Spain: Crowdfunding Video Games is becoming an Investment Market

The credit austerity over the last years has limited access to “classic” credit in particular for start-up and indie video game studios in Spain. This situation has boosted the development of alternative fundraising strategies. Crowdfunding has become one of the new financing systems from the standpoint of the patronage or sponsorship, and is heavily used by the video games industry in Spain.

In fact, the video games sector is one of the most active sectors with regard to crowdfunding matters, spurred by the possibilities that the growing market of smartphones and mobile apps provides for video games developers beyond the traditional PC, console and online games market. In 2013, about $ 100M were raised through crowdfunding systems in the video games sector, becoming the second sector in money generation within the United States of America. Crowdfunding platforms are actually placing the video game industry at the core of the audiovisual sector as one of the largest leisure and entertainment industry in Spain, with a turnover exceeding the cinema and music industry ones together.

Crowdfunding and Complex Copyright Rules

The videogames sector can be complex in terms of its legal regulation for a number of reasons. For instance, it is not always clear what set of copyright rules applies to video games, which can also have impacts on the value of a crowdfunded game.

In Spain, the trend as of today is to look at video games as forms of software rather than as audiovisual works. The reason behind this is simple: Video games are usually created by a number of authors which assume the creation and development of different parts of it, and audio-visual works cannot be subject to the regime of the collective works but rather to the one of the works of joint collaboration. This entails that the producer of the video game, the one who is actually funding the project, may not retain all the rights conferred upon authors by the copyright laws but rather the video game will be a compound of different works with different authors retaining their respective authorship rights (e.g. music composer, photography, software, etc.) from which the producer can obtain the exploitation rights but not the rights of authorship.

Crowdfunding platforms in Spain today deal with these controversies regarding authorship and exploitation rights of video games by protecting the author’s copyrights and third-party rights through non-disclosure agreements and copyrights assignments.

An Emerging Investment Market

Early forms of crowdfunding were configured as donations addressed mostly to the music and the film industry. As a general rule, the return of the investment to the “investor” was understood as recognition by the entrepreneurs for the financial aid which was thanked to the investor, for instance, by disclosing the identity of the investor as such or by giving gifts related to the project as a way to express gratitude for the financial support. Lately, the projects seeking financial aid are moving forward to offering real economic returns to investors. Although pure donation schemes are most popular, certain projects, particularly within the cinema and video games sector, are moving towards offering returns to investors by means of a percentage on the amount invested, and are thereby ultimately creating a new investment market.

Development of Crowdfunding Regulations

In April 2015, the Spanish legislator passed the Law on the Promotion of Entrepreneurial Finance (Law 5/2015, of 27 April, on the Promotion of Entrepreneurial Finance). The subject matter of this law is to regulate crowdfunding and other new forms of access to credit configured as participating investments.

Until the enactment of the Spanish law for the Promotion of Entrepreneurial Finance, crowdfunding activities were not directly covered by the regulations in force in Spain. Crowdfunding, together with other financing techniques, like loans (both ordinary and equity loans), was considered under the previous regulatory framework as a form of joint accounts.

A preliminary analysis of the Spanish Law on the Promotion of Entrepreneurial Finance shows that this law would be applicable only for equity crowdfunding and for crowdfunding on loan basis. This means that all crowdfunding activities that do not generate a return on the investment (such as the “donation style” crowdfunding discussed above) will fall outside of the scope of application of this law.

The new law also distinguishes between accredited investors and non-accredited investors in order to fix the maximum investment amounts. As a general rule, the Spanish National Stock Exchange Commission (CNMV) would be the supervisory public entity for the inspection and the monitoring of the project.

Specific Rules for Crowdfunding Platforms

Nowadays, one the most widespread channels for crowdfunding purposes are the online platforms due to their characteristics, especially when the crowdfunding is addressed to digital projects, such as video games. The online platforms can be a relevant channel to link potential investors and entrepreneurs in order to obtain the necessary financial aid to run a project. The Law on the Promotion of Entrepreneurial Finance lays down the requirements for setting up a crowdfunding platform. The following are some of the key points:

• The minimum equity for the incorporation of a crowdfunding platform must be above € 60,000 (fully disbursed in cash).
• However, it could be also possible to configure as a crowdfunding platform those entities which have a minimum coverage limit equivalent to the equity amount stated above and a civil liability insurance policy.
• In addition, the law states that the maximum investment thresholds will be limited based on the type of investor to which the project is addressed, for instance, the maximum amount accredited investors would be able to invest would be € 5,000,000 (€ 2,000,000 in case of non-accredited investors).
• These platforms should ask for an authorization in order to act as a crowdfunding platform, considering that if the platform has no activity during a year term the supervisory authority could annul the granting of that authorization.