When Using Crowd Funding, Consider IP Consequences
On Friday of last week, I attended a presentation hosted by Senator Michael Bennet regarding the future of crowd-funding. In April, President Obama signed the Jumpstart Our Business Startups (“JOBS”) Act, see full-text here. Senator Bennet of Colorado, working with Senators Scott Brown of Massachusetts and Jeff Merkley of Oregon, crafted an amendment to the JOBS Act that permits limited equity sales through crowd funding. While businesses may now be able to avoid costly compliance with Reg D, individual investors will be limited in the amount of money that they may invest in any one fundraising round. Currently, the SEC is in the process of developing the rules that will implement the crowd funding provisions of the JOBS Act.
The focus of this post, however, will be on the IP issues related to a crowd funding campaign. The success of a fundraising campaign often lies with the pitch. A successful pitch should introduce the business and its management to investors; explain the products or services offered by the company; and communicate the goal of the fundraising campaign. The pitch should convince investors to choose your company over thousands of other investment opportunities.
The challenge, from an IP perspective, is balancing the need to make sufficient disclosures to instill confidence in potential investors and protection of trademarks, patentable subject matter, and trade secrets. First, while the potential risks to the firm’s trademarks are fairly remote, trademark protection should nevertheless be included in an analysis of a funding pitch. As many funding campaigns will be run via web platforms such as Kickstarter, Kiva, etc, there is a potential for a non-U.S., entity to appropriate your trademarks in foreign jurisdictions. A risk exists that a U.S. competitor or troll could seek to limit your trademark rights in the U.S.
Businesses may also jeopardize potential patent rights through an investor pitch. While a patent application requires an inventor to make certain disclosures, the application process imposes strict timeframes. It is entirely possible that a business could trigger an application deadline through an overly broad investor pitch. Businesses may also invite a patent infringement suit from a competitor who believes that the product offered by the firm seeking funding infringes upon the competitor’s patent. Alternatively, even if the product does not infringe upon the competitor’s patent, the mere threat of expensive patent litigation may be sufficient to scuttle a fledgling startup.
A third consideration, and the one that is most often overlooked, is trade secrets. Trade secrets consist of information of a confidential nature that has been collected by a company over time. Trade secrets may include pricing strategies, customer lists, growth forecasts, and marketing plans. In order to maintain trade secret protection, firms are generally required to take steps to ensure access to its confidential information is limited. Of all the different types of intellectual property owned by a business, trade secrets are at greatest risk during the investor pitching process. Information protected by trade secret law can be used to explain the current state of the business, or project out its future growth. While it seems counterintuitive, transparency during the investor pitch process can be the greatest risk to your business.
In order to protect your business model, consult with an attorney familiar with intellectual property law prior to publishing your investor pitch. This can be a challenge to many firms who lack the funding to to hire capable professionals. The cost, however, can be a relative bargain given the potential pitfalls of an overly transparent disclosure.
For a bullet list of other potential issues to consider before utilizing crowd funding services, see this post on Mashable by Bill Clark of Microventures for additional considerations, here.