06 Feb Kickstarter Legal Guide
Kickstarter Legal Guide
Kickstarter is the best known site for “donation based crowdfunding,” which has taken off in recent years. Fortunately, for those who want to launch Kickstarter projects, the process of launching such a project is relatively easy, and the laws governing donation based crowdfunding projects are relatively straightforward.
This is because the entrepreneurs or businesses that launch the projects are soliciting donations in exchange for products or gifts, and are not offering any equity (ownership positions) in any business. As a result, there is no offer or sale of a security, and securities laws are not an issue.
This article addresses the laws to be aware of when launching, or backing, a Kickstarter project; considerations about protecting intellectual property; and some misconceptions about how the JOBS Act affects Kickstarter projects.
The Laws On Kickstarter Projects
In the case of successful projects, usually there are not many legal issues to deal with. This is because the project creators have received all of the money they need to successfully create the project they envisioned, as well as to return to the project backers the goods or experiences that they promised. In short, the deal was completed as agreed upon and everyone can move on happily.
However, most Kickstarter projects are not successful, and this is where the law becomes a bigger issue. In fact, as of the date of this article, Kickstarter reported that less than 50% of projects reached their funding goals. So what happens to the contributed money if a project isn’t successful?
Kickstarter’s stated policy is not to get involved in failed projects. That is, Kickstarter positions itself as a third party hosting platform and leaves it up to the project creators and the project backers to determine what to do with the donated funds in the case of a failed project.
According to Kickstarter’s blog, creators are required “to fulfill all rewards of their project or refund any backer whose reward they do not or cannot fulfill.” This is another way of saying that Kickstarter does not want to be in the middle of disputes, and it is up to the creators and backers to hash out a resolution in the case of a failed project. On its blog, Kickstarter also explains that it will not issue any refunds, and, in fact, Kickstarter never has any funds in its custody (even though it does take a cut of the contributed funds).
So, what does this mean to the people who have contributed funds to a failed project? It essentially means that it’s up to them to chase down the project creators and hash out some sort of a deal about getting money back, or at least getting something back. Apparently this is a common enough problem that when NPR wrote a story about it in September 2012, Kickstarter immediately addressed that article in a blog post the following day, and other reputable sites have more recently followed up with articles about this problem and the lack of accountability of project creators.
As with most failed ventures–whether it’s a project on Kickstarter or a more sizable business venture–there is often little legal recourse in the case of failure because there is no money, or not enough money, to pay the investors back (or in the case of Kickstarter, the backers). So, even if a hypothetical Kickstarter backer could come up with some sort of a theory of legal recovery–fraud, for example–from a practical perspective, it’s not even worth trying to chase the project creators down if they refuse to return contributed funds. In addition to chasing an empty pocket, the amount contributed is often so small that it’s not worth the time in trying to recover it. As a result, there’s little ability to enforce Kickstarter’s terms, which require a refund to any backer whose reward is not fulfilled.
If you are a potential backer, the takeaway, from a legal perspective, is to do your “due diligence” and find out as much information as possible about the team that is pitching the project as well as their success in other ventures. That way, you give yourself the best chance of backing the right project and receiving the promised reward.
Protecting Intellectual Property
Another common legal issue in Kickstarter campaigns is how project creators can protect their intellectual property (trademarks, copyrights, trade secrets and patents) while launching a Kickstarter campaign. It’s a fine line for project creators to walk, because they simultaneously have to provide ample information in order to get the requested funding while trying not to reveal too much valuable information about their product or company.
Before launching a campaign, the project creators should first identify all of their valuable pieces of intellectual property, and then decide how to protect them. In the case of patents, one option is to file a provisional patent application. Trade secrets — such as valuable and confidential names, processes and customer lists — simply should not be revealed in the campaign. Trademarks may be further protected by filing registration applications at the state and/or federal level.
Moreover, project creators need to be careful not to infringe others’ intellectual property in the process of launching a campaign. For example, project creators should secure licenses for all copyrighted materials (songs, video, copy) that they intend to use in the campaign, and they should be sure to run trademark searches on any names or logos they intend to use in the campaign.
Kickstarter Crowdfunding and the JOBS Act
As a quick side note, there seems to be a lot of confusion about if and how the JOBS Act affects Kickstarter. In short, the JOBS Act will not affect crowdfunding through donation based web sites such as Kickstarter, as this article points out. This is because the JOBS Act only applies to investment based crowdfunding campaigns. Again, only in those types of crowdfunding campaigns is equity offered.
Other Thoughts: Kickstarter in Oregon
For those of you here in Oregon who are thinking of launching your own Kickstarter project, you have lots of company. If you ever wondered how many Kickstarter projects have been launched here in Oregon, check out this page (3,256 as of the date of publication of this article!). There are even crowdfunding meetups here in Portland, so that’ll give you an idea of how popular crowdfunding has become.
If you need legal assistance with any kickstarter or crowdfunding issues related to your startup or small business, or if you have any other legal questions concerning a startup or small business — especially if your business is in or around Portland, Oregon — please contact us.
Author: Andrew Harris
To continue reading more about the laws that might affect your business, please see the Articles page, or to simply see a list of helpful legal resources for Oregon startups and businesses, please see the Legal Resources page.
If you need assistance with a particular legal issue affecting your business — especially if your business is in or around Portland, Oregon — please contact us and we will get back to you as quickly as possible.