Legal Opinion: Do you want to own a games studio? Investment crowdfunding is the next big Kickstarter

Shut Up And Take My Money

By on November 28, 2013 at 11:21 am

Ever wanted to own a games studio? Now you can! Almost. And you can thank Obama.

In 2012, the Americans signed into law the JOBS Act, or Jumpstart Our Business Startups. Now, at the end of 2013, it’s almost operational. In a nutshell, it allows business to crowdfund their investment capital. This is as crazy as it sounds.

Well, not crazy—it’s widely supported by the tech sector. But it ramps Kickstarter up to eleven and will be one of the next big things for the games industry in 2014. (You read that here first—I checked.)

Games developers are poor

Building a games studio is hard work. Not only do you have the expenses of any new business (and sometimes more, with the hardware and software costs), but you also face the prospect of not being able to independently raise funds.

You don’t have a product. You have a publisher. You live from game to game, relying on a publisher to give you money to develop only what they approve.

Kickstarter helped break the pattern, a little. It gave developers an avenue to raise a bit of cash themselves for individual projects. However, Kickstarter still has its shortcomings. Unless you’re a celebrity intent on inflicting your latest clickfest human psyche experiment on everyone, you’ve a good chance of having the fundraiser fail.

And you’re still going from game to game. With development costs as they are, Kickstarter won’t give you all the funds needed to make a successful game, much less a successful studio.

JOBS relaxes investment rules

One way to escape this hand to mouth conundrum is to raise investment capital and upscale. However, options are restricted. Investment rules are strict, and limit small business investment to a small number of sophisticated investors. You can’t just take out an advertisement looking for investment capital, because rules prohibit advertising to unaccredited investors (which is anyone earning under $200,000 a year).

JOBS will relax the rules on who can invest, how many can invest, and where businesses can seek investment. Even as an unaccredited investor, you’ll be able to go to a website like crowdfunder.com (the Kickstarter equivalent for equity investments) and just buy a stake in a games studio.

This is sure to gain traction in the games industry. Unlike Kickstarter, there are no project goals. The studio is not beholden to use your money for any particular purpose. What you get in return—as with any investment, is the chance for a financial return. And perhaps extra information on how the studio’s latest game is coming along. Any sane business would jump at the chance to raise public funds in this way without the fun run rigmarole of the existing investment rules.

Investor beware

Understandably, there are concerns of fraud. Kickstarter already led to concerns that by relaxing the traditional publisher oversight, people will lose money on games that don’t go anywhere. The usual answer is that Kickstarter backers are not investors—they’re customers making a pre-order. If they do happen to receive a sucky game at the end, well it’s no different to those poor schmucks who pre-ordered Aliens: Colonial Marines.

That obviously changes with investment crowdfunding. You’re no longer giving money in exchange for a future product. You’re making an actual investment, with all the accompanying risk. You could lose money.

JOBS caps the amount of money you can invest each year to 5% of your annual income, limiting the potential loss. Still, concerns remain. Even sophisticated venture capitalists lose money on most start-ups they fund, and they apply a bit more rigour than the average Kickstarter backer. With few safeguards other than the yearly cap, anyone looking to invest in a games studio has to be prepared to lose money.

However, JOBS is rightly receiving almost universal praise for opening small business investment up to the hoi polloi, even down to the unwashed console-owning peasants. JOBS will allow independent studios to seek funding from sources other than publishers or Kickstarter’s hand to mouth donation drives.

This is a game changer for independent studios looking to raise funds. 98% of businesses that apply for venture capitalist investment are turned down. Right now, raising money is hard. Conversely, an estimated market of $300 billion is held by unaccredited investors in America alone. With established experience in making crowd funding work, the games industry is well positioned to take advantage of these opportunities.

4 comments (Leave your own)

How is this crazy exactly Patrick? This is how anything has gotten funded since investing existed as a concept. The only difference is now that people can directly invest in publishers instead of through the sharemarket or through an investment fund. The last thing I can think of to go consumer’s directly funding things is Mortgage Backed Securities.

Except now you’re doing all the research on your own and you have to be the one to diversify your portfolio instead of your super fund.

Sorry but I think I’ll stick with existing investment routes with my savings considering the risk on investing in untried projects is ridiculous (which is why on Dragon’s Den they ask for huge amounts of a share of the business to offset the enormous risk they’re taking), although i can understand people that want to see indie games get funded and they throw a few bucks here or there at them.

“You’re no longer giving money in exchange for a future product. You’re making an actual investment, with all the accompanying risk. You could lose money.”

Hate to break it to you but kickstarter is the same. You’re investing the same regardless, except instead of the possibility of getting a product out of it you get the possibility of returns.

“However, JOBS is rightly receiving almost universal praise for opening small business investment up to the hoi polloi, even down to the unwashed console-owning peasants.”

Hate to break it to you but that’s what banks and loans are for. Banks loan out your deposits to small business and your risk is offset because the bank does all the work in getting you good returns.

Also, venture capitalism is stupidly risky, especially if you don’t know what you’re doing. I would strongly advise against anyone investing anywhere near a sizeable amount of their income and just stick with superannuation.

 

Yeah the benefit of Kickstarter IS its shortcomings. If you get a bad game.. all good.. you wasted $20.

If you invested in a game developer that sunk, and ended up a majority shareholder in a company that might have done something illegal at some stage… guess who the feds are coming after…

And then there insider trading..

The point with kickstarter was, minimal risk for a product that was essentially niche anyway. Its a trend in creating “On-Demand” game development because its based on the assumption that if people want this.. they’ll pay for it to be made. The way people are treating it now however is as a pre-order system which is why its been criticized just as Early Access has as well which basically became an excuse to release buggy games early. Very unfortunate because the point was to eliminate that risk not make it worse.

If you want games to be made keep doing the crowdsource thing. Don’t start looking at venture capital because its a world of misery, nothing good will come of it in this industry.

 
Patrick Vuleta

You think this isn’t crazy and then go on to say it is stupidly risky? The two thoughts seem to be in conflict there. :P

 

Patrick Vuleta:
You think this isn’t crazy and then go on to say it is stupidly risky? The two thoughts seem to be in conflict there. :P

Lawyer-ed ! Very nice article will be interesting to see how this pans out …. and who takes up using it…

May I ask what is your legal back ground ? what area of law do you specialize in ?

 
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