The movie industry has long been subject to criticism for its lack of diversity in talent and voices. Film3 offers a potential alternative, striving to create new opportunities for people of all backgrounds to realize their filmmaking dream. But how can Film3 create supportive and sustained communities that help emerging talent and challenge the Hollywood status quo? This article explores potential ownership incentives Film3 can offer communities to develop its platforms and enjoy long-term success.

What is Film3?

Film3 is a catch-all term that describes a growing ecosystem of platforms, projects and communities dedicated to developing, funding and distributing short and feature films. Basically, Film3 connects talent (screenwriters, directors) with a community; it doesn’t directly connect talent with investment or financing, rather it provides talent an opportunity to receive community funding.

Currently, there are two Film3 models, the Creator model and the DAO model. The creator model is essentially crowdfunding with NFTs. Creators raise money for projects by soliciting donations or selling NFTs to their fans or followers. The creator then uses those funds to make their movie. I won’t discuss the creator model, but interested readers should look to two successful Film3 creator projects by Julie Pacino and Miguel Faus.

But it’s the DAO model that we’re concerned with and that’s the model that gives Film3 its potential to scale. The DAO model has talent submit their project proposal, i.e., screenplay, trailer, or completed footage to DAO members for an on-chain vote. The community votes on each submitted proposal and the proposal with the most votes receives community funding. Generally, the talent with the winning proposal enters into an agreement with the DAO, the funds are transferred, and the movie is made. Revenue earned from that movie then returns to the DAO treasury so the DAO can fund future projects.

Governance

All Film3 DAOs require members to possess governance tokens to vote. Generally, DAOs use token weighted voting or the “more tokens, move votes,” method whereby an individual’s accumulation of governance tokens determines the member’s voting power. One exception, however, is Decentralized Pictures, which uses a reputation based voting method where a member’s voting power is determined by the their community reputation and not their token totals.

Community Participation and Incentives

Film3 lives and dies by community engagement. If members don’t consistently engage by voting, minting NFTs, or donating money then both the creator and DAO models fail. So how does Film3 entice members to stick around? Currently, Film3 offers several membership benefits including tickets to the funded movie’s premier, film festival and award show tickets, on-set access and NFT stills or video scenes from the movie.

One interesting incentive offered by Decentralized Pictures are voting bounties, which are token rewards given to members who successfully vote on a proposal. So the more proposals a member votes for, the more token rewards the member earns. Currently, Decentralized Pictures issues its voting bounties in its native token, FILMCredits.

Although the above perks are attractive, it remains to be seen whether Film3 can maintain steady engagement without offering any real financial incentives for member to hang around. Award show and movie premier passes are nice and all, but are tickets and NFT scenes enough for members to consistently participate long-term?

So, here’s the issue Film3 faces: will non-financial rewards be enough to keep members around for good, or must Film3 offer financial incentives and risk trouble with the SEC?

What is Ownership?

But what ownership or financial incentives can Film3 offer? Right now there are three choices. Obviously the first is revenue share from funded movies, but then there’s copyright ownership and then there’s platform ownership, like an investor’s equity ownership in a corporation.

Currently, Film3 DAOs don’t give members revenue share and none offer ownership in the platform. But what about copyright ownership?

Film3 platform KinoDAO is clear that the DAO solely owns the copyright of each movie it funds. And Decentralized Pictures avoids mentioning copyright ownership altogether, but I suspect its position is similar to KinoDAO.

Yet, copyright ownership is essential for securing long-term revenue earnings and Film3 much have revenue from funded movies return to treasuries to fund future projects. And the best way for DAOs to legally protect future revenue with through copyright ownership.

On the other hand, Film3 platforms owning the entire copyright isn’t very Web3ish, considering Web3 is all about “ownership,” not to mention DAOs owning the entire IP is no different from traditional studios. And what better way for Film3 to distinguish itself from Hollywood than by offering talent copyright ownership; in fact, I believe copyright ownership gives established Hollywood talent an excellent incentive to leave traditional studios for Film3.

The Howey Issue

Everyone in crypto has undoubtedly heard about the Howey Test and its role determining whether a token is a security. In short, the Howey test looks to four factors to decide whether a token is a security (1) there’s an investment of money in a common enterprise or business that is (2) made with the expectation of profits that are (3) derived from the efforts of others.

And the key Howey issue for Film3 is whether platform revenue is “derived from the efforts of others.” In other words, are Film3 DAO members dependent upon the managerial efforts of an individual or small group to generate income?

If the answer to the above is yes, then it’s likely that the DAO’s tokens are securities. On the other hand, if the revenue is generated from the collective efforts and activities of the DAO community then the tokens are likely not securities.

Understand the key issue here is not whether members can receive a financial benefit; rather what’s important is whether members anticipate receiving financial benefits from the efforts of those in charge of the platform.

Reliance and the Investment Contract

Hence, Film3 must avoid creating member reliance, because when members rely on those in charge of the platform to do all the work an investment contract is created. An investment contract is between investors and an individual/small group, wherein the latter performs all the necessary work while the former are passive investors who do nothing but expect a return on their investments. And if an investment contract is created between Film3 DAOs and their members, then any token entitling members to future profits are likely securities.

And to avoid reliance and an investment contract, decentralization is key. A DAO that is highly decentralized is much less likely to have its tokens classified as securities; but decentralization requires that all members of a DAO work together to complete tasks so that all revenue and profits are the result of a collective effort, and not from the “entrepreneurial or managerial efforts” of a single party or group.

Film3’s Centralization Problem

Although Film3 initially appears decentralized-members vote for all funding proposals-Film3 DAOs are actually highly centralized in certain areas, specifically production management and distribution. If Film3 DAOs only voted to approve funding for the best film projects then centralization wouldn’t be an issue. But someone needs to manage the production and find distribution so that audiences can enjoy the movie and the DAO can earn revenue.

The main problem is that production management and distribution are all off-chain activities and are currently handled by small groups or teams of experienced Hollywood players with Film3 members having little to no participation or input. For example, both KinoDAO and Decentralized Pictures have groups of “Hollywood Insiders” (not their term, but mine; because it’s heavily implied that production management and distribution will be performed and secured by each team’s respective Hollywood experience and relationships) that help talent manage the production and negotiate and secure distribution.

So, not only are DAO members uninvolved with management and distribution, but they’re relying on the efforts of these Hollywood insiders perform this work so the movies can made and the DAO can earn revenue. And that’s reliance; and with reliance there’s an investment contract and when there’s an investment contract there’s a security.

But how does a DAO address this? Because reading screenplays and voting is one thing; any member can with a computer and WIFI can do that. But knowing where to find a film distributor, and knowing how to negotiate and secure a distribution deal requires knowledge and experience that the average Film3 member doesn’t have.

One idea is to utilize small committees or “sub-DAOs.” For instance, rather than having all distribution performed by a small group off-chain, DAOs can form distribution sub-DAOs that can facilitate on-chain member interaction and participation with off-chain activities. And DAO members would not only be privy to these negotiations but they would also vote and approve all distribution deals.

For production management, a sub-DAO is created that would transmit all production budgets on-chain for community vote and approval; not to mention providing information and updates giving the community the opportunity to manage the production on-chain.

But the issue is how meaningful these member contributions actually will be, especially for distribution. Not to mention it’s likely a slow and inefficient process to have all production budgets and potential distribution deals voted on and approved by the community. But inefficiency is one tradeoff for decentralization and decentralization is currently the only way Film3 can offer its members ownership.

DAO Entity Idea for Ownership: The Cooperative

A cooperative is a great entity choice for Film3 to incorporate and prioritize decentralized principles. Cooperatives are organizations owned and managed by their members. Members purchase a membership share, sign a membership agreement to join, and enjoy membership benefits like voting rights and profit share. A famous cooperative example is the outdoor sports retailer, REI, which is a member-owned cooperative organized in 1938.

Cooperatives are legal entities that can open bank accounts and file taxes. But most importantly for Film3, cooperatives are entities that are recognized by the SEC as organizations formed and managed by their members and not as businesses or financial enterprise giving financial returns to investors. So, cooperatives are a great choice for Film3 DAOs to potentially avoid SEC and Howey issues.

Yet, the important caveat here is that a Film3 DAO can’t organize as a collective but engage in centralized activities; meaning that small groups can’t control production and distribution off-chain without the knowledge or participation of the community. But there’s nothing stopping a cooperative from incorporation the sub-DAO or committee idea and give members the ability to participate in those activities to ensure that the cooperative is sufficiently decentralized.

Non-Ownership Idea: Not-For-Profit Collective

But what if a Film3 DAO only wants to avoid ownership and only distribute revenue sporadically to its members? Than an unincorporated not-for-profit collective is an option.

Before California legalized cannabis, it allowed medical cannabis patients to organize as patient managed not-for-profit collectives. Although they weren’t allowed to disburse profits to members, these collectives were allowed to reimburse members for services and contributions provided to the collective.

Film3 DAOs can replicate this same model and offer members compensation for their services and contributions. And an unincorporated not-for-profit a DAO can distribute funds to members in the form of grants or rewards for coding, marketing or even voting. Rather, then offering voting bounties in governance tokens, DAOs can reward members with stablecoins or dollars for voting on proposals.

But like cooperatives, a not-for-profit collective must remain decentralized and can’t rely on small groups to manage and control vital activities for the benefit of the community. So there still must be member contribution to both production and distribution.

Finally, I should mention that it’s easy for a lawyer to discuss possible theories or actions, but it’s much harder put it into practice. So don’t take the above as legal advice and consult your lawyer before trying anything.

But Film3 is an exciting opportunity with immense potential. And if it can find a way to offer serious financial incentives for members to participate then Film3 can grow to serious challenge and replace Hollywood and become the movie industry of the future.