In its purest form, tokenization is the act of adding liquidity to real-world assets. A good – if not exact – comparison is depicted in stocks and shares, which represent fractional ownership in a company. Tokenization is relatively analogous to these types of equity investments, taking the conventional model, expanding upon it, and placing it on-chain. In theory, anything can be tokenized – and according to some, everything soon will be tokenized.
As the world of finance continues adapting to contemporary innovations, it almost cannot help but drag other industries along for the ride – willingly or otherwise. Film is one such sector currently undergoing a quiet revolt, concocting a radical subversion to traditional models of financing. This is partly due to the emergence of distributed technologies such as blockchain, and it has led to a new concept: the tokenization of everything.
Daywalker Movie Fund
Hollywood actor, director, producer and martial artist Wesley Snipes is attempting to capitalize on this shift to tokenization. Earlier this month, it was reported that Snipes, together with the Liechtenstein Cryptoassets Exchange (LCX), plans to tokenize a $25 million movie fund. The venture, known as the “Daywalker Movie Fund” (DMF) will invest solely in the artistry of Snipes and his production studio, Maandi House Studios, allowing investors from all over the world to hold a stake in the fund’s productions. Speaking to Cointelegraph, LCX founder and CEO Monty Metzger detailed the benefits afforded to investors:
“The Daywalker Movie Fund will be structured as a fund, giving token purchasers access to a portfolio of productions including the whole value chain, from the actual movie to games, merchandise and intellectual property rights.”
LCX will launch a wholly compliant security token offering (STO) with the Daywalker Movie Fund – represented by the DMF Security Token – thereby leveling the playing field between retail investors and Hollywood financiers.
STOs – much like their ostensibly defunct cousin, the initial coin offering (ICO) – represent value via a digital token. However, unlike ICOs, security tokens are designed with a strong foundation of regulatory due diligence. Moreover, ICOs offer little more than a token utilizable only through specific infrastructure. By contrast, security tokens symbolize more tangible assets, such as shares in a company or even equity in real estate.
The one factor that truly legitimizes security tokenization is its ties to regulatory governance. Needless to say, the policy construct of tokenization differs jurisdictionally. In Liechtenstein, where LCX is stationed, the government recently passed legislation aptly dubbed the Blockchain Act. Alongside stringent rules on Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, the act essentially provides a clear legal basis for the ownership, transfer and safe storage of security tokens. Metzger elaborated on the regulatory landscape of Liechtenstein and its bearing on the DMF:
“The Daywalker Movie Fund is part of the LCX ecosystem and therefore supervised by the Liechtenstein Financial Market Authority. A key benefit of Liechtenstein is the market access to the whole European Economic Area (EEA), and Switzerland combined.”
LCX is also taking an active role in the pursuit of global regulatory clarity for the blockchain industry, with hopes to extend the scope of investment to a broader demographic:
“LCX is engaging at the World Economic Forum to shape policymaking and the future of the blockchain industry. Due to our international approach and partnership network LCX is considering to apply for regulatory approval in other jurisdictions as well to open up the security token offering to a wider audience. But this is a work in process.”
In the United States, the regulatory practice surrounding tokenization is just as rigorous. Security tokens are governed by the U.S. Securities Act of 1933 and are categorized under three types of regulation: D, A+ and S.
Regulation D avoids formal registration of the offering with the Security and Exchange Commission (SEC), provided a specialized form is filled in after the STO. It also allows issuance to a broader demographic of investors, assuming they’re accredited – i.e., high-net-worth individuals, banks and hedge funds. Regulation A+ allows nonaccredited investors to join the fray. However, this is only available under securities registered with the SEC, which can prove to be a lengthy process. Finally, Regulation S targets STOs offered outside of U.S. jurisdiction and are therefore not subject to SEC registration.
A growing appetite for tokenization
Snipes isn’t the first to venture into movie tokenization. Laying claim to spearheading the concept is tZERO, the blockchain subsidiary of U.S. retail monolith Overstock.com.
Back in July, the firm announced the tokenization of “Atari: Fistful of Quarters,” a biopic of Nolan Bushnell, the founder of game publisher Atari. Together with the producers of the movie, tZERO plans to design a security token named “Bushnell” and relays that the token will incorporate a “pro-rata portion of worldwide adjusted gross receipts from the film,” along with several other benefits.
Speaking on the compliance issues surrounding security tokens, tZERO told Cointelegraph that STOs are emerging with some initial stumbling blocks:
“Anytime an entity issues a security, there are regulatory considerations that must be taken into account. While security tokens are still somewhat novel, the goal of our protocol is to be compliant with all existing securities laws and regulations regardless of the industry of the issuer.”
Clearly, there is burgeoning demand for tokenized funding – and what’s more, by most accounts the film industry is in dire need of new vehicles for liquidity. Traditionally, film funding comes via a hodgepodge of revenue streams, ranging from hedge funds to individual investments from wealthy benefactors. These, of course, come with a price, usually in the form of partial ownership in the finished product.
Mitigating risk via co-financing
One particularly favored route for funding is known as co-financing, in which multiple parties share the cost of production. At the height of its popularity in 1995, co-financing was utilized in 35% of films produced by major studios and employed by industry giants such as Fox, Miramax and Paramount. This cooperative approach to funding is often applied in order to mitigate risk – and financial risk within the film industry is particularly prevalent. After all, it’s one of the only sectors in which a valuation cannot be made until demand is assessed, and demand cannot be evaluated nor can the associated costs be realized until the film is released. Due to the hazards affiliated with film-making, investors, for the most part, shy away.
This tightening of the purse strings has been especially pervasive in recent years, made worse by the rise of the internet and the disruption it has sown within the industry’s traditional distribution models.
The need for fresh capital flows is particularly evident within the independent film scene, in which emerging filmmakers struggle to find suitable funds. Speaking to Cointelegraph, director of photography Nicholas Eriksson noted the myriad hurdles for independent filmmakers:
“In many ways, Netflix and streaming services have taken a huge share of the traditional film indie market for less financial risk and far lower distribution costs. Nowadays, generally speaking, funding an indie project comes down to three options. 1. Self-funded 2. Crowdfunded 3. Government subsidies through charitable organizations.”
The rise of crowdfunding
Crowdfunding is an avenue in which more and more filmmakers find themselves traversing. The rise of crowdsourcing has acted as the quasi-death knell for traditional financing, with platforms such as GoFundMe, Kickstarter and other derivatives holding a firm grip in the world of funding.
Often, these platforms reward backers either with equity or a more humble incentive, such as early access to a product. However, crowdfunding isn’t without its drawbacks. From their once humble beginnings, various crowdfunding platforms have now become inundated with requests for funding, and it appears the novelty is wearing off.
According to statistics from Kickstarter, a mere 37% of film and video projects have been successfully funded since the site’s inception, and this success rate is dropping – down 6% since 2015. Now, it seems, even the smallest contributors are in short supply. Eriksson was lucky enough to get his short film funded via this grassroots approach. However, he noted one aspect in which crowdfunding falls short:
“Crowdfunding is definitely a good alternative to traditional funding, especially as it enabled me to get my short film project off the ground. However, it is also a huge amount of work, and to underestimate this would be a big mistake.”
Crowdfunding vs. tokenization
Crowdfunding has become a novel but inefficient way to raise money, requiring a substantial amount of time and effort to market the fundraising campaign alone. However, just as crowdfunding looked to outmode traditional financing, tokenization is now looking primed to antiquate crowdfunding.
Metzger, an evident propagator of tokenization, remarked that while it bears a resemblance to crowdfunding, it’s blockchain that is taking the concept of tokenization to an entirely new level:
“You can see it this way: Crowdfunding is a front-end where users can buy rights to future products or services, like an eCommerce shop – but the whole back-end has to be managed manually. This can be complex. With blockchain technology, it’s not only the front-end that is automated, but also the whole back-end is digitalized, smart contracts execute on rules, and the actual product can be a digital asset, eg, a security token.”
Indeed, some of the chief qualities of tokenization come from the benefits provided by their underlying technology. Via the use of blockchain, a verifiable framework for funding can exist and be executed with ease. The bureaucracy that often comes along with traditional film financing dissipates as smart contracts offer a one-size-fits-all solution for any investor, automating the work typically undertaken by costly lawyers. Furthermore, tokenization extends investment exposure to almost anyone with access to the internet, mitigating issues associated with finding specific contributors.
It isn’t just the filmmaker that stands to gain, either – the investor also profits from risk management adaptations of traditional film finance by being able to invest in a slate of films rather than just one, as per Snipes’s venture. Perhaps the most significant benefit of all is the instant liquidity that tokenization offers to investors, granting the opportunity to offload the tokens at a moment’s notice.
Speaking to Cointelegraph, Ali Vatansever, an award-winning film director and founder of Indiewonder — a blockchain-based film fund – stressed the benefits of tokenization on audience participation:
“Tokenization opens movie financing to masses. It has the potential to create a more democratic and transparent ecosystem. Along with conventional crowdfunding, it’s a powerful tool to connect with the movie audience early on in the process and turn them into fans or rather users.”
Of course, tokenization isn’t necessarily a veritable gold mine. Like everything, it holds its own specific disadvantages. For example, the traditional risks associated with the film industry still exist: If a movie flops, so too do investor profits. Additionally, the aforementioned pros linked to the lack of a middleman can sometimes be outweighed by the cons. Smart contracts are offered in lieu of a lawyer, who is typically responsible for drawing up agreements, defining the rights of clients and investors, negotiating the rate of returns from the investment, and ensuring regulatory due diligence is met – all of which, in the case of tokenization, would be transferred to the distributor of the token, which in itself holds its own perils and may even turn some investors off.
Further to this, and somewhat contrary to one of the primary benefits of tokenization, is the jurisdictional restriction provided by regulation, which could prove to exclude investors outside a specific territory.
Above all, Vatansever, stresses that it is inclusivity and accessibility which will judge the success of tokenization:
“If we don’t involve the crowd in the decision making processes, tokenization is just a convenient way of collecting and distributing finances and making more shareholders happy (or sad). But it’s still a small step forward of creating an inclusive entertainment industry. We should not just trust on the money of the fans but their taste. Through creating an alternative channel of interaction with movies; we can turn the audience into local ambassadors for change in the industry.”
“Everything that can be tokenized will be tokenized”
Regardless of its opportunities and obstacles, tokenization is becoming a widely adopted instrument for investment. According to analytics firm Inwara, STOs increased by a monumental 130% in the first quarter of 2019 alone. As this growth seems set to continue, Metzger insisted that the opportunities provided by tokenization aren’t just confined to the movies themselves:
“The film industry is currently only producing movies that the so-called ‘experts’ and the decision-makers behind the production funding think will be profitable. They depend on market research, past success, or just on their gut feeling.
“By tokenizing the film industry, the audience will be empowered and will ultimately decide on what movies will be produced. The whole entertainment industry, Hollywood studios, and fan culture will change. I often say: Everything that can be tokenized will be tokenized.”
Eventually, it seems, the ivory towers inhabited by venture capitalists and angel investors are set to come crumbling down as more emphasis is put on on this new form of fundraising – and it seems the film industry could just be one of many sectors that is set to be disrupted.