'Crowdfunding' refers to the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organisations.

There remains some confusion in the marketplace as to the mechanisms by which such funds are made available to, for example, film promotion and production projects. At present, it is not legal to solicit, offer or otherwise make available any form of securities or equity investment through online, crowd or other web-based funding schemes. People or organisations cannot raise equity or solicit investments through crowdfunding that provide the expectation of profit or the risk of loss of capital investment – in much the same way the traditional stock markets function when they allow individuals to purchase and sell securities.

The Securities Exchange Commission has discussed promulgating regulations aimed at legitimising, through regulation and oversight, the use of crowdfunding as an investment opportunity. However, until the regulators promulgate rules and enable it, investors cannot invest and businesses and other ventures cannot raise capital through equity or security offerings through crowdfunding.

However, there are still opportunities for media players to raise capital from the public in ways that are not illegal and do not involve equity or securities. At present, there are four major categories of crowdfunding activity:

  • The rewards model, whereby investors are rewarded by the organisation with certain benefits – for example, a musician could give investors tickets to awards shows.
  • The pre-payment model, whereby an investor is granted access to the musician's work before general release – an investor could provide a $5 investment and be granted access to the song before it goes on general sale for $7.
  • The cause-related model, whereby an investor is persuaded to provide funding due to personal interest – for example, an investor could support a musician for maintenance and to assist in the production and publication of his or her work, and expects no reimbursement or other benefit in return.
  • The loan model, whereby an investor provides an interest-free loan to be repaid on completion of the project. In this case, there must be no expectation that anyone who lends money will make a profit (interest) on the loan. While there may still be lending laws that apply to how this is carried out, it will not trigger the prohibitions under securities laws provided that the business does not pay interest.

While there are some high-profile examples of projects that have raised equity through crowdfunding, these are rare. It remains to be seen whether commercial ventures will become more successful in using crowdfunding to raise funds.

For further information on this topic please contact Joseph I Rosenbaum at Reed Smith LLP by telephone (+1 212 521 5400), fax (+1 212 521 5450) or email ([email protected]). The Reed Smith website can be accessed at www.reedsmith.com.