Last week, I wrote about a number of ways to fund your indie game development. Now, a new challenger has arisen that’s gotten the games media and game fans very excited.
I’ve read a bunch of articles that have been written in the aftermath of the launch of Fig, a new crowdfunding site for games created by DoubleFine COO Justin Bailey. However, each of the stories I’ve read only contains a piece of the whole tale about what Fig is, how it works, and how it can (or whether it will) benefit game developers.
So here is my attempt at a comprehensive post covering the legal aspects of how this new crowdfunding platform works. It’s a long one, but worth it if you want to understand how Fig fits into the crowdfunding space, now and in the future.
How Fig works
Traditionally, the most popular crowdfunding sites like Kickstarter and indieGoGo allow backers to pledge certain amounts of money in exchange for a product or other reward. This is before the product has even been developed, in most cases.
This, in my opinion, was a huge change in the games industry. It has a similar effect on the funding side of game development that the Internet and self-publishing avenues had on the distribution side – it has further democratized the development of games.
And that, I believe, is totally awesome.
However, one thing that isn’t okay on a platform like Kickstarter is buying into the success of a game or the developer, beyond just receiving a copy of the product. This, known as having “equity,” is relatively common in many other industries, from films to start-ups. These companies often raise funds in exchange for a piece of the business (in start-ups) or of the proceeds from the product (in films and other media).
Why can’t you do that on Kickstarter?
Because of a little government agency called the Securities and Exchange Commission (SEC) and some laws from the early 1900’s. These laws deal with something called “securities,” which are things like stocks, bonds, and other investment vehicles.
Securities laws dictate that you can’t just go around selling securities to people without proper disclosures. The fear is that you are either duping or misrepresenting people into buying them. The SEC wants to make sure that the purchaser has enough information about the thing they are buying into, so there are a TON of regulations that govern the sale of securities.
Because of this, if Kickstarter was allowing people to buy shares of a game company or their game’s profits, they would need to adhere to these securities laws. That most likely involves a lot of overhead both on the part of Kickstarter and on the project creator, which drives up the cost of offering those securities.
The easiest thing to do for Kickstarter, then, is to just allow backers to get something out of it, without a stake in the profits.
Exceptions to the securities laws
While there can be a lot of legal overhead involved in offering securities publicly (known as an IPO), which keeps it mostly in the realm of bigger, more successful companies, there are some exceptions. If you only offer to a limited number of people or only allow certain investors to purchase, you can meet an exception to the rules.
These exceptions are used by sites like Angel.co and CircleUp to allow those certain investors (known as Accredited Investors) to purchase shares in start-ups and other companies that are looking to raise cash.
So why not game developers?
Launched on August 18, 2015, Fig.co is a crowdfunding website that combines both fundraising methods we discussed above. Backers interested in the projects hosted on Fig can choose to either back in the Kickstarter style (just getting a reward) or purchasing equity by getting a financial stake in the game’s profits.
But there’s the rub. Fig isn’t able to skirt the existing securities laws – equity backers must still be Accredited Investors. This means that they need to have either a $1 million net worth (not counting their primary residence) or a $200,000 annual income (or $300,000 if including a spouse).
This is most likely not the case for your average Kickstarter backer looking to use Fig. So most people will just be in for the rewards-based crowdfunding side. However, allowing Accredited Investors opens developers up to a much bigger pool of capital in exchange for a percentage of game profits.
How does that work?
Basically, Fig creates a single purpose LLC to hold on to those royalty shares in the game’s profits. Once the game is released and starts (hopefully) bringing in profits, the portion allotted to the investment will be paid to the LLC, which will then distribute them proportionally to all of the equity investors.
When can non-Accredited Investors get in on the action?
This is a great question, and one that is certainly on the minds of both Fig and the average backer. When I hit the Internet the day that Facebook purchased Occulus Rift for $2 billion, there were many comments wondering why the original Kickstarter backers weren’t getting a piece of the action. They were, after all, a big part of the initial funding (though there was much more funding from equity investors after the Kickstarter).
While Occulus’ legal responsibilities to backers end when the promised rewards are delivered, it would still be cool to be able to get a stake in the company’s future.
The JOBS Act, signed in April 2012, may hold the key to allow non-Accredited Investors to do just that. One part of the JOBS Act already made Fig possible – it allowed you to generally advertise these fundraising opportunities under Title II of the Act.
Another portion of the JOBS Act, known as Regulation A+ (a modification of the old Regulation A), is one of these potential candidates for spreading the wealth to the smaller investor. This would allow equity fundraising up to $20 million, of which non-Accredited Investors could take part.
However, a Regulation A+ offering has a much bigger cost up front. There are lots of disclosures, accounting oversight and other things that need to be paid for, and securities lawyers and accountants don’t come cheap.
When the total fundraising amount is small, it doesn’t make much sense to spend a lot on all of these legal work. For example, Fig’s first campaign, Outer Wilds, is seeking $125,000 in funding. With up-front costs of a Reg A+ offering potentially costing anywhere from $50,000 to $100,000, it makes no sense to do it this way. Never say never, though – bigger games will require bigger funding, and could make these up-front costs a smaller part of the overall budget.
True Equity Crowdfunding
The other possible way to allow lower-investment crowdfunding is to use Title III of the JOBS Act, the CROWDFUND Act. Yes, this is actually an acronym for “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure.” Bravo, Government.
This method, which saw a release of 550 pages of proposed rules in late 2013 but has not been finalized yet, would allow non-Accredited Investors to invest in companies through crowdfunding platforms. There is an upper limit to the amount you would be able to invest, depending on your income.
Those with under $100,000 in annual income could invest either $2,000 or 5 percent of their annual income, whichever is greater;
Those with over $100,000 in annual income could invest up to 10 percent of it.
There is also a limit on the total amount of funds raised by the company – $1 million. This is much lower than the other types of fundraising we discussed, but for many games it is more than enough. When these rules go through, equity crowdfunding would be much less difficult – the cost of setting things up beforehand is much, much less than with Regulation A+.
Equity crowdfunding under Fig
There is a catch to these new crowdfunding rules, at least as far as Fig is concerned. There are rules (at least in the proposed regulations) that limit what the funding portal could do. In this case, Fig.co wouldn’t be able to:
offer investment advice or recommendations;
solicit purchases, sales or offers to buy the securities displayed on its platform;
compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or
hold, manage, possess, or otherwise handle investor funds or securities.
Well, in Fig’s case, they are taking applications to go on the platform and will only allow the ones that they think are the best. They are currently shooting to have two funding campaigns a month.
If they try to do this when the equity crowdfunding rules are in place, though, it seems like they could potentially run up against #1 and #2 above. Because they are curating the platform so deeply, doesn’t it seem that whoever ends up on the platform would be recommended or solicited by the platform itself?
They could open up more in the future when this happens, though. As crowdfunding expands, Fig could also expand their platform with it and stop curating the specific campaigns that it features.
I’m extremely excited to see where this all goes in the near future, and hope that the SEC can get these crowdfunding regulations finalized so we can get moving. I, for one, would love to have a stake in projects that I am excited about. If you think that people become evangelists for crowdfunding campaigns now, just wait until they have investment in the game or company itself!
Fundraising is just one of many legal issues that game developers deal with. If you need legal assistance, contact a game lawyer. You can grab my free eBooks to learn more about the legal landscape of game development, as well. Finally, check out my gamedev contract creation site, indieGenerator, and get 50% off for the rest of the year with coupon code “indiegen50off”.