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Martin Frascogna: 3 Legal Tips for Amanda Palmer-style crowdfunding

Raising over a million on Kickstarter is amazing (CONGRATS AMANDA!). But what are the legal implications? Entertainment lawyer Frascogna explains

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Amanda Palmer Kickstarter videograb

Make no mistake about it, Amanda Palmer achieved the impossible. Who would have thought an indie artist could successful raise $1,000,000+ via crowdfunding, an amount which rivals most label release budgets? Well, lots of people thought this was possible. not to mention an entire community of indie musicians. Amanda would likely be the first to say it was a perfect orchestration of luck, personality, fan connection, and unremitting work to pull off such feat. Her navigation into the unknown was handled flawlessly, resulting in a marvellous project in the making and a world of inspired indie musicians. This is a good thing. This is a very very good thing.

Raising millions via crowdfunding doesn’t come without questions, and more so, legal implications. Where does all the money go? Is there a legal obligation to investors? Because Amanda’s successful Kickstarter will inevitably inspire others to initiate crowd funding campaigns, artists can avoid future pitfalls by implementing the following techniques:

 

1. Treat It Like a Contract

Successful crowdfunding is a positive result from a healthy artist/fan relationship, but the monetary exchange is much more complex than a simple donation. Kickstarter, like most crowd funding sites, requires a section list of deliverables. Donate $1 and the artist will give you X. Donate $5, and the Artist will give you Y, and so forth.  Due to this element, the relationship becomes contractual. If the Artist offers a service/product and the Fan accepts this offer by monetary consideration (i.e. – the money), a mutual contract exists. Artists using crowdfunding techniques MUST deliver, otherwise it’s a breach of contract which could have further legal implications if the donor so chooses to pursue. Yes, it’s unlikely a lawsuit will spawn from a undelivered $5 gift exchange. However, artists potentially face a more daunting public relations nightmare. The important information nugget here is to deliver upon what you offer. Because Kickstarter is often criticised for their failure to “assure” implementation and fund allocation (rather than simply overseeing of the process itself), it’s likely future policies interpreted in the U.S. Securities & Exchange Commission concerning crowdfunding will be initiated and further setting precedent for other countries.  Currently these issues are being identified under the Jobs Act passed by President Obama on April 5th 2012.

 

2. Assure the Proper Entity

Tax implications emerge when raising money. For starters, who raised the money? LLC, Corporation, Individual, etc? Unfortunately, many artists haven’t properly set up their business by filing the appropriate paperwork, therefore they simply operate as an individual. Pending on the entity of operation, the funds will be taxed accordingly. In Amanda’s case, she’ll likely pay a Massachusetts State Tax along with Federal Taxes on the money raised. Additionally, once again pending on the entity, taxes and potential deductions will vary. For example – let’s assume Amanda has a Massachusetts-registered business. She can potentially deduct certain funds as business expenses (i.e. pressing the product, album design, mailing cost, etc.) therefore, on paper reducing the amount of business profit and reducing the amount of taxable income. If the funds were raised by Amanda (acting as an individual), it’s likely funds will be reported as personal income which she’s taxed upon, forfeiting the advantage to claim certain business-related deductions. Clearly all of these aspects vary pending on country, state, and tax codes – however it’s an area of ultra-concern and important tax implications.

 

3. Transparency Is Key

A compelling aspect of Amanda’s campaign was the fact she remained extremely transparent throughout the fundraising process – constantly identifying where funds would be allocated. “Recording will cost $X, Publicity will cost $Y, Producer will cost $Z” and so forth. Donors want to feel involved in the creative process and have a general idea where their money is going.  However certain areas of Amanda’s campaign fell short in this regard.  As funding escalated, Amanda stated that she would likely spend excess funds on “debt and staff fees.” What debt? Personal debt?  How much? Staff? What staff? The resistance was minimal at best but take notice of these complaints in order to avoid fan friction in the future. Be transparent.

 
Oddly enough, Amanda Palmer’s successful campaign shed light upon another important issue, an issue often overlooked in the indie community – a proper release is incredibly expensive.  When labels front these cost and incur the risk, why are they interpreted as evil? A different debate for a different time.

But what Amanda did show was alternatives. Realistic and achievable alternatives. An alternative to bypass the several areas of fine print found in the standard label Recording Agreement. An alternative way to start a project in the black as opposed to the recoupable red found in the traditional label contract.  Amanda doesn’t have to worry about selling merch, touring, and album sales to pay off debt. She has laid the foundation to make money immediately upon release. At a minimum, this feat should be honored as a monumental accomplishment, whether you’re on the label side of the fence or an indie artist hustling to make it on your own. Cheers to you Amanda Palmer.  Well done.

Martin F. Frascogna is an entertainment attorney who represents clients both indie and major in 23 countries spanning 6 continents. Frascogna’s practice, Frascogna Entertainment Law, notably specialises in advising DIY artists. Follow him on Twitter for daily tips.

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