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Crowdfunding PART 3(A)– Alternatives: Rewards-Based Crowdfunding

Posted by on Aug 5, 2013 in Crowdfunding and Fund Raising

The prior 2 crowdfunding discussions focused on what crowdfunding is under Title III of the JOBS Act and its potential disadvantages should the SEC and FINRA ever get around to promulgating the applicable final rules… Today the discussion will focus on what, if any, alternative crowdfunding opportunities are out there, given you can’t yet rely on the exemption in Title III of the JOBS Act to raise capital from the general public. Alternative Crowdfunding Opportunities– REWARDS-BASED CROWDFUNDING Rewards-based crowdfunding is perhaps the most familiar form of crowdfunding and does not require an exemption from the SEC’s registration requirements of typical offerings because there is no “offer” or “sale” of securities as those concepts are defined in applicable Securities laws. Under the rewards-based crowdfunding method, a company or an individual can raise funding for a project by promising individual donors that they will receive some specific reward from the project when the project is complete. The classic example of a rewards-based crowdfunding method is an author or a filmmaker trying to raise money for a book or a documentary by promising those who donate that they will receive a free copy.  Thus, the rewards-based crowdfunding method is analogous to the pre-sale of goods and services. There are many companies who have used rewards-based crowdfunding platforms to raise or help companies raise capital, including Kickstarter, Inc. and Indiegogo, Inc., and the popularity of this fundraising platform continues to grow.  Kickstarter, for example, has helped raised over $732 million and successfully funded more than 46,000 different creative projects since its inception in 2009 .  (Check it out: www.kickstarter.com) For more information on other crowdfunding alternatives to the delayed Title III exemption in the JOBS Act stay tuned for Crowdfunding PART 3(B). Also, if you’re interested in learning more about how to raise capital for your company or project, please get with an attorney who can help bring some of this to...

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Crowdfunding 101— PART 2: Potential Disadvantages

Posted by on Jul 30, 2013 in Crowdfunding and Fund Raising

Ok, so last time in Part 1 we went over what crowdfunding is as contemplated by Title III of the JOBS Act and how crowdfunding can be useful.  We also discussed how true JOBS Act crowdfunding is not really an option right now until the SEC and FINRA adopt final rules clarfying the scope of crowdfunding potential. Before getting into the potential disadvantages of crowdfunding should the final rules be adopted any time during our lifetime, we would like to emphasize how late the SEC and FINRA are in their rulemaking efforts regarding crowdfunding possibilities: Given that it is already almost August 2013, the government is woefully behind in its end-of-2012 deadline for promulgation of crowdfunding rules– and, despite the potential disadvantages of the JOBS Act crowdfunding methods, much of the startup and entrepreneurial world is frustrated with the (not-so-atypical) regulatory clog. Now that the regulatory rant is over, we can go over the potential disadvantages of crowdfunding (despite the many potential advantages, there are many concerns): Potential Disadvantages of Title III Crowdfunding We can boil the potential disadvantagse of Title III crowdfunding down to: Cost and Effort–  Many practitioners fear that offerings relying on the Title III crowdfunding exemption will be too costly and time-consuming for the very companies and investors the exemption purports to target.   EXAMPLE: 1) Disclosures:  Title III of the JOBS Act requires issuers to make an inordinate amount of disclosures.  Issuers will have to provide detailed descriptions of their officers and directors, ownership and capital structure, business and financial condition (including financial statements–some of which may need to be audited). 2) Liability:  Issuers may be held liable for material misstatements or omissions in their oral and/or written statements in a manner that is not too different from the potential liability arising out of a traditional SEC registered offering. 3) Attorneys’ and Professionals’ Fees:  In order to comply with the requisite level of disclosures, many practitioners believe that a substantial amount of legal and accounting help will be required and that a large portion of the funds raised will end up going to pay the fees associated with such services. 4) All or Nothing:  The issuer in a Title III crowdfunding offering must set a fundraising goal and, unless the company raises that specific amount (or more) from investor commitments, no securities can be sold.  This raises the potential risk that an issuing company can incur a significant amount of up front costs for absolutely no reason. Given the uncertainty surrounding the regulatory requirements of Title III crowdfunding, as well as the potential costs and burdens of compliance once applicable final rules are promulgated, alternative crowdfunding platforms have developed and will likely continue to do so in the future. For more information on alternatives to Title III crowdfunding, stay tuned for PART 3 of the Crowdfunding 101 series, and, as always, if you have any questions concerning raising capital, crowdfunding or otherwise, please seek the advice of an attorney who can take you beyond the 101 series into the practical world of...

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Crowdfunding 101: What Is It? And Should I Be Excited About it? PART 1

Posted by on Jul 26, 2013 in Crowdfunding and Fund Raising

Ever since the passage of the JOBS Act (the Jumpstart Our Business Startups Act), there’s been a lot of hype about crowdfunding. A lot of startups have built their entire business model on the assumed ability to use crowdfunding methods to raise capital. But, what is crowdfunding? And, is it really something that you should be excited about right now? When used in connection with the JOBS Act, the term “crowdfunding” refers to an exemption intended to permit US companies to raise up to $1 million per year from the general public without the same restrictions as would normally be applied in a traditional private offering (or private placement) governed by Regulation D of the Securities Act of 1933. Crowdfunding as contemplated by the JOBS Act would permit a company to sell small amounts of equity to a much larger pool of investors than is currently permitted. What’s So Great About Crowdfunding Anyway? Non-Accredited Investor Potential: While traditional private placements may only be offered to institutional investors (such as banks or pension funds) or to a limited number of individuals who are qualify as “accredited investors” (i.e. those having a net worth greater than $1 million or an annual income exceeding $200k (or $300k if combined with that of a spouse)), crowdfunding would permit the issuing company to raise money from a greater number of non-accredited investors who are typically not eligible to participate in a private placement. Accessible Funding Portals: Companies who wish to raise capital through crowdfunding methods will eventually use platforms that are publicly accessible websites.  This enables companies to issue equity shares over the Internet to registered investors who will make their investments through the online funding portal without the companies having to have engaged in the often difficult and costly process of forming a pre-existing relationship with the investors. Should You Be Excited About Crowdfunding? The answer to this is both yes and no. Yes, you should be excited about the ways your company could potentially benefit from this new(er) fundraising method. But, no, you should not be too excited about crowdfunding just yet. Here’s why: Title III of the JOBS Act, which is home to the crowdfunding exemption to the traditional Regulation D private placement rules, has not been fully implemented yet because the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have not yet adopted the final rules which are needed to fully clarify and define the scope of the crowdfunding exemption. Until the final rules under Title III are adopted by the SEC and FINRA, private offerings and sales of equity interests which are intended to rely on the crowdfunding exemption in Title III of the JOBS Act are unlawful. Therefore, while there are some companies who are using hybrid methods or other alternative crowdfunding platforms to raise capital, it is probably not a good idea to get too excited just yet about your company’s ability to fully rely on the crowdfunding exemption to raise capital. For further discussion on crowdfunding (including its anticipated disadvantages and alternatives) stay tuned for Crowdfunding 101: PART...

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Patents: Is It Too Late To File??? PART 3

Posted by on Jul 23, 2013 in Intellectual Property

Continuing our discussion on patents and when and whether to file one…  So, is it too late to file? As we have emphasized over the last few posts, it is crucial for inventors to keep the novelty of their invention—i.e. whatever is new about your invention—a guarded secret.  If you disclose your invention without any protection, say, without a non-disclosure agreement, it can be rendered non-patentable. In the absence of the protection of a non-disclosure agreement, most public disclosures of an invention made before a filing date at the USPTO is obtained will prevent an inventor from obtaining patent protection for the invention. There is one and only ONE exception to this rule: If the disclosure is limited to a publication made by the inventor or someone on behalf of the inventor within one year before the filing date of the patent, it does not become a part of the prior art.  However, relying on this one-year period can be extremely risky. That’s the only exception. Under the old regime, other public disclosures (like offers for sale, trade show exhibitions, etc.) did not necessarily become a part of the prior art, if the patent’s filing date was within a year of the disclosure. Now, there is no 12- month grace period for these types of disclosures. Tying this Part 3 discussion in with last week’s Part 2 discussion on provisional patent applications, this disclosure rule shows how powerful provisional patent applications can be—because they may be used to obtain earlier filing dates on patents that issue.  (See Part 2 from last week on discussion of provisional patent applications.) Remember: Once you file a provisional application, you have reserved your filing date. And as long as your actual patent application is filed within a year of your provisional patent application (and everything else goes smoothly), you will be entitled to keep that earlier filing date of the provisional application. If this sounds tricky, it’s because it is tricky. Don’t risk patent forfeiture. Make sure you know what you should do, shouldn’t do, and when by contacting a registered patent...

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When To File For A Patent — PART 2

Posted by on Jul 19, 2013 in Intellectual Property

Other Important Events in the Patent Timeline Provisional Patent Applications So, as we discussed last week, ideas aren’t patentable.  But, can the USPTO offer any assistance to inventors that are perhaps a bit farther along, but aren’t quite ready for a patent?  Full-blown patent protection is not available until the patent issues; however, if an inventor files a provisional patent application, the USPTO will give the future actual patent the filing date of the provisional patent application. This earlier filing date may be extremely important; in the United States, patents are no longer granted to the ‘first to invent’. Since the America Invents Act took effect earlier this year, the USPTO now grants patents on a ‘first to file’ basis. When a contest to be the first heats up, an earlier filing date preserves your priority as the initial inventor who is entitled to patent protection. A provisional application has other benefits, including allowing inventors to mark their inventions with “Patent Pending.” Other benefits are discussed below. While a provisional application typically includes a description and/or drawing of the invention, it does not require any claims, oaths, or disclosures of the prior art like an actual patent application. Some warnings: a provisional patent application is not a patent; it actually is never examined by the USPTO. Therefore, to be granted a real, protection-providing patent, the inventor must file an actual patent application within one year of the provisional application or risk patent forfeiture. This shows how powerful provisional patent applications—which may be used to obtain earlier filing dates on patents that issue—can be. Once you file a provisional application, you have reserved your filing date. And as long as your actual patent application is filed within a year of your provisional patent application (and everything else goes smoothly), you will be entitled to keep that earlier filing date of the provisional application. For further discussion on when to file your patent, stay tuned for PART 3: “Is It Too Late To...

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Indemnification — Don’t Leave Home Without It

Posted by on Jul 17, 2013 in Draft Your Contract, Limiting Liability

Suggestion – don’t bring up indemnification at a dinner party if you’re trying to break the ice. As most lawyers (and non-lawyers who even know what it is) know, it can be more of a conversation ender than a conversation starter.   However, it is an important legal concept that parties should be aware of before entering into contractual relationships, and it’s really not as complicated as many people assume. Here’s a brief and general intro to indemnification. Why Does Indemnification Exist?  Indemnification is a risk allocation tool, allowing the parties to know who will be responsible for what costs or liabilities in certain situations. What is it?  Generally speaking, indemnification is an obligation by one party to compensate the other party or otherwise be responsible for certain costs and expenses. Indemnity is imposed either by law or contract. What costs are covered by an indemnity?  Generally, an indemnification obligation requires the party providing indemnification to compensate the other party for any claims, losses, liabilities, etc. incurred by the other party and owed to a third party. Are There Limits to Indemnification? The general rule is that certain losses cannot be indemnified – for example, a party cannot be indemnified (i.e. recover from the other contracting party) for losses caused by its own willfull or intentional acts or omissions, its own use of the products that does not conform with the specifications or instructions, or its own bad faith failure to comply with the agreement. Why Is It Important to You? When you are entering into a contract, any reduction of your risk is a good thing. A proper indemnification provision allows you to ensure that if you are sued because of the other party’s acts or omissions, you can recover any costs or damages from the other party rather than be liable for them yourself. Again, this intro to indemnification is brief and there may be other considerations to take into account in your particular situation.  Please contact an attorney if you have further questions or if you have a specific situation that you’re dealing...

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So You Have An Idea, But Is It Patentable Yet? Part 1

Posted by on Jul 11, 2013 in Intellectual Property

First, a parable. Like so many others, you’ve been pondering for years how to build the better mousetrap. Finally, inspiration hits you. You don’t have any of the particulars, but you know that with more thought, time, and resources, the invention is bound to take shape. With so many other inventors hot on your heels, you’d like to exclude them from your idea. Is now too soon to file for a patent? When should you ask the U.S. government to step in and help you protect your work by filing for a patent?   The answer depends: Generally, a vague idea like this, by itself, is not patentable. Although patent professionals often discuss the patentability of ideas, usually these professionals aren’t using the term ‘idea’ to mean ‘a vague mental conception’. They’re usually using the term as shorthand for the actual invention itself. More than an ambiguous mental concept, the U.S. Patent and Trademark Office requires that an invention be reduced to practice before granting a patent.  Although reducing your invention to practice may sound daunting, it really isn’t: There are two ways in which inventions may be reduced to practice: (1) by actually practicing the invention—for example, building or creating the invention, and (constructively) (2) by filing a patent application While option (2) may sound circular, successfully filing for a patent requires the inventor to tell the USPTO, in terms that a person of ordinary skill in the appropriate technical field would understand, how to practice the invention. The inventor must have turned that vague idea into a definite, explicit, workable concept, by thinking through all of the particulars of the invention—for example, the mousetrap’s structure, how it will actually work, etc. If the inventor has both (1) failed to actually practice the invention and (2) can’t explain the invention to someone who should be able to understand, the time is not yet ripe to file for a patent. As inventors know, much of the inventive timeline is erratic and fluctuating. Because it’s important to understand when the timing is right to file for a patent, the idea phase may still be a great time to talk with an attorney, especially as the invention begins to show commercial promise. But, more important than knowing how early you should speak with a patent attorney is knowing when it’s too late. For more thoughts on this and on guarding your invention throughout the inventive process, stay tuned for Part...

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Making Sure You Get Paid For Your Services

Posted by on Jul 2, 2013 in Draft Your Contract, Practice Pointers

If your company performs services for a fee, you know first-hand how great it is and how much of a relief it is when you get paid….on time and in the correct amount, that is.   While it is great when things work out and you can move onto the next project, it is unfortunately common for service providers to run into trouble when it’s time to collect for the services they’ve performed.  Here are ways to help make sure you get paid for your services: (1)    For any contract you enter into under which you agree to provide services for a fee, it is important for the contract to clearly set out the method and timing of payment, as well as any penalties that will be assessed if the payment is not made timely. (2)    It is also very important that the contract contain a provision entitling you to recover your attorney fees and related expenses should you have to retain an attorney to help you collect what you are owed under the contract.  Late fee penalties and attorney fees provisions in contracts provide strong incentives for the other party to pay you on time and in full.  Including an attorney fees provision in a contract is especially important in situations where the contract fee for your services is relatively small.  Without an attorney fees provision, the other party may simply refuse to pay you knowing that it will be cost prohibitive for you to sue them, i.e., you will end up spending as much or more on attorneys than the amount of contract fees you are actually owed without the ability to recover the attorney fees you incur in the process. (3)    It also important that you always invoice the other party per the time intervals for payment set forth in the contract (e.g., if the contract provides that you are to be paid every month, you should submit an invoice every month).  In addition to clearly setting forth the fee amount due and due date for payment, your invoices should also note the late fee penalties that will accrue if payment is not timely made as per the contract as well as your right to recover your attorney fees and expenses if you retain legal counsel to assist you in collecting the amounts due. These simple steps will provide you with a first line of protection against the other party to the contract not paying you for your services on time and/or in full. Remember though, before you sign any contract, you should always consider having your attorney review it to make sure you are properly...

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Best Efforts or Reasonable Efforts? — How Legal Efforts Standards Can Affect You

Posted by on Jun 28, 2013 in Draft Your Contract, Practice Pointers

It’s very popular for people to talk about giving “110%” these days.  Suddenly, giving 100% effort seems like slacking.  And what about just partial attempts, like 75%?  Although they are contract provisions that are often overlooked, “efforts” provisions can have a huge impact on your business deal. Before entering into any contract, you should know what “effort” qualifiers exist and what they mean– because understanding these provisions could make the difference between having a claim under a contract or being subject to a breach of contract claim yourself. The three most common effort qualifiers in contracts are (1) Best Efforts, (2) Reasonable Efforts and (3) Commercially Reasonable Efforts. While these may seem innocuous on the surface, each phrase can mean something totally different and can subject contracting parties to completely different standards and requirements.   While some courts remain unclear on the actual distinctions between each standard, here is a brief overview:  Best Efforts –      This is often considered the most demanding of the effort based standards.  This is a gross generalization, but think about it this way–basically if it’s possible, you have to do it, regardless of whether it’s unreasonable or not commercially reasonable or cost-effective. Reasonable Efforts      – This is a middle ground between best efforts and commercially reasonable efforts.  Again– the general practical application is that there is some leeway as to whether it’s possible vs. whether it’s reasonable.  Just because it’s possible, doesn’t necessarily mean you have to do it if it’s not reasonable. Commercially Reasonable Efforts –  This is considered the least demanding effort standard. By including a commercial standard, courts look into whether it  makes sense from a business or other economic or efficiency standard. So, just because it’s possible and just because it’s reasonable, does not mean you have to do it if it’s not necessarily reasonable for your business. So, the next time you are reviewing a contract or signing a contract, keep an eye out for any effort based provisions and consider how they might change the deal and whether you would rather a different standard be put in place – whether a higher or lower. To the extent possible, it is often preferable to define what standard should apply in more detail, but if one of the more generic standards is used make sure it aligns with your business...

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Business Practice Pointer: Avoiding Verbal Agreements

Posted by on Jun 25, 2013 in Draft Your Contract, Practice Pointers

Many of the business disputes our clients face are the result of a misunderstanding or miscommunication concerning the parties’ respective obligations under a given contract.  While many startups or entrepreneurs may not believe they are in the contract formation stage of their business yet, they may easily engage in conduct or conversations that can lead to similar business disputes down the line. One classic mistake many businesses and entrepreneurs make is coming to a verbal agreement that is not memorialized in any “provable” fashion.  When a discussion or negotiation occurs verbally, whether over the phone or in person, it is difficult to prove the content or outcome of the discussion should there be any disagreement in the future concerning what was said (unless someone was recording the conversation!). Whether the discussion concerns the scope or timing of work or services to be performed, or whether the discussion concerns something seemingly more mundane, such as when the next discussion will occur, it is important to remember that, if it isn’t written or recorded in some manner, then it will be difficult to clarify or prove later should the need arise. We hear from clients and entrepreneurs all the time about how they thought one thing, engaged in behavior based on their belief (or, even worse, incurred expenses based on their belief!), only to find out the other party had a completely different understanding.  When we ask whether either party can prove what the understanding was, the typical response is, “Well, we discussed it over the phone,” or, “We just talked about it when we ran into each other.” The lesson to be learned is that, whenever possible and whenever you can remember, try to make a habit out of following up a verbal conversation with a written re-cap.  Usually a simple email will work, such as: — “Hey, it was great seeing you today and talking about _______.  As I mentioned, I will  _______ and be ready to discuss it with you on ______.”     — “I wanted to follow up our conversation earlier today and say ‘thank you’ for your willingness to take care of _____.” — “I wanted to thank you for your understanding that I am going to need more time to _______.” By following up verbal agreements with a written reference or summary, you ensure that, at the very least, there is something to help substantiate that the occurrence and the scope of the conversation. NOTE:  If you do not want to be able to substantiate the occurrence or scope of a conversation (i.e. it will be beneficial to you to not be able to prove it later), then you may want to intentionally fail to follow up.  However, you can use the follow up to your advantage by indicating in your email what your understanding was. At any rate, as we often tell our business clients:   Although you may not think the content of the conversation could ever turn into a real problem, there’s never a problem until there’s a...

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