A major problem for most entertainment artists ("artists") is funding their work and covering their living expenses while they build a following. Traditional sources of funding can be hard to come by without a large institutional investor or a label prepared to front all of the costs associated with producing quality work and gathering a fan base.

For years, artists have been able to raise funds by soliciting donations from friends and family-members via websites like GoFundMe and KickStarter. But never before have those same interested and loyal fans been able to share in the upward success an artist may come by later in their career. With the advent of the new crowdfunding rules released by the SEC in October, artists may have a new avenue to fund their work from day one without having to solicit donations or work two part-time jobs just to be able to travel to a gig.

Typically to offer investors equity, one would have to register the security with the SEC or fall within one of the exemptions. The most common exemptions, however, are available only to high net worth individuals the SEC defines as "accredited investors." With the enactment of these rules, individual artists along with small businesses ("Issuers") will be able to offer equity to non-accredited investors without registering the offering with the SEC. To qualify for the exemption, investments will be limited based only on an individual investor's annual income or net worth, and the offerings must be conducted through registered "funding portals."

While the offerings will be exempt from registration, both the Issuers and the funding portals will have continuing disclosure obligations both to one another and to the SEC. For example, the online portals will be required to run background checks on the Issuers, maintain certain records and books and ensure Issuer information is published to investors before purchases are made. Issuers will have to disclose to their investors their business description and financial condition, the proposed use of the proceeds from the offering, how the price was calculated and information about officers, directors and controlling shareholders, if any. The Issuers will also have a continuing annual reporting obligation. This is far more cumbersome that holding a fundraising campaign, but it has the potential to get an artist from day one to signing without signing any IOUs. It would be up to the label, but investors could be bought out upon signing or share in the continued success of an artist once they are able to join an entity with the ability to front costs going forward.

Some of the additional parameters of the rules are as follows: an Issuer may raise up to $1 million in a 12- month period; an individual with a net worth or annual income of less than $100,000 may invest up to $2,000 (or 5% of annual income or net worth, whichever is greater); an individual with a net worth or annual income of over $100,000 may invest 10% of the lesser of his or her annual income or net worth; an individual may invest up to a total of $100,000 in crowdfunding offerings in a 12-month period; the securities purchased will be subject to resell limitations and cannot be resold for one year from the date of purchase. These parameters are meant to protect investors who may not have experience in buying securities from small companies. Buying the equity of an emerging artist will no doubt be a risky use of an individual's funds, but to many fans it would be an exciting opportunity and another reason to follow their "investment."

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