Crowdfunding involves a large number of people contributing small amounts of money to finance a business venture, typically an early-stage startup company. Over the past several years, online crowdfunding platforms have become a popular tool for new businesses and entrepreneurs to market inventions, generate revenue, and increase customer base. While improving accessibility to funding offers a significant economic advantage, crowdfunders should be careful not to release too much information before legally protecting an original idea.
What Are the Legal Risks in Crowdfunding?
The major legal risks in crowdfunding stem from crowdfunders launching campaigns before adequately identifying and protecting intellectual property (IP). This inadequate IP protection may allow ideas and inventions to be copied or stolen without legal repercussions. The risk of unprotected IP is magnified by various public disclosure requirements mandated by online crowdfunding platforms. Specifically, popular crowdfunding websites like Kickstarter require detailed disclosures of how a particular invention or product works—beyond a simple prototype—before a campaign is posted. Moreover, sophisticated predators are constantly searching crowdfunding websites for unprotected ideas.
How Can Crowdfunders Protect Intellectual Property?
In general, a crowdfunder should ensure necessary IP protection is in place before making any public disclosures in launching a campaign or submitting a business plan. The first step to ensuring adequate IP protection is identifying all potential IP involved in a project. Thereafter, proper protections should be implemented for that IP before the project is released to the general public. Specifically, crowdfunders should consider four types of IP before pitching to investors: (1) trademarks, (2) patents, (3) copyrights, and (4) trade secrets.
First, a trademark registration should be obtained to secure the rights to the unique brand identifier of the product or service. In addition, registering any domain name with an online domain registry to establish exclusive ownership. Second, a patent application should be filed for the exclusive manufacture, use, and sale of the invention as early as possible, preferably before making any public disclosures about the project. In fact, once certain triggering disclosures are made, an inventor will have only 12 months to file a patent application before losing patent rights. Third, a copyright should be obtained to prevent others from copying tangible expressions like website or application designs without permission. Lastly, a crowdfunder should be particularly careful to avoid exposing trade secrets (e.g., recipes, formulas, and customer lists) which forfeit special protected status upon disclosure.
In sum, if you are considering raising capital for a new business venture by marketing the project through a crowdfunding platform, it is essential to consider the IP that may be involved, and how to secure legal rights accordingly. So, consulting with an attorney is the best way to ensure adequate protection before launching a crowdfunding campaign. At our law firm, we assist clients in legal issues associated with the crowdfunding industry. You may contact us to set up a free consultation.