With the success of platforms such as Kickstarter, Indiegogo, and RocketHub, the practice of crowdfunding is rapidly expanding. While crowdfunding may be an easy way for startups to fundraise their projects, the legal side of crowdfunding presents many challenges for platform owners.
Here are some common legal problems that the owners of crowdfunding platforms may experience:
Corporate Form
The majority of crowdfunding platforms elect to structure their company as a limited liability company (LLC) or a corporation. While LLCs allow for greater flexibility when it comes to taxation and management structure, a corporation, with its more rigid organizational requirements, provides more protection for its investors. The different entity types each provide various advantages and drawbacks with respect to how much control you have over your crowdfunding platform. Questions to consider include: will your platform facilitate funding in exchange for reward, debt, or equity? Who will be responsible for driving those decisions? A lawyer can help you determine which entity will best serve the needs of your crowdfunding platform.
Privacy
Crowdfunding platforms collect private financial information from their website’s users. It's therefore critical for the platforms to safeguard the privacy of their users. Data and security breaches present a huge problem, and can do irreparable damage to a company’s brand name. Even well-established crowdfunding platforms are not exempt from the dangers of cybercrime: earlier this year, hackers accessed encrypted passwords, phone numbers, and mailing addresses from Kickstarter, compromising user accounts. All companies would do well to craft a well planned internal policy for handling sensitive data. Enlist a lawyer to help create a privacy policy that will protect your company in the event of a security breach.
Liability
Considering the multitude of businesses who use crowdfunding websites, platform owners are exposed to a lot of risk; no matter how many precautions you take, there are no surefire measures that will prevent companies from abusing your website. A lawyer can help establish your website’s terms and conditions of use in order to minimize your platform’s liability, and defend your company in the event of a lawsuit concerning any sort of crime committed through your website. Here are just a couple of issues that crowdfunding platforms can be held accountable for:
- Financial Crime: Recently issued by The Securities and Exchange Commission, Title III of the Jumpstart of Business Startups (JOBS) Act has established new regulations for crowdfunding platforms. In sum, crowdfunding platforms must exercise due diligence, monitor transactions, and implement anti-fraud measures on all businesses seeking to advertise for and receive funding through their website. Essentially, a crowdfunding platform can be exposed to risk in the event of any sort of financial crime.
- Intellectual Property Theft: Due to the public nature of crowdfunding websites, copyright and patent infringement is common, and litigation between businesses over intellectual property theft occurs frequently. As a platform on which other businesses are promoting their intellectual property, you don't want your company to get caught in the crosshairs of an infringement dispute. Hire a lawyer to draft your website's terms and conditions and protect your company from third party liability.
Help realize the dreams of others while protecting yourself from liability and other problems by consulting a lawyer through Priori Legal.
Special thanks to Ella Gibson for her research and editorial contributions to this article.
