Can crowdfunding move from rewards to an equity basis?

so uh yeah it's David hoppy gamma law in San Francisco we work with video game companies entering the US market uh seeking investment and um generally uh game uh company transactions and that is not the right button all right there we go so everyone knows crowdfunding is growing dramatically Lots going on in the space lots of money being raised uh this chart uh exemplifies that in part and I say in part because it does not show 2013 13 number was twice that of 2012 uh everyone knows uh at least some of these uh logos these are crowdfunding websites Kickstarter of course being the largest but really sort of us Centric uh Indiegogo has uh accommodated campaigns from various countries Kickstarter is limited to a few outside of the United States but one thing great about Kickstarter is there statistics which are available uh uh on their site and

are updated in Real Time games is interesting among all the categories uh probably the biggest disparity within games and that is because games is the largest dollar category uh of all of these and of course most people know Kickstarter for film video uh music types of projects games account for fully half of all of the projects that raise over a million dollars on kick starter over the life of of of of the the site however games account for only about 8% of the projects that are on the site so pretty dramatic unsuccessful project statistics on Kickstarter an unsuccessful project of course is one that does not reach its funding goal in which case you don't get anything um not exactly sure why I put that slide in but if you kind of look closely you can see that games break

down pretty much the same as the other categories in terms of uh what percentage of funding goal is uh is not reached among these unsuccessful projects it always seems like uh at least every few months there's some big game that uh you know far exceeds its Target and makes the headlines and uh most recently we have Mighty number nine from Japan uh four times the amount that they originally requested was raised um 67,000 backers so just in kind of brief summary here 10,000 some campaigns on Kickstarter to date uh 35 and sorry those I think are successful campaigns 35.6% sorry those are those are campaigns in total in the category 35.6% of those were successful um and despite the fact that games is the largest dollar category

actually only 28% of those uh of game campaigns raised over $110,000 72% of them were small campaigns so that's actually uh interesting to know if anyone uh you know and I would guess those $10,000 campaigns are probably being run by people other than those in this room but just the same an interesting statistic um just by way of comparison and music we had three times as many campaigns a higher success rate and uh an even higher percentage of campaigns that are seeking lower dollars and it's similar with film as well uh so the the most interesting development in the space of crowdfunding here in the last two years is the development of what we're calling equity crowdfunding which means actually selling stock in your company online not just giving out t-shir shirts

or posters or providing other rewards in exchange for people who want to support your project but actually uh providing a value proposition to people who want to invest in your company and hold stock presumably long term before we leave reward crowdfunding which is uh what we the term that's used to describe the traditional model that we've seen to date t-shirts and so forth it's worth noting that reward crowdfunding is not with without uh its caveats and uh there seems to be an impression among a lot of people even a couple years into this that crowdfunding is free money uh it's actually not and I didn't go into the costs of raising the money in this uh short presentation but they are substantial especially in the lower dollar brackets um and but probably of more significance is the fact that this money is taxable and in the US and no doubt in Finland although I actually don't know anything about Finnish tax law um I

should mention actually I did uh live and work in Finland uh several years ago now and I'm really happy to be back um so uh so money's taxable there are ways to mitigate that consult your tax adviser um just the same uh reward-based crowdfunding is essentially unregulated both in the United States and in Europe uh it is a good idea though to run the campaign through a separate company if possible or at least segregate the funds and uh unlike some of the new regulations as we'll see coming from the US there's no requirement of a US entity to raise money through reward crowdfunding Equity crowdfunding these people become your investors your stockholders and perhaps in some sense become your boss later on you may have to live with them for a while well Europe has sort of led the way in equity crowdfunding

uh and that's not because European Regulators have been so forward thinking as to come up with some comprehensive crowdfunding regulatory regime it's rather simply because in some ways European Securities regulation uh is uh is is uh a little more flexible uh and people have uh to date any way found ways to run campaigns and sponsor campaigns in the within the scope of the existing regulations just the same it continues to be uh at least for the time being uh sort of a country bycount basis and without a unified regulatory system well the United States uh has a very conservative Securities regulatory system that was set up after the Great Depression and has changed very little since that time uh to their credit the US Congress two years ago came up with this idea of a crowd fing law which

would provide some certainty for people who wanted to raise money through crowdfunding uh uh through equity crowdfunding and um hopefully promote the sector here's the bill being signed into law two years ago however the law has been on the books now for two years but if you go online and Pitch stock in your company you could go to jail and that is because the Securities and Exchange Commission has has not yet issued the regulations implementing the new law uh there is a tremendous amount of resistance within the regulatory Community there's a lot of skepticism there's a lot of concern about fraud uh as you'll see here two quotes the first of them a sunny optimistic quote about uh the every man being able to buy stock online and the second one uh not quite so optimistic the thing about crowdfunding is that it brings together unsophisticated issuers with unsophisticated IND at investors

what could possibly go wrong well actually the uh the law that was passed two years ago was set up in such a way that I'm not sure too much can go wrong except that maybe the sector won't develop very well and that is because the law has built in a lot of restrictions already companies can only raise a certain amount annually people can only invest a certain amount annually uh and all this has to be through a crowdfunding website that has been Reg reged with the SEC there's required disclosure when you launch the campaign uh audited financials we'll talk more in a moment uh if you're targeting more than $500,000 there's a very limited ongoing reporting requirement you need to make your financials uh uh file them publicly once per year and under this Mass Market we can call it Equity crowdfunding exemption uh the campaign has to be run through a US company

the size limits per company $1 million per year and per investor 2,000 to 100,000 corresponding with income financials and this is the part of the law that uh has attracted the most concern Indigo we calling this a massive deal breaker uh if you want to raise over $500,000 you have to get your financial statements audited in the US the cost of that is estimated 8,000 to $30,000 and probably more uh and those numbers are for you know relatively new startup so those uh restrictions that we just briefly ran through may make many of us wonder what's the value of this new law in the US uh I need to have a US company uh as a European developer or Us games company um I have to spend a lot of money maybe on you know us accountants US legal

advisers so forth so just to step back for a minute um uh in in the US and certainly in Europe as well in addition to the public markets and the public you know exemptions like this one we just discussed for crowdfunding there is a massive pool of funds that's available and that's trading hands on a daily basis that uh does not go through these channels and these are private placements these are wealthy individuals they are investment funds they're institutional investors uh estimated four times the capital uh available um on an annual basis $1.2 trillion dollar compared to the uh IPOs that are making the headlines King and others uh just a word about what this uh private uh regulatory regime is all about so statistics on you know who these uh accredited investors are

um one thing here is that audited financials are still required for private placements in most cases so what does this have to do with crowdfunding well as it turns out that the new law actually has a special accommodation for uh Equity crowdfunding campaigns that are directed at uh accredited investors only and there's a few sites that are doing this Kickstarter interestingly has said we're not interested uh in equity crowdfunding at all whether for credit investors or for Mass market so if your crowdfunding campaign Equity crowdfunding campaign online is directed at accredited investors and you only accept accredited investor money suddenly a bunch of those rules go away there's no limit on the size of the offering there's no limit on how much each investor can invest there's no ongoing reporting requirements and there's no requirement of a US entity there's also uh no All or Nothing

campaign requirement which means if you don't reach your goal you can still take the money home so at the end of the day I think what we just discussed here the private placement option for an equity crowdfunding campaign in the US is one that offers a lot of potential for European game developers and European uh other independent game companies um however we still have uh the question because this is such a new channel is the amount of work that's required to do this and the cost is it going to be worth uh the the amount of money that's available through these new channels I guess we'll wait and see thank you