Crowdfunding by LendingMemo
The Legal Side of Crowdfunding
by Roman Zelichenko and Mark Levy
As more and more artists, photographers, and movie makers are turning to crowdfunding to raise money for their projects, it’s important to think about and understand the legal landscape of this new, democratic way of fundraising.
There are four main types of crowdfunding: equity-based, donation-based, lending-based, and rewards-based.
Equity , which is geared toward small company capital raises, provides actual company stock, or equity, in exchange for funding. The financial contributors are actually considered “investors” rather than “backers,” and are subject to a regulatory scheme that is not applicable to any of the other crowdfunding types. Equity crowdfunding came about as a result of the Jumpstart Our Business Startups (JOBS) Act, signed into law by President Barack Obama in April 2012. In fact, in October 2015, the Securities and Exchange Commission finally adopted rules permitting, among other things, companies to offer and sell securities (i.e., stocks) through crowdfunding. These rules are slated to go into effect May 2016. Complicated and wrought with legal questions, this type of crowdfunding generally doesn’t work well for creative projects.
Donation crowdfunding focuses on charities and social causes, ranging from supporting flood victims to helping families pay for medical expenses for loved ones. These donations do not promise anything in return, and can often be written off as nontaxable gifts on individual tax forms.
Lending crowdfunding creates peer-to-peer loan opportunities where money is lent to an individual or organization with the understanding that it will ultimately be repaid, usually with interest. While, in theory, these types can be used to support a creative project, they almost never fit the bill.
Rewards campaigns, the focus of this article, promise various levels of rewards depending on the amount of money pledged. For example, a $20 contribution to the production of a short film might get the backer a personalized “thank you” email or social media shout-out, while a $1,000 contribution might get them an “Executive Producer” credit or a meeting with the cast. These campaigns are usually best for product launches or creative projects, such as books, albums, and video productions.
Legal Aspects of Your Campaign
Before settling on a crowdfunding website and starting to work on your rewards-based campaign, be sure to read and understand the terms and conditions of the site you want to use. It’s not the most exhilarating read, but it will give you an understanding of the legal landscape of your crowdfunding effort and may even help guide your campaign strategy. We’ve compiled a few of the important ones here, and we hope you read the terms in more detail to understand what applies to your particular campaign.
One somewhat obvious yet important consideration is the set of prohibitions crowdfunding sites list in relation to campaign content and offerings. For example, popular crowdfunding site Indiegogo.com includes a list of prohibited campaign “perks,” a list that is important for a campaign’s strategy, as contribution levels and associated rewards are determined. A few interesting ones include the prohibition of alcoholic consumer product or air transportation rewards – so you can’t offer to buy your backer a beer or fly them over to meet the crew on-set. Others are more obvious, such as the prohibition against offering or providing weapons, controlled substances, or financial incentives as rewards. While not strictly legal in nature, each one of these restrictions is based in some kind of law or regulation, whether constitutional law, criminal law, or more complicated financial regulations.
Another vital part of crowdfunding deals with potential disputes. Disputes between funders and campaign owners are strictly handled between those two parties, and the crowdfunding platforms typically don’t get involved. Kickstarter.com, another popular crowdfunding platform, specifically states that it doesn’t “become involved in disputes between users.” Indiegogo goes as far as to say it “may provide the Campaign Owner’s contact information to the Contributor so that the two parties may resolve their dispute” on their own. This is important to keep in mind, especially for campaigns with lofty financial goals – the more funding you seek, the more campaign backers you will be dealing with, and failing to deliver your perks, using the money for something else, or otherwise not complying with your campaign promise can lead to reputational, and potentially legal, trouble.
Other important aspects deal with taxes (both your taxes as well as potential write-offs for your campaign contributors), refunds, and governing laws for any disputes that may come up with the crowdfunding site itself, among others.
Intellectual Property and Your Campaign
One particular area of interest to us is intellectual property (IP) implications, both for you as the campaign owner as well as for the crowdfunding sites. Project funding often hinges on providing potential backers with enough information to convince them that your product, project, or concept, as well as your ability to follow through, are worth their time and money. So if you’re looking to fund your full-length movie, you want to provide them with enough of a storyline and text without divulging, and therefore protecting, your full plot or other important details. Luckily, copyright law is in your favor here since your script, musical score, plotline, and other original work are automatically copyrighted when you describe them on paper. Of course, you can always officially safeguard your work by registering it with the Writer’s Guild of America, ASCAP, or other similar organizations that provide intellectual property rights protection and resources.
Similarly, if you are crowdfunding for a product and working on the video and other campaign content, be sure to consider whether you can patent any of your work or ideas before sharing them. Provisional patent applications are a good, low-cost way to begin the process of patent protection in a pinch, since the full patent process is usually lengthy and potentially expensive. Finally, if your product is based on trade secrets, you should consider refraining from sharing them at all, since once publicized, they cannot be protected.
Now, let’s consider everyone else’s intellectual property rights. When creating your campaign content, be careful not to infringe the intellectual property rights of others. If you intend to use a song, lyrics, or other potentially copyrighted material, for example, it is best to contact each copyright owner (there may be multiple copyright owners even for one work), and obtain permission to use the work. If you intend to use a name or logo in your campaign, be sure to perform a trademark search on the U.S. Patent and Trademark Office website (uspto.gov).
Crowdfunding sites take IP violations seriously. Kickstarter, for example, reserves the right to “delete or disable content alleged to be infringing, and to terminate accounts for repeat infringers,” and Indiegogo follows suit. Infringement can also lead to a potential lawsuit down the line, so take care to avoid such headaches by considering any IP implications when first creating your campaign.
We love the idea of reaching out to the masses to help support creative endeavors, and are even more excited when these campaigns succeed and projects go on to be success stories. But you will have to do some leg work in the beginning. Keeping in mind the legal implications of creating, setting up, and running your campaign falls into that category.
If you find yourself scratching your head as to the legal nature any part of your crowdfunding campaign, speak to a lawyer for help with your case. Fleshing out the details of your campaign in the beginning, and thereby avoiding any costly or simply stressful legal issues down the road, is always worth the conversation. Crowdsource your success, not a lawsuit.
Roman Zelichenko, based in New York City, is a business consultant with intellectual property experience, and has drafted legal opinions and articles on the subject. Mark Levy is an award-winning amateur movie maker and intellectual property attorney now based in Colorado. In addition to offering occasional insights to the legal side of the creative life important to the starving artist, Levy is Ragazine.CC’s “Casual Observer.”