Talent, Fans, and Equity Stakes

The Internet has been a catalyst for the democratization of creativity in art. The low-cost, high-reach communication tools it affords its users have allowed creators of all types to bring their works to a global audience, and to communicate directly with that audience. This is well known. But while the Internet’s role in the dissemination of creative works cannot be understated, it is by no means the only way in which it has empowered talent. It has also delivered innovative financial practices that depend on micro rather than macro financing. Crowdfunding, for instance, is the gathering of piecemeal contributions by fans, along with the Internet community at large, to pay for creative and artistic projects.

There are three main models here. Each procures finance for a project through pledges or contributions from a mostly anonymous public that is online. But the way they go about it is different.

Rewards based crowdfunding is the most popular model, supported by sites like Kickstarter and Indiegogo. Fans that give money to a project receive in return a gift according to the level of their contribution. For musical campaigns, rewards often range from a CD or download for a contribution in the $5-20 range, to a private concert by the artist for donations of many hundreds or even thousands of dollars.

Donation based crowdfunding works in much the same way, the main difference being that it does not provide any sort of gift to contributors. Donation based crowdfunding tends not to be used to fund artistic or technological projects, but rather charitable projects like covering someone’s hospital bill, or helping to cover a student’s college tuition.

The most exciting of the three platforms, however, is equity crowdfunding. In equity crowdfunding, rather than a gift, contributors receive an equity stake in either the project or the company running the project, allowing the general public to get involved in business not unlike venture capitalists or Wall Streeters. Equity crowdfunding has yet to realize its full potential in the United States and is awaiting regulatory issues.

The New SEC Rulings

In the spring of 2012, the Jumpstart Our Business Startups (JOBS) Act, which was intended to increase investment in small businesses by both easing IPO requirements for some existing businesses and inviting equity crowdfunding for startups, was passed by Congress and subsequently signed into law by President Obama. The JOBS Act was meant to help set up the framework for equity crowdfunding. However, when it came time for the Securities and Exchange Commission (SEC) to draft regulations, things slowed down. The SEC was able to implement Title II of the JOBS Act fairly easily, allowing those looking for funding to advertise to accredited investors. It had problems when it came to dealing with non-accredited investors—the demographic that equity crowdfunding aims to tap into. Talks on how to regulate investment by these more vulnerable investors stalled for quite a while, but now it seems that we might be very close to the true launch of equity crowdfunding in the United States.

In March, the SEC announced its Title IV Regulation A+ rules, which directly address non-accredited investors. Under these regulations, companies will be able to draw investment from both accredited and non-accredited investors in one of two investment tiers. Tier 1 allows companies to raise a total of $20,000,000, and Tier 2 allows for a cap of $50,000,000. In addition to their fundraising caps, the main difference between the two tiers is that Tier 2 pre-empts some state laws, allowing companies easier access to investment from all across the country. However, while those who go with Tier 1 may face some difficulties reaching investors in certain states, they will not face the same auditing and financial reporting requirements as those who chose Tier 2.¹

When these rules go into effect in a few months, they will likely open the floodgates, bringing a wave of new investment to small companies all over the country and, by example, likely around the world. While there has been much talk of the massive role that equity crowdfunding could play in driving growth and development in the tech sector, it could have a similar impact on arts funding, particularly on the way musical projects are financed.

Equity in Music

While digital technologies have greatly reduced the costs a musical act faces in distributing and marketing an album, they have by no means eliminated them, nor have they eliminated all of the costs associated with producing musical content. While there are of course a number of big players in the electronic music scene whose only investment before fame was a few thousand for a computer and some software, they are still very much the exception. The majority of artists still need to pay for studio time, mixing and mastering, studio musicians if they aren’t in a band, and that, which could total thousands of dollars, is just for the production of the music; they will still be faced with advertising costs, merchandise and CD costs, and can probably expect to lose money on at least their first couple tours. The amount of money it takes to make an artist truly competitive, coupled with the fact that many artists are wary of becoming indebted to a label because they cannot recoup their advance, has made crowdfunding, specifically rewards based crowdfunding, incredibly popular among musicians. That being said, in this day and age continued fan engagement is crucial to an artist’s success, and, unfortunately, in a rewards based campaign fan engagement can begin and end with their donation. With an equity crowdfunding campaign, however, donors have a vested interest in the success of a project, and are therefore much more likely to remain actively involved in promoting it.

Though the United States is just beginning to bring equity crowdfunding to a wide audience, the funding model has been in existence for several years now in the music industry, though primarily in Europe, through crowdfunding startup Sellaband.

Sellaband functions in much the same way a site like Kickstarter does; the artist has an idea for a project, determines how much it will cost to make it a reality, then sets up promotional tools and markets the campaign to fans. Unlike Kickstarter, Sellaband allows the artist to choose either various tiers of rewards, or a fixed amount of equity in the project to give away to donors, who are called “believers” on the site, based on the size of their contribution. The concept was met with tremendous praise from the likes of Public Enemy’s Chuck D, and Greg Scholl, former CEO of The Orchard.² However, though the site has had some major campaigns, including one for Public Enemy, it has mostly failed to live up to expectations, with the largest of its current campaigns having, at the time of writing, only raised €870 (US $943).³ While its failure in the rewards based market can likely be chalked up to the dominance of Kickstarter and Indiegogo, its failure in the equity realm is likely due more to the risk involved with investing in musicians.

Despite this challenge, crowdfunding platforms are still looking for a way to make equity crowdfunding a larger player in the music industry. Among them is MIT-based startup TapTape, which has come up with a way to manage risk. The company has teamed up with several prominent indie labels that essentially serve as curators, identifying up and coming artists that they would like to sign and help develop. They then bring the artist to TapTape and launch a campaign that allows fans to join them in funding the artist’s project, thereby greatly increasing the capital available to the artist. In return, investors get both “The Basics”, a guaranteed reward, such as a CD or shirt, if the campaign reaches its goal, and “The Upside”, a percentage of the profit earned by the project.

Though the label-curated system is likely going to exclude smaller artists, this move is probably for the best, as Sellaband has proven that there is little interest in making an equity investment in an unproven, unsigned artist. Though the service has yet to officially launch, they are already offering “TapPoints”, which can be used as a currency to invest in artists, to 500 of their early users.⁴ Better than the points is the possibility of getting involved early with a funding model that could very well change how musical projects and business endeavors of all sorts are financed.

By Griffin Davis

2. “About Us.” SellaBand. Web. 7 Apr. 2015. <https://www.sellaband.com/en/pages/about_us>.

3. “Artists.” SellaBand. Web. 8 Apr. 2015. <https://www.sellaband.com/searches?locale=en&options[artists_status]=fundraising&options[currency]=EUR&options[since]
=always&page=1&sort=amount_raised_reverse>.

4. “TapTape Prelaunch Campaign.” TapTape. Web. 5 Apr. 2015. <https://taptape.com/#/>.

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