You are a creative entrepreneur with a massive vision expanding every day. Some of your friends have run successful crowdfunding campaigns for their businesses and you’ve wondered if you should do the same. Before President Obama signed the JOBS Act in 2012, you could only give your crowdfunded investors (or backers) rewards. You know? A signed t-shirt. An autographed print. Limited edition tote bag.
Now, with the JOBS Act, Title III equity crowdfunding rules approved by the Securities and Exchange Commission in 2015, and state laws on equity fundraising, you have equity crowdfunding at your disposal (depending on where you live + work). Illinois (where I’m based) is one of the lucky states.
What does this mean for you? You can now run a crowdfunding campaign and offer investors a stake in your company. It’s huge to have this opportunity at your disposal, but you absolutely must know the legalities.
Grab your favorite bourbon, take a seat and read on to learn key steps to handle the legal issues in your crowdfunding campaign.
One of my primary goals is to transform how clients conduct business, day to day. When they recognize a legal risk and call me with “Patrice, I thought I should run this by you first…” I know that my mission is nearly accomplished. For example, one client ran a huge crowdfunding campaign for her business and reached out so that we could talk through the legal nuts and bolts first. She launched a legally-clad campaign and that’s what I want for you.
How many creative entrepreneurs unknowingly assume major legal risks through crowdfunding without even realizing it? With the expansion of the laws in this area, we are going to see more lawsuits spurring from crowdfunding campaigns. Don’t believe me? Just google “Kickstarter lawsuits” and see for yourself.
Here are four legal issues in your crowdfunding campaign that you need to know and handle before launching it.
The first legal issue in your crowdfunding campaign.
You are entering a vague yet legally, binding contract with your backers. Raising funds for your business on a crowdfunding platform forms a contract between you and whoever backs your campaign. Under most circumstances, a contract is a great thing, but in today’s world of crowdfunding usually the terms between the business owner and the backers are vague. For this reason, you need to be as specific as possible when describing the reward you will offer. Additionally, you need to ensure that the reward is one you can reasonably fulfill (i.e. do a thorough analysis of the potential costs of fulfilling each reward). You can be sued if you fail to fulfill your obligations under the campaign. Washington state filed the first consumer protection lawsuit against a business owner who used Kickstarter to raise funds.
The second legal issue in your crowdfunding campaign.
You are potentially infringing on someone else’s intellectual property. Guess what? You can’t just grab any music for your promotional video. Also, if your brand name and logo haven’t been properly vetted to ensure they don’t infringe on a pre-existing trademark then there’s more room for exposure. Before launching your campaign, make sure that you’ve done the work to own the intellectual property. If someone else owns the intellectual property, you need to work with them to get a license (or other appropriate agreement). I know you’re thinking, “Patrice….I need to run this campaign in order to pay for legal fees.” That’s fine. Contact me if you’re in this situation.
The third legal issue in your crowdfunding campaign.
You are incurring tax liability. Taxes are still a murky area for businesses who raise funds on crowdfunding platforms. However, any funding raised from these sites will currently be treated as income by the IRS, and not a gift. This means you are liable for paying taxes just as you would on any other business income (and yes, that lucky potato salad business owner who raised $55,000 owed a lot of moolah). You should receive a 1099-K from the payment processor linked to the crowdfunding website for gross sales over $20,000 and more than 200 transactions. However, even if you don’t fall into this category, you must report the income when filing taxes. Kickstarter offers a very barebones tax guide. I strongly encourage you to consult an accountant.
The fourth legal issue in your crowdfunding campaign.
You are incurring risk of personal liability. Crowdfunding platforms are not liable for legal issues that arise from your campaigns. You will be completely responsible. You should consider setting up an actual business entity and running the campaign through that business. That way, the liability will fall under the business and not you personally (unless you do something fraudulent or illegal of course).
I know that you are already planning major work for 2017 and am hoping this helps you along the way. Take the time to plan carefully now that you know the legal issues in your crowdfunding campaign, and avoid a big, legal mess. Next time you hear from me, I’ll be sharing the top things you need to know about equity crowdfunding laws.
Creative Genius Law helps clients with all things business + intellectual property law. We’d love to work with you to set up a legally clad crowdfunding campaign. Schedule your initial appointment today.