Is equity crowdfunding a good fit for funding game development?

The introduction of equity crowdfunding:

Since the passage of the JOBS Act in April 2012, there has been an expectation that crowdfunding could make the jump from contribution-based fundraising (such as that seen on Kickstarter) to equity-based crowdfunding. On Oct. 23, 2013, the Securities and Exchange Commission released their proposal for a set of rules implementing Congress’s equity crowdfunding mandate, passed as Title III of the JOBS Act. While there is certainly some excitement in the crowdfunding space over this new opportunity, it remains to be seen whether this will result in a shift away from using Kickstarter to fund game development or if it is even a good fit for the industry.

Securities law essentials:

Before delving into the specifics of the JOBS Act rules, a little background on securities is necessary. Whenever you sell a financial instrument, whether a stock, bond, or some other investment vehicle, you are selling what’s called a “security.” Securities are heavily regulated and have costly disclosure and registration requirements before they can be sold. The SEC estimates that the average cost of a public securities offering is $2.5 million, with another $1.5 million per year in compliance costs. However, many smaller securities offerings meet one of the exemptions to these requirement, either through a low fundraising amount or by limiting the number of purchasers. This significantly lowers the cost, provided that only certain so-called “accredited investors” purchase the securities. Accredited investors are, most commonly, those who make over $200,000 a year or have $1,000,000 in net worth.

The new regulatory requirements:

The JOBS Act changed these rules up a bit, adding a new exemption meant to facilitate the crowdfunding of securities. This exemption allows an issuer of securities to raise up to $1 million from an unlimited number of purchasers. Purchasers are limited in how much they can invest, though; up to 5% of their annual income for those making under $100,000, and up to 10% for those making over $100,000. The proposal doesn’t require any action on the issuer’s part to verify the income of the investors, which is a huge change from other securities exemptions (which require costly verification procedures for each investor). Additionally, the exemption requires the issuer to have a business plan, to disclose who its officers and major shareholders are, and how the proceeds of the sale will be used.

Is this a good fit for game development?

Whether there will be a move toward equity crowdfunding in the game development depends on a few things:

While these issues may not be new for many in the financial sector or in the startup community, they are not familiar to those who have cut their teeth on Kickstarter. When a company is ready to make the jump to selling equity, there may be resistance or a complete lack of interest due to the particulars of these new securities regulations. It remains to be seen whether or not the game development industry takes advantage of them. Above all, before engaging in either contribution or equity crowdfunding, consult an attorney to ensure compliance with the law.