Issue and Risks Associated with Crowdfunding

Crowdfunding has become very popular for both entrepreneurs and people interested in helping. For entrepreneurs, it is an efficient and fast way to raise the money necessary to launch an idea. For people who donate, it is an opportunity to support an idea while simultaneously obtaining a benefit (the product promised, in addition to the perks offered by the entrepreneur). While it can be very beneficial, there are important risks that both entrepreneurs and people donating need to be aware of.

Intellectual Property

Crowdfunding may be utilized for a variety of purposes, from publishing a book to producing the next big “must-have” gadget. If you discuss patentable technology in a way that would allow another person to use that technology, you will have to file for a patent within one year or lose your right to a patent. It is entirely possible that you will disclose technology in this manner because of the way in which crowdfunding works.

Another issue related to patent is the first-to-file rule that the United States Patent and Trademark Office (USPTO) follows. If you discuss your idea on a crowdfunding site prior to applying for a patent, another person may take your idea and file a patent for it. It is possible to litigate to determine who has rightful ownership of the patent, but this can be costly and may not be successful.

Failing to Meet Obligations

It is common for entrepreneurs to promise two things: the production of the idea and certain benefits for those who donate. A failure to fulfill either of these could result in liability or, at the very least, make you the defendant in a lawsuit. Clearly, there will be significant issues if you meet your crowdfunding goal and then make no effort to accomplish your purpose. But, it is also possible that individuals, especially those who donated a large amount, will not be satisfied, even if you made a concerted effort to complete your idea.

To help protect yourself, you should avoid specifically stating that you will accomplish objectives. Instead, use language that indicates you hope to develop your idea into reality, even though there may be challenges along the way. This type of language makes it clear you are not promising anything.

Fraud

The ability to raise large sums of money quickly could lead to individuals committing fraud in an effort to steal money. This could be accomplished by using misleading statements about a project or the expected outcomes. Alternatively, the money raised may not be used appropriately.

As an individual starting a crowdfunding campaign, it is important to remember to use the money strictly in accordance with your stated objective. Any other use may result in a lawsuit being filed against you. Similarly, a person donating should be careful that the entrepreneur they give to follows through with their goal and doesn’t spend the money on other items.

Consult an Expert

Working with an expert insurance broker and attorney can help you craft proper customer and vendor agreements, while protecting your assets with appropriate insurance. Forming an LLC or Corporation will theoretically protect you from personal liability but many arrangements can open you up to personal liability as a fiduciary for the crowdfunded investment. Our top notch insurance brokers have the experience to negotiate cost effective insurance solutions to protect your personal and business assets.