Legal Brief: Financial Dreams--Four Legal Risks of Crowdfunding Your Best Ideas

November 2014
Nicholas D. Wells
Utah Business

When Sunny T. wanted to launch a new line of titanium accessories, he did not get out his credit cards or call his rich uncle for a loan. He launched a Kickstarter campaign where people could contribute money to his venture, essentially pre-purchasing one of his key chains or other titanium designs and funding Sunny’s business in the process.

Kickstarter, Indiegogo and dozens of other crowdfunding sites can connect inventors with enthusiastic supporters to help create the “Next Big Thing.” Crowdfunding is an exciting concept, but before posting an idea and collecting donations, consider the legal risks and proceed with caution. Seth Quest didn’t consider all the consequences of crowdfunding and last year he declared bankruptcy because a donor to his Kickstarter project sued him for nonperformance. Seth neglected to finish his project after collecting money from crowdfunding donors. Maybe the person who sued him was being unreasonable, but making promises and taking money does have consequences.

Here are four legal risks to consider before posting a project on a crowdfunding website:

Losing patent ownership

Disclosing your patentable idea starts a one-year clock under the United States patent laws. If a patent application is not filed during that time, then a patent cannot be filed on the products you have disclosed. Further, in virtually every other country where you might want to export your product, you simply will not get a patent on any idea disclosed to the public in enough detail that they can produce your invention. 

Since 2013, the America Invents Act created a “first to file” patent system in the U.S. Previously, it was possible to win a challenge to patent ownership by showing (with witnesses or documents) who first created the invention. Now, it no longer matters who invented first; what matters is who filed first at the U.S. Patent and Trademark Office.

Disclosing an idea on a crowdfunding website before filing a patent application may mean giving someone else everything they need to grab ownership of the idea. 

Losing the Brand

Lots of crowdfunding projects involve creative works like independent films. For many others, the project will include a clever name—a brand for the project or the new product to be produced.

The basic rule is whoever applies to register a trademark first will get the registration and can block other similar trademarks from being registered. If a clever new brand name and logo are used on a crowdfunding website, someone else could be the one to file for trademark protection first. While the inventor could initiate a lawsuit to get ownership of the trademark, it would waste a lot of time and money.

Trademark rights in the U.S. are linked to using a mark “in commerce.” So file for protection before sharing a new brand with the world.

Sharing Success

Even if an idea or brand is protected in a crowdfunded project, there still might be trouble. 

Most crowdfunding sites allow people to comment on projects, especially if they become donors. But, who owns the ideas others contribute? What if those ideas are used to build on the invention or become part of a film script or children’s book?

Some crowdfunding sites (see Indiegogo) specify that the project sponsor owns all submitted comments. But one of the largest crowdfunding sites, Kickstarter, does not even define the ownership of submitted comments. So before incorporating ideas and suggestions from donors, check the terms of the crowdfunding website and consider discussing the situation with a lawyer.

Fulfilling Obligations

Crowdfunding is still a fairly new business model. The obligations and caveats of project sponsors and donors are not always clear. When crowdfunding first appeared, sponsors were giving away ownership shares of their projects, but the U.S. Securities and Exchange Commission (SEC) quickly stopped that as a violation of securities laws. (New laws should make it acceptable, within very tight limits.) 

Now people promise “non-equity” rewards to donors, like a free LED toaster or their names in the film credits. Long lists of rewards entice donors to participate, but what if the inventor fails to finish the project or fails to provide the promised reward?

The story of Seth Quest demonstrates the danger: the law is not always clear and a lot of money can be spent trying to turn the situation around.

Not all crowdfunding projects will face all of these legal issues, but the risks are serious. Crowdfunding can be a great source of financing and enthusiasm for new ventures as long as each project is treated like a real business. Consider the risks, invest in professional advice when appropriate and take responsibility for making the project a success.

Nicholas Wells, a Shareholder with Kirton McConkie, focuses on legal issues related to trademark, media/entertainment, licensing, copyright, advertising, Internet and data privacy. He can be reached at (801) 323-5995 or at nwells@kmclaw.com. www.kmclaw.com