Equity crowdfunding – a short history
In the games industry, we’ve been happily crowdfunding creative projects for years now through Kickstarter and other sites. In exchange for a pledge from a backer, a Kickstarter creator is obligated to provide a designated reward. This is usually a copy of the game, but it could also entail physical rewards or even lunch with the creator!
What if you could actually invest in the company making the game, though?What if you could actually invest in the company making the game, though? Imagine if, instead of just receiving an Oculus Rift development kit as a backer, you owned some shares in the company and a piece of that $2 billion buyout by Facebook?
President Obama and the US Congress had these people in mind in April 2012, when they signed the JOBS Act into law. In the law, the Securities and Exchange Commission was supposed to have final rules for equity crowdfunding in place within 90 days. The crowdfunding community was excited about the prospect of legitimizing equity crowdfunding.
However, it took until October 2013 for the first proposed rules to be made available for public comment. Now, on October 30, 2015, the rules have been finalized and equity crowdfunding is good to go!
The final equity crowdfunding rules
So how does it work? I’ll lay out the basics, as reading the full rules can be a bit unwieldy at nearly 700 pages.
Companies can raise up to $1 million across all of their crowdfunded offerings over any 12-month period.
Purchasers of shares in these companies can buy up to a certain amount, depending on their income. Those either making less than $100,000 annually or with a net worth under the same amount can invest either:
- 5 percent of either their annual income or net worth, or
- $2,000 (whichever is greater)
For those making annually or who have a net worth of at least $100,000, the limit is 10 percent of that number. However, a company may only allow any single investor to purchase $100,000 worth of equity across all of the company’s crowdfunding campaigns in a 12-month period.
Crowdfunding portals are the third pillar of the equity crowdfunding rules. Basically, the company will advertise their fundraising and point potential investors to their offering page on a crowdfunding platform (not unlike Kickstarter). That platform will have to have a number of things available to investors, such as:
- educational materials about this type of investment,
- a way for potential investors to communicate with each other about the offering,
- the ability for investors to review the company info for 21 days before the offering and to make an account on the platform for the purposes of investing
Additionally, the platform will not be able to recommend any particular investment – they have to remain neutral. For me, this calls into question whether or not the crowdfunding portal can have a front page showing the various offerings. This has the potential to be an implicit recommendation just by virtue of an offering’s placement or existence on the front page.
Disclosure requirements for companies
In addition to the rules about how much money can be raised, there are a number of disclosure requirements for companies. While these may seem like a lot, they are nothing compared to, say, an IPO.
Here’s a sample of what’s required:
- Financial statements, which may or may not need to be audited by a professional auditor,
- The company’s business plan, including how the funds will be used,
- Information about the company’s directors, officers and those who own at least 20 percent of its shares,
- Information about the shares themselves, such as the price of each share, how that price was determined, and the total amount of fundraising being sought (along with whether or not they will accept more funds than that)
While the crowdfunding portals may be able to streamline the process, I would still recommend getting an attorney or other professional familiar with the rules to prepare all of this information.
How can this help fund your game company?
This is the big question – is this even a good idea for game companies? I’d say the answer is “maybe.” There certainly has been interest in equity crowdfunding for games; the recent launch of Fig shows that, though their system works a bit differently using older rules. It remains to be seen whether they make a shift to take advantage of these new equity crowdfunding regulations.
However, there is always the fact that most gamers don’t really want a piece of a company – they want a game!Like with Kickstarter, it will probably take a big success to really get the public’s eye on equity crowdfunding for games. Like the DoubleFine Adventure Kickstarter, a popular fundraising campaign could pave the way for many more companies to take advantage of these new rules.
However, there is always the fact that most gamers don’t really want a piece of a company – they want a game! The popularity of Kickstarter comes from the fact that gamers want to support projects that they know wouldn’t otherwise exist. They want to reap the benefits of that support in the form of a physical or digital copy of that game. Most are not really interested in owning a piece of the company.
Regardless, I am excited for the future of equity crowdfunding when it comes to games. I look forward to those first big successes!
If you have questions about implementing these rules and raising capital for your game company through equity crowdfunding, why not contact a game lawyer?
- Check out the 686-page final rules
- The SEC’s press release on the final rules and other proposed equity crowdfunding rules, dealing with in-state and regional offerings