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Is the Facebook-Oculus Rift deal the tipping point for equity crowdfunding?

California game lawyer looks at Facebook's $2 billion purchase of Oculus Rift and speculates about its effect on the future of equity crowdfunding in the games industry.
"This new development with Facebook may just be the “tipping point” toward pushing equity crowdfunding into the forefront of the games business.

Facebook CEO Mark Zuckerberg announced last night that his company is purchasing virtual reality startup Oculus Rift for $2 billion. Oculus famously got its start with a Kickstarter crowdfunding campaign that raised $2.5 million. Since then, they have captured the attention of the masses, attracted top industry talent like John Carmack and possibly prompted video game maker Sony to come up with their own version of VR technology.

Equity crowdfunding:

I’ve written before about how I’m not confident that the new JOBS Act rules on equity crowdfunding will take hold in the games industry (in a post that also details the proposed rules, for those interested). However, this new development with Facebook may just be the “tipping point” toward pushing equity crowdfunding into the forefront of the games business.

photo credit: James Cridland via photopin cc

photo credit: James Cridland via photopin cc

 

A hypothetical:

Imagine that Oculus Rift had run an equity crowdfunding campaign instead of a Kickstarter. Some percentage of backers would have purchased shares in Oculus Rift. These shares would be valued much (much!) higher now that the company is being purchased. In fact, the value of the shares would probably have been going up steadily given the constant stream of good news that the company has had since launching.

The criticism:

The Internet outcry about the purchase seems to come from two places:

  1. Belief that Facebook will somehow ruin Oculus Rift
  2. Belief that the backers are “owed” something for believing in the product from the beginning.

Well, I’m not going to touch the first one. Who knows what FB will do with their new acquisition. However, for the second point, it is easy to see how backers could be quite satisfied had there been an equity crowdfunding campaign, given the return on investment that they see.

A happy medium?

I think that a hybrid fundraising campaign strategy is better than doing one or the other.

Now, had Oculus Rift just had an equity campaign, it is not certain that so many of the Rift prototypes would have been in the hands of people. This would require a separate sale of the prototypes. I think that a hybrid fundraising campaign strategy is better than doing one or the other.

  • Begin a Kickstarter, and use the momentum of that success to propel advertising and investment in the equity raise
  • Go the other way around, generating seed funding through an equity raise and offering either a pre-order style Kickstarter or simply take orders the old fashioned way.

I think these strategies could work well for different products.

photo credit: photosteve101 via photopin cc

photo credit: photosteve101 via photopin cc

 

Remaining issues:

While they may not be $2 billion successes, there is money to be made in the industry by investing in these companies.

The big issue, in my opinion, that still remains is the lack of a secondary market on which to sell these shares if they go big. However, this is a question of supply and demand. Because the rules aren’t in place yet and equity crowdfunding has yet to begin, it doesn’t make sense for such a market to exist. Once the shares are out there, I am confident that a market will develop, whether formal or informal.

Trading and purchasing things on Steam is a good analogue. For a while, a black market existed (at least I had heard about it, but didn't participate in it) for games like TF2, but trading has become normalized in the official sales of trading cards. The same happened in Diablo 2 -> 3 with the auction house.

The other issue is that this is a one-in-a-million company. However, there are successes on Kickstarter all the time. While they may not be $2 billion successes, there is money to be made in the industry by investing in these companies.

Conclusion:

I think that the future looks bright for equity crowdfunding, and I think that gaming can have a piece of this future. Hopefully, the SEC gets their act together and delivers workable rules soon.
In the meantime, if you are thinking about starting a crowdfunding campaign on Kickstarter, set up a free consultation with a game lawyer. We can walk through the legal steps you can take to protect your new business and project.

 

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