Academic journal article American University Business Law Review

Crowdfunding in Wonderland: Issuer and Investor Risks in Non-Fraudulent Creative Arts Campaigns under the Jobs Act

Academic journal article American University Business Law Review

Crowdfunding in Wonderland: Issuer and Investor Risks in Non-Fraudulent Creative Arts Campaigns under the Jobs Act

Article excerpt

INTRODUCTION

Consider the following scenario: a down-on-his-luck Broadway producer seeks funds from elderly ladies to finance a theatrical production. The elderly ladies are not sophisticated, and the producer comes up with a scheme to defraud them. In each case, the producer seduces the woman into investing a 100% share in a new production. The problem, of course, is that the producer is overselling the show. Only one woman can purchase 100% of the production, but he seeks that same amount from many investors. The first part of this scheme was a common practice in the 1920s. Some say it helped precipitate the stock market crash of 1929. Even in a film like The Cocoanuts, Groucho Marx is selling the same piece of real estate in Florida over and over again. But the scheme hatched by our Broadway producer, inspired by the musings of his sidekick accountant, has an especially interesting twist. Instead of simply running away with all of the money invested by the elderly women, the producer and his sidekick decide that they can avoid the appearance of fraud by mounting a show that would be so unappealing to audiences so as to represent a total loss of each woman's investment. Since the women do not know about each other, each investor will think that she lost all of the money that she put into the show and walk away. And since there were no profits flowing from the Broadway flop, the producer and the accountant can simply split the remainder of the capital invested by the women.

By now, you can see that this is the plot of Mel Brooks' 1968 film The Producers, which, perhaps ironically, was later adapted into a smash hit on Broadway. The plot twist that makes The Producers a brilliant comedy is that the performance that producer Max Bialystock chooses as his intended flop turned out to be a great success as a campy farce. It is this last element of Mel Brooks' plot that reveals a pressing challenge for regulating the sales of securities when it comes to creative artistry, such as theatrical or filmic productions. The comedy of The Producers is ultimately predicated on the reality that art is subjective. No one can tell you what is good art or not good art, and it is difficult to tell if a producer's effort is worthwhile or lackluster in the production of that art.

Enter the Jumpstart Our Business Startups ("JOBS") Act of April 5, 2012, which Congress passed to spur investment in creative content and ultimately help create jobs in our economy.1 Indeed many independent producers in the entertainment industry have been awaiting the opportunity to solicit capital from the public for their projects. On October 23, 2013, the Securities & Exchange Commission ("SEC") proposed new rules and forms to implement Title III of the JOBS Act.2 Finally, on October 30, 2015, after years of anticipation and commentary on the proposed rules, the SEC promulgated the final rules, known as "Regulation Crowdfunding," which went into effect on May 16, 2016.3 Title III of the JOBS Act added section 4(a)(6) to the Securities Act of 1933.4 Section 4(a)(6) provides a registration exemption for crowdfunding offerings up to $1 million per year.5 Crowdfunding is a fundraising method where small amounts of capital are raised from a large number of accredited and non-accredited investors to finance a new business venture through authorized intermediaries, such as funding portals.6 Prior to the JOBS Act, the only way to sell interests in creative content was through a public offering or a private placement under section 4(a)(2) of the Securities Act of 1933.7 Companies and investors could also rely on the safe harbor provided by Regulation D, which set forth a number of rules that sophisticated companies and investors could follow to avoid an action by the SEC. Post-JOBS Act, subject to certain conditions and depending on the amount of the offering, issuers of crowdfunded campaigns are exempt from registration and there are decreased disclosure requirements. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.