The basics. There are three parties involved: 1) the Project Initiator (PI); 2) the Crowd (i.e. the pool of potential funders); and, 3) the Platform (e.g. Kickstarter, Pozzible, etc.).
There are four kinds of crowd-funding: 1) Donation-based; 2) Reward-based; 3) Credit-based; and 4) Equity-based.
The PI places a proposal on a platform that identifies: 1) the specific amount to be raised; 2) the deadline by which the entirety of the amount must be raised; 3) the purposes for which the funding will be raised; and, 4) background information about the PI, including whether it is a non-profit organisation.
Donation-based crowdfunding is exactly what the name implies. The Crowd derives satisfaction from contributing to a noble cause, plus possible tax benefits if the PI is an IRS 501 (c) 3 entity (both non-profit and tax-exempt) or the equivalent in other countries. Suitable more for projects that would raise money for medical equipment for a local community or for the purchase of mosquito nets for use in third world countries than to finance movies and tv programs.
Reward-based crowdfunding allows the Crowd to receive something of tangible value in exchange for the donation. So, if it were used to raise money for a concert event or produce a music CD, the rewards might be concert tickets, CDs, autographed posters, etc. If the PI is an NPO, the Crowd may be able to deduct the difference between the value of the reward and the amount of the donation from their taxes.
It is a very suitable means of pre-selling tickets to a concert. In the event that the target funding is not raised–and the event does not take place–the platform will automatically refund the donations at such time as the deadline for complete funding passes. Such reduces the risk for the ticket buyer (Crowd) and the responsibility for refunds from the PI.
Laws governing Credit-based and equity-based crowdfunding are still in a state of evolution. At the time of this posting, crowd funding operated under the same laws governing conventional loans and investments. But, if and when they find a legal status something short of conventional private offering, they may be an excellent vehicle for raising capital for larger motion pictures and tv projects.
Using crowdfunding for big budget screen projects. I do not particularly like the idea of using crowdfunding in its current legal state as a vehicle for raising the entirety of the funding for a multi-million dollar motion picture. It is a long shot at best, even if you have something of great perceived value to offer (such as Spike Lee getting $10,000 each from 29 people desirous of sharing his court side seats at a Knicks game).
However, let us say that you are trying to raise US$2.5 million for a film to which you have attached a relatively unknown star with a small but enthusiastic following. A combination of $500,000 in pre-sales and/or in an advances from a distributor, $1.25 million in a combination of equity finance and government incentives, plus $750,000 in reward-based crowdfunding would cover the costs.
Best of all, it could avoid the chicken and egg contingencies that plague most fundraising efforts. The pre-sale and equity entities would be induced to put up irrevocable letters of credit with execution dependent only upon raising the target crowdfunding amount. (Money in the budget would have to be allocated for factoring the LCs.)
The importance of passion. Reward-based crowdfunding is best suited to projects where the crowd feels passionately about the subject matter and/or participants in the project. In the 1980s, a collection was made in Mennonite churches to fund a movie about the founder of the Anabaptist movement from which the Mennonites, Amish and Baptist churches descended–knowing that their religion prohibited they themselves from seeing The Radicals.
If the Crowd would like to see the project funded, but does not feel compelled to take action, the crowdfunding effort has little likelihood of succeeding
When the laws governing credit-based and equity based crowdfunding have been enacted, I will be back with updated notes on same.
Thanks for reading.