Entrepreneurs will soon be able to raise up to a million dollars from the public, thanks to new equity crowdfunding rules from the Securities and Exchange Commission that take effect in May.
That opens up a new pool of investors, but it also exposes an idea or invention to more eyes. So businesses need to be careful.
- Safety first. “It’s important to protect your intellectual property prior to undertaking a crowdfunding campaign, especially one in which your idea or venture will be publicly disseminated,” says George Likourezos, a partner at the Melville intellectual property law firm of Carter, DeLuca, Farrell & Schmidt.
He advises filing both a patent application and trademark application, depending upon the intellectual property you want to protect, with the U.S. Patent and Trademark Office.
In 2013 the United States went from a first-to-invent system to a first-inventor-to-file system, giving precedence to the patent application that’s filed first. So if you fail to file a patent application before launching a fundraising campaign, you risk someone seeing your idea, improving on it and filing first, notes Likourezos.
- Leeway on time. If you want a placeholder before filing for a full patent, file a provisional patent application, which gives you one year to file, he said. The provisional process costs $2,000 to $3,000, compared to $8,000 and up for some types of full patents.
- Trademarks. Similarly, if you have a unique product name, logo or slogan you want to protect, you should file one or more intent-to-use trademark applications to begin the federal trademark registration process, Likourezos advises.
Unlike patents, with trademarks and copyrights first use generally establishes common-law rights. So if you can prove you were using a name or logo before launching your funding campaign, you may be able to defend it after the fact, notes Michael S. Melfi of Melfi & Associates PC in Birmingham, Michigan, and author of “The Simple Secrets of Crowdfunding” (CreateSpace; $19.95) and “The Simple Secrets of Intellectual Property” (CreateSpace; $14.95).
Still, Likourezos recommendes you file your trademark application before launching a campaign as an added safeguard. Filing costs about $1,000, he says.
- Onus is on you. Whatever you disclose on a crowdfunding site, the onus is on you to protect your intellectual property, says Melfi. The sites don’t offer intellectual property protection, he says. “Usually you’re posting at your own risk.”
Ultimately, “it’s important to only provide information you feel comfortable disclosing to the public on these sites,” says Melfi, noting it’s prudent to consult with a professional.
- Confidentiality. When conducting any offerings on these sites, make sure you have “proper offering documents that put in place confidentiality provisions and other appropriate disclosures,” says Neil Kaufman, a partner at the Abrams Fensterman law firm in Lake Success and chairman of the Long Island Capital Alliance in Melville.
To be sure, there’s always a risk, even when meeting with private investors, that they might steal your idea, he notes. “That’s why many companies require potential investors to sign confidentiality agreements.” That protection, though, is not feasible when dealing with hundreds of potential crowdfunding investors.
- What if? A failed crowdfunding offering, says Kaufman, “leaves public evidence of a lack of investor interest in your company, and this could adversely affect your ability to raise alternate financing.”
In most cases, though, the biggest roadblock stopping entrepreneurs from taking their ideas to market is their own lack of action, says Jason Best, co-author of “Crowdfund Investing for Dummies.”
He has “zero examples
” of ideas stolen on crowdfunding sites.
Percentage of small business owners surveyed last year who were unsure of the risks involved with crowdfunding.