Invest in Movies: Profit From Hollywood’s Equity Crowdfunding Boom
Imagine discovering the next David Lynch or Wes Anderson. You see the idea, the beautiful, aesthetic-driven film. You can even imagine the minimalist soundtrack and edgy merchandise. Now all the up-and-coming producer needs is a bit of money to get their movie up on the big screen. And it turns out that you now have the potential to make their dreams a reality. How? Let’s take a deep dive through everything you need to know to invest in movies.
At the heart of the newest trend in feature film investing is the Jumpstart Our Business Startups (JOBS) Act, which former President Barack Obama signed into law in 2012. This piece of legislation spurred a rise in crowdfunding sites like Kickstarter and Indiegogo. But 2016 marked another milestone. Regulation Crowdfunding measures allowed investors to back private ventures for the first time since the 1929 stock market crash.
Essentially, Title III of the JOBS Act gave everyday investors the ability to participate in the fundraising activities of early stage companies and startups. It defined this equity crowdfunding process, requiring filmmakers to use certain platforms and disclose specific financial information. The biggest takeaway is that individual investors — people like you and me — could now invest in movies for returns.
Prior to this, only accredited investors, those with annual income over $200,000 or a net worth greater than $1 million, could get a shot at Hollywood. Other individual investors could only back movie projects for perks like tote bags and free tickets.
Whether you are a fan of romantic comedies or high-speed action movies, equity crowdfunding represents a chance to invest in a film with big potential. Granted, there is a certain type of filmmaker raising money through this avenue. You are more likely to back a David Lynch than a Chris Nolan. Before jumping into feature film investing, it is important to know the risks and potential for rewards.
If you are looking to invest in movies, read on.
How Film Investors Turn a Profit
The standard film financing process happens even before the production stages. Major studios try to estimate revenue from ticket sales, foreign film rights, television and video-on-demand rights, product placements, and merchandising. As Investopedia’s Dina Zipin writes, even the big guys can get it wrong. Movies with big production and marketing budgets don’t always pay off, as they have to make hundreds of millions just to break even. On the flip side, however, is the chance for a small-budget movie to bring in profits. Little Miss Sunshine had a budget of $8 million and made almost $60 million in U.S. movie theaters. That’s a 650% return.
Outside of these standard revenue channels are a handful of tax incentives, government grants and debt financing measures that help bring beloved movies to screens near you.
But where do independent filmmakers fall in this process? They typically operate outside the major studio systems, which means they operate outside these funding processes. Sure, the tax incentives, grants and debt financing measures are available, but they can be hard to navigate. This is where the first iterations of JOBS Act crowdfunding came in.
Perks-based feature film crowdfunding relies on friends, family and fans to give an independent director the budget of their dreams. Kickstarter and Indiegogo became hubs for this model. Social media engagement also played a huge role in early crowdfunding success.
These platforms still exist, and they are still very popular. But, unlike opportunities unlocked by Reg CF, they don’t come with a financial return.
Jennifer Kent’s The Babadook is perhaps one of the best examples of this. Kent funded her movie on Kickstarter, netting $30,000 from 259 backers. The film’s backers were given perks like digital downloads, set merchandise, screening tickets and, for the especially generous, a “Kickstarter associate producer” credit. Similarly, Veronica Mars raised $5.7 million through a Kickstarter campaign. Anyone who pledged more than $10,000 received a walk-on speaking part. It’s not a financial return, but it may still be appealing. And right now, The Weight, a trending project on Kickstarter, is offering the role of executive producer to anyone who contributes $10,000.
The Private Investing World Meets Film Equity Crowdfunding
I am not here to knock these perks — a walk-on role or executive producer status sounds pretty cool. But some individual investors are looking to feature films because they want to make money. Thanks to equity crowdfunding, they now can.
Equity crowdfunding means investors in feature films can now see financial returns. Your investment represents an equity stake, and it represents a unique form of portfolio diversification. Not only does an investment in a movie represent a step away from a traditional portfolio of stocks and bonds, it also offers you a non-correlated asset. According to BlackRock, alternative investments like feature films can help enhance returns and increase your overall income.
This mindset — especially in the early days — brought critics. IndieWire’s Chris O’Falt wrote in May 2016 that the new form of crowdfunding could “be terrible for indie filmmakers.” His concern, shared by many film crowdfunding pros, was that the wrong type of investors would be drawn to the space.
What does this mean? Well, rewards-based crowdfunding was a way for fans to show their support for an indie filmmaker or a niche project. Return-hungry investors may not share the same passion, and they may lose interest in the space once they lose money. At the time, O’Falt wrote that fewer than 2% of independent films make their money back.
That is certainly a risk to consider when investing in movies, but equity crowdfunding platforms have pushed forward. So has early success in the space. David Willis now runs “master classes” on equity crowdfunding for films. His I’ll Be Next Door for Christmas raised about $1 million though campaigns on StartEngine and Wefunder. He claims he only spent $2,000 out of pocket.
Perhaps what is most important for investors to take away from Willis’ fundraising success is his strategy. He and fellow teammates were transparent with investors — warning them to only put in what they could afford to lose. From there, the team sent monthly newsletters providing updates on the Christmas flick. That transparency is key.
How to Invest in Movies
First, start with your mindset. While critics have claimed equity crowdfunding is bad for the film world, No Film School’s Oakley Anderson-Moore sees it as a natural progression for indie filmmakers. She writes, “Equity crowdfunding is not charity, it’s an investment. And when people have a chance to make back money on your project, they are that much more likely to support you past that initial throwdown of cash.”
To make your money back, you need to pick a platform. StartEngine and Wefunder are top picks, featuring many film offerings. Movie Investor offers access to new projects from recognizable directors like Lynch and Michael Levy. Crowdfunder occasionally dips into film territory, and the United Kingdom’s Syndicate Room offers exposure to films through its Access EIS. Movino requires users to request a demo, but it bills itself as a blockchain-based equity crowdfunding platform for film.
All are ways to democratize film, diversify your portfolio and support the dreams of indie filmmakers.
Next you must evaluate a film offering, and the offering’s deal terms. Ashley Brandon, an assistant professor of film, television and media arts at Quinnipiac University, told InvestorPlace.com that there are two main components investors should be looking at when evaluating a film for a financial return. Investors must be sure to evaluate the potential audience and the film team’s track record.
“On the first point, it should be considered who the target audience is. Does the film hold the ability to have mass appeal? Or, does the subject matter and style of cinema really only target a small niche audience? Obviously, a film with mass appeal holds much potential in having those tickets or VOD purchases flying in based off of that audience interest, but that doesn’t mean small niche audience films can’t have a successful run.”
Brandon also recommends evaluating the marketing and branding strategy behind the film, as well as the background of each of the film’s creatives.
“[I]t is essential to look into the team behind the film properly. Have the critical creatives behind a movie had a successful or promising work in the past? Do those key creatives have a following? What is their reputation?”
Investors will want to know that a team can take money and turn it into more money. A history of popular films or critical success indicates money-making potential. And a team with a recognizable director, or even a popular actor, can generate more consumer interest. That consumer interest can translate into returns for investors.
Getting a Sense for Film Offerings
I’ll Be Next Door for Christmas was a success in its fundraising abilities, but what did its deal look like? David Willis and team used a revenue share model. This means that as the film generates revenue, investors receive a fixed return. In this case, they are able to recoup as much as 115% of their investment. Plus, the team highlights its big market opportunity — a timeless Christmas movie appropriate for all ages — and its serious creative power. Cumulatively, the filmmakers had previously earned one Oscar, four Emmy awards and one Golden Globe.
Where’s Rose, a current film campaign on Wefunder, takes a similar approach. Investors will be able to recoup as much as 120% of their investment, and they will be entitled to additional profit participation after the team repays priority debts. Director John Mathis bills Where’s Rose as a “thrilling social horror film,” highlighting that horror movies are the most profitable. Star Ty Simpkins has previously held roles in Insidious, Jurassic World and Avengers: Endgame.
It is important to note here that a film may meets its fundraising goals but fail to pay out investors. Audiences are unpredictable, and a reliance on video-on-demand revenues and streaming services also adds risks. Plus, an unforeseen event like the novel coronavirus has the potential to knock the industry completely off its feet. In just the last few months, we have seen the pandemic close theaters and indefinitely delay even big movie releases.
Willis posted in September 2019 that figures from an aggregator — those responsible for placing the film on streaming platforms — were surprisingly low. His team launched an inquiry, but investors want more answers. The film will need to generate enough revenue for investors to cash out.
This risky reality is why Brandon recommends taking a close look at who holds risk if the film flops.
“If the movie flops, the investor shouldn’t be the only one losing out while the director takes home an extensive check. You want to make sure that in the event of the failure, you aren’t the ONLY one that loses.”
Ultimately, some movies are going to flop. But if you are going to take on that risk, you want to know the directing team is taking risk with you. It shows they have that extra level of motivation to make everything work. If not, what is holding them accountable to delivering on their promises?
The Bottom Line on Feature Film Investing
If you have some cash and an interest in evaluating up-and-coming films, equity crowdfunding seems like an unbeatable way to invest in movies. There are plenty of risks, but like with other alternative investments, the rewards are so tempting.
As interest in equity crowdfunding — and specifically feature film investing — grows, so too should the film offerings. More talented indie directors with more appealing films should really solidify the portfolio potential.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks