Since its inception in 2009, crowdfunding platform Kickstarter has seen over 66,000 successful campaigns raise over $1.2 billion. Through it, entrepreneurs can acquire funds by circumventing banks and venture capitalists and going straight to the people.
There’s no doubt it’s a great service, but to get the most out of it, participants must know the legal issues they face before they get involved.
Intro to Kickstarter
Kickstarter connects people who want money to complete a project, “creators” in Kickstarter lingo, with donors who want the project to succeed, “backers.” Creators choose a project, a target amount of money to raise and a timeframe to raise it in, between one and 60 days.
They also assign “rewards” to each donation amount, such as a mug for a $15 donation, or a copy of the final product for a $50 donation. Individual donations are typically small but can add up to huge sums of money.
It operates on an all-or-nothing basis. If a project falls short of its goal, no money changes hands. If the project meets or exceeds its target, the project is carried out and the backers are rewarded.
Legal issues for crowdfunding creators
In May, a lawsuit was filed against creators of the 2012 Asylum Playing Cards project who raised over $25,000 to design a deck of cards but never delivered the goods, leaving backers out in the cold. The case highlights the risks for both creators and backers.
All entrepreneurs can benefit from the advice of an attorney to sidestep potential problems, no matter what the venture. For Kickstarter creators, those pitfalls can include:
- Breach of contract. When the defendants in the lawsuit above broke their promises to their backers, they left themselves open to a lawsuit. To avoid this, follow through on your promises.
- Leaving yourself liable. Creating an appropriate business structure, like a corporation or a limited liability company, protects your personal assets in the event of a lawsuit. If you raise money for your business and then get sued before you incorporate, your personal assets will be on the hook.
- Copyright and intellectual property concerns. Kickstarter is a community, and sharing is at the heart of it. While that’s wonderful, it does mean your ideas could get ripped off. Speak to an attorney about getting copyrights and trademarks in place before you go public so you can protect your intellectual property.
Finally, be especially careful before getting involved in an equity crowdfunding platform. Unlike Kickstarter, which is a rewards-based platform and intends to stay that way, other platforms are taking advantage of the SEC’s rulings to allow businesses to get investors and raise capital via crowdfunding. In these cases, the legal ramifications are more complex, and contacting an attorney is essential.
Once you’ve covered your legal bases, check out our 5 keys to kick butt on Kickstarter and jump-start your small business.
Photo: Gil C / Shutterstock.com
