Hello Phillip,

There are two things that I would look at.  The first is the tax credit.  

Film and television producers are very fortunate this year, because a new version of the Section 181 Tax Deduction was passed as part of the Tax Cuts and Jobs Act of 2018 (TCJA). This is great news for anyone looking for private investor financing for a feature film, television series or live stage production. Please also see my Entertainment Lawyer Question and Answer Forum at www.filmtvlaw.com, for more in-depth advice that I publish twice a month.

For those who have been following the saga of the Section 181 Film Tax Deduction, it did expire at the end of 2016 with a lot of people assuming it would never return. But without much fan fair or publicity, a new tax provision emerged from deep in the 2018 Tax Cuts and Jobs Act (TCJA) that does the same thing, and it specifically references the original text of the Section 181 Tax Deduction, even though that deduction has expired.

WHAT IT DOES

Anyone familiar with the old Section 181 Tax Deduction knows that the purpose was to create a tax incentive for investors to invest in feature films, television shows, and later live stage productions made in the United States. The new Section 181 Deduction under the Tax Cuts and Jobs Act of 2018 (TCJA) likewise creates a 100% deduction for any money invested in a film, television series, or live stage production that is produced in the United States and that qualifies under the original qualification standards of Section 181.

What does a 100% tax deduction mean for a film or television investor? It means that for every $1.00 that a high net worth investor invests in a film or television series, the investor can write off 37 cents from that investor’s tax return. That is a tremendous incentive to invest in a film, television or stage production, when more than a third of the investment can be written off.

WHO CAN TAKE ADVANTAGE OF IT

Like the original Section 181 Tax Deduction, the new version of the Section 181 Tax Deduction can be taken when a producer sets up a qualifying securities offering, in which the private placement memorandum (PPM) and other provisions of the securities offering have been drafted to incorporate the new depreciation rules found in the 2018 TCJA version of the Section 181 Deduction.

The new Section 181 Tax Deduction under the Tax Cuts and Jobs Act applies to any investor that is subject to United States federal income tax. 

HOW THE NEW SECTION 181 TAX DEDUCTION IS DIFFERENT

The new Section 181 Film Tax Deduction is different in a couple of ways that make it even better for investors and producers. First, there is no longer any cap to the Section 181 Deduction, meaning that even projects budged over $15 million can take advantage of the deduction. The studios and networks might be the biggest beneficiaries of the deductions, because now every film and television series produced in the United States for the next 5 years will get to take advantage of it if the production qualifies.

Second, the way that the deduction is taken by the production company is now different as well. Rather than an expense, it is a form of depreciation. The provisions are complicated for anyone that is not familiar with tax law, but the net effect is to create the same benefit for investors as under the original Section 181 Tax Deduction.

Third, there are no longer special zones where certain geographic areas get a higher cap, since the cap has been removed altogether.  

Secondly I would look at is that ideaPledge.com looks set to become the “Facebook of Finance,” by finally removing the catch-22 from equity financing. Gone are the membership fees and startup costs, replaced instead by a flat 10% compliance fee paid from the proceeds that covers everything from escrow costs to transaction fees. This is a major finance tool clients need to know about.

CROWDFUNDING VERSUS CROWDINVESTING

First off it is important to make the distinction between “crowdfunding” and “crowdinvesting.” Companies like Kickstarter.com and Indiegogo.com have been around for a while offering crowdfunding, which is donation based. That means that producers are prohibited by law from offering any percentage of the profits to someone during crowdfunding, thereby creating a tax problem for the donor. Any money donated must be kept track of for the donor’s Lifetime Gift Exemption, as well as the donors Annual Gift Tax Exclusion. The IRS puts limits on both how much money can be gifted in one year, and throughout someone’s lifetime.

Crowdinvesting, however, is entirely new and just getting off the ground now because of the change in SEC regulations last year. Crowdinvesting allows users to offer profit participation to investors, creating a real investment that can gain value and pay back the investor if the project makes money. 

CHANGES IN THE LAW

What makes this all possible are several recent changes in the law.  First, Regulation CF finally went into effect mid-2016. The SEC had prohibited any crowdfunding portals to start operation until Regulation CF was completed, and the regulations were delayed since 2012, when Congress first passed the JOBS Act.

To show they mean business, the SEC has also amended Regulation A, creating Regulation A+ at the same time, which is another potential avenue for crowdfunding portals. These amendments finally became effective May 22, 2017. Therefor opening more opportunities.

REMOVING THE CATCH-22 IN EQUITY FINANCE

ideaPledge is now the only crowdinvesting company that I am aware of with no upfront costs of any kind. When ideaPledge started last year, there were several membership fees, but ideaPledge has wisely removed those, providing a real financial tool with no commitment upfront from users or investors.

Historically, it has always ‘cost money to make money.’ To raise investor financing, it was required to set up a limited offering, which included a private placement memorandum (PPM), state and federal securities filings, and the organization of an investment company. 

However, all of that is in the past now since ideaPledge handles all the SEC compliance and financial documentation as part of the app, accessible both from mobile devices and desktop computers.

HOW IT WORKS – SHORT ANSWER

There is a short answer and a long answer to how this all works. Full disclosure, I have been retained to review and prepare some of the compliance portion of this app, so I know how sophisticated this is from a legal standpoint.

But from a user standpoint it is very simple. Someone seeking start up financing registers as a “Creator” (there is no membership fee now), and then posts a project to the Project Grid. Simple dropdown choices let Creators choose what percentage of the company to share with investors. Creators can upload video and photos for the project. Then Creators click the “Share Project” button to share on Facebook, LinkedIn, Twitter and Google+, or instead Creators can share links through email or even old fashioned postal service mailings.

Investors can look at the project for free and without registering, but to “Reserve Shares”, an Investor must register and go through a short questionnaire. It takes about 2 minutes and there is a nice interactive whiteboard presentation to take your investor through the process.

After Reserving Shares, the Investor then waits for the project to reach the Funding Goal. When it does, the Investor automatically receives securities disclosure materials and can purchase the units. The Creator receives the funds in about 10 days after the close.

HOW IT WORKS – LONG ANSWER

The long answer is that a lot is going on under the hood, and that ideaPledge takes advantage of a new Regulation A+ exemption, in addition to some longstanding SEC regulations, to create a forum where business owners and investors can privately share information about prospective offerings. Throw in a virtual currency issued by the app to Investor users and a very robust finance structure emerges.

One of the outcomes of this is that the offerings are private, unlike on other crowdfunding sites that use the Reg CF exemption, where projects are open to the public. Creators can invite individual contacts to view their projects, but before the investor can access the full website or Reserve Shares, the contact must first register and agree to the terms of the User Agreement.

That should give Creators a real sense of security, because materials are not being put out on the web for unregistered investors to see, and before any contact can Reserve Shares, they will have to agree to limited liability clauses that serve to protect the Creator.

FINAL REVIEW

I have to say that the entire app is very impressive, and given that it is no cost, it will catch on quickly. One point I will make is that ideaPledge is designed to bring in outside contacts, Facebook Friends, email lists, etc. and convert them into investors. Basically, ideaPledge replaces the use of offerings and investment companies, but it does not replace marketing and the need to have a list of contacts and relationships to which you can present your project.

I would recommend ideaPledge for any equity financed project, even those funded by close friends and family. Because ideaPledge handles the legal and compliance with no cost upfront, why not utilize this tool for even closely financed projects? It brings a level of professionalism and liability protection that no other service can offer.

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