The Inkshares Blog – Why Equity Crowdfunding Is The Best Thing For…

by crypto journalist

By Adam Gomolin, General Counsel

The end of October consistently finds me in a bookstore.  Three of my good friends have birthdays within a few days of each other, so I make my way to Browser Books on Fillmore Street in San Francisco.  Last year, I didn’t think twice about the price of these books, each between $25 and $60.  But this year I was furious: not at my friends, of course; nor at the priceless neighborhood bookstore, which I hope continues to thrive for many years; nor even at the legacy-publishing system, which produced the great pieces of literature and nonfiction on which I was raised.  I was furious for the authors, who receive a paltry 10% of the money I forked over.  I was furious as the consumer, paying such a high price for a book when so little of it goes to its creator.  I was furious because I know this year what I did not know last year: I know we can do better.

Inkshares came together around a core idea: to use the JOBS Act’s equity-crowdfunding provisions to allow readers to invest in books much the same way that legacy publishers do.  That is, we wanted to create a portal by which anyone could invest in, and thus own a part of, great books.  In conjunction with that, we wanted to provide the core set of value-added services – editorial, design, print, distribution – unavailable on a funding-only portal.  These services are an important part of creating great books.  (We’re also focused on crowdfunded journalism, because that system suffers from many of the same core maladies.)

Equity crowdfunding means that the crowd funds a venture, providing its money in return for a share in the company – a classic “security interest” under the law.  That’s different from more general crowdfunding on a platform like Kickstarter, where you donate or trade funds in return for the promise of a finished product (we will also have pre-orders and nontraditional goods like dinner or drinks with the author).  Put simply, equity crowdfunding is what we do in the stock market every day.  However, the shares you trade in the stock market are those of what the SEC terms “publicly-registered corporations.”  These corporations are subject to burdensome regulations, including filing large informational disclosures.  The unfortunate reality is that these regulations are so laborious and costly that only gigantic corporations can bear them.  What this really means is that equity crowdfunding by the general public has only been for large corporations.  It also means that until now, publishing houses were the only ones with a viable system for putting money behind words, bringing those words to market, and profiting therefrom.   

The JOBS Act changed this (the first draft of the rules came out last week, the full version likely but a few months away).  It allows smaller entities, such as individual authors, to equity crowdfund from the general public without having to become a publicly registered corporation or bear the burdens of the corresponding regulatory stricture.  We believe that this can create a sea change in the economics of publishing.  It will allow authors to connect with their readers and raise money directly from them.  And it will allow readers to not only enjoy, but also profit from, great books.  

This takes me back to my fury in the bookstore.  Each of these books is a product of the legacy-publishing system – or at least, the lack of a viable alternative to it.  Legacy publishing ideally works roughly as follows.  An author writes a manuscript.  The author then seeks out an agent.  The agent sells the book to a publishing house.  The publishing house gives an author a small advance, provides the author with important editorial and design services, manufactures the book, and then works with a distributor to put it in retail outlets, whether online or brick and mortar.  The question remains as to what is the matter with this system: why was I so angry?

First, many great books don’t get published.  The legacy publishing process is defined by its obstacles.  Agents are difficult to find.  Without one, your manuscript sits in a purgatory called the “slush pile,” your future tethered to the slim probability that it lands in front of a Vassar intern with the good taste and temerity to insist on its quality to a superior.  And, even if one finds an agent, most only marginally increase the chance of your manuscript being acquired.  Indeed, the reality is that most publishing houses are not very good at picking out what we want to read.  The most famous example in recent years, publishing house after publishing house rejected Harry Potter.  Our solution is to allow the crowd to decide what does or does not get published.  Let readers decide what they want to read.  We think that if J.K. Rowling had posted the first chapter of Harry Potter on Inkshares, and a parent had read it to their child, the child’s rapt attention would have moved that parent to pre-order or invest in Ms. Rowling and Mr. Potter (a wise bet that would have been).

Second, the price of a book is inflated, the product of an outmoded and inefficient publishing model.  Publishing houses bear gigantic risks because they aggregate gigantic portfolios of books.  When they publish a book people don’t want to read, they take on huge losses.  Their answer to this is to raise the prices of all books.  That way, books that sell make huge profits, covering the losses on their duds.  Bottom line, when you buy a book, you’re not just paying for a book, you’re paying for a broken business model.  As a consumer, that’s partially what infuriates me.  By contrast, Inkshares allows for readers to invest in or pre-order on a book-by-book basis.  This means we can significantly lower the price of a book.

Third, authors receive a slim slice of the royalty pie, because publisher’s need to hog it in order to make up for their losses.  This means that all but the best-selling authors struggle to make ends meet.  Authors have the creativity, intellect, and drive that produces great books.  It’s not okay that authors receive only about 10% of the list price of a book.  They’re not marginal parties: they’re the sina qua non, the foundation, the keystone.

In sum: (1) there are great books that never get published; (2) books are inflated in price to make up for the shortcomings of an outmoded business model; and (3) the barest sliver of the royalty pie goes to the author who creates the book.  Inkshares wants to use crowdfunding, and equity crowdfunding as a major part of that, to resolve each of these problems.  We want (a) every author to have a chance to pitch his vision to a crowd of interested readers; (b) a book’s price set by the author, not inflated by a publisher to cover losses on separate and unrelated works; and © authors and their investors to share the majority of the royalty stream.  

Book publishing is strong.  It’s grown over each of the last few years, a $15 billion industry annually.  Inkshares wants to make it stronger.  The books I bought today are great books.  They’re brilliant words, diligent research, creativity incarnate, perfectly designed.  But they’re also overpriced and too much of their revenue flows to a broken legacy-publishing system, rather than the authors who deserve it.  Maybe next year the books I buy will be different.  They’ll be just as great, but a little less costly, and more of it will go to the authors.  And, if equity crowdfunded, maybe some of those dollars will flow to you as well.


This content was originally published here.

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