Intellectual Property and Crowdfunding: Practice Safe Crowdfunding®

Intellectual Property and CrowdfundingBy Mary Juetten, Founder and CEO of Traklight

Crowdfunding, despite its popularity, is still misunderstood. Many people are familiar with rewards crowdfunding sites like Kickstarter and Indiegogo based on widely publicized campaigns such as the Pebble Watch and the Veronica Mars movie. However, the intricacies of the Jumpstart our Business Startups (JOBS) Act, the federal equity crowdfunding legislation, continue to be a mystery to entrepreneurs and potential investors alike. Further, any link between all types of crowdfunding and intellectual property (IP) is less well known.

The JOBS Act was passed into law in April 2012 but the Securities and Exchange Commission (SEC) has not released the long overdue final rules. Comment letters were requested late in fall 2013 and, like many involved in advocating for non-accredited investors to be able to invest in startups, we filed Traklight’s comments in January 2014. In general, our position is that we recognize the difficulties associated with balancing investor protection and deal flow with startup access to capital. Thus we provided suggestions with a view to reduce costs to companies seeking funding while still balancing investors’ needs for protection.

In short, the JOBS Act will allow federally what some states are already doing within their borders. The average American will no longer have to be accredited (i.e., required to meet minimum net worth of a million dollars or income of several hundred thousand dollars per annum) in order to invest in private companies. Unlike Indiegogo, where money is contributed for a perk or reward, equity crowdfunding will allow you to actually buy shares or equity in a company using an online platform or portal.

For reference, equity crowdfunding is practiced in countries such as Australia and the United Kingdom. Other platforms, such as AngelList, offer equity-based investments but for accredited investors only.

IP and the JOBS Act

When we wrote our comment letter to the SEC, we quoted our company mission as educating and empowering entrepreneurs and businesses on intellectual property and innovation for their success. Therefore we expressed grave concerns about any public disclosure when entrepreneurs may not have first properly identified and adequately protected all intellectual property: trademarks, copyrights, trade secrets, and patents. We recommended that warnings be provided to issuers and, in addition to the education provided in the JOBS Act for investors, we advocated for entrepreneur education. We would like to see information on IP identification, protection, innovation capture, and disclosure of the same plus a non-exhaustive list of potential public disclosures that both educate the entrepreneur and improve the quality of deal flow for investors.

Steps to Successful Crowdfunding:

We advise that you Practice Safe Crowdfunding® as follows:

Identify and protect IP.

It is extremely critical to protect IP before launching your rewards-based crowdfunding campaign since launching requires that you completely disclose how your invention or product works. For example, Kickstarter will not allow a drawing or prototype but instead asks for details on how your product works, enough in most cases to be an enabling public disclosure. Under equity-based crowdfunding, the rules propose similar disclosure in the business plan.

Also, setting out how your product works in a public forum is going to affect your patent rights inside and outside the US. Patent lawyer George Rondeau had this to say:

In the U.S. a public disclosure will start a one year period running within which you must file a patent application to avoid loss of patent rights, which may force you into filing before your invention is ready. It also presents the possibility that another person may copy your idea and even fraudulently file a patent application on it before you do, which is a real problem now that the U.S. uses a first-to-file patent system. At least filing a well written provisional patent application is suggested before making a public disclosure if you cannot file a full nonprovisional application using a patent attorney. The public disclosure will result in immediate loss of patent rights in most foreign countries if you have not previously filed a patent application. It will also destroy any trade secrets, leaving patents your only option to protect your invention.

Your brand should be protected with necessary trademarks or copyright before you launch your campaign. There are horror stories of names and designs being copied because the entrepreneur did not protect before launching. However, keep in mind that before you can protect your IP, you must first identify all your potential IP.

Choose the right platform.

You can either opt for an all-or-nothing or earn-what-you-raise system. It is important to determine how much of the funds raised will be used for fulfillment of your rewards so you do not fail to provide the rewards offered.

You should choose a platform where you will reach your crowd. When we are using the equity rules, I recommend choosing a platform that will educate you on the rules and process.

Build social capital (not just social media followers).

It is important to create value and market presence before launching your campaign. Simply put, you must prime the pump or presell. Have friends, family, and networks ready before the product launches so that you reach 20–30% of the goal on the first day of launch. Crowdfunding has its origins in charitable donations and those campaigns are always pre-loaded before announcement. Look at the training materials on the larger sites for advice.

Create your pitch and put up the campaign.

This is where we caution people to be careful about infringement; no one wants a large fine or even a cease and desist letter. We encourage people to read terms and conditions of all third party content (i.e., music, videos, photos) used when making their pitch. Remember, just because there is no copyright © on the item, whether on the Internet or not, you do not have the automatic right to use it for your campaign.

In the meantime (since federal equity crowdfunding is still unfortunately illegal), you can look to intrastate equity crowdfunding, which is allowed in at least 10 states that have passed requisite acts. For example, if you are a Georgia company and want to raise funds solely from Georgia investors, then you can do so by selling portions of your company under Georgia intrastate equity crowdfunding laws on an intrastate funding platform.

Please join me on Twitter @maryjuetten and @traklight to help spread the word that the SEC should #releasetherules.

Mary Juetten is the Founder and CEO of Traklight, the only self-guided software platform that creates your custom intellectual property (IP) strategy. Mary has dedicated her more-than-25-year career to helping businesses achieve and protect their success, specializing in leading companies in transition or startup phases and helping them create sustainable, operational, and financial growth. Mary wants entrepreneurs and businesses to have Fortune 500 style software solutions! She has a Bachelor of Commerce degree from McGill and a Juris Doctorate from Arizona State as well as her US and Canadian accounting and public accountant certifications. She is an international writer, speaker, and mentor, as well as co-chair of the Arizona Technology Council’s Law and Technology committee. Mary also represents entrepreneurs on the Board of the Crowdfunding Intermediary Regulatory Advocates and the Emerging Enterprise Committee of the Licensing Executives Society.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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