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 dmarlett@BlueRunMedia.com

David

www.BlueRunMedia.com

Celebrities Use Crowdfunding Too

Good article at ABC News.

Celebrities Use Crowdfunding Too

New Edward Burns Hedge Fund Movie Embraces Crowdfunding

This is a great Forbes article that seemed best to just copy here.


In addition, here is the link to the original story:  http://www.forbes.com/sites/karstenstrauss/2013/02/11/new-edward-burns-hedge-fund-movie-embraces-crowdfunding/
by:  Karsten Strauss, Forbes Staff
Several months ago we spotlighted a soon-to-launch crowdfunding company that sought to bring crowdfunding to independent film. That company – Seed & Spark – has launched and now boasts an upcoming film starring Edward Burns among its list of financing projects.

Largely financed by Atlantic Pictures, the film’s working title called Oliver’s Deal and stars Edward Burns (The Brothers McMullen, Sidewalks of New York) as a hedge fund jock working to redeem a $1 billion debt from Peru‘s government. The film also stars Caitlin Fitzgerald (Newlyweds, It’s Complicated) and will be directed by Barney Elliot (True Colours).

The decision by the filmmakers to use a crowdfunding source like Seed & Spark underscores one of the flexible aspects of crowdfunding in general – to be able to raise smaller sums to fill “those little gaps in cash” that film projects can experience during development, said Emily Best, founder of Seed & Spark. Those gaps can make themselves felt in any portion of the filmmaking process – development, production and post production – and Oliver’s Deal shows that projects that have already secured funding will look to the crowd for additional finances.

“They’re going to be the beginning of a trend moving forward,” Best explained. The film begins shooting in May in New York.

Seed & Spark launched in December and works much like other crowdfunding site—the crowd donates funds or loan items, for which the donor can receive a shout-out in the credits or other gifts. Capital is released to the filmmaker once 80% of the desired sum is in place.

Once the film is finished it can be uploaded to the site and viewed for a sum. Filmmakers who have notused Seed&Spark to fund their films will be able to upload their independent films to the site for viewing.  In its first 60 days, the company raised about $146,000 in funds and goods for seven different projects.

Seed & Spark raised about $235,000 in seed funding prior to launch and has begun its second round, in which it intends to raise an additional $300K to $500K.

One Man's Guide to Successful Crowdfunding

GUIDE TO SUCCESSFUL CROWDFUNDING

The following is repeated from Crowdsourcing.org, who created it from James Mathe of Minion Games. Mathe has run seven crowdfunding campaigns and recently published a list of tips and lessons learned throughout. While Mathe is writing specifically about card or board games, his insights can help out all entrepreneurs thinking about crowdfunding their next product. This list originally appeared on Mathe's blog, and Crowdsourcing.org re-posted a slightly edited version (provided here) with the author's permission. Make sure to follow Mathe's company on Twitter @MinionGames.

___________________________________

This guide was created to help people avoid the pitfalls of, and run of, a successful campaign for a card or board game through Kickstarter. Kickstarter is like a mall, the worlds biggest; it brings customers to your “store”. You must concentrate on selling them a game while they are visiting, and get them to help share it with others. Using your own website or even a competing crowdfunding site will not be nearly as effective.

As of the writing of this, I have run seven successful Kickstarter campaigns. Very few people or companies can say that. So, let’s just get right to the bullet points:

BEFORE YOU START

Realistic Expectations

• Find out what ALL your real costs before you start. Get a quote from a manufacturer. Make sure you’re not going to promise to make something that is very costly.
• Set your campaign funding goal amount to the actual cost to make and ship the game. Do not set it to just a pie in the sky number.
• Plan out your stretch goals to reach that pie in the sky. Make the first couple easy and have them completed (designed) before the launch. You can add more later if needed but think about them now.
• If you think your campaign is going to go big ($50,000+), consider setup an off-site Paypal shopping cart to allow alternate forms of payment and post-campaign pre-orders.

Shipping

• Most campaigns include free shipping in the U.S. Priority mail is the most common method used. Prices for these can be found online.
• Make your shipping options and up-charges very clear in your campaign description area.
• Try to find an E.U. company to help ship so you can do $15-20 USD shipping there. This will also help avoid the customers paying VAT which can be as much as shipping. Have your printer drop a pallet load of the games to the E.U.
• Avoid sending multiple shipments, send it all at once when done. Otherwise, you’ll probably have to eat the shipping costs and lose many hours of your life.

Social Outreach

• Establish your brand before you start. I cannot stress this enough.
• Be a part of your community and gain followers now. Post on relevant topics and discussions.
• Make a Facebook page now and give it a friendly URL with http://www.facebook.com/username

Setup Work

• Choose your campaign name carefully.
• Setup business banking account or at least a separate personal one. Don’t use your personal account as temptation is too great to mix your money.
• Apply for Amazon payments as soon as you can. This can take up to a week.
• Create detailed bio entry for the creator of the Kickstarter campaign (you). Include relevant experience to help people trust you can follow through on your promises.
• Back some projects on Kickstarter. Show you are part of the community and not just trying to run to the bank.

THE CAMPAIGN

Duration

• Good days to start a campaign are Sunday or Monday
• Good days to end a campaign are Friday Night or Monday or End of Month (think paydays)
• Holidays and season don’t appear to have that much effect on a campaign
• Set your duration from 30-45 days. Common wisdom and Kickstarter have stated that 30 days is the optimal duration for a campaign. I have, however, found that most of our campaigns continue to gain revenue every day until the very end.
• Based on the time you were told by your print for how long to make and ship the game to you, add at least another 1 or 2 months and set that to your Ship Date. No one ever complains about a project being early, but they do if you’re late.

Reward Levels

• Name your reward levels as they will be easier to find and cross reference.
• Early bird rewards? No. Do not offer any special intensives to pledge right away. Most of your early pledgers will be the fans that already follow you. These kinds of reward levels also make it psychologically hard for someone to change pledge levels later.
• Deep discounts? No. $5 off and free shipping is the most you should offer non-retailers.
• Most pledged level will be in the $25-50 range which should get a basic copy of your game.
• Fewer reward levels to start your campaign are better. Add more later to re-energize upping pledges.

The Story

• Make a video! If possible, be in your video: a personal touch goes a long way in building up the trust level.
• Your project video should be under 3 minutes long. Do not include any text longer then a phrase on any one page. Ad some music in the background.
• List all of components so people can get a sense of the value of the game. Show pictures.
• Use pictures for your headers and menus and stretch goal status. It helps break up the text.
• Make a gameplay demo to show the game in action. This is very important to many backers. You should add this after the initial rush to your game to give you a reason for an update message.
• Add an About section for your company  and designer. Your goal is to gain the backer’s trust & confidence. You want them to have no doubts that you can make this project a reality.
• Explain what the money raised is needed for. Don’t detail every dollar, just explain why you chose Kickstarter.

Stretch Goals

• I personally don’t feel it matters if you revealing only a couple stretch goals or all of them at one time. If you’re having a hard time figuring out more, you can delay it by revealing them later.
• Be careful not to over promise or include too many things that will make your profit disappear.
• Your stretch goals should mainly consist of upgraded bits, bonus promo cards, or a mini expansion.
• Generally a stretch goal should not require an extra payment of any kind and should be free to all backers when it’s met.
• Interweave exciting in demand goals with smaller token reward goals.
• 
  

LAUNCH TIME

The Start

• The first couple days are very important don’t rush into this. Set aside enough time to monitor your campaign constantly. Take a day off your real job!
• If you don’t have a built-in fan base or a large social following, don’t get discouraged by a slow start.

The Long Haul

• Monitor and add to your comments several times a day. Prevent any flame wars. Provide accurate and honest information.
• Start updating the campaign FAQ as you get repeat or important questions. Especially about reward levels that have been taken already as you can’t edit them at that point.
• After the initial buzz dies down about your campaign, start to post review links, videos, and your designer blog. One a day at most, spread them out. These give you a great reason to get mentioned in site news and other blogs and promote your campaign.

Some Statistics

• Expect a cancelation rate of about 3-6%.
• A typical successful graph will have a spike in the beginning, then pledges will continue to come in stead till the last 2 days spike again.
• You want 30-50% Project Video plays completed. If you are getting a very low number (under 20%) consider shortening your video.
• You will get about 90% of your pledge money to your Amazon account usually within a 1 day (not weeks). It’ll take a couple days to get to your bank. But within a week you should have your money.

Marketing

• When you do post or share, make the content is engaging, and use a picture.
• Hopefully, in the months leading up to this campaign or from a previous campaign, you have collected a mailing list to send to. Send them a mail with a reason to check the campaign out.
• Post daily or at least several times a week on Facebook. Not everyone sees every post.
• Twitter posts multiple times a day. Send out review links. Status updates. Everything.
• Post a link to relevant pages on Reddit.
• Google+, LinkedIn, etc.: post important updates or review links.
• Get mentioned on blogs and post those links everywhere.
• Attempt to get reviews and interviews in videos and podcasts.

Last Day

• This is the time you’re allowed to be a bit annoying and post often on all social media.
• Update your story to include links at the top of the page to your website and post sale page as you will not be able to edit your page after your campaign ends. Remember people still find your page after your campaign is over.
• Use Kickstater to send a customized message to each reward level about things they miss out on. Ask them to use their social networking to spread the word.

AFTERMATH

Failure

• It’s possible to cancel your campaign right before it ends, but I’m not sure that’s a good or bad thing.
• You can start a new campaign at any time to attempt this all again. I’ve done it and it works. Use what you learned to improve things the second time around. Wait a couple weeks to build more followers before relaunch.
• You can (if you’re willing) ask for less the second time around.

Success

• Make sure you have a way for people who missed the Kickstarter to per-order the game from your website.
• Export reports about a week after the campaign ends. Kickstarter will move the failed payment transactions to their own section and it makes it hard to know where they original pledged.
• Surveys are allowed once per group so do them as late as possible so you don’t have to track address changes.
• Ship to your backers before you sell at a conventions.

To read the full list, click here.

Our thanks again to James Mathe of Minion Games.

Deloitte Predicts a $3B Crowdfunding Year

"Crowdfunding portals will raise $3Billion in the year ahead, a 100% increase over 2011."

I am pleased to pass this little nugget along, with a link to their full 2013 predictions.

CLICK HERE FOR FULL STORY

Crowdfunding’s growth matters to TMT for two reasons.  First, some crowdfunded projects raise funds for new technological devices and media content such as computer games. Second, the portals themselves are likely to become a new type of Internet portal.Crowdfunding portals are websites that enable large numbers of individuals to financially support a project or company, with each backer contributing just a small percentage (generally less than one percent) of the total funding.  A typical crowdfunded project has thousands of backers.

Media coverage of crowdfunding tends to focus on its role as an alternative to traditional venture capital (VC); however, there is much more to the concept. In fact, there are four distinct categories of crowdfunding that vary by type of portal and capital raised. 

Categories of crowdfunding portals

Consumer lending is the largest category. Financial institutions and payday lending companies have for many years lent small amounts of money at relatively high interest rates to consumers with bad credit histories. Now, these services are available online through crowdfunding. In the five years between 2008 and 2012, crowdfunding portals likely lent more than $1.5 billion. In 2013 these loans are could to exceed $1.4 billion, up more than 50 percent from 2012¹.

Reward-based is the second largest category of portal. Individuals go to a website and support a specific project in exchange for a reward. For example, those assisting with the development of a computer game may get a copy upon completion. Those investing more may receive a basket of games and a T-shirt. Backers of a new kind of remote-controlled light bulb might receive a quantity of light bulbs, depending on the level of investment made. Backers of a new play might get tickets to the opening; more generous patrons might be invited to a champagne reception. This category could raise more than $700 million in 2013².

The next biggest category is the donation market.  This overlaps with the reward market: many artistic endeavors that use reward crowdfunding also encourage funders to contribute very small amounts of money, typically less than $25, without expectation of a return -- except for the knowledge of having contributed to a worthy cause. Donors often receive a thank you in a program or liner notes. Traditional charities usually request donations to support their overall mission, and then decide for themselves how to allocate the funds. Crowdfunding portals can raise funds for individual projects, meaning donors can give to the project of their choice. This market may be worth more than $500 million in 2013.

Venture capital, which gets the most media attention, is actually the smallest category. Traditionally, early stage startup companies are initially funded from credit cards and savings, and then reach out to friends and family. This usually covers the first $250,000. Beyond that point startups look for money from individuals (angels) or established venture capitalists, with the first seed round raising perhaps $500,000. Expected changes in North American securities regulation could make it possible for companies to raise money via a crowdfunding portal62b, with contributors receiving an equity stake in the company. This category is the wild card for 2013. It could raise more than a billion dollars if the rules change, but less than $50 million if they don’t.

Crowdfunding generally involves small contributions at the individual level. Although the top pledge packages can be more than $10,000, on average the individual contribution is likely less than a thousand dollars in almost every category³. The funds raised for a particular project or investment tend to be in the thousands or tens of thousands of dollars, although on rare occasions they can be in the millions. For example, on one of the better known crowdfunded reward sites only 17 projects raised more than a million dollars and only two raised more than $ five million⁴.

Still, across tens of thousands of projects and investments, the total funding can really add up. In the past five years, the 30 largest lending portals raised more than $1.5 billion⁵. The largest reward platforms collected nearly half a billion dollars cumulatively.  Donation sites raised hundreds of millions of dollars. Venture capital portals raised just tens of millions of dollars, but that number is expected to rise dramatically in the near future⁶. In aggregate, crowdfunding portals are already a multi-billion dollar industry, growing at more than 50 percent a year.

That being said, the $3 billion that crowdfunding is expected to raise in 2013 remains small compared to comparable funding mechanisms. Traditional venture capital raises about $40 billion annually⁷; charitable giving was almost $300 billion in the United States alone in 2011⁸, and the pay day loan market in the United States was worth more than $50 billion in 2008⁹. In each category, crowdfunding is growing much faster than traditional sources of funding, but still represents less than one percent of the total.

Given crowdfunding’s impressive growth rate, it is worth looking at some illustrative examples. The reward-based market is expected to have the greatest impact on technology and media developers. In May 2012 a company sought $100,000 via a popular reward-based portal to make 1,000 programmable watches, but ended up collecting $10.3 million from 68,929 people – an average of $150 per investor¹⁰. Most reward-based projects have tended to be for consumer products such as watches, smartphone accessories or games. In one recent survey, seven of the top ten products fell into these categories¹¹. But there are many exceptions. Some non-consumer technologies, such as multiple-core chip architectures, also use the platform¹².

Equity-based crowdfunding is often discussed as an alternative to VC for small to mid-size firms. Growth is accelerating as new platforms are launched, investor interest rises and regulatory constraints are reduced.  In the United Kingdom, there are several platforms that provide equity-based financing for startups and growth capital¹³. In the US, a large crowdfunding portal raised $15 million in venture capital to pursue expansion into equity crowdfunding¹⁴. In Canada, an alternative stock exchange has publicly stated its support for crowdfunding¹⁵ and a provincial government is contemplating an exemption to the accredited investor rule for crowdfunding sites¹⁶.

Despite these advances, and even if VC portals become larger due to beneficial regulatory changes, they may still only capture a small share of the VC market. Startup companies value the intangible contributions such as knowledge and networks that an experienced VC provides. Also, regulations protecting casual (non-accredited) investors may remain in place for many jurisdictions. Finally, investor enthusiasm may be dampened once crowd investors experience their first ‘burn’. 

Crowdfunding will more likely have a role in complementing traditional VC, generating additional capital at the ’friends and family’ stage of funding that generally precedes VC involvement. Indeed, crowdfunding could benefit the ‘A round’ market (where startup companies usually first try to access institutional money; typically for one to three million dollars) by helping more start-ups establish proof of concepts and secure their first paying customers. Further it could enable VCs to skip the riskier and more laborious early stage investing that many would rather avoid. In a recent survey, seed financing from VCs was down almost 50 percent year-over-year¹⁷, indicating that there may be a funding gap for crowdfunding to fill. Crowdfunding also brings the potential for more democratic or broader access to capital for startups and innovators without personal connections to capital.   

The Jumpstart Our Business Startups (JOBS) Act in the United States has added to the excitement surrounding  equity-based crowdfunding by requiring that the US Securities and Exchange Commission (SEC) consider the creation of new classes of investors who could participate in venture-like financing, in addition to the existing ‘accredited investor’ class. The SEC could decide to significantly loosen the rules, which would likely attract billions of dollars. However, there are many concerns about investor protection, disclosure and the potential for fraud77. If regulators don’t alter the rules in a meaningful way, or if they add new barriers, the equity crowdfunding market is likely to remain small.  It is unclear at the time of writing what the outcome of the SEC process will be, or even when a decision will be made: it was supposed to be by January 2013, but by mid-December there were media stories suggesting that deadline will not be met¹⁸.

Bottom Line:

If regulations around equity crowdfunding are relaxed, there are likely to be increased risks -- and not just for investors.  While crowdfunding may open the floodgates, capital will largely flow to inexperienced inventors and project managers.  Crowdfunded projects have a history of unanticipated delays as inexperienced teams struggle with project deadlines and manufacturing details¹⁹.   Some research suggests that crowdfunded opportunities are a bigger risk than traditional IPOs, and that the potential for the average investor to misunderstand or misinterpret the promises of an early-stage startup are higher than for an experienced accredited investor²⁰. 

There are also risks for those who participate in reward-based projects. The time elapsed between contributing money and receiving the reward or product may not be very long, but it is longer than scooping a similar item off the shelf of a retail store, and during those few weeks or months the funded product may become obsolete, as happened for some iPhone-related projects when Apple switched to a new kind of connector²¹.

In the computer gaming industry, crowdfunding portals could be an important source of funding –primarily for smaller titles that need millions of dollars, not hundreds of millions²². But given the uncertain nature of the creative process, many game projects never get finished, take longer than expected or need more money. Crowdfunders are unlikely to be happy with any of those outcomes²³.

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¹ Deloitte Touche Tohmatsu Limited estimates based on existing knowledge, conversations with industry players and published industry estimates

² Source: Crowdfunding Platforms Raise $1.5 Billion and Successfully Fund One Million Campaigns in 2011, Finds Research Firm Massolution, Market Wire, 8 May 2012. See: http://www.marketwire.com/press-release/crowdfnding-platforms-raise-15-billion-successfully-fund-one-million-campaigns-2011-1654020.htm

³ Based on Deloitte Canada review of multiple crowdfunding portals.

⁴62b Source: Information Regarding the Use of the Crowdfunding Exemption in the JOBS Act, see: http://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htm

The gaming category was responsible for nine of the 17 million dollar plus raises.Source: The most funded projects in Kickstarter history, Kickstarter, 28 November 2012. See:http://www.kickstarter.com/discover/most-funded?ref=sidebar.

⁵ Deloitte Canada analysis of publicly disclosed crowdfunding portals. The amounts we cite are likely to be lower bounds.

⁶ Deloitte Canada analysis of publicly disclosed crowdfunding portals.

⁷ Source: Global Venture Capital Volume Up in Q1, Deal Number Down, Science Business, 4 May 2011. See:http://sciencebusiness.technewslit.com/?p=4150

⁸ Source: Giving Statistics, Charity Navigator, 2012. See: http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=42

⁹ Driehaus, B. (2008, September 7). Some states set caps to control payday loans. New York Times, p. A18.

¹⁰ Source: Some States Set Caps to Control Payday Loans, The New York Times, 6 September 2008. See:http://www.nytimes.com/2008/09/07/us/07payday.html?_r=0

¹¹ Source: Crowdfunding video games, The Economist, 8 September 2012. See:http://www.economist.com/node/21562213

¹² Source: Spurned by VCs, a ship startup turns to Kickstarter, GigaOM, 27 September 2012. See:http://gigaom.com/cloud/spurned-by-vcs-a-chip-startup-turns-to-kickstarter/

¹³ Source: Raising business finance through online investments, Crowdcube, 2012. See:www.crowdcube.com

¹⁴ Source: Indiegogo Raises $15 Million Series A To Make Crowdfunding Go Mainstream, TechCrunch, 6 June 2012. See: http://techcrunch.com/2012/06/06/indiegogo-funding-15-million-crowdfunding/

¹⁵ Source: Trading Summary, Alpha Trading Systems, 2012. See: http://www.alphatradingsystems.ca/

¹⁶ In the United States, securities regulation is principally a matter of federal jurisdiction under the SEC. In Canada it is under provincial control, through various Securities Commissions. Source: Ontario examines ways to loosen crowdfunding rules, The Globe and Mail, 29 November 2012. See: http://www.theglobeandmail.com/report-on-business/small-business/sb-money/business-funding/ontario-examines-ways-to-loosen-crowdfunding-rules/article5781219/ 

¹⁷  Source: Where’s the Venture Capital?, Chief Executive Group, 11 July 2012. See:http://chiefexecutive.net/wheres-the-venture

¹⁸ Source: Small Businesses Await Crowdfunding Rules, The Wall Street Journal, 12 December 2012. See;http://professional.wsj.com/article/SB10001424127887324339204578173731988591450.html?mod=WSJ_SmallBusiness_LEADNewsCollection&mg=reno64-wsj&utm_source=buffer&buffer_share=a7755

¹⁹ Source: Crowd-funding dark side: Sometimes investments go down drain, USA Today, 14 August 2012. See:http://usatoday30.usatoday.com/money/markets/story/2012-08-14/crowd-funding-raising-money/57058678/1

²⁰Source: Crowd-funding dark side: Sometimes investments go down drain, USA Today, 14 August 2012. See:http://www.usatoday.com/money/markets/story/2012-08-14/crowd-funding-raising-money/57058678/1

²¹ Source: Kickstarter’s Obsolescence Problem, Illustrated By A Fantastic iPhone Cable I’ll Never Use, TechCrunch, 26 September 2012. See: http://techcrunch.com/2012/09/26/kickstarters-obsolescence-problem-illustrated-by-a-fantastic-iphone-cable-ill-never-use/

²² Source: Video game raises $4 million through crowdfunding, EtonDigital, 18 October 2012. See: http://www.etondigital.com/video-game-raises-4-million-through-crowdfunding/

²³ Source: Crowdfunding’ should be a red flag’ to backers, Develop, 3 October 2012. See: http://www.develop-online.net/news/42140/Crowdfunding-should-be-a-red-flag-to-contributors

Could a Fund of Crowdfunds Help Investors Take the Plunge?

By Charles Luzar  (reposted here with permission)

A few weeks back I wrote about how risk shouldn’t stop crowdfunding from becoming available in the United States.  However, any responsible investor should consider risk before participating in any investment.  Investment without pragmatism is just gambling, after all.

What are the legitimate risks involved with crowdfunding as defined by Title III of the JOBS act?  For one, this type of crowdfunding in the US marketplace is a complete unknown.  There are lessons to be learned from other countries that have implemented some form of crowdfunding, but every country and every market is different.  The United States is also the largest market to date that will legalize crowdfunding in this way, so it is undoubtedly a unique situation.

The general nature of the US startup ecosystem is notable, too.  We are a nation of risk takers, a trait that has resulted in an extremely high rate of failure for new businesses.  It is also the lifeblood of one of the world’s greatest economic engines.  Give and take.

In a country where business opportunities abound and new businesses fail at a high rate, the well-studied investor inevitably wins.  This presents a bit of a problem.

Judy Robinette, a partner at Crowdfund Capital Advisors, recently divulged that there were over700 crowdfunding companies either existing or in development.  Obviously the market is expecting (or at least hoping for) extremely high rates of participation among the US business community.

If we expect a huge pool of available offerings when crowdfunding takes off, are we also naive to think that unaccredited investors currently possess the tools to make sense of this emerging movement?  Trust me, being well-versed in hundreds of portals and thousands of offerings is cumbersome at best.

A crowdfunding mutual fund or fund of funds could help solve some of these problems.

Risk could be spread across numerous offerings.  Lending-based offerings that provide medium risk and lower returns could be used to hedge against equity offerings that promise higher returns with the caveat of higher risk.  Funds could also be allocated across industries and concentrated in those industries that provide the greatest chance of ROI.

The investment professionals who manage these funds could help facilitate educational outreach to potential investors, thus helping to eliminate the painful step of having to manually perform due diligence on individual crowdfunding offerings and those behind them.  This would also lift a burden from business proprietors, who could focus communication efforts on one individual or firm rather than interacting with an unknown quantity of individual potential investors.

Most of all, it boils an extremely complex funding movement into a much simpler exercise for tomorrow’s investor in much the same way that mutual funds and ETFs do for today’s investor.

Inevitably the market will provide more powerful tools for investors interested in crowdfunding offerings, but a crowdfunding fund or FoF could provide added benefits and accelerate access to business capital in ways we haven’t imagined yet.

Photo credit Azarius