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On April 5, President Obama signed the Jumpstart Our Business Startups Act, known as the JOBS Act. The Act establishes a number of registration exceptions from traditional securities laws to facilitate a wider adoption of micro-financing practices, including crowdfunding. This is the phenomenon by which a relatively large pool of small investors can use the Internet to make an equity investment in a company.

Filmmaker has covered this important development. Scott Macaulay presented a helpful introductory overview to the Act and discussed some of its likely consequences for indie makes. Matthew Savare, an attorney, and Richard Jaycobs provided a more in-depth analysis of the Act’s features as well as a number of helpful cautionary warnings. Makers are urged to read these useful background pieces before considering crowdfunding as a financing option.

Filmmaker is partnering with Kickstarter, the premier crowdfunding site or what is coming to be known as a “funding portal,” to help raise financing for two-dozen indie projects.

The Act is not scheduled to go into effect until January 1, 2013, as the SEC works through compliance regulations. A recent one-day seminar, sponsored by The SoHo Loft, focused on professional issues relating to crowdfunding and capital formation. For many brokers and Wall Street investors, crowdfunding represents a potentially new means to revitalize the micro-capital equity market. It is seen a bridge or stepping-stone vehicle to enable small businesses to go public through an IPO (Initial Public Offering).

The seminar took place one day prior to the Facebook IPO.  The event’s keynote speaker, David Weild, a former senior NASDAQ official and now head of Capital Management Associates, warned that the Facebook IPO was a chimaera, hiding deep structural problems in U.S. financing marketplace.

First, he noted that it covers up the anemic state of U.S. IPOs.  In 2001, the total number of IPOs was 79; last year it was only 81. During the rah-rah pre-Great Recession years of 2004 thru 2007, IPOs averaged around 160 per year.  Most telling, he noted that the number of underwriters in major IPOs had significantly declined.  When Microsoft went public in 1986, raising a meager $61 million, it had two-dozen underwriters led by Goldman Sachs and Alex Brown; when LinkedIn went public last year, it raised $353 million and had only JPMorgan Chase, Morgan Stanley and Bank of America as its underwriters. (It should be noted that Facebook’s IPO raised approximately $16 billion and retained 33 underwriting banks, led by Morgan Stanley, JPMorgan Chase and Goldman Sachs.)

Indie filmmakers, like many small businesses, often rely on friends, family and angel investors to fund their ventures.  Crowdfunding, as shown by Kickstarter and Indiegogo, represents a potential new source to generate early-stage financing.  Traditionally, only “accredited investors” could invest in a public offering.  Under the Act, the vast majority of the American public, the 99 percent who are in effect “unaccredited” investors, will soon be able to “invest” in a project they believe in.

For indie makers, getting into the Wall Street financing game does not come cheap.  To qualify, a maker must fulfill certain reporting requirements based on the level of money they seek to raise:

  • Less than $100K: You are required to provide your income tax returns and have your financial statements certified by your CEO.
  • From $100K to $499K: Your financial statements will need to be reviewed by a public accountant.
  • Between $500K to $1 Million: You will need to provide the investors with audited financials.

According to one of the seminar panelists, putting together the basic offering documents (e.g., business plan, audited financials and legal fees) and paying to hold money in escrow could run between $10,000 and $15,000. This is before the maker sees dollar one. And these “mom & pop” investors will become the maker’s business partners.

For more on crowdfunding, check out Crowdsourcing.org and the Daily Crowdsource.

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David Rosen is a writer and business-development consultant. He is author of the indie classic Off-Hollywood: The Making & Marketing of Independent Films (Grove), originally commissioned by the Sundance Institute and the Independent Feature Project. He can be reached at drosennyc@verizon.net. For more information, check out www.DavidRosenWrites.com and www.DavidRosenConsultants.com.

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