Sunday, March 31, 2013

Response to Legal Concerns about Film Crowdfunding

I have received a number of 'forwards' of the below article that trumpets (trumps up?) the potential legal hazards that might await the Veronica Mars crowdfunders.  And many of my film crowdfund clients have expressed concern too.  Thus, rather than responding to each individually, I decide to give my response publicly, here. 

First, as the head of the National Crowdfunding Association and the World Crowdfund Federation for a year now, and having given about 40 speeches on the subject nationwide, I am rather accustomed to the nay-sayers.  I understand that many simply find it hard to fathom that a horseless carriage could actually exist.... er, I mean that the general population might give small amounts of money to support something.  So, while it is happening, indeed flourishing, right in front of them, they continue to wring their hands and stomp their feet as to  whether or not such a contraption should ever begin.

I am not saying that I think my fellow counselor of the law and author of this article is decrying crowdfunding in its entirety.  But, he certainly sounds to be coming from the room where those naysayers mingle to shield themselves from the reality outside, that life as they knew it is already changing at a meteoric rate.

The Article
First, if you haven't read it, here is a link to the Hollywood Reporter article, and a copy of it. The Dangers of the 'Veronica Mars' Kickstarter Victory (Guest Column)

My Response
First, by stating my opinions here, I am NOT giving legal advice but only a lay opinion.  You should seek the counsel of your own attorneys and/or accountants on these matters.
Just as with my above comments, the article has a hyperbolic ring to it.  Though perhaps legally defensible, it appears written by someone not particularly familiar with the realities of what is happening in crowdfunding (on Kickstarter and the many other portals).  For starters, the author fails to mention that after 2 1/2 years and over $5 BILLON dollars (yes, B B B B Billion) through reward-based crowdfunding and peer-to-peer lending, there hasn't been an instance of any of these sky-falling things becoming a legally punitive issue.  Nevertheless, I appreciate him looking at the crowdfunding transaction in a proscribed, statutory manner, and his cautions deserve our attention.  I will take each point and comment:

Accurate Statement of Facts
Yes, of course the producers must "accurately state the facts regarding their project on the website"!    Not full Reg D disclosure requirements, mind you, but certainly the producers must be clear and accurate in their disclosures.  I have seen no evidence that the Veronica Mars Crowdfunders have been anything other than transparent and accurate, thus the inclusion of this point seems unnecessary.  Perhaps the author might also wish to remind us that the producers must "not threaten to wedgie anyone who doesn't contribute to their crowdfunding campaign".

Living Up to Promises
This point is certainly true, and understood in the crowdfunding community to be of vital importance.  If the t-shirt for The Ripper of Bloodville doesn't arrive on time and in my size, I may well get on the web and bad-mouth the producer and the film, even though it is still months from being shot.  But I don't think the contributors of amounts less than $100 each (90% of all crowdfunders) will be too upset if, for innumerable reasons, the film doesn't get made.  (Though disclosure of this possibility should be made clear in the offering.)

We (BlueRun Crowdfund) now provide fulfillment services to film crowdfunders.   By leaving it to fulfillment pros, producers can relax.
For those who give larger sums, usually close friends and family, this could be an issue with some legal bite.  But again, if the disclaimer is clear from the offset that the possibility exists that the film gods might squat on the whole thing, then the producer should be fine.  The key is to CLEARLY COMMUNICATE with backers.  With that, they will (usually) forgive even the most enormous setbacks.

California Labor Code Sec 450 (can't charge people to audition or be hired)

This one is a bit more tricky and we (BlueRun Crowdfund) are watching it carefully.  We may need to pull back on this, or find another way of phrasing it, but the reward will continue, one way or another (in a legal manner).  Here are my basic responses:

The walk-on appearance doesn't apply under CLC Sec. 450 because:

  1. The backer is there as a spectator.  (Just as someone who pays to watch a concert on stage isn't suddenly a member of Maroon 5, though the audience may see them up there and presume them to be such.)
  2. The backer is there as an outside participant.  (Just as someone who pays to get to be a passenger in a race car isn't suddenly an employee of Penske, though the audience may seem them in the car.)
  3. The backer is there as a volunteer.  (Just as someone who pays to sit in the front row, center seat knowing that whomever sits there will be chosen by Criss Angel to come on stage and be embarrassed, isn't a paid member of the magician's team.)
Of note, there are employment law attorneys (in CA and elsewhere) who are more familiar with the applications of such statutes, and how to distinguish a crowdfund participant's appearance in a film.

Crowdfund Dollars are Taxable, Not Tax-Free Gifts
Possibly, but so far, after billions, the IRS hasn't engaged in any enforcement on this matter, and neither has any state.  Even the hundreds of millions that have been received via crowdfunding that are basically for 'pre-paid' sales (such as for apps, the Pebble watch, etc.) have gone without significant comment from the states as to sales tax.   These facts are significant, though not probative as to future actions by the feds or the states.  Thus I make sure my clients have a strategy ahead of time to deal with any such action were it to arise.

Backers Can't Deduct Their Giving
That's right.  For 90% of them, their 'gift' is less than $100, and they don't seek such a deduction.  Again, this not been a problem.  If a deduction is important, such as for a non-proft organization crowdfunding, then there are portals such as Indiegogo where tax-deductible crowdfunding can occur.

I welcome thoughts on this.  Please either post here, or feel free to email me directly at