2014 is almost over and entrepreneurs still cannot access funds under Title III of the April 2012 Jumpstart our Business Startups (JOBS) Act’s equity crowdfunding provisions. The US Securities and Exchange Commission (SEC) has not released the final rules however, the rest of the industry is exploding!
I recently spoke on intellectual property (IP) and crowdfunding at the 3rd Annual Crowdfunding for Equity conference in Washington state. Washington recently passed legislation allowing equity crowdfunding from Washington resident investors for companies organized within the state and with 80% of their revenue in Washington. Entrepreneurs can raise up to $1 million using equity offerings only under this new law which became effective on November 1st, 2014.
There was discussion around the challenge posed by the 80% Washington revenue limitations but many companies are very early stage and pre-revenue so this is not expected to be a huge deterrent. It’s great news that Washington has joined the other states improving access to capital.
Kickstarter is not a store
I have written extensively on the topic of safe crowdfunding and how Kickstarter is not a store for taking pre-orders for products. So when an article was featured on Business Insider a couple of weeks back titled, “Startup Pulls Kickstarter Campaign Due to Concerns over Intellectual Property,” it understandably caught my eye. Aurora Labs’ campaign claimed the “most affordable metal 3D printers in the world” and received generous support. In the end, they decided to remove their over-funded campaign from the platform because they were not willing to post more information on precisely how their product worked.
David Budge, CEO of Aurora Labs, explained in an interview, “The way [Kickstarter] phrased it, we weren’t disclosing enough information about what the product could do or how it worked.” The big issue inside the US and in this Perth, Australia-based instance is disclosure prior to protection. In the US, you are impacting patent rights and in many cases killing your international patent rights. It’s a complicated area and seeking professional legal assistance is critical prior to posting any campaign.
IP protection is not just for patents
Before crowdfunding, all your brand IP or your trademarks and copyrights need to be identified and properly secured, otherwise you risk copycats. For example, Scott Wilson’s TikTok Lunatik watch kit raised $942,578 on Kickstarter in 2010. The watchstrap held an iPod Nano to create a touchscreen watch, and the campaign was a monetary success. However, Wilson did not protect the design or the trademark prior to his campaign; it was quickly widely copied.
Why not equity instead
In my opinion companies should be accessing equity-based crowdfunding, where the details of how products work are not required to be displayed online. Unfortunately, US securities or equity crowdfunding is still not legal on a federal level because the SEC has yet to release the rules. It’s been over nine months since the comment period closed and we head into 2015 without JOBS Act Title III crowdfunding as a mechanism for small businesses to raise capital.
Even at the first Global Crowdfunding Convention & Bootcamp (GCCB) in 2012 – speculation was that companies would only raise $50K on average. It almost is legitimizing the friends and family round in some cases. International platforms and state activity seem to be on that same scale. Small businesses are the backbone of our economy so releasing a version of the rules is critical to the intention of the JOBS Act to increase access to capital.
In true entrepreneurial form, most entrepreneurs are using either rewards-based crowdfunding or, where possible, accessing capital within their state crowdfunding laws. An additional benefit of rewards crowdfunding is visibility and market validation of your product or offerings. Companies can pitch angel investors and try for bank financing but if they are able to demonstrate public demand for product on a rewards platform like Indiegogo or Kickstarter they are doubling down. The money is raised plus customers are locked in.
I have written on the onerous nature of the current rules for companies raising over $100K. I ask that we focus on small equity campaigns to get equity crowdfunding moving. The SEC recent annual forum was summed up here but there has been no movement in almost all of 2014 on Title III.
Last month, I spoke with Joe Wallin, a startup attorney in Seattle and fellow presenter at the GCCB active in supporting Washington state crowdfunding, about the release of the rules. I believe Joe summed it up in one line:
People are tired of this. Congress acted. Why can't the SEC do its job?"
Entrepreneurs are resourceful and will do anything to keep their projects moving forward, enacting state crowdfunding laws to “fill the void” left by the SEC. Unfortunately, that still does not include access to capital thru Title III of the JOBS Act. However, regardless of funding raising methods, take heed to Aurora Labs’ and TikTok LunaTik’s experience and put IP before fundraising.
