Fan Finance: Basics of Crowd Funding for Creative Professionals

by Deborah Hrbek and Rebecca Goldstein

August 2012.

© 2012 Hrbek Law LLC. All Rights Reserved.

Social media and related technologies have created an opportunity for artists to reach their desired audience instantly. Many creative entrepreneurs have taken advantage of this accessibility through methods such as crowd funding and crowd sourcing.

Crowd funding is a variation of crowd sourcing. Through crowd sourcing, an inventor, artist or other creative entrepreneur solicits input and services from others who share an interest in the development of their project. The idea is that the community contributes opinions and sometimes in-kind services for a project that is being developed for public consumption. The potential market for the product or service is actively engaged in its development.

Crowd funding takes this public input one step further. When a project is crowd funded, some or all of the capital needed for the project is raised through donations made by members of the public. Instead of relying on a single large investor (e.g. for a tech company, a venture capitalist, or for a singer-songwriter, a major label) -- often an unattainable feat -- the idea of crowd funding is to raise small amounts of money from a larger group of people.

This notion of crowd funding is still fairly new, and is therefore still taking shape. Most commonly, donors use websites such as kickstarter.com and indiegogo.com to survey the available project proposals. They can choose to make an online contribution to the projects that interest them, from music videos to mobile phone applications to niche inventions in all media.

In the case of independent artists and companies, crowd funding is becoming a key vehicle for getting creative projects off the ground. By adopting an entrepreneurial spirit, the creative professional no longer has to wait for a major corporation, such as a Hollywood studio or traditional publishing company to sign them up. Rather, artists can turn to their fans for financial as well as traditional fan support. We call this "fan financing." Backers of an EDM concert can raise funds for the top DJs and bands to converge on their home town. Supporters of a documentary film project can provide finishing funds that get the final cut of the film completed and onto the festival circuit. Producers of a web series can attract higher cost talent and higher quality production teams to get their programming off the ground and marketed broadly.

Currently, under US securities laws, donations are permitted, but not investments. In other words, the project developer can "thank" the donor with a t-shirt or a first-run discounted version of the completed product, but not with a monetary reward, or an equity stake in the company. Contributors cannot be invited to share in the profits should the project become commercially successful.

With the passing of the JOBS Act (Jumpstart our Business Startups) in April 2012, the potential impact of crowd funding changed significantly. Once implemented, this legislation will give individuals the opportunity to invest in, as opposed to simply donate to, independently developed projects. Essentially, the JOBS Act amends the securities laws, so as to enable contributors to benefit financially when a project they have supported becomes profitable. In a way, the JOBS Act is allowing people to act as individual venture capitalists. Any eligible contributor can seek out a start-up company or project to invest in and potentially make a profit from this investment.

Legitimate concern by SEC regulators to protect potential "fans" from being scammed is delaying the implementation of the new crowd funding legislation. We hope that they figure it out soon, as crowd funding -- if permitted to become crowd "financing" -- has tremendous potential to help get independent creative and other entrepreneurial projects off the ground.