Advice on best crowdfunding practices

Crowdfunding is fast becoming a serious alternative to traditional financing sources for the production of content. It’s an indisputable fact.

The Social media monthly covers crowdfunding in its May 2012 issue

For a number of months, Kickstarter, the applauded American crowdfunding platform, has been making the news. First came the Sundance Film Festival , which announced that 10% of the films in its official selection had been fully or partially funded by Kickstarter. Next, two video game producers grabbed the headlines in quick succession: surpassing $1 million in their financing quests. A more recent case is that of the fledgling company that designed the Pebble watch and raised an impressive $10 million in under 30 days becoming the “richest” project in the short history of crowdfunding.

What until lately was a relatively marginal phenomenon that enabled a certain number of project promoters to launch modest initiatives, crowdfunding can no longer be ignored. The recent decision by the U.S. Congress allowing start-up companies to access crowdfunding is one obvious example of the attention the practice has been garnering.

Closer to home, Canadian project developers are also hoping to benefit from this new funding mechanism. While crowdfunding platforms exist in Canada(Haricot, Smallchange, Touscoprod), many Canadians are drawn to high-profile Kickstarter. In fact the recent HOTDOCS conference offered a few tips to anyone considering this alternative.

During a presentation entitled “Best Practices in Canadian Crowdfunding,” Richard Hanet, a partner at Lewis Birnberg Hanet LLP, recommended the following:

  1. Pay close attention to the type of contributions you receive. This aspect is central to the crowdfunding strategy. Canadian content      creators must understand that any funding received via a platform such as Kickstarter will be considered as taxable income as soon as it enters the country. In addition, under the federal law governing tax credits, this kind of      monetary injection into a financial structure is considered as      “assistance,” which obliges the producer to reduce the contribution of  these tax credits accordingly in the organization’s financing structure. Therefore, what may be gained on one level could be lost on another.
  1. Ensure you have a chain of title in accordance with      Canadian requirements. As part of the incentive exchanges between producers and their “contributors,” on-screen credits or even certain rights may be granted. Such exchange strategies should be avoided, not only because of rights issues but also due to the CAVCO certification rules that Canadian productions are subject to.
  1. Ensure you have a valid contract for your American “antenna.”    A site such as Kickstarter requires that the project developer have a U.S. address, bank account, and business number. Therefore, Canadian producers  must establish an agreement with an American entity. Hanet warns against      partnering with ‘friends or in-laws.’ Instead, he recommends establishing  a legal contract with an American entity—ideally a distributor. In this way, the money raised via crowdfunding will be considered as a  distribution advance, and the problems noted above could be avoided.
  1. Lastly, give careful thought to the cost of your exchanges.  Hanet emphasizes that it’s all well and good to offer a t-shirt for a $10 contribution to your film. But if the shirt costs you $4.50 to make, $17 in postage, and $10 in customs fees to send it to your contributor in Austria, it’s a losing proposition.

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