Crowdfunding 101— PART 2: Potential Disadvantages
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 clarifying 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 disadvantages 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...
Read MoreCrowdfunding 101: What Is It? And Should I Be Excited About it? PART 1
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...
Read MorePatents: Is It Too Late To File??? PART 3
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...
Read MoreWhen To File For A Patent — PART 2
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...
Read MoreIndemnification — Don’t Leave Home Without It
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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