In their quest to secure funding for their projects, independent mediamakers are more and more using a financing option called “crowdfunding” in which mediamakers place their projects on such websites as Indie GoGo and Kickstarter and request that people donate usually small sums of money towards such projects.

Usually a project is listed on these websites and includes some preliminary information about the project and a request for people to donate funds so the mediamakers can reach some pre-established goal. Mediamakers generally use these funds which range from a few thousand dollars to approximately $20,000 for distinct purposes such as development of a project or as finishing funds when a project has been shot and is in the post production phase. However, mediamakers can use crowdfunding at any phase of a project.

These websites and mediamakers with projects on their websites generally utilize such social media as Facebook and Twitter as well as blogs or dedicated websites in conjunction with these websites to get the word out about a project.  Donations can be in any amount of money; however, the main distinction between IndieGoGo and Kickstarter is that Kickstarter requires mediamakers to set a deadline by which a mediamker’s funding goal has to be met or the mediamakers cannot access the donations for their projects. Some proponents of the Kickstarter approach emphasize that when mediamakers fix a funding deadline, it forces their efforts and those who may be interested in donating towards projects to focus more than if there is an open-ended opportunity to donate.

Mediamakers often set a funding goal that is too high and, as the deadlines nears, they are compelled to place enough funds themselves to meet their funding goals.

In addition, mediamakers have offered various items as perks for donating at a certain level. These perks may include receiving a “thank you” or “producer”-type credit on the project, a T-shirt or a cap with the project’s title on it, a DVD copy of the project which would be sent to certain level donors when (and if) the project is completed. This type of securing donations is akin to the public television pledge breaks in which different donation levels can entitle a donor to a tote bag, a copy of a book based on the pledge program, a CD or a DVD of the pledge program.

Mediamakers use crowdfunding as a means to building an audience for their projects who often will have a pre-existing interest in a project’s subject matter in the hope that donors would encourage others to donate to these projects as well as pay to see such projects.

Mediamakers and potential funding contributors should realize the operative word is “donate” and donors should have no expectation of receiving anything but the perk generated by donating at a certain funding level and a sense of accomplishment that they have helped to fund the production of a project which features a subject matter that is interesting to them or to acknowledge confidence in mediamakers who these donors know or wish to support.

The problem arises when mediamakers are offering any financial benefit derived from the exploitation of thee rights in their projects because then they are offering what is a security (no matter what the mediamakers call it). Mediamakers then may run afoul of the state and federal securities laws which require that mediamakers offering such financial benefits either to register these interests as securities or seek an exemption in which mediamakers would not have to spend the time and money to register such interests. In addition, such financial documents as a private placement memorandum (or a prospectus in the case of a public offering and an operating agreement would be required to provide extensive information regarding the seller and its key executives, the use of the funds, and the financial risks associated with project. The preparation and filing of such documents can be cost prohibitive or financially steep for most ultra-low budget projects. Some companies occasionally have offered stock or the opportunity to receive proceeds from a company or a project directly over the Internet, but that approach can result in a public offering which would require either seeking an exemption from registration or a full registration of the securities with the Securities Exchange Commission and the states in which the securities are offered or sold or mediamakers could face substantial penalties and liabilities.

Therefore, any mediamaker who uses such terms as “invest” and “investment” or offers some financial benefit to the donor regardless of what the mediamaker calls it) should raise red flags to potential donors.

For very low budget projects, crowdfunding can replace or be used with the much more technically challenging sale of securities (as well as loans and tax credits, if applicable) to fund a project.

Whether used by mediamakers solely or in combination with other funding techniques, crowdfunding utilizes the social media and permits mediamakers simultaneously to seek funding as well as market their projects to an audience which supports the mediamakers’ and the audience’s goals and/or interests.

Disclaimer: The information provided here is intended to provide general information and does not constitute legal advice. You should not act or rely on such information without seeking the advice of an attorney and receiving counsel based on your particular facts and circumstances. Many of the legal principles mentioned might be subject to exceptions and qualifications, which are not necessarily noted in the answers. Furthermore, laws are subject to change and vary by jurisdiction.