July 09, 2010
Peer-to-Peer Microfinancing for the Arts? Looking at Kickstarter
Posted by Christine Hurt

First of all, apologies for absence this summer.  My summer travels are now complete (as far as I know), so I can focus on keeping first things first, like the Glom!

Now, for the fun.  I love movies, and I love to think about both microfinance and peer-too-peer investing and borrowing.  So, yesterday on the plane (of course, the plane) I loved this article on Kickstarter, a crowd financing website that enables all kinds of artists to raise money for their projects.  Apparently it has been so successful that this week it is hosting the Kickstarter Film Festival (which it Kickstarter financed).

Reading the article, I assumed that Kickstarter was allowing artists to use its website to find angel investors for their projects.  So, of course, I was interested to see how the site was going to satisfy SEC regulations on registering securities.  But, I was wrong.  When you "back" a project on Kickstarter, you are not an investor.  Or a lender.  Or even a donor.  What are you?  You're a backer. 

So, if you look at the FAQ, you'll see that Kickstarter goes to some length to explain that backers are not making an investment.  Project owners must keep 100% of the ownership and "may not offer financial return or equity under any circumstances."  Investment and loan solicitations are "forbidden."  OK, so if I can't get a return, I must get a tax deduction, right?  Um, probably not.  Your "pledge" is not tax deductible, unless the project owner is a 501(c)(3) entity.  In fact, Kickstarter tells project owners that this is "not a place for charity projects" or "donations to causes."

Well, this will almost certainly keep Kickstarter's legal costs down, if money goes directly to the project and is not a security, or a loan, or a charitable deduction.  But what is in it for the backer?  Well, Kickstarter requires project creators to deliver "rewards" worth between $1 and $10,000.  (Not sure why the $10k limit.  Gift tax?)  So, what are some of the rewards?  I looked through the film projects and was intrigued by a film that is already fully funded, so in using it as an example, I don't think I'm really hawking it.  The film is Green Corn, about a U.S. family that illicitly grows marijuana.  The project wanted to raise $6,000, a fraction of the film's cost.  Backers receive various rewards, depending on their funding level.  For example, $25 gets you a DVD, $50 gets you a t-shirt and a DVD.  Interestingly, although creators aren't supposed to offer equity, $1,000 gets you a single share of "Green Corn LLC," which will issue only 25 shares.  (My crude internet research skills found a Nevada LLC of the same name with a Las Vegas address, but that's all.) 

Another project I clicked on, which is not yet fully funded, seemed to also walk the line on Kickstarter's prohibition against "funding your life" through Kickstarter.  In this project, which I won't name, a creator wants $5,000 to be used walking through a geographical region.  $2,000 is for backpacking equipment, and $2,000 for living expenses, and the rest to make "rewards" for backers.  The rewards seem to be photographs of the walk.  The creator may very well be a professional photographer, but it still makes me wonder if I could fund my next family vacation this way.  My kids are really cute and sometimes photograph very well.

Projects are picked by the backers by reviewing information provided by the creators themselves.  Kickstarter seems to have adopted a "caveat backer" approach and merely tells would-be backers to "use your internet street smarts."  One small protection is that if a project is not fully funded within a certain time period, then the backers' credit charges will not be charged and no money changes hands.  So, perhaps if your internet smarts are not as refined as the rest of the backer market, the backer market will save you.

So, why are so many people backing these creative projects without hope of a financial return or even a tax deduction?  I can think of at least three reasons, which may all amount to one reason.  First, perhaps most financial backers of artists don't receive much of a return anyway, if at all, so this just tosses away the burdens of that expectation.  Maybe it's better to send a t-shirt to a stranger even if your film doesn't get picked up then have to look your father-in-law in the eye next holiday season after the film dies into obscurity.  Second, perhaps backers just like being part of something, like the idea of getting a unique reward (a t-shirt and DVD of an indie film seems like a pretty good reward for $50) or even a "thank-you" in the credits in the film.  The ability to show your friends that you're in the credits of the next indie film sensation may be worth a lot more than a thousand dollars or two.  Third, lots of people gamble away $25 here or there anyway with low probabilities of return because of the consumption value of gambling.  Here, the consumption value seems pretty high.   You get to scroll through fun, new projects, follow it along, feel some moral investment if it comes to a festival near you, etc.

Two final thoughts about Kickstarter.  First, why isn't Kickstarter organized like Kiva for the arts.  Why didn't they become a 501(c)(3) and make all pledges tax-deductible?  I think Kickstarter would prefer to be the next Facebook, not the next Kiva.  Watch for a Kickstarter IPO near you.  (And wouldn't it be amazing if it was an online IPO!!)

Second, do we need a charitable deduction for backers of the arts?  Would Kickstarter attract more funding for the arts if it offered a tax-deduction?  This model makes an interesting opportunity to see whether the arts needs the tax deduction to attract donors.  Perhaps it's the intangible rewards of arts funding that attracts donors, not the tax deduction.

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