Magazine article Risk Management

The Risks of Crowdfunding: Most Have the Best Intentions When It Comes to Crowdfunding an Ambitious Project, but Intellectual Property Issues, Ownership Rights and Perk Obligations Present Potential Hurdles to Making a Dream Become Reality

Magazine article Risk Management

The Risks of Crowdfunding: Most Have the Best Intentions When It Comes to Crowdfunding an Ambitious Project, but Intellectual Property Issues, Ownership Rights and Perk Obligations Present Potential Hurdles to Making a Dream Become Reality

Article excerpt

Thousands of small companies, independent artists and entrepreneurs now use crowdfunding to raise money for their projects. In 2012 alone, nearly $320 million was raised through Kickstarter, the largest crowdfunding company. The process is simple: a person seeking money submits a project and the public can pledge money to any idea that they want to see succeed. In addition to Kickstarter, dozens of other crowdfunding companies have sprung up, including both general-purpose sites, like Indiegogo, and those focused on funding specific types of projects. These companies, through their popular websites, now fund everything from scientific research to music albums to films, and individual donations can range anywhere from five bucks to several thousand dollars.

But a factor often lost in the race to this new business model is the legal risks for those who use crowdfunding to raise money. Early models of crowdfunding, for example, offered equity in exchange for donations to a start-up venture. That model was quickly recognized as a violation of state and federal securities laws and is no longer used. Instead, people now donate cash merely for the "feel good" factor or for token rewards such as a credit line in an independent film or a t-shirt with the company's logo.

Still, even though the model has matured beyond its misguided beginnings, four key risk areas remain for anyone who submits projects to crowdfunding websites.

Patents, Trademarks and Copyright

Most crowdfunded projects, whether technology-focused or related to the arts, involve intellectual property. And public disclosure of intellectual property can have a significant affect on its legal status.

For example, if a patentable technology is publicly disclosed in a way that enables someone else to use the new technology, this starts a one-year countdown under the U.S. Patent Act. If a patent application is not filed during that time, then a patent cannot be filed. If the project creator wants to follow a growing trend and file a patent in countries other than the United States, there is no one-year bar. Instead, in most countries there is a requirement of absolute novelty. So a public disclosure in the United States means patent protection is no longer available in most other countries.

Perhaps of greater concern, beginning this month, the United States will move to a "first to file" patent system. Under the America Invents Act, whoever files a patent first will have priority. If an entrepreneur disclosed a new technology on a crowdfunding website and someone else filed a patent application before the entrepreneur got around to it, the filer would own the invention. (The entrepreneur could litigate ownership based on various legal theories, but the outcome would be much less certain.)

A similar problem exists for trademarks. Whoever files for a trademark first is presumed to have rights to that mark. A crowdfunded project that discloses a catchy new slogan for which a federal trademark application has not yet been filed is at significant risk of having someone else file an application for that trademark. Imagine for a moment that YouTube--a trademark now worth millions--had sought crowdfunding and disclosed its brand without registering it. Once again, the original owner can seek a court order to obtain ownership, but a much easier path is to protect the brand before disclosing it.

The risks of disclosing copyrighted material are more subtle. In many cases, the relevant copyrighted material has yet to be created; funding is often being sought to allow an artist to create a copyrighted work such as an art installation or a documentary.

But if the relevant copyrighted work has already been created, disclosure is generally equivalent under the Copyright Act to "publication." And publication starts a 90-day clock under the Copyright Act. If the copyright for a work is registered at the Copyright Office during this 90-day window, the copyright owner can claim statutory damages if someone infringes the copyright. …

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