Crowd-funding: A market for chumps?

17:00, Sep 03 2014

Here's a sentence you don't like to hear about a new investment opportunity pitched to unsophisticated investors on a crowd-funding platform: "It's kind of a weird structure."

That's how Josh Daniell, from crowd-funder Snowball Effect, put it when he rang earlier this week to say that "everything we've seen in the media is wrong, but different wrong" about reports of the $500,000 sought from crowd-funding to complete a new Lee Tamahori film, The Patriarch.

If alarm bells aren't already ringing, try this for size: the offer apparently offers a 20 per cent per annum return - although more on that later.

Not even the dodgiest failed finance company was offering that kind of return. It's a figure that screams "risk".

Yes, films are like oil wells. They lose money more often than they make it, but when they're profitable, there can be enormous paydays.

Tamahori's biggest-grossing film was Die Another Day, at $517.3 million in 2002. In 1995, Once Were Warriors grossed $26 million. His 2011 production, The Devil's Double, is the most recent listed in the offer document and grossed just $6.2 million.


And to be fair, while the Snowball Effect website initially pitches a "20 per cent per annum" return, a close read of the detailed offer makes it clear that return is only available annually "if, and until, the first tier of stakeholders has been repaid their capital plus 20 per cent per annum", said Daniell.

The return structure then changes. The non-voting shareholders holding this 5.2 per cent chunk of the film should not expect 20 per cent annually ongoing.

To get to the bottom of this brain-teaser, you'll need to read all 37 pages of the offer, and thread your way first through three appropriately scary warnings from Snowball Effect about the high-risk nature of crowd-funded investments.

Once you've done that, the offer details how five layers of investors line up for payouts, according to how well the film sells.

Weirdly, but apparently it's common for film, the project doesn't need to cover its $9.2 million cost before there's a payout.

A "realistic" scenario in the document puts an estimate for total sales at $6.2 million - some $3 million less than its forecast production cost.

In other words, some investors should expect to be out of pocket, unless sales go above $9.2 million. An "optimistic" earnings scenario forecasts takings at $13.2 million, at which point everyone goes home smiling.

Those taking the biggest risks are also the most deep-pocketed - New Zealand on Air, the Film Commission, and, near the bottom of the heap, a group of "contractor investors", which include Sir Peter Jackson's Park Road Post, where post-production on the Hobbit movies occurs.

Also in this category is the film's producer, Robin Scholes, who's putting her money where her mouth is.

The investors pulled in through Snowball Effect are, happily, at the top of the heap, although even before they get paid, Australasian distributor Hopscotch will be reimbursed its share of $537,000 it has put in the pot, along with Maori and Prime TV and global distributor Wild Bunch.

If this all feels a bit commercially odd, it is.

"It's different for film and the arts," says Scholes. "It's about encouraging films to be made and stories to be told as well as to have an equity position."

In other words, and in common with much other crowd-funding, this is about passion rather than making money.

As long as investors understand that, they will be fine, but it does beg the question as to whether crowd-funding, which is licensed by the Financial Markets Authority and intended as a low-cost way to raise small amounts of capital, is a venue for investors or for dreamers.

Snowball Effect's first capital-raising was $700,000 for the Blenheim-based top-end craft beer brewer Renaissance.

It filled that offer within a week. Like the Moa float, there were plenty of punters who liked the idea of having a small stake in a boutique brewer, besides which there was a "free" annual crate of the product in question for anyone who put in $2000 or more.

That's a guaranteed return on investment of sorts, even if it proves that $700,000 is far too little for Renaissance to fulfil the plans it outlined to invest in new capital equipment and take its beers into Australia, the US, UK, European and Asian markets over the next four years.

PledgeMe, the other crowd-funding site licensed last month, has many more and smaller projects than Snowball Effect, many of which offer no prospect of return.

One seeks $2300 to fund a court challenge to the Electoral Commission's ruling against the "Planet Key" song and is close to reaching its target, while the youthful founder of three month-old Honest Organics is not faring so well in raising $2000 for a trip to New York.

In other words, crowd-funding is an interesting and low-cost way to try to raise money, but by cloaking it in the language of serious investment, the risk is that some will place small but real dollops of their cash into ventures where commercial and other objectives are competing.

There's nothing wrong with that in principle, but the risk of never seeing your money again rises exponentially if the investment being offered doesn't seek to make a real profit.