Wednesday, April 10, 2013

Book Publishing After the JOBS Act Revolution

On Monday, the US Senate confirmed Mary Jo White as the new head of the Securities and Exchange Commission (the SEC). The book industry will never be the same. No, that's not a non sequitur.

A year ago, a bipartisan majority in Congress passed the "Jumpstart Our Business Startups" or JOBS Act, and President Obama signed the legislation on April 5, 2012, thus accomplishing the first major overhaul of the nation's securities laws in over forty years. Perhaps the most far-reaching provision of the JOBS Act is the legalization of equity crowd funding. But not quite yet. The SEC has not published the rules that would implement the JOBS Act, and so it's not yet legal to crowd fund a business, unless your crowd is all millionaires.

"But what about Kickstarter?" you may be asking yourself. "Isn't that legal?"

Kickstarter and businesses like it (, which I run, is one) take great pains to prevent projects on the site from offering any sort of tangible equity. Instead of equity-based crowd funding, these site offer rewards-based projects and products. People become backers on Kickstarter because of the rewards they get if the project a success. In many ways, Kickstarter is just a site where creators pre-sell products that don't exist. A supporter on might get a signed manuscript or some other reward,  but it's the intangible equity of making a book free to the world that drives the site.

By contrast, the backers on an equity-based crowd funding platform could receive shares in a business.  So on a crowd-funding site for books, the backers might become investors in the individual books, and would make money if the books turned a profit. If you happened to invest in Fifty Shades...

From an author's point of view, this would completely change the game of publishing. Instead of relying on an insider network of literary agents who market book properties to publishers, an author would put proposals on a book-funding site. They'd line up a team of free-lance editors, illustrators, designers and developers, and the literary proposal would look like a mini-business plan. (More likely the author would seek help from a new class of social-media-savvy literary product-manager-agents who specialize in marketing to the crowd funders.) The crowd – probably consisting of voracious readers hoping to earn a little money from their obsession- would fund the books that had the best chance of success. That same crowd would be the marketing vanguard for the book when it's finally published; how can corporate publishing compete with that?

There's nothing intrinsic about crowd-funding that restricts this sort of fund-raising to unknown authors looking for a first advance. The JOBS act restricts the amount raised from "unqualified investors" to $1,000,000, so the really big name authors would have to tap the "qualified investor" funding market. (An individual with more than a million dollars in assets excluding home and vehicles is considered "qualified")

Once equity crowd-funding becomes established for books (and it WILL happen!), incumbent publishing houses will have lost, at a stroke, their oligopoly on books as investment vehicles. Already, publishers are outsourcing their design, editorial, production, distribution and sales functions; providing capital is their last bastion of essential function. They will have to participate in the new markets or they will dissipate into irrelevancy.

The reason the SEC has not issued the new regulations implementing JOBS is apparently because the previous Chairwoman, Mary Schapiro, had reservations about opening the gates to crowd-funding. The SEC's mindset is to protect ordinary investors from being fleeced by Wall Street sharks.  One would assume that President Obama's new appointee will be motivated to implement what could be a signature accomplishment of the Obama administration. So Monday's confirmation of Mary Jo White could signal the start of a new era of American investment.

Tim Draper at SVCrowdFund
by Return On Change
I had not paid attention to the possibilities of equity crowd funding for books until I attended last week's "SVCrowdFund" conference in Palo Alto. There I met many of the people who had been instrumental in getting the JOBS Act introduced and passed. There was electricity in the air, and my head is still spinning.

What's needed to make equity crowd funding for books a reality is a platform that has both crowd funding and publishing functions. Mostly, investors in books need to be protected from the sort of accounting shenanigans that prevent advances from earning out and royalties from amounting to more than a few pennies per copy. They also need some insurance against authors who don't deliver their promised manuscripts. All parties need sound legal agreements, business plan templates and investment entities. But above all, none of it will work without copious transparency and openness.

I've been trying to think some of these things through. It's a pretty big project, needing a variety of expertise. If you'd like to join me and others in some discussion, please let me know, and I'll organize something. Or leave a comment.

Community/Crowd Funding for Books
Disaggregated Publishing
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  1. If someone is going to go "self" I see no reason why they would want to sell equity in their book. A Kickstarter for pre-orders...yes...and I recently raised almost $31,000 for a Kickstarter I did for my most recent novel. But indies like to be...well independent and having parties owning a share is against everything they are trying to avoid by not going the traditional route. It's not like putting out a book take tens of thousands of dollars. My first few self-published books were less than $30 each. And many can get it done for $500 - $1,000. Even using the same freelancers that New York uses you can get top-end design and copy editing for $6,000. It's not enough capital to go out and get equity funding for.

    1. Interesting perspective. So you think authors are ill-advised to take advances at all? What about authors whose books are not a sure thing?

  2. We are experimenting/introducing a MICRO-Crowd-funding way: instead of asking support for a whole book, we pitch users to fund a piece.
    In this particular case, ONE illustration, part of a larger, existing picture book.
    But can be a chapter, in a text book, or whatever.

    Andrei Kelner
    Cofounder, Bookata

  3. Taking up the point about whether indie authors would want investors, there's one dimension that's missing from the conversation. The people most likely to invest are people who (1) most strongly believe in the quality of the book as an investment and (2)--maybe most importantly can influence the liklihood of the book selling. So, if Stephen King invests in your next work, you can be sure he'll blog about it, etc. If each investor is an influencer, this gives scale to the marketing necessary for books to find an audience in an era of content ubiquity.

  4. There's also the validation aspect of working with a publisher that causes many authors to shun self-publishing. Could "getting funded" replace "getting published" as the emblem of authorial success?

    1. Yes, "getting funded" by well-respected investors is part of the currency of status and success. It's taking expert endorsement to the next stage. It would be interesting to try to workout the logistics of how this would work--specifically connecting authors work to investors. What's the equivolent to the "pitch deck" for books as startups? Interesting stuff.

    2. Hi Eric,

      Not that Seth Godin needed an emblem of authorial success when he launched The Icarus Deception on Kickstarter. But I tend to feel what he accomplished went well beyond getting him a better contract b/c he proved a point to he publisher. I think it went far to change the landscape for other authors, providing *them* both that emblem you mention and validation.

  5. Really interesting discussion Eric. When I heard about and Unbound I was interested to see new models. The whole idea of crowdfunding books in this way is fascinating and one I'd love to be involved with.

  6. Forgot to mention that I too would like to be a part of the discussion you've begun, Eric. (And thanks to Digireado for directing me to your blog post!)


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