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Alms for the Creative: Crowdfunding means passing on traditional funding to pass the collection plate

Move to change securities regulations could mean big changes in the micro-funding model


Travis Swartz wanted to make a movie, but he didn't have any money. And while the Boise resident had made zero-budget films before, he wanted this one to be good and that meant he needed some dough.

He could have pounded the pavement shopping his script about an unloved janitor with eight days to live to aspiring producers and so-and-so's rich uncle looking for the $25,000 needed, but Swartz didn't feel right about it.

"If we're all being honest with independent film, it's not a smart investment. It's an investment of love," Swartz said.

Instead, he chose to delve into the growing world of crowdfunding, where small, individual contributions provide a new way of getting projects off the ground, ranging from independent films or music to a hobbyist's attempt to create nuclear fusion in his Brooklyn garage.

Though there are several different variations on the crowdfunding model, the idea is to use the web to pitch an idea and collect small donations to fund it. Essentially, a project managerĀ­--an artist, filmmaker, journalist, scientist, etc.--creates a project profile and pitch on a crowdfunding site--like Kickstarter or Indiegogo--then uses social networking to solicit small contributions from a large number of people. In return, contributors receive non-monetary gifts relative to the amount of their contribution.

"When I first started looking into crowdfunding I was uncomfortable with it because it seemed like handing out the hat for nothing, but I discovered that's not what it's really about," Swartz said. "It's like pay-in-advance. You get something in return."

For donating to Swartz's film, Nobody Cares, contributors would be rewarded with what amounted to tokens of appreciation. A smaller donation would get a signed DVD, where a larger donation would guarantee a luxury private screening and the donor's name in the credits as a financier. Essentially, Swartz was pre-selling tickets to and copies of a movie he hadn't actually made yet.

From a promotional standpoint, Swartz's crowdfunding campaign would have made the audience personally invested in the film's progress in the same way comic book fans obsessively follow every step of film adaptations.

"It's really important to build an audience into the filmmaking process," Swartz said. "The old way is to send [a film] out to festivals and hope it builds an audience. Crowdfunding is really a process of not just raising the money, but raising the money from the audience that is really going to appreciate it."

The combination of the promotional and financial benefits of crowdfunding may be so successful, in fact, that even established institutions with solid donor bases are looking to augment their budgets by passing the virtual plate. In Boise, for example, Boise Contemporary Theater recently used Kickstarter to produce its 2010-2011 season opener, The Krumblin Foundation.

And while members of Boise's artistic community are piling on the crowdfunding gravy train to cover the cost of albums, plays and even teaching expeditions to Kenya, what many don't realize is that they're also firing the opening shots in what could be a major revamping of the laws that dictate how funding is done in this country, from the arts to small business.

As things stand now, crowdfunding contributors are sidestepping longstanding laws of the land. They are considered "donors" and not "investors" and can only receive non-monetary gifts. If they were to benefit financially from their donation, it would be in direct violation of the Securities and Exchange Act of 1933, the law passed to prevent the sort of practices that brought on the stock market crash of 1929 and the Great Depression.

The act "Requires that any offer or sale of securities using the means and instrumentalities of interstate commerce be registered pursuant to the 1933 Act, unless an exemption from registration exists under the law."

No exemption exists for the type of small-scale projects crowdfunding is typically used for. Anyone who wants to offer financial returns must register with the SEC, a process often more complicated and expensive than the project itself.

"What those laws were protecting against was the oil speculators knocking on widows and doors," said Danae Ringelmann, co-founder and CFO of IndieGogo, a crowdfunding site that operates in more than 130 countries. "But that was an age when communication was literally knocking on doors. You had to get physical reports on how projects were running."

According to Ringelmann, the transparency brought by the Internet is the single biggest change since the laws governing these transactions were written. And though the Internet has provided tools to more effectively assess risk and track projects, the laws are still strictly enforced.

"We're not dealing with big amounts of money here," said Tim Kappel, a Nashville-based entertainment lawyer who specializes in crowdfunding. "There are ways to structure in protections for the creative investor. Meanwhile, you've got the stock market, which is a big roulette table and people treat it like a casino or a race track."

Kappel published a paper in the Loyola of Los Angeles Entertainment Law Review, explaining the differences and problems between what he calls "pure patronage" and "patronage-plus" models--the "plus" being financial returns.

"The U.S. market poses unique and significant legal obstacles--specifically laws governing gambling and the sale of securities--that could derail any effort to import a patronage-plus ex ante crowdfunding system for the recording industry," Kappel wrote.

Kappel translated that from law person to lay person.