdfunding has advanced to the next level. Instead of just donating money to their favorite projects, fans now have the opportunity to participate in the commercial success as actual investors.
Entertainment is one of rewards-based crowdfunding platform Kickstarter’s top categories. Indiegogo also emerged later as a specialized platform and friend to Hollywood with a strong emphasis on entertainment.
While crowdfunding has been a great tool for passion projects and for garnering support for projects the industry left behind (Veronica Mars raised $5.7M from 91,500 people , Mystery Science Theater 3000 raised $5.7M from 48,000 backers), most of today’s crowdfunding campaigns operate under a “donation” model with supporters giving to support the cause. Rewards and bragging rights come with some of the higher-level donations, but it’s still fundamentally a donation—just not a tax deductible one.
There is no upside or money-making potential for the backers. For Hollywood’s top talent, this is akin to cyber-begging and a complete turn off. Plus, with these donations come obligations for the creators: t-shirts, mugs, fresh baked cookies; whatever the creator put out there to get the money now has to be fulfilled. Fulfilling these rewards can be tremendously time consuming—often making it hard for creators to find enough time to work on their actual project. According to our estimates (based on speaking with several creators who worked on campaigns), those behind a successful crowdfunding project can spend more than half of their time just managing the campaign.
You may also be interested in the webiner: Crowdfunding from the Investor’s Perspective
Commercially, it gets worse. With the donation model, almost all contributions will offer some sort of access to the content with the pledge (a DVD, stream access, etc.). And this is where things fall apart.
Let’s take a movie as an example. Under the current model, creators are essentially paying for the production by pre-selling the DVD directly to fans. In this scenario, the filmmaker has prematurely weakened the commercial potential for the project. A distribution or acquiring company will treat the project as having gone straight to DVD, which immediately clouds the most lucrative licensing windows, most of which comes well before the DVD release. As a filmmaker, three words you never want to hear associated with your film are “straight to DVD.”
Equity Crowdfunding Model
Today however, thanks to Title III of the JOBS Act, for the first time in history, creators can let fans in and literally own a piece of the successful projects. True equity crowdfunding for all investors, regardless of income or net worth, was authorized by Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012.
This transforms everything. If crowdfunding opened a window into Hollywood, this new equity crowdfunding era is opening the gates to Hollywood.
These new rules offer an opportunity for fans to join A-list creators (who have until now been hesitant to be involved with traditional crowdfunded projects) on the same side of the table, and to be a part of developing a profitable property.
By accumulating an impassioned following of fans who are now both emotionally and financially invested in the project—and not selling the DVDs—there is increased upside to the commercialization prospects. Since supporters don’t get free access to the content, but they are shareholders, they will gladly pay to see it and likely encourage all their friends and family to do the same. After all, owning shares in Apple doesn’t get you free iPhones. Having fans as shareholders is a critical marketing lever that can increase the commercialization opportunities and heighten the value to any buyer.
Finally, selling shares and not rewards allows the creator to do what creators do best: create, develop and monetize the content, without being distracted baking cookies.
The market investment trend in the entertainment sector has experienced inclined growth after the Title III of JOBS Act. According to the CCA Regulation Crowdfunding Indices, the entertainment industry is the third highest preferred sector for capital investment with current share of $1,193,929 as of the ending of August 2016. Out of the 107 regulation crowdfunding campaigns launched in last three months, 17 campaigns are in excess of their minimum investment goals. As stated on WeFunder, three companies: Hops & Grain, Beta Bionics, and my company (Legion M) have raised the maximum amount of $1 million. In this race of equity crowdfunding startups, we have already amassed over 3,000 investors and 7,000 loyal supporters along for the ride without investing.
Furthermore, equity crowdfunding is more intense, as investors are looking beyond simple rewards and expecting a real financial return on their investment. This puts added pressure on the projects and creators. Additionally, Hollywood is a hit-driven business, so not all projects make money and many of them actually lose money. Lastly, equity crowdfunding is a high-risk, high-reward scenario that is not always suitable for the faint of heart. This simple fact can get lost in the communication of an exciting and transformative idea.
In summary, while entertainment is already one of the most popular categories in today’s crowdfunding paradigm, the new era of equity crowdfunding can open up the industry even further, resulting in a massive increase in quality and quantity of projects brought to life by the fans. It’s only the beginning. Combining the fans and the funding together is not just smart, it’s brilliant and it has the power to reshape Hollywood forever.
Categories: Market Data and Deal Flow