Whither "Equity Crowdfunding?"

I was unaware that US Law had changed in November 2015 to allow Filmakers to engage in "for-profit" Crowdfunding. 

Ok, let's define here: non-profit Crowdfunding is your Kickstarter/Indygogo model. Donors give to a project they believe in. Donors may receive material perks for donations, but no financial return is expected (also, Crowdfunding sites make "caveat emptor" quite clear--there is no guarantee that the crowdfunded project will actually release. "Axanar" is a case in point--if shut down by Paramount I, and other donators basically lose our money.)

For profit Crowdfunding is different--one is considered an investor with profit-sharing. Now, ignoring that most films lose money* and those that don't usually have cooked studio books to deny profit**, this isn't really a good idea, for reasons well discussed here:  http://www.moviemaker.com/archives/blogs/cinema_law/be-very-very-careful-about-equity-crowdfunding/

*Let's look at "Force Awakens." Roughly $2 billion in box office--Disney makes all the money! Wait... Theaters take half of that (US theaters get 10% Box Office, rising 10%/week to a cap of 60%. Chinese theaters take 60-70%. I don't know the split for other countries. 50% is a rough estimate). Okay, a cool billion... Minus $250 million for budget. Minus $200 million in marketing and distribution. Leaving $550 million... Once the back-end deals are done 25% of that goes to Abrams, Ford, Hamill, Fischer, etc. We're down to about  $375 million in profit. This offsets the $275 million Disney estimates losing on "Tomorrowland," leaving $100 million in profits. Yeah, $100 million is a lot of money, but if that movie had only done $1.5 billion? No profit. Disney isn't going to make a crapton of cash on the films--the profit is in the merchandise! 

**Did I say Hollywood studios cook the books? I did! See the following for how Warner Bros. "lost" $160 million dollars on a Harry Potter film that grossed almost a billion. http://deadline.com/2010/07/studio-shame-even-harry-potter-pic-loses-money-because-of-warner-bros-phony-baloney-accounting-51886/ Let's not forget the famous case of Art Buchwald suing Paramount over the "nonexistent" profits for "Forrest Gump."  http://www.nytimes.com/1995/05/25/movies/gump-a-huge-hit-still-isn-t-raking-in-huge-profits-hmm.html

Comments

  • edited March 2016

    @Triem23 - You left taxes out of the equation. Probably closer to $80 million......that's including all the little side taxes along the way for goods and services and payrole in each department as well as from the final income total.

    I was glad to see the first article include taxes in the equation. Taxes are the only reason I haven't tried starting my own crowdfunding advert. I just don't know what the impact of taxes would be collecting $250, $2,500 or $25,000. After taxes would it look more like $125, $1,250 and $12,500? Is it considered income and if so does it get combined with my total income including both my jobs and any other revenue sources?

    I agree with you on all other accounts. The for profit crowdfunding sounds nice but it does open oneself up to all kinds of litigious activity.

  • Interesting, well the marketing is basically just merchandise as far as I'm concerned. All studios just put up their trailers on YouTube and let the people do the rest, all they need is the cinemas to be full, right, not convincing countries to watch their film? 

    Does the cinemas make more money than the crew producing the film? That's messed up if true... :(

     

     

    Kevin

  • Huge "gray" zone here for sure

    According to my CPA crowd funding is taxable income. This is a huge revenue stream that the money mongers want a piece of and you can all but guarantee they WILL get a piece of the action.


    The IRS has not addressed this yet but you must assume they will as it was a 5 billion dollar industry in 2015.  You can bet when the get their sh*t together and start enforcing taxes you'd better have your ducks in a row for the past seven years. Paper trail, paper trail

    ...and if you don't operate under a business name and go at it from a personal standpoint your taxes will be through the roof and.. you will have no deductions.

     

  • @KevinTheFilmmaker - Back in the day, movies would run twice through the theaters about 9 months to a year apart. If you missed it the first time you could catch it on the second run. If you missed it a second time you'd have to wait literally four years before it would appear on TV. Now, one pass through the theaters and you can buy it on DVD at the store, at home online or stream it 3 months or sooner after it's run through the theaters. I'm sure studios are still making a sizeable amount on any blockbuster just on DVDs and streaming. Grandma and Grandpa were only able to see a favorite movie once in a while unlike today when you can watch just about anything you want right now for as many times as you desire. Marketing can include anything from toys to posters to  DVDs which are things from which an independent film maker can't generate enough money to be able to compete. Today, profits are more immediate due to technology and the marketplace. I'm sorry- did I wander off topic again? lol

    @GrayMotion- Yeah, that sounds about right. That's why I'm for abolishing the IRS.....among a myriad of other reasons unrelated. I'd have to hire an accountant if I went the crowdfunding route and I can't afford that anymore than I could the taxes. I would even think out of habit that the taxes would be a larger percentage because the revenue is from donations rather than any kind of sale or service. Thanks for the info!

  • Triem23Triem23 Moderator

    @KevinTheFilmmaker My "50% goes to the theaters" estimate above is a rough guess. Like I said, I only know percentages for US and China. That said, a US movie theater gets 10% of Box Office for opening weekend. This percentage goes up 10% per week, BUT.... most movies, no matter what they are, suffer a 30-40% drop in ticket sales, week to week. So, by the time a US theater is up to 50/60% of box office, ticket sales are way down. However, China is always taking 60-70%. Averaging out to 50% seemed about right, but, again, I don't know Box Office percentages for any other market, so that number can be way off. The key point here is that most film (on paper) don't ever make any money. There are also hidden costs--if you remember the 2006 "Superman Returns," that film was reported to have a "$350 million" budget. It didn't. That film had a $150 million budget and another $200 million CONSIDERED to be part of it's budget that represented the development fees for every Superman movie that didn't happen in between "Superman IV" and "Superman Returns." That Tim Burton version starring Nicolas Cage that never got made? Yeah, they spent a millions of dollars not making a movie. Kevin Smith did some screenplays--not made, but Smith was paid... All of that crap gets rolled over as "Budget" for "Superman Returns." (We'll ignore the fact that Bryan Singer spent $10 million of a sequence cut from the film).

    Overall, though, yes, the theaters are "making more than the crew," (not counting certain actors, which we'll come back to), but understand, crew got paid up-front for their time. if it's a Hollywood, union film, they got paid pretty damn well, too (The truck drivers ("Teamsters") make $60/hour, base. That's to drive the truck AND NOTHING ELSE. So that guy gets $60/hour to drive out in the morning and $60/hour to hang out all day, and, if their shift goes over a 10 hour day (it will), they jump to $90/hour. $120/hour for double-overtime, which they WILL get most days. Camera crew start at $50/hour. Basically everyone but a PA is making really good money. But this is all accounted for in "budget." Now, those theaters that show the films--they all pay property rent, they all pay electrical bills, phone bills, and employ hundreds of thousands of people. Movie theaters are not terribly profitable, and let's just say the snacks are expensive, not because of gouging, but because it's the SNACKS that make enough money to stay in business. The economics of the movie industry are terrible on all sides.

    Also, remember that some (not all) actors, directors, producers get percentages of the profits, and massive fees. We'll use Mark Hamill in "Force Awakens" first--his salary was about $5 million dollars, PLUS he gets percentage points off the film profits. This is good money for what was really a week of "work," (Costume fittings, fly to Ireland, shoot one day for three freaking shots), and a few months of growing his beard while doing other voice over work. Is that "fair?" hell, no! Robert Downey Jr. famously got $50 million for Avengers 2 (and was on-set for seven days.). Once you factor in how his pay raise lead to pay raises for the other principal Avengers and Joss Whedon (no to mention THEIR percentage points), well, the pay for the seven principal Avenger, plus Joss Whedon came out to about $150 million of a film with a "$250 million budget). In other words, you can make two "Deadpools" for what those eight people got paid. Again, is that "Fair?" (BTW, these guys also get part of the merchandise money.) Because the money that those eight people made on Avengers probably pays the salaries of 7,000 theater employees for a year BEFORE profit sharing kicks in.

    Another note--the main studios, again, don't make their money off the theater releases of movies. Disney/Pixar/Touchstone/Hollywood/Miramax--all the studios controlled by Disney--make up about 7% of Disney's revenue. Disney's money is in Theme Parks and merchandise...for a real eye opener, look up exactly how many TV stations, radio stations, clothing companies, publishing companies, news companies etc etc etc Disney really owns.

    @StormyKnight you're right, I totally left out taxes--but that just means my estimate of Disney profits from "Force Awakens" is even lower. Once again we're back to merchandise being the profit (which includes DVD's/Blu-ray, but doesn't take into account cable/airplane/streaming broadcasts.) and, no, you didn't wander off topic--merchandise rights are actually relevant to the conversation--since most films don't make any money, these considerations are valid for persons considering a crowdfunding model--especially the "for profit" model. I think it was @StevensBilderwelt who linked the article to the British indy movie that got picked up by Amazon and Netflix for streaming--a film with worldwide distribution where it's writer/director is personally still $100,000 in the red. Or maybe it was @SimonKJones ? Heck, it could have been me, but I don't think it was. So--crowdfunding does try to deal with merchandise, and, in the Kickstarter/Indygogo model, one can even argue that the prime draw for donors IS the "mechandise," i.e. "perks."

    Jumping back to "Axanar," for a moment--I donated to that Kickstarter at the minimum tier that got me a Blu-Ray of the film. Well, that Blu-Ray is going to cost them between $3-$5 to make (depending on total number created), plus the cost of the other perks at that level. Of the $35 I pledged, probably about $20 was actual "film budget," with the rest of that donation being Kickstarter fees and my perk/merchandise. This tier level is where the majority of the donations were; people who gave enough money to help make the film, but, "gimme my Blu-Ray!"

    Axanar is actually a good example--some people in the donors group have decided to be really grumpy about the Paramount suit, and some of them are grumbling about suing Axanar themselves if the film is shut down. Why, guys? One, Kickstarter Terms of Service already warn that products donated to might not ever see the light of day. Ares Productions (makers of Axanar) have been open with their books. Some are mad that some people at Ares are paid--well, yes. Money is still needed in society, and I don't think there's anything wrong with paying oneself some money to be able to pay bills while working full-time on this project. Remove these paychecks, and watch production time go up by several years--this is no different than Corridor Digital's Patreon site--"i.e. give us money so we don't have to get jobs, so we can keep making shorts for you!"  Also, Axanar producer Alec Peters paid himself... $30,000? Um, when Cal.i min wage goes to $15/hour, that's minimum wage, baby! He's not giving himself that much money to build and run a project for a yea. rSo, some people might want to sue Ares productions for their "donations" back if Paramount shuts down the film--never mind that this would be circumstances outside Ares control, never mind that a lot of the donations have already been spent on studio space, props, actors, and shooting the segments already produced.

    Now imagine how much worse this cluster would be under a "for profit" donation!

    @GrayMotion while my business is basically kaput, I re-activated the DBA basically for tax purposes in case the IRS wants to talk to me about the years I was actually solvent. *Sigh* a few years ago I could do things like buy a car for cash. This month, I haven't made enough to pay my credit card minimums, and my credit is near maxed out. My 2015 business taxes were $25.25. $25 bucks is the paperwork fee, so I didn't make a damn thing last year. But that's a different story. I'll just end this little digression with the note that employers don't count running one's own business as actually being employed. It seems I have no "work history" for the last decade, since I was my own boss. Sigh.

  • Aladdin4dAladdin4d Moderator

    @StormyKnight @Triem23 It was ok to leave taxes out of the equation. Any kind of payroll taxes are already accounted for under the labor budget. Taxes for goods and and services? B2B exemptions or pass throughs to end consumers. Corporate taxes on net profits? Not so fast. Any loss incurred during a fiscal year can be used to offset tax liabilities. Warner Bros losing 160 million on a Harry Potter movie also lowered their taxable profits by 160 million. All else being equal a studio with nothing but profitable movies can end up with less money than a studio that had the same gross revenue but posted some losses. Finally there's a lot places offering tax rebates if you make a film there.

    Now to crowd funding as income. If you give a donor anything of value in return for the donation (Axanar Blu-Ray) then it's basically taxable and you probably have to take care of sales tax too. If you don't give anything of value then the donation is a gift and non-taxable. Anything that's a legitimate business expense paid for with the funding is deductible lowering the income amount you owe taxes on. Need lumber to build a set? That's a legitimate expense. Insurance? Legitimate expense. Planning carefully you can take a lot of the sting out of the tax liability just make sure you do it all through at least an LLC and document everything.

    Realistically indie types can't afford to go with for profit equity crowd funding. There's 685 pages of SEC rules you have to follow and that alone makes it impossible 

     

  • Triem23Triem23 Moderator

    @Aladdin4d it's also one of those things that kind of flew under the radar--if I hadn't spotted a random article yesterday and shared it here, probably none of us would still know this was an option! ;-)

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