William Carleton

Invest In The Arts – Ministry of Culture Edition

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Some time ago I came across the China Cultural Industries cultural projects page. The page is part of the China International Cultural Industries Fair website, an organization authorized by the China Ministry of Culture “as a state-level authoritative portal website of China cultural industries, integrates the comprehensive information of the cultural industries, the release and trade of the cultural projects and products.”

If you look at the project listings asking for millions and billions of RMB in investment and are a little wary in light of all the corruption stories we are hearing from China these days, you probably should be.

I created an account to get a closer look at the “View after signing in.” categories of information and it didn’t really illuminate things for me. Information was incomplete or missing, website links didn’t work. From what I could tell, all the information is supplied by the projects themselves. There may not be any vetting to assure their viability. Though some do have official government sanction.

Now all that being said, there isn’t any comparable listing in the U.S. As much as we may want to keep away from solely arguing about the economic value of the arts, having a listing of all the arts and culture related projects in the United States would help illustrate the impact pretty visibly and make arts and culture harder to dismiss.

True, there are lot of arts and culture projects listed on Kickstarter, but no publicly available list that attempts to be comprehensive. Certainly no central list of projects with the imprimatur of a government arts and cultural office at any level. (Okay, I admit there may be some state or county that has such a list and I am merely unaware of it.)

Apropos of my posting last week about art organizations experimenting with different structures and corporate expiration, such a listing would help the process along by making a greater number of people more aware of ways to organize themselves.

It might also attract investment of resources and expertise from much further afield than would otherwise be possible. People might contact the project organizers noting that the it might be better organized under an entirely different structure and provide advice on some aspects of the planning.

Having this type of exposure would require organizers to have a higher level of sophistication than might normally be required. There will be those who might be looking to exploit a project solely for their own gain. In the for-profit world, many companies who receive the support of venture capitalists find themselves so dominated and beholden to the VCs, they barely recognize the company as their own after awhile. Something similar might happen to the cultural organization, the majority of which may no longer be non-profits.

Now that President Obama has signed the JOBS Act which will allow crowdfunding on a larger scale, this situation becomes more viable. (See my discussion of the proposed legislation last December. Good series of articles on the general implications of the JOBS Act as passed for crowdfunding on William Carleton’s site.)

Thanks to this sort of legislation regarding investment opportunities, people would be able to follow up on the project listings with a higher degree of confidence in their legitimacy. There will always be the danger of being scammed. A game being funded on Kickstarter was just outed as a hoax today thanks to the fact checking of some of the claims by the online community.

But as I said, in general, such a listing would be invaluable to the arts and culture community in terms of raising awareness of the scope and impact of the sector’s activities and marshaling support for them.

Info You Can Use: Crowdfunding Legislation Update

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Thanks to Ken Davenport’s post on the subject, I discovered the bill to facilitate crowdfunding I wrote about at the end of October is nearing approval. The House (H.R. 2930) approved the measure early in November and the Senate’s proposed bill (S. 179) is in committee.

As discussed in my earlier post on the subject, the existing rules for inhibit small investments made by many people because S.E.C. rules kick in after threshold of 500 people. These bills provide a little more leeway.

William Carleton has a good comparison of the passed version of H.R. 2930 and the proposed S. 179. Of most immediate concern to most people will probably be that where the House bill places the per investor, per year limit at the lesser of $10,000 or 10% of annual income, the Senate bill caps investment at $1,000. The North American Securities Administrators Association apparently agrees with the Senate on this point.

At that level, and given the level of required reporting and investor notice, I wonder if it will be worth it to too many people to attempt crowd funding in this manner. But again, I am thinking in terms of the investing prospectus one receives. Presumably, there will be less information to provide to investors in the case of crowdfunding efforts.

Trent Dykes at The Venture Alley provides the details of the House bill. I was particularly interested to see what sort of protections an investor had against fraud.

Not that it isn’t enough motivation to defraud, but you can only raise $1 million annually using the exemption provided by the bill ($2 million if you provide audited financial statements.) In addition to providing warnings of risks to potential investors and sending a collection of information and reporting to the S.E.C., one protection people will have is that the money will be held in escrow by a third party until 60% of the target amount has been raised. Presumably, if the amount has not be raised by the target deadline, additional arrangements must be made to retain it. There are also provisions that ensure the people handling the offering and cash management are qualified to some degree. People with a history as a “bad actor” as determined by the S.E.C. will be prohibited from offering investment opportunities.

As I am not an expert in investing law, I don’t know how vulnerable these arrangements are to fraud. Presumably, moreso then your typical investment opportunity. Individuals will just have less of their personal fortunes exposed to the fraud.

For some people in the arts, this might offer a viable alternative to the non-profit model. I imagine the return on investment might manifest as a hybrid of traditional donor benefits and cash. Providing preferential treatment to encourage people to remain emotionally invested in the organization in addition to paying out cash dividends will probably help keep them financially invested in the company.

Hopefully the limitation on the investing level will insulate arts companies from demands to operate themselves to maximize investor return. Even if the cap is set at $10,000, people aren’t going to be getting immense returns enriching their bank accounts (at least not for a few years). Who knows, perhaps a company will realize so much success thanks to this, they will grow to the point the will be subject to regular S.E.C. investment rules.

Now that this form of investment looks to pass the hurdle of legislation, how long before the arts community will pass the mental hurdle of considering anyone who uses it to finance their operations as selling out their purity and ideals?