10 FAQ about Broadway Investing

Before I crowdfunded Godspell, I had a thesis.

“There are thousands of people out there who would love to invest in Broadway shows . . . they just don’t know how to do it, or who to talk to.”

Sure enough, when we announced our plans for Godspell, thousands of leads poured in. In between placing all those return calls I remember thinking, “Huh, will you look at that . . . I got this one right.”

Of course, not all those people invested (in the end we had about 750 investors), but thousands expressed interest and proved my thesis correct.

And all those thousands of people had questions.

Five years later, people still have questions about investing in Broadway shows. As I’ve spoken to more and more potential investors, I’ve noticed that many of the questions are the same.

That’s why I’ve created this FAQ for Broadway Investing. So whether you’re a potential Broadway Investor looking to dip your toes into our theatrical waters, or whether you’re a Producer looking to raise money for your show, I think you’ll find these Qs and their appropriate As helpful.

1. How much do I need to invest?

When a new theater investor asks me this question I always ask them what they think the average investment in a Broadway show is. Their answers usually range between $50k and $100k. The truth is that the average investment is only around $25k according to our survey. And it’s not uncommon for Broadway Producers to accept as little as $10k. (And Off Broadway shows as little as $5k.) So the entry fee isn’t as high as you think.

2. Can I lose more than I put in?

No. Most offering documents for Broadway shows have a clause that limits your liability to only your initial investment. If you can’t find it when you read your documents, ask the Producer to point it out. Now, if the show gets into a situation and it needs more capital to keep running after it opens, the Producer does have a right to ask for a “Priority Loan,” but the key word there is “ask.” You can always say no.

3. Can anyone invest? Do I have to qualify?

Most Broadway and Off Broadway offerings are for accredited investors only, which means you must meet certain financial requirements to invest. See the official definition here to check if you qualify. (Note that as I wrote in this blog, the definition may change again soon allowing more folks to be able to invest.)

The recently passed JOBS Act may eventually allow more non accredited investors to invest, but I would expect JOBS offerings to be used on Off Broadway shows rather than Broadway shows due to the $1mm cap on the capital that can be raised under its regulations.

4. What about tours and high school productions?

When you invest in a Broadway show you are usually investing in the originating production, or the “Mother Ship” as I like to call it. To compare that to the restaurant world, it’s like investing in the first McDonald’s . . . and then watching it franchise. Traditionally, investors in the original Broadway productions have the right (but not the obligation) to invest an amount proportional to their original Broadway investment in any additional companies produced by the same Producer (i.e. National Tours, London, etc.). Additionally, all those other companies pay a royalty and usually some net profits back to the Mother Ship. So if you invest in an additional company, you can make money on both sides (or if you choose not to invest in an additional company, your Broadway investment will still benefit from the profits (if any) of that company).

For any subsidiary activity that the Producer does NOT have the rights to (i.e. Greece, a movie, etc.) the Mother Ship is still paid a percentage of income received from the Authors for that activity (usually between 30-50%). However, it’s important to note that this doesn’t last forever. There is a ticking clock (somewhere between 7 and 30 years traditionally) that starts as soon as the Broadway production (or last production produced by the Producer) closes. The length of time that the investors receive this income is based on the percentage referenced above (the higher the percentage they receive, the less time they get this money).

Subsidiary deals do vary for each show, so ask your Producer to describe what your show’s deal is. These are very important as a good subsidiary deal can mean a long-term annuity fund for a successful show.

5. Do I get to go to opening night?

If you invest in Coca-Cola, they aren’t going to send you a free six pack. But on Broadway, we like to give you lots of perks! And yes, opening night is one of them. But, usually opening night tickets require a minimum investment. I try to get every investor into the opening nights of my shows, no matter the amount, but because the theaters are limited in size, this is often challenging for many Producers. Ask what the minimum is for opening night up front.

You should also get access to “house seats” (full price tickets reserved for VIPs), and may also be invited to dress rehearsals, meet and greets and more.

6. How does this work with my taxes?

Thanks to a very recently passed law, taxes for Broadway investors are easier now than they have been. First, it’s important to remember that this is an investment. You will receive a K1 at the end of every year just like you would for any investment. And since Producers don’t know your specific situation, you should always talk to your accountant about how an investment (successful or not) will impact your taxes. But yes, expect to pay taxes if the show is profitable and yes, expect that you will be able to write off a loss if not. And, click here to read about how the government has finally made this more advantageous for Broadway Investors. (By the way, Producers shouldn’t be giving you tax advice so if one does . . . don’t listen and call your accountant.)

7. Can I afford to invest?

Investing in Broadway shows is a very risky endeavor. According to industry averages, only one out of five shows recoup their investments. As I say to all my first-time investors, “Write this check like you are never going to see it again.” It’s important to have proper expectations, especially on your first time out.

8. How do I pick my first show to invest in?

Make sure you pick something you love, so if it does disappoint you and doesn’t recoup, you will still be proud to have helped make it happen. Some people hang a piece of art on their wall. You’re going to hang a poster for a Broadway show. You want something that is going to make you think, “Look at what I helped make!”

And make sure you’re investing with a Producer you know and trust and has a good track record for returning investments, producing quality shows and communicating with his/her investors.

9. Ok, I want to invest, but how do I find someone to invest with?

Although Producers don’t usually advertise that they are looking for investments (there are regulations against that), most would be happy to take your information if you raised your hand and said you were interested in getting involved with a show. My suggestion to potential investors is always to go see shows, and when you like one, look at the name at the tippy-top of the list of Producers on the Playbill. That’s the lead Producer . . . and if you liked his/her show, then you have similar tastes. Reach out to their office (a quick Google search will find something for them I’m sure) and say, “Hey, I liked your show. Can you put me on your list?” I’d bet money they will.

Now, don’t expect to get a call to invest in the next “sure thing.” First-time investors usually have to take a little more risk on a show before they are offered the shows that are safer bets. Why? Well, when Producers do have something that feels big (a show with a big star, etc.) they usually go to the people who have lost money on bigger risks before. There is seniority, as I’m sure you can understand.

10. What if I wanted to invest more and be a Co-Producer?

For larger investors, it is possible to earn additional perks including Above-The-Title Producer credit, additional profit percentages, participation in business decision making, and more. Contact your Producer if you are interested in these opportunities. Average Co-Producer investment minimums average around $350k but can be lower or higher depending on the level of risk involved with the production.

And lastly one bonus FAQ, and the most important . . .

11. Why should I invest?

Because you love the theater. Period. Yes, you can make money. Yes, you can make great networking connections. Yes, you can learn if you’re looking to produce/develop your own shows. But the bottom line is only invest if you couldn’t live without it. And think the world shouldn’t be without it either.

Want to learn more about investing in Broadway shows, including my tips and tricks on finding a winner? Click here to register for my upcoming Broadway Investing webinar on March 22!

 

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The SEC may change the definition of Accredited Investor . . . again.

You know why I love having blog readers from so many different industries?

Because they notice things I miss.

One of my super sleuths sent me an email in late December about a report commissioned by the SEC which reviewed the definition of Accredited Investor.  And that report, which you can read for yourself here, has change written all over it.  But will it help the Broadway Producer  . . . or hurt?

Before we get into that, let me back up, in case you’re wondering, “What the heck is an Accredited Investor and why should I care?”

First, to read the definition of Accredited Investor, click here . . . but in layman’s and laywoman’s terms . . . it means “rich person” (anyone with a net worth of over $1mm).

Second, 99% of all Broadway Investments are available ONLY to Accredited Investors (Godspell was an exception).

Now I’m sure you can see why if that definition changes, how it would massively impact how Broadway Producers do business.

So what’s the SEC up to?

It all has to do with the financial crisis.

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, it included a provision to re-examine the definition of Accredited Investors every four years.  And, well, it’s that time.  (When Dodd-Frank passed initially, there was a major change to the definition of Accredited Investor – when an individual’s home was excluded from the calculation of net worth – and instantly so many people were dropped from the category.)

And can you blame them?  $1mm is not what it was ten years ago, never mind twenty years ago.  And since the SEC’s job is to protect the small investor, it just may be time to make some modifications to that definition.

Yeah, that’s right, I said that . . . even though raising that $1mm threshold or modifying it might cost Broadway potential investors.

But that’s not my only suggestion . . . and luckily, the SEC beat me to it!

Rather than read that entire report, let me tell you what the SEC has recommended that affects us:

  • Leave the current income and net worth thresholds in place, subject to investment limitations.
  • Create new, additional inflation-adjusted income and net worth thresholds that are not subject to investment limitations.
  • Index all financial thresholds for inflation on a going-forward basis.
  • Permit spousal equivalents to pool their finances for purposes of qualifying as Accredited Investors.
  • Grandfather issuers’ existing investors that are Accredited Investors under the current definition with respect to future offerings of their securities.

What this means is that they DO want to raise that $1mm net worth threshold to make sense in terms of today’s dollars (and on a rolling basis) . . . but they are willing to allow those people who currently qualify to continue to invest, subject to limitations (not unlike what they are doing with the JOBS Act).

In a sense they are advocating two levels of investors . . . “rich person” and “really rich person.”

This WILL slightly restrict investors who want to get in to our game . . . so why am I not asking you to write to the SEC right now?  Well, first, it makes sense. I can’t argue with things that make sense even if it makes my job a little harder.  The $1mm figure was set in 1982.

And second, the SEC is also recommending some other ways for investors to qualify.  And they are:

  • Permit individuals with a minimum amount of investments to qualify as Accredited Investors.
  • Permit individuals with certain professional credentials to qualify as Accredited Investors.
  • Permit individuals with experience investing in exempt offerings to qualify as Accredited Investors.
  • Permit individuals who pass an Accredited Investor examination to qualify as Accredited Investors.

Now we’re talking . . . so all of a sudden even if you don’t have the assets, but have the knowledge to make an educated decision (and not risk more than you have), you’d be able to qualify.  This could actually EXPAND the Broadway Investor pool if enacted.

And this makes even more sense than raising the $1mm threshold.

While I understand the reasoning behind restricting some investors from certain offerings, it has always driven me crazy that in this country, you can take every penny you have, drive to any casino (which you probably have within 1.5 hours of your home) and risk it all . . . and all that you need to show is your ID.  But, you can’t take even a portion of that life savings and invest it in a small business or what you think might be the next Uber.  Nope, that’s not for you.  That’s only for the really rich.  But please, go buy as many Powerball tickets as you can.  Because that’s a smarter investment.

The definition of Accredited Investor should change.  Create a higher threshold sure, but also allow more people to qualify.  That’s how you inject more capital into small businesses all over America, including Broadway and Off Broadway.

Stay tuned . . . I’ll report back if I need you to start writing letters.

 

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An early Xmas present for Broadway Investors: Tax Relief!!!

Santa came early for Broadway Investors and Producers this year.

After months and months of lobbying (some of which YOU helped with back when I posted this blog), Congress approved a change in an archaic tax law that will benefit Broadway Investors.

Finally!

The gist of the change is this . . .

Previously, Broadway Investors were required to pay tax on paper profits as reported by the show, even if the Investor had not yet received the money for those profits.  Confusing?  Exactly.  That’s why they changed it up.

I can’t tell you how many angry phone calls and emails I’ve received from Investors (usually around April 14th) saying, “Ken!  I finally got a hit!  And now I’m writing a check to the IRS, even though I don’t have the money that I’m paying that tax on?  Tell me why am I doing this again?”

Now, under the old system, the cash would eventually straighten itself out, but boy oh boy was it confusing.

Under the new law?  That “phantom income” concept is gone.  You only pay tax when you get the profit.  (Duh, right?)

What does this mean?  Well, it simplifies Broadway Investing, and anything we can do to make the process simpler (especially when paying profit) and easier to understand gives us a better chance of Investors continuing to play our game.  Too many complications and things that don’t make sense (especially about taxes, which I’m convinced only about 7 people in the world truly understand), and suddenly, just writing a check to a non-profit, which allows the Investor to take the loss right away, seems that much more attractive.

Will the change mean a flood of new Broadway Investors to our market?  Nah.  But we’ll have less Investor attrition for sure.

The bigger win here has nothing to do with the law.  It’s the tip of the hat and the deep bow that Congress just gave Broadway.

What you may not know is that TV and Film already had this tax benefit, but no one ever cared enough about us in DC to make the change.  Broadway was the only entertainment industry treated in this unfair manner.  After the past several years of record-breaking seasons, after multi-billion dollar economic impacts on NYC, after headline-getting news like Universal announcing Wicked would be its most profitable venture ever, after visits from the Obamas to many of our shows, and after our shows making so many appearances at the White House, Congress finally realized that they needed to give our cottage industry a second look.

Yep, this 13-year-old, pimply-faced girl with braces just grew up into a supermodel.

So yeah, I’m happy about the tax change.

But I’m even happier about the Aretha Franklin-sized R-E-S-P-E-C-T that the lawmakers just gave us all.

Major kudos go to the Broadway League, and its Government Relations Committe (led by the Two Toms, Tom Ferrugia and Tom Viertel) for their tireless efforts on our behalf.

 

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First comes Streaming, then comes Crowdfunding, then comes Kenny cooing like a baby in a baby carriage.

What a week Broadway is having!  It’s like innovation week here on the Great White Way.

Yesterday I e-talked about the two positive steps forward we’ve taken in the streaming race, and today there is some news out of Washington that will eventually trickle down and affect us all.

Crowdfunding, like streaming, is another one of those subjects that I’m uber-fond of, mostly because of how I raised money for Godspell back in the day by day.  In order to raise that $5mm, we used an antiquated regulation known as Reg A, which has since been revised, thanks to one of the few bipartisan bills passed in the last decade, the JOBS Act.  The JOBS Act had a number of provisions, including the revision of Reg A, the removal of the general solicitation rules, and what everyone has been waiting for (especially you readers out there based on the # of emails I get about this subject), the legalization of for-profit crowdfunding.

So in typical government fashion, they revised Reg A and removed the solicitation rules, but they’ve sat on the crowdfunding and have failed to write the rules and regulations that would allow it to be used.

But they couldn’t wait forever.

This Friday, the SEC will vote to finalize the rules on “Title III” of the JOBS Act, which will finally allow crowdfunding for non-accredited investors (click that link for a definition of what that is).  And from everything I’m reading, it’s expected to get a go-go-gadget yes vote.

Then what happens?

Well, don’t go raising money for your show from any Tom, Dick or Harriet just yet.  The vote will approve a set of rules for crowdfunding.  Those rules will mostly apply to the portals that the JOBS Act insisted must be set up to accept these investments (3rd party portals at that – so there is a intermediary between investor and raiser).  Once the rules have an effective date (and I’ve heard everything from 60 days from the yes vote to 360 days from the yes vote) then you’ll start to see these portals pop up and start accepting money.

How will this affect Broadway?

Eh.  Early assessments are that this may have zero effect on Broadway shows, since we already know there is a cap of only $1mm that can be raised through this method.  Find me a Broadway show that costs $1mm these days, and I’ll find you a room at Bellevue because you’re living in the 50s, my friend.  That said, once these rules are published and revealed, maybe there will be a few workarounds.  Who knows?

But Off Broadway?

I’ve blogged about this before, but this is where we could see an immediate and important impact.  And frankly, this is exactly why JOBS was enacted . . . to jump start small businesses.  Off Broadway is the small business of the theater industry, and JOBS could play a big role in helping revitalize this beaten up little brother of Broadway.

So if you’re looking to raise money for your Off Broadway show in the coming years, you might just have an easier way to do it than ever before.

Man, streaming, crowdfunding, what’s next . . . plenty of bathrooms?

 

(Got a comment? I love ‘em, so comment below! Email Subscribers, click here then scroll down to say what’s on your mind!)

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What Investment Guru Peter Lynch taught me about Broadway Investing.

You know me, I love to look outside our industry for tips on how to improve what I do every day.  Since I’m a big believer in the theory that the entertainment industry should be its own investment asset class, I read a lot of investment advice to see if I can apply it to how I screen shows.

One of the best pieces of Broadway investment advice I ever received comes from one of the most important investors of the 20th century, Mr. Peter “Legend” Lynch, who took one mutual fund from $18 million to $14 billion.

So when Peter Lynch talks, people punch other people in the face to get them to shut up so they can listen.

One of Peter’s most important investing axioms didn’t have anything to do with P/E ratios or earnings per share or anything financial at all.  It was simply . . .

Invest in what you know.

Peter believed that you should invest in companies that made products that you used every day.  Not only do you understand those products, but more importantly if you used them, and if you were passionate about them, then other people would be too.  And hopefully there would be enough of you to make that stock jump up.

I’ve applied that rule to picking Broadway shows to invest in or produce.

I only produce or invest in shows that I love.  Or to put it in Peter’s terms . . .

Invest in shows that you would see every day.

The reasons why are twofold:

First, see above.  If you are a huge fan of a show . . . and it gets under your skin and into your heart, there are probably a lot of other people that feel the same way.  While that’s not a guarantee of success, it is a sign that you’re headed in the right direction.  I would never invest in a show that someone else loves and you don’t, regardless of how much money you think it might make.  Making a decision because you think you’ll make a lot of money is a surefire way to lose it.  And be unhappy in the process.

Second, when you invest in something you love, and it doesn’t work out, it doesn’t hurt as much.  Because you loved it.  You are proud of it.  You are glad it’s in the world, even though it might have cost you some money.  You helped put art into the world that will have ripple effects all over this planet.  (One of the shows I’m proud of that didn’t work here on Broadway was Mothers and Sons, from two seasons ago.  While we didn’t recoup our investment, that play will be done in regional theaters and international locations for years, helping people understand how to heal with the AIDS crisis.)  To use an analogy, I often refer to Broadway shows that you invest in like your kids.  They are expensive, and they’ll often disappoint you.  But you love ’em anyway.  🙂

Yes, I analyze budgets with a fine-toothed spreadsheet when considering investing in a Broadway show.  Yes, I look at the pedigree of the creative teams before I write a check.

But I always start out with the simplest Lynch-like question . . . would I see this show every day?

Ask yourself that, and while you might not make money every time you invest, you will never go wrong.

Looking for more tips on investing in Broadway shows, or are you raising money and want to better understand the Broadway investing process?  I’m teaching a seminar on the subject next Saturday, November 7th at 2 PM.  Click here to learn more.

 

(Got a comment? I love ‘em, so comment below! Email Subscribers, click here then scroll down to say what’s on your mind!)

– – – – –

FUN STUFF:

– Listen to Podcast Episode #43 with Broadway Director John Caird!  Click here.

– Win 2 tickets to Story Pirates!  Click here!

– Want to learn the ins and outs of Broadway Investing? Click here to sign up for my Broadway Investing seminar on 11/7.

 

Ken Davenport
Ken Davenport

Tony Award-Winning Broadway Producer

I'm on a mission to help 5000 shows get produced by 2025.

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