Overview of the JOBS Act about Equity Crowdfunding and Success Stories

The University of Memphis Cecil C. Humphrey’s School of Law law magazine (Spring 2017) has an excellent and concise five page overview article concerning the JOBs Act and crowdfunding.  The article describes three types of equity crowdfunding under the Act and discusses the related regulations.  The article notes that, “As of this writing, there were over 20 debt and equity crowdfunding platforms, with 186 companies having launched a campaign through them, and with 79 of those companies hitting their minimum funding target.”  Apparently, $19 million was raised for the 186 companies.  Interestingly, the real estate sector is a strong participant in crowdfunding. One success story described in the article concerns Zenefits, a human resources services company for smaller entities which notably raised $300,000 “on Wefunder.com at a $9 million valuation in March 2013; [r]aised $15 million at a $70 million valuation in January 2014; [r]aised $66 million at a $500 million valuation in June 2014.”  The second interesting story concerns Elio Motors, which raised $16 million on “StartEngine from 6,600 investors in early 2016.”  According to the article, Elio Motors has an over $1 billion valuation. 

The article points to Indiegogo (“movies, games and tech gadgets”) as an equity crowdfunding platform that “is expected to bring millennials” into the game.  Indiegogo’s website notes that over $1 billion has been raised over 650,000 projects in 222 different countries since 2008.  Indiegogo’s equity crowdfunding platform is called, First Democracy VC, a partnership with MicroVentures.  The First Democracy VC website apparently went live in December of 2016 and a couple of companies have raised a half million dollars (US) or more. 

US Securities and Exchange Commission Rules on Crowdfunding Effective

The U.S. Securities and Exchange Commission (SEC) rules on crowdfunding became effective on May 16, 2016.  The rules are a hefty 685 pages long and are available, here.  The Investor Bulletin issued by the SEC Office of Investor Education and Advocacy provides an overview of the rules and the JOBS Act tailored to potential investors, here.  The Investor Bulletin explains that anyone can make a crowdfunding investment, but that there are limitations based on net worth and annual income on the amount that can be invested.  The Investor Bulletin explains: 

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. 

Additionally, crowdfunding investments can only be made through a portal and not through other direct means.  "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)."  The Rules provide numerous requirements for intermediaries to protect investors.  The Investor Bulletin also provides numerous warnings to potential investors concerning the risks associated with crowdfunding.  The Rules provide that, "An issuer is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period." 

Notably, the Rules also state that: 

Certain companies are not eligible to use the Regulation Crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are Exchange Act reporting companies, certain investment companies, companies that are disqualified under Regulation Crowdfunding’s disqualification rules, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Offering documents must disclose: 

Information about officers and directors as well as owners of 20 percent or more of the issuer; • A description of the issuer’s business and the use of proceeds from the offering; • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount; • Certain related-party transactions; • A discussion of the issuer’s financial condition; and • Financial statements of the issuer that are, depending on the amount offered and sold during a 12-month period, accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor. 

Happy investing!

 

"And with one leap he was Unbound ...": a Jolly perspective on subscription publishing

One of the most interesting items to appear in the Authors' Licensing and Collecting Society (ALCS) newsletter in recent times is "Crowded House: Why I Crowd Funded My Book", this being an informative and (inevitably) well-written account by writer Alice Jolly of her reason for taking the crowd-funding route when seeking to publish her forthcoming memoir Dead Babies and Seaside Towns, through the agency of Unbound.  You can read Alice's piece in full here. Of particular interest to readers of this weblog are the following comments concerning the financial side of the publishing equation:

" ...  I raised £10,000 for the publication of my book. Was it worth it? Would I recommend the experience to other writers? With publication over a month away at the time of writing, the jury is still out. Overall, however, my experience with the crowd-funding publisher Unbound (“a new way to connect authors and readers”) has been positive. Not just positive, actually, but also fun, frightening and exciting.

... Unbound was set up by three writers who were fed up with all the moaning ... Their model is generally hailed as innovative and modern. In reality, what they have done is to use the internet to revive the ancient practice of publishing by subscription. This is the way that Dr Johnson published his Dictionary and it is also the way that many novels were published in the 18th and 19th centuries.

... Unbound has to decide whether they want your book. It guards its gate as carefully as any traditional publishing house. Equally, however, it can afford to take a punt on a risky book in a way that other publishing houses often can’t. This is because, before Unbound publishes, the writer has raised the money in subscriptions (in my case that £10,000) to cover the production costs of the book. Unbound might not always win but it can’t lose. Clever, isn’t it? The financial deal they offer to authors is also attractive: once the book is published, the author gets 50% of royalties.

... I needed approximately 500 people to each pledge £20 in order to raise the £10,000 required. In return, these subscribers will get a beautiful hardback copy of the book with their name in the back. People who contribute more money can get other benefits such as an invitation to the book launch or lunch with the author. To help a writer raise the subscriptions, Unbound makes a video about you and your book, and sets up a web page with an extract from the book and a biography. ...

It can be embarrassing emailing your friends and neighbours again and again. You have to become adept at using social media, and you need to go to any writing-related event to which you are invited and market yourself shamelessly. ...  The whole process is hard work – sometimes frustrating and sometimes bruising. You know exactly who has signed up and who hasn’t. You learn not to take it personally ... 

Once you get the subscriptions you need – in my case, it took six months of hard work – Unbound operates as any traditional publishing house would, dealing with editing, proofreading, cover design and publicity. ... 

... how does Unbound go about selling the book to a wider audience? Unbound has recently signed a deal with Penguin Random House, who will now deal with the distribution of Unbound books. This is a huge coup. For Unbound writers, it means the possibility of a small, personal publishing service with access to big publisher distribution. Isn’t that what most writers would like?  ...

Unbound believes that its subscribers will keep pledging. It is now publishing the second books of some writers, and reports that those authors are finding it easier to raise the subscriptions a second time around. That should be true. After all, you already have an email list of all the people who signed up before.

I would now be loath to return to traditional publishing, even if I could. Unbound was there when I needed it, while the mainstream publishing industry certainly was not; it just didn’t have the nerve for my book. And I won’t forget that fact. Other than the question of raising the subscriptions, I can’t see any downside to the Unbound model at the moment. ...

This blogger recalls the large number of people who have urged authors and publishers to come to terms with the internet and new technologies and to come up with new business models rather than demand reforms of copyright law.  This approach to publishing has the attraction of using the internet and the social media to good effect while adapting a model, based on subscription publishing, that is centuries old.

Filling the YouTube Gap: Ongoing Financial Support for Small Creators Through Crowdfunding

This blog has discussed crowdfunding in many different contexts, including for basic research and large scale video game development.  A relatively new crowdfunding platform brings together the very best of crowdfunding: the ability of people to choose to support what they love through essentially a gift (with benefits); a source of funding for interesting projects, particularly ones that may not get accomplished because of a lack of funding; and bringing people together to support a common venture—with a sense of community.  Crowdfunding and the technology that enables it lowers the barriers that exist for people to join together to support one another financially for what they believe are worthy projects—and now for a potentially long term relationship. 

Enter Patreon (A clever trademark as well.).  In a recent article published March 28, 2015 by CNBC titled, “Starving Artists No More: Meet the Kickstarter for Music, Arts,” Trent Gillies discusses Patreon, a San Francisco startup crowdfunding platform for supporting dance and theater to animation to music to comedy.  The article notes that revenue from a source such as YouTube is insufficient to support “small” creators and Patreon moves in to fill the gap.  How does it do that?  It allows people to pledge ongoing monetary support for creators—another revenue source.  People are able to become “patrons” of specific artists.  Patreon appears to also allow the donation of funds for one-time projects as well, but the promise of funding on a long term basis could allow creators to actually quit that daytime job waiting tables (or at least cut down on some shifts) and spend the majority of their time and energy on their creative work (including promoting it).  A nice silver lining is that the ongoing patronage will not only lead to the works being created, but also to better quality works.  The artist has a nice incentive to keep up the good work and to improve it.  Of course, creators who use other sites such as Kickstarter have a similar incentive even if they are seeking funding project to project.  But, I imagine that the stress may be lower for the beneficiaries of, at least, the pledge of ongoing support and because of the good feelings behind the supporters commitment to their work inure to the benefit of the creator. 

So, how well is Patreon working so far?

Patreon says 250 thousand patrons are donating small amounts of money to 14 thousand active creators. According to the website, it is sending $2 million dollars a month to artists, and the average payment creators are receiving is $9 a month.

And, as the article notes, this is despite the fact that much of the creator’s existing work is already available “for free.”

I think Patreon is a worthwhile endeavor for sure.  I do wonder if ongoing support will create a greater expectation of “control” over a creator’s future work by funders.  What do you think?

If you think that crowdfunding is only for small fry games, think again

For those of you who think of crowdfunding for artistic endeavours in terms of modest amounts, a million or so dollars at the most, the report in the February 14th issue of The Economist, “The stars are the limit”, is certainly an eye-opener. The article describes the fundraising that has accompanied the development of a new video game by Cloud Imperium Games (CIG), entitled “Star Citizen”, set for release in 2016. According to the report, this game has attracted aggregate investment of more than $72 million dollars, which amount puts it on a par with several of the most expensive game development budgets ever, such as the iconic series “Grand Theft Auto”. The magnitude of this amount can be seen by comparing it with the second largest amount invested via crowdfunding, $18 million dollars for a Bitcoin-related publishing platform called Ethereum. This makes the current aggregate investment in Star Citizen four times larger than the next largest crowdsourced amount ever invested.

It is not merely the amount that has been invested in Star Citizen which is remarkable, but the number of investors who have participated in the funding of the game’s development. The article reports that over 750,000 people have pledged to invest in the game, with the amount of the investments ranging from $36.00 to $18,000. What do these investors expect to receive in return? If you think that the answer is equity, or a share of any profits, you would be wrong. Instead, the investment in the Star Citizen project is perhaps the leading example of what is called “reward crowdsourcing.” In this context, it means, in the words of the article, that the investors receive “virtual spacecraft to use in the game, early access to unfinished versions, T-shirts and so on.” As such, the motivation derives more from a certain commitment to the game itself and the collective desire to see the game successfully published.

The article suggests that this type of investment, as opposed to seeking more conventional sources of funding, enables the developer to connect with the population most likely to become users of the game once it is launched. As such it represents the use of social media in the dual role of product development and product marketing. Thus CIG is releasing the game in stages, in part to reassure investors about the viability of the project, as well as to elicit their feedback regarding the game itself. The ultimate goal is to instill “rabid devotion in fans” long before the actual launch. It is crowdfunding that makes possible this integration of funding with pre-launch marketing. That said, the question remains whether this form of engagement of small investor-cum-user can be generalized to other video games and the like, or if the Star Citizen project is a one-off success.

Money for Nothing (?) and the IP for Free: Crowdfunding Science

Inside Higher Ed recently published an article about several entities with websites which allow crowdfunding for scientific research projects, most by academics, in Kickstarter style.  Here are a few: Petridish.org; Microryza.com; and Fundageek.com.   Do the funders obtain IP rights?  I suppose they could as an incentive for funding depending on the rules of the entity.  Although travelling with a researcher to Peru may be more fun!

Fundageek.com is thoughtful about protecting the IP of the submitters of research.  Here is a link to their IP site and they have a “special IP guidelines document” by Daniel L. Dawes.   Clearly, employers of researchers will want to know if they have researchers submitting proposals to these types of sites.

The Inside Higher Ed article also highlights the launch of the University of Virginia’s own crowdfunding site—great idea!  Here is the site.  And, they’ve already started getting funding!  Know of any other similar sites?

Two More Stories of Access (and Creation): Veronica Mars and Semaphore Press

Following up on my last post, here are two more stories of access and creation.  Veronica Mars is a television series involving a young female detective played by Kristen Bell.  The television series has a strong and loyal following, but was cancelled after a few seasons.  Apparently, there were grumblings about creating a movie based on the television series, but nothing was happening.  Well, something has happened—in a little over one day via crowdfunding on Kickstarter over 2.7 million dollars has been raised to create the movie.  There are over 45,000 backers of the film.  Read more here, and here.  There are also incentives for various giving levels.  At the top, for one person who donates more than $10,000:

You will get a speaking role in the movie. Here’s the scene — Veronica is eating with the man in her life. Things have gotten tense between them. You are the waiter/waitress. You approach the table, and you say, “Your check, sir.” We guarantee you will be on camera as you say the line. Unless you go all hammy and ruin the scene and we have to cut you out, but that would be a sad day for all of us. Just say the line. Don’t over-think it. You’re a waiter. Your motivation is to turn over the table. In addition to appearing in the movie, you’ll receive a framed copy of the page of the script that includes your line. You’ll get an invitation to the premiere and the after party. You are, after all, in the movie. Think of yourself as Guy Fleegman from Galaxy Quest. People will surely want autographs. You’ll also receive the signed movie poster, the Blu-Ray/DVD combo pack, the digital version of the movie, the T-shirt and a pdf of the shooting script.

That actually doesn’t sound like a bad deal to me.  I wonder how much I would pay to appear in a new Star Wars movie—probably not as much as many other fans.  At the lowest gift amount, $10 or more, you receive a pdf of the script and updates about the movie.  Will Veronica Mars’ success change the game for filmmaking?  No, according to one Forbe’s author who points to the facts that the Veronica Mars project had a loyal fan base, a script and the buy in of Kristen Bell, the lead actress.  Great points, but I am a bit more optimistic--maybe with some tweaking it can change the game for some types of indie films. 

Semaphore Press is the brain child of Professors Lydia Loren and Joseph Miller.  Professor Loren is a intellectual property law expert, who specializes in copyright law at the Lewis and Clark Law School and Professor Miller is a intellectual property law expert, who specializes in patent law at the University of Georgia Law School.  Semaphore Press offers books for sale based on a suggested price:

What do you have to pay?
Each publication has a suggested price. We price full casebooks based on our belief that it is fair to ask a student pay about $1 for the reading material for each one-hour class session. Different schools use different calendars and credit hours, so we've settled on a suggested price for most of our casebooks of $30. We ask that you pay the suggested price either with a credit card (by clicking the appropriate link on our page), or by sending us a check, and then download a digital copy of the casebook. Note that if your professor has assigned, e.g., only 10 class sessions of material from a Semaphore Press book, then we suggest that you pay $10.

We have expenses that we need to cover. Our authors hope, and deserve, to receive some royalty revenue from the works that they've created. But we also recognize that law school is expensive. We've heard stories of students not buying the required books because they just can't afford them. These students - who want to learn just as much as those who can afford the books - borrow a classmate's book some days, read the copy that is on reserve in the library other days, and some days simply can't do the reading. We think that is not the best way to go about obtaining, or offering, an excellent legal education. Download the required reading and pay what you can, or what you think is fair.

Yes, you read correctly—you could pay nothing for their books.  And, I am sure that some choose not to pay.  How much do casebooks usually cost? Casebooks can cost as much as $180.  Semaphore Press currently offers three casebooks: Intellectual Property Law: Cases and Materials; Internet Law: Cases and Problems; and Interstate Compacts: Cases and Materials.  I have used the Intellectual Property Law: Cases and Materials book and I think it is excellent.  If you need a casebook concerning US intellectual property law, I highly recommend it.  And, I highly recommend you pay at least the suggested price.

Good News for Crowdfunding for Start-Ups? President Obama nominates Mary Jo White to head Securities and Exchange Commission.

Late last week, President Obama nominated Mary Jo White as the head of the Securities and Exchange Commission (SEC).  Her appointment awaits confirmation by the U.S. Senate. Hopefully, this is an indication that the new SEC rules implementing the JOBS Act will become effective soon and thus, the legal landscape concerning crowdfunding for startups in the United States will be clarified.  Apparently, part of the hold-up relating to approval of the rules has revolved around concerns with inadequate investor protection in the rules and questions concerning the identity of the new member of the SEC.   A description of the issues concerning crowdfunding is provided by startup guru Yoichiro“Yokum” Taku here.