Got Intellectual Property? Part III: Crowdfunding and IP

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Check out the first two parts of Mary's great series on Intellectual Property here and here.

Equity crowdfunding under the JOBS Act (Jumpstart Our Business Startups) is legal in the UK and Australia but not yet legal in the United States.  Reward, donation, or perk-based crowdfunding is legal in the US; think Kickstarter, Indiegogo or RocketHub. This ‘rewards-based’ crowdfunding has been an active space over the past couple of years, both in the US and internationally. 

What is the difference? 

At a conceptual level, equity crowdfunding allows the average person to buy a security in a private company without that company having to go public and list shares on a stock exchange. 

The person becomes an investor and a shareholder and the company that is raising money through crowdfunding is considered an issuer.

In direct contrast, the person supporting a rewards-based crowdfunding campaign does not become a shareholder in the company. Instead, the reward or the perk offered is received. Rewards range from an actual product, for example the Pebble watch; a film credit; or an advance copy of a book to a listing as a donor on a website.  The process and rules for rewards-based crowdfunding campaigns have rigor but pale in comparison to the equity crowdfunding requirements in the US JOBS Act.

Get Prepared

Equity crowdfunding is prohibited until the US Securities Exchange Commission (SEC) promulgates the rules.  

Although the list below is daunting, with proper planning companies can be ready for equity crowdfunding as part of the normal course of growing and running a business.

The following will be necessary to equity crowdfund under the US JOBS Act (1) :

  1. Company must be registered and incorporated in the US;
  2. Names of the Directors, Officers, and any Shareholder with more than 20% of ownership;
  3. Business Description and Business Plan;
  4. Financial Statements with varying levels of attestation depending on the amount of money being raised;
  5. Prior year Tax Returns;
  6. Goal for Capital Raise and Target Dates (progress updates are also required);
  7. Planned Use of Capital Raised;
  8. Share Price and methodology for determining share prices;
  9. Detailed information on the Ownership and Capital Structure, including terms for the shares being offered under crowdfunding; and
  10. Terms of any other outstanding shares and the differences between those outstanding and those being offered.

This list is not exhaustive because the SEC may add more requirements to protect investors and the public. 

Many of the above requirements are good practices for any business and necessary for accessing capital, regardless of the source. Thus, companies should start preparing now.

IP and Crowdfunding 

Intellectual Property (IP) is a consideration when raising capital from sources including banks, government grant programs, competitions, accredited Angel or Venture Capital investors, and definitely crowdfunding.

Investors want to know that your IP is protected as a barrier to entry against competitors.  When raising funds, you gain credibility with investors when IP is  identified, secured, and managed effectively. 

Equity Crowdfunding Business Plan on the Internet 

Under equity crowdfunding requirements, the contents of the business plan will be displayed on a crowding funding platform. This means that disclosure of the secret sauce or too much information about products or process may jeopardize any Intellectual Property rights .

Although most entrepreneurs recognize that success lies mainly in the team and execution, it is good business to protect your ideas and avoid accidentally disclosing too much.

Disclosure for all types of Crowdfunding

A US inventor raised funds on Kickstarter over a year ago.  He disclosed all the details about his product in the video and words in the campaign.  The question of whether he would be barred from filing a patent in the US or internationally due to the Kickstarter disclosure is a legal question. Although legal advice should be sought from a licensed attorney, the time to ask the question was when he was designing the campaign.

Before you crowdfund: 

  1. First identify all IP assets.  Do not rush to create a video, publish an article, show a demo, or post a campaign without first identifying what type of IP you may have.
  2. Know IP basics. Kickstarter recently changed the rules for Hardware and Product Design Projects. Kickstarter is not a store(1)  discussed the requirement for information on how the project “works.” This raises a red flag to those understanding the concept of disclosing enough information in public so that someone in the same field can recreate your invention.  Ensure you seek legal advice on the appropriate level of disclosure for your crowdfunding campaign.
  3. Keep Trade secrets secret If your idea relies upon some secret process or recipe, or if your business thrives because of  your customer or supplier list, it must be kept secret to be protected. Do not release these secrets as part of a crowdfunding or any public disclosure. Also ensure your employees, contractors, suppliers, and others are bound to keep those secrets confidential.

In order to crowdfund, a public campaign is necessary and concealing everything about your idea will not work. However, by first identifying your IP and educating yourself, you will find the right balance for your capital raise disclosures. 

(1) Thank you to www.crowdfundingroadmap.com for the minimum requirements list. 

(2) http://www.kickstarter.com/blog/kickstarter-is-not-a-store

The next article in the Got Intellectual Property? series will focus on the debate that emerges concerning patents. Subsequent articles will discuss IP ownership strategies, special copyright challenges with respect to software development, and trade dress issues, but please remember, when in doubt, consult an attorney. 

This article was written by Mary Juetten, founder of Traklight.com a site that provides inventors, creators, and small businesses with the tools to identify and protect their intellectual property. Traklight® products include the IP Vault®, which enables users to time-stamp and store files to prove dates of creation, invention, and publication. Visit www.traklight.com and take the IP Risk Quiz to assess the risk of losing your IP and use ID your IP®  to identify your IP. Ms Juetten is also a member of the CfPA and CfIRA, two US based crowdfunding organizations.

Disclaimer:  This article is intended to be general information and nothing in this article constitutes legal advice. Please consult with an attorney before making any intellectual property decisions.

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