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How equity crowdfunding just might upend film financing

Slated.com co-founders Stephan Paternot and Duncan Cork.
Source: slated.com
Slated.com co-founders Stephan Paternot and Duncan Cork.

Crowdfunding, the idea that you can plead for money from the masses, is no longer relegated to mom and pops. The platform is nibbling at the edges of the famously opaque film industry, and helping established professionals raise millions.

"If 10 to 30 percent of a film budget can be found through fans, friends and family—that's a big deal," said Duncan Cork, co-founder and chief executive of Slated.com, a year-old digital platform that connects potential investors with independent filmmakers. "The industry is coming around to this new world order," he said.

Zach Braff: $2.6 Million and Counting

Actor-director Zach Braff—perhaps best known for his role on the TV series "Scrubs"—has raised about $2.6 million and counting on Kickstarter. He's making his sophomore feature after "Garden State." And, oh, how the haters have pounced. They've essentially accused him of swimming in a money pond that had been the purview of smaller fish with limited access to capital. "Is Zach Braff ruining Kickstarter?" one headline read.

Critics aside, it's difficult to imagine anyone in the industry turning away new piles of money—especially as the Hollywood economy changes rapidly.

The TV-computer hybrid model and on-demand viewing through platforms such as Netflix are gaining traction. Hollywood is churning out expensive blockbusters such as "Iron Man 3" that had a reported production budget of around $200 million. It was financed in part through presales in foreign markets. The ranks of middle budget pictures, meanwhile, are shrinking with notable exceptions, such as "Argo," which was made for about $44 million.

(Read More: Netflix Has 'Tremendous Traction,' Despite Stock Volaility: Analyst)

So imagine a new film financing world, where average investors—not movie moguls and financiers—can buy a stake in a future film, and enjoy a portion of that project's success. It would be like buying a stock. So far, Slated.com is the closest thing to that holy grail—a funding mechanism that opens up film financing to a broader audience. And more investors presumably mean more lower-budget features that big studios are ignoring.

Regulators are still drafting guidelines on so-called equity crowdfunding, which allows funders to actually own a piece of new businesses. In contrast, traditional crowdfunding that's prevalent on sites such as Kickstarter allows users to solicit cash donations (not loans) for projects and nonprofit causes.

The traditional film-financing machine can be mysterious and time sensitive. "We want to make film financing accessible," said Cork. Based in Lower Manhattan, Slated's team includes Stephan Paternot, a film financier and angel investor.

(Read More: Millennials Want to Donate, Save the World, Really)

How Slated.com Works

The site is an online meeting place for filmmakers, investors and industry folks. Slated.com includes about 3,000 global members including 400 investors—predominantly from North America. Roughly 175 film projects have been featured on the curated site.

To be clear, the online community only offers introductions to develop relationships. Any actual investment is executed offline directly between users.

At least six films have found financing through connections made on Slated.com. Currently investors can reach out to filmmakers and any deal happens offline. Financial regulations need to be in place when the site can act, essentially, as a broker. Some notable films that found financing are a directorial debut from Christian Camargo, starring Katie Holmes and William Hurt; and the Roman Polanski documentary, "Wanted and Desired."

(Read More: Fans 'Kickstart' New Life Into Defunct 'Veronica Mars')

Removing the Veil on Film Financing

Slated CEO Cork was working on a film about five years ago when he quickly realized film financing can be an inefficient maze.

"Investors in film have to write big checks to justify the legal costs in single-picture deals, which limits the number of investors that can access good deals," Cork recalled. Smaller investors are discouraged. "That and producers want to work with as few a number of investors as possible due to the administrative burden that comes with raising equity from investors," he said.

It's a maze actor-director Braff knows first hand.

Braff has been making the media rounds, explaining why he turned to Kickstarter after bypassing the studio system and financiers, who wanted creative control. They wanted final cut of the film and to cast stars in roles. "The way that financiers hedge their bet is they pre-sell foreign territories based on what famous people you have in the movie, and how their movies have preformed overseas," Braff recently told KCRW. "I'm not criticizing that. I totally get it. You're an investor, you have to hedge your bet." But Braff has other actors in mind.

"I, for example, have almost no foreign value. I had done a TV show for 10 years that doesn't count. 'Garden State' did well overseas," he told KCRW. "But not numbers that are going to show up on their algorithm," he said.

So You Wanna Be a Movie Mogul

Interest in crowdfunding broadly has exploded after President Barack Obama signed the Jumpstart our Business Startups, or JOBS, act a year ago to legalize equity crowdfunding. That emerging platform is the subject to new rules being penned by the Securities and Exchange Commission.

But without rules, it's not difficult to imagine unscrupulous businesses, preying on unsophisticated investors—including newbie film investors, hoping to somehow rub elbows with beautiful movie stars.

Even hedge funds, brimming with excess capital—at least up until the 2008 crash—make perfect civilian recruits for Hollywood, according to film expert and author Edward Jay Epstein. Studios, for example, recruit outside financing and ink "asymmetric" deals with outside investors, who pocket a smaller share of total earnings than studios on the same investment of capital.

Through asymmetric deals with Wall Street, studios enhance their returns and support the "Hollywood tradition of giving civilian investors the short end of the stick," Epstein wrote in his 2010 book, "The Hollywood Economist."

(Read More: Key JOBS Act Features Delayed for Small Businesses)

More Crowdfunding Disruption Ahead

Despite the potential minefields lurking in film financing and crowdfunding overall, new online platforms such as Kickstarter and Slated have serious, potential staying power. Equity players on Slated range from the super wealthy to doctors and dentists, Cork said.

And yes, crowdfunding, at first blush, sounds crazy. Why not go online and give money to projects, created sometimes by strangers I've never met! Here's my credit card number!

But whether you're a die-hard fan of a local artist, or you want to help first responders after the Boston bombings, crowdfunding helps users tap into very niche, but very passionate communities. Site users trying to raise money, in turn, fan that passion by offering donors behind-the-scenes access to projects in process. For a few bucks, you can belong.

Andreesson on Crowdfunding and Smartphones

Now take this desire to connect and throw in the proliferation of smartphones.

Venture capitalist and start-up maker Marc Andreessen sees a future where mobile users—armed with smartphones—can pledge to projects immediately. Future areas of growth he's focused on include collaborative-consumption models such as home-sharing site Airbnb, and "crowdfunding the idea that lots of projects can be funded on the fly with people just clicking on their smartphones," Andreessen told CNBC's "Closing Bell" in April.

Of course disruption is never easy, and Slated has felt some resistance from Hollywood. "Change is scary, but great things will come of it," Cork said. "Look at the line of investors waiting to get onto uber-transparent AngelList." The service matches early-stage start-ups with investors.

Besides, the major studios are no longer focused on features with a $15 million production budget or lower—part of Slated's sweet spot.

And if your pocketbook isn't big enough for Slated, consider Braff's Kickstarter page for "Wish I Was Here." "I want you to be my financiers and my audience so I can make a movie for you with no compromises," he writes.

Braff also offers a quote from Thomas Edison: "Hell, there are no rules here—we're trying to accomplish something."

By CNBC's Heesun Wee; Follow her on Twitter @heesunwee

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