Forget Kickstarter: How Obama's New Law Could Change Hollywood Crowd-Funding

The measure could give filmmakers access to $300 billion from regular Joes with net worth over $1 million who can own part of the movies they fund -- unlike Kickstarter.

This story first appeared in the Aug. 16 issue of The Hollywood Reporter magazine.

Like many filmmakers, Spike Lee is using Kickstarter, in his case, to raise $1.25 million for his next project. A $10 donation gets you an autographed postcard, for $1,000 you can be an extra, and for $10,000 he'll take you to dinner and a Knicks game. But one thing Lee and others who raise money through crowdfunding cannot offer -- because it is illegal -- is a share of profits should the movie be a hit. That, though, is about to change, paving the way for a revolution in "equity crowdfunding" that could give filmmakers access to big money from small investors hoping to make a buck in a glamorous industry.

The change is coming courtesy of the Jumpstart Our Business Startups Act, which President Obama signed into law in April 2012 with the hope that removing some Depression-era restrictions on how fledgling businesses raise money could boost the economy. The first of the new rules is set to go into effect Sept. 23, and several players are gearing up for them.

While Kickstarter has no plans for equity crowdfunding, rival Indiegogo does. It will have competition from upstarts EarlyShares, Crowdfunder, Slated and several others.

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Here's how it works: Now, startups are required to pitch investment opportunities to individuals rather than broadcast them to the masses. But Title II of the JOBS Act allows those seeking money to advertise investment opportunities on TV or via Facebook or Twitter -- wherever, including at crowdfunding sites.

Potential investors must be "accredited," defined as an individual (or married couple) with a net worth of $1 million excluding their primary residence or an income exceeding $200,000 in the two most recent years ($300,000 for a couple). Under those rules, about 9 million Americans qualify. "It opens up access to a lot of capital for filmmakers," says Jason Best, co-founder of Crowdfund Capital Advisors. "There's a lot of people who are passionate about film but can't make one themselves, but they want to be a part of one. Soon, they can."

Even "unaccredited" investors ultimately can participate via Title III, which should go into effect in 2014. Individuals with a net worth or annual income of $100,000 can invest 10 percent of their income, and those with a net worth or income less than that may invest up to 5 percent or $2,000, whichever is greater. (A filmmaker will be able to raise only up to $1 million a year per film from these investors.)

Even with the restrictions, Best estimates that the equity crowdfunding market could reach $4 billion in four years, with a nice chunk of that going to filmmakers.

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Critics might balk at novices investing in film, especially considering Hollywood's notoriously opaque accounting practices. But Jennifer Anderson, COO of crowdfunding player Slated, says sufficient safeguards still are in place. "Some people view the restrictions as onerous, so anyone going through the trouble of meeting them will probably be viewed as legitimate," says Anderson. "Most people don't want to voluntarily engage with the SEC."

Still, filmmakers basically can set their own rules, including minimum investments and the structure of profit participation. Some could choose simplified metrics such as paying investors based on box office, while others might draft more complex profit definitions typically used by Hollywood studios.

EarlyShares, based in Miami, already has partnered with 5X5 Media, a film and TV studio that will use EarlyShares to equity-crowdfund two microbudget movies this year. 5X5 CEO Guy Zajonc envisions at least two per year for the foreseeable future, with investors offered 50 percent of profits in perpetuity.

In the future, predicts EarlyShares chairman Stephen Temes, "The audience will see a trailer and not only say, 'Wow, that looks great. I'd like to see it,' but also, 'That looks like such a great movie, I want to invest my hard-earned money into it.' " Temes says most filmmakers will require that accredited investors put up a minimum of $1,000 or much more but will set minimums far lower for unaccredited investors (perhaps $100) in hopes of attracting 2,000 investors who will become marketing evangelists. His firm will take up to an 8 percent fee for the movies it crowdfunds.

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Chicago attorney Corky Kessler of Deutsch, Levy & Engel already has lined up entertainment clients to pursue equity crowdfunding. Jeff Kehe is hoping to raise as much as $5 million to make a movie called A Gringo Walks Into a Cantina. "Independent filmmakers have had to rely on rich uncles and outright donations," says Kehe. "Now we're on an even playing field with actual entrepreneurs."

When Title II kicks in, another company called Crowdfunder will have 500 accredited investors lined up with $200 million to spend, and CEO Chance Barnett is predicting his investors will plunk down $20 million to $30 million in 18 months to fund film projects.

"There is $30 trillion in total personal savings and investment accounts in the U.S. If equity crowdfunding captures 1 percent, that represents $300 billion," says Barnett.

He even sees opportunity for larger studios: "They can offload some risk while also marketing their film, with thousands of people talking about it while it's still in the funding stage."