Individuals are now free to invest small sums in the projects they want to see.
In 2000, Paul Scanlan and Jeff Annison had the prescient idea for MobiTV, a service that would stream live TV to phones. Thinking their business proposal had a real chance, the two pitched it to their friends and family, who agreed and wanted to show their financial support. By selling shares in the company to a number of small contributors, they managed to secure seed money.
But when they tried to move forward, they ended up having to return that money. Their investors were not “accredited,” and therefore could not legally invest in securities that were not registered with the authorities. According to SEC regulations, “accredited investors” needed to be millionaires, which naturally ruled out a lot of people who might be interested in investing in a young business. Annison and Scanlan did eventually raise over $100 million for MobiTV, but the way an arbitrary regulatory barrier set back their start stuck with them.
The Jumpstart Our Business Startups (JOBS) Act was passed in 2012, and starting in 2016 it removed a number of barriers to these kinds of investments — now called “equity crowdfunding.” As it turns out, the law also facilitated a number of films starring A-list actors, thanks to Scanlan, Annison, and a new company called Legion M.
“Crowdfunding” tends to bring to mind platforms such as Kickstarter, Indiegogo, and GoFundMe. Such platforms existed before the JOBS Act — but, as Thaya Brook Knight of the Cato Institute explains, until then they were not legally allowed to facilitate actual investments. Companies could provide various perks to those who contributed, such as “preferred status on a waitlist for the forthcoming product, a T-shirt, or a handwritten letter of thanks from the company’s founder.” But they couldn’t give a traditional return: a promise that if the project succeeded, a portion of the profits would go to the contributors.
In theory, this protected unsophisticated investors from securities that were not subject to various transparency requirements and other regulations. In practice, it meant that investing in many new projects was the place of the very rich alone — and, bizarrely, that one could solicit money from the public only if one did not plan to pay a return on the investment. Certainly there is something to be said for restrictions that curb irresponsible behavior, but this setup essentially walled off an entire part of the economy.
This situation attracted criticism, both from free-market Republicans and from Democrats. As a result, Congress debated a series of reform packages and enacted the JOBS Act in 2012. The act’s crowdfunding provisions created portals through which a firm could solicit funds from small investors. These funding portals are strictly regulated, and the new system does limit how much someone can invest, which has earned complaints from some libertarian-minded observers. But it’s a reasonable compromise, and, if nothing else, it’s certainly an improvement on the previous rules.
Scanlan and Annison closely followed the course of these economic reforms, and their next business idea was built around the possibilities of equity crowdfunding. Annison wrote a 2016 blog post celebrating the reforms in the language of economic freedom and personal empowerment; he pointed out that, during the years when actual investments had been out of reach, there had been “nothing stopping ordinary Americans from ‘investing’ money in Las Vegas, lottery tickets, or TV evangelists.” With the barriers removed, he wrote that “the general public [can] participate in early stage financing, a domain that for the last 80 years has been the exclusive purview of venture capitalists and high-net-worth individuals.”
Almost immediately after the provisions took effect, Legion M hit the ground running, says Terri Lubaroff, the company’s chief operating officer. For a few years, fans had been crowdfunding creative projects, including video games and movies — the Veronica Mars film was famously funded by fans — but the JOBS Act created the opportunity for fans to be real stakeholders in an entertainment business. And equity-crowdfunded entertainment companies take that to another level.