Crowdfunding: What it Means for Small Businesses and Startups
By: Suzan Hixon and Brittany Riley
The passage of the Jumpstart Our Business Startups Act (the JOBS Act) has the small business world abuzz. More specifically, entrepreneurs are intrigued by a provision of the JOBS Act entitled the “CROWDFUND Act.” Although the Act is recent, crowdfunding itself is not a new concept. For years, individuals and organizations have utilized the internet to raise money for charitable purposes, political campaigns, and various other projects. However, the Act will allow crowdfunding to take on a new identity by allowing small businesses and startups to have the ability to sell securities in small amounts to a large number of potential investors.
In the past, crowdfunding was subject to several limitations. For instance, the sale of securities triggered the registration requirements of the Securities Act of 1933, a daunting task. Under the Securities Act, companies are required to pay expensive registration fees as well as follow numerous, restrictive regulations. The JOBS Act will require the Securities Exchange Commission (SEC) to formulate rules to create an exemption from registration that permits a private company to sell securities in small amounts to large numbers of investors. Of course, as with all government regulations, the SEC is given wide discretion to prescribe various requirements on intermediaries and issuers for the protection of investors and in the public interest. The JOBS Act was signed into law by President Obama on April 5, 2012. The SEC has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors.
What does this mean to you, the small business owner or budding entrepreneur? Whether or not the Act will have any significant impact is debatable. Although entrepreneurs will be able to raise up to $1 million annually from an unlimited amount of investors from the general public, they will be subject to various restrictions that may make crowdfunding impractical for companies raising money and the intermediaries that facilitate the process. For instance, businesses that participate in crowdfunding will have to file their financial information with the SEC annually. Likewise, small businesses will have to disclose their financial information to anyone they are asking to invest. The ability to raise capital will come with time costs as well. Online portals will help expose small businesses to investors, but the owners will still have to actively market their deal. Entrepreneurs will also have to manage multiple investors during the investment process and after its completion. Thus, crowdfunding will require entrepreneurs to invest a significant amount of time compiling information, distributing it, and marketing their business to investors.
A more serious issue that can make crowdfunding unreasonable for small businesses is that it could expose entrepreneurs to liability. As with most big opportunities comes serious risk. Participating in crowdfunding allows investors to sue entrepreneurs personally for material mistakes and omissions in their offering materials. Therefore, entrepreneurs must balance the chance to raise capital through a medium that exposes them to more investors and the inherent risk that comes with dealing in securities.
The publication of the SEC rules may provide more guidance as to whether crowdfunding will be an effective method for small businesses to raise capital. However, the impact of the JOBS Act on entrepreneurs will also depend on whether investors will be willing to use online forums when making their investment decisions. Ultimately, the effect of crowdfunding on small businesses will rest on numerous questions only the small businesses can answer. Entrepreneurs must ask themselves if they will be able to handle the costs and risks involved with crowdfunding.
By: Suzan Hixon and Brittany Riley
Developing businesses must take certain measures to protect their brand and products in order to survive. An integral part of these safety measures is the protection of trade secrets. A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers.
The Uniform Trade Secrets Act (UTSA) was enacted in 1979 and amended in 1985 to provide a legal framework for improved trade secret protection. Since trade secret law is a matter of state law, the UTSA is not controlling in every state. Currently the UTSA framework has been enacted in 46 states and the District of Columbia. The prefatory note of the UTSA provides its original motivations:
A valid patent provides a legal monopoly for seventeen years in exchange for public disclosure of an invention. If, however, the courts ultimately decide that the Patent Office improperly issued a patent, an invention has been disclosed to competitors with no corresponding benefit. In view of the substantial number of patents that the courts invalidate, many businesses now elect to protect commercially valuable information by relying on the state trade secret protection law.
Thus, information qualifies as a trade secret only if reasonable efforts are taken to keep it a secret. If reasonable efforts are not employed, the information cannot be enforced as a trade secret. The more efforts taken, the less likely it is that a trade secret will be found unenforceable. Although trade secret law is state specific, there are general guidelines that companies should take to protect their trade secrets:
- Restricting Access to the Trade Secret
In order to maintain the secrecy of a trade secret, the information must be kept in a restricted area. For instance, confidential processes, devices, or information can be kept in restricted areas. Documents or devices should be kept in receptacles such as a lockbox. When trade secrets are maintained on a computer database, measures such as firewalls, cryptology, and passwords should be used to restrict access.
Likewise, restrict personnel having access to trade secret information to only those who need to know. This can be accomplished through the use of keys, passwords, combinations, or other means. Furthermore, visitors should not be allowed to visit areas where trade secrets are performed or kept.
Lastly, the number of confidential information documents should be limited, conspicuously marked “Confidential,” and all unnecessary copies destroyed.
- Using Agreements to Restrict Others From Using or Disclosing the Trade Secret
Generally, companies should be concerned with two types of agreements to protect their trade secret: 1.) employee agreements and 2.) agreements with others given access to trade secret information. Arguably, employees have an implied duty not to use or disclose an employer’s trade secret; however, confidentiality or non-disclosure agreements clarify any ambiguities regarding trade secret status and provide notice to the employee. Some companies find it prudent to require an “exiting” employee to identify his/her new employer and potential employment responsibilities so as to allow notification to the new employer of the use and disclosure restrictions.
A similar agreement should be required for non-employees who have access to trade secrets, such as contractors, suppliers, vendors, or potential licensees.
- Providing Notice of the Trade Secret
Under the UTSA, liability for trade secret misappropriation often turns on the misappropriator’s knowledge that such information was a trade secret. Thus, notice is important to maintaining the confidential status of a trade secret. Along with non-disclosure agreements, employers should consider performing exit interviews for employees ending their employment. During this interview, the employee can be reminded of the significance of the non-disclosure agreement. After the interview, the employer should write a letter summarizing the information discussed in the interview and, if possible, identify all trade secrets of which the employee has knowledge. These steps make it difficult for a former employee to claim that he or she had no reason to know that the information was a trade secret or acquired by improper means.
Employers should also consider providing documents and other things that include trade secrets with legends or sign indicating it is proprietary trade secret information. Likewise, signs should be posted in areas in which trade secret information is kept.
The measures discussed above are not meant to be an exhaustive list of the precautions that should be taken in protecting trade secrets. Hopefully, it will serve to assist businesses in recognizing that insufficient precautions are being taken or that a system should be put in place if trade secret protection is desired. In instituting a system to protect trade secrets, companies should consult with an intellectual property attorney.
By: Suzan Hixon and Brittany Riley
Entrepreneurs are often stuck in a detrimental cycle of creating marketable ideas, but being afraid to pitch them when seeking funding. This cycle may be attributed somewhat to insecurity, but a main cause is fear that someone may “steal” the idea. Many entrepreneurs sit around attempting to “start an idea”; however, this approach is faulty in many respects. In order to be successful, these entrepreneurs should be “starting a company” and focusing on the execution of their idea.
Pitching an idea or a company to potential investors is inherently risky, but it is often essential. Therefore, it is imperative that entrepreneurs take certain precautions when making their pitch. First, it is a good idea for entrepreneurs to protect their brand by file for trademark protection, and protecting their creative expressions by filing for copyright registrations. Entrepreneurs should also consider applying the copyright notification symbol (i.e., ©) as well as the trademark notification symbols (i.e., ® for registered trademarks, or ™ for non-registered trademarks). Inventors should apply “patent pending” and/or the patent number, if applicable. These symbols provide notice to potential investors that the entrepreneur recognizes and appreciates intellectual property, and that he is serious about protecting his intellectual property. There are also some more pitch-specific precautions that entrepreneurs can take.
During a pitch, it is important for an entrepreneur to limit what is provided in the “pitch packet.” The entrepreneur should only give the potential investors a general view of his idea. Entrepreneurs should already be cautious in selecting investors to pitch their idea or invention to; nevertheless, they should be careful in what information they disclose. Entrepreneurs should focus on what their idea or company will do, and not exactly on “how” it does it. While revealing too much about an idea is one problem, being too secretive can kill a potential deal, too. If entrepreneurs do not provide potential investors with enough information about the idea, or if he acts too secretive about it and starts throwing non-disclosure agreements around, then the investor will likely show the entrepreneur the door.
Entrepreneurs preparing for a meeting with potential investors can also consider including certain language in their pitch packet establishing the expectation of confidentiality and ownership of the information contained therein. An example:
CONFIDENTIAL INFORMATION FOR YOUR EYES ONLY.
[Entrepreneur’s name/company] respects the intellectual property rights of others, and we ask that you do as well. All materials included within [Name of Pitch Packet], including, but not limited to, names, trademarks, graphics, renderings, code, and text, are the property of [Entrepreneur’s name/company], and are subject to copyright owned by [Entrepreneur’s name/company]. Any reproduction, retransmission, or republication of all or part of any material, document or element is expressly prohibited, unless [Entrepreneur’s name/company] has expressly granted prior written consent to reproduce, retransmit, or republish the material. All other rights reserved.
Including a confidentiality and ownership clause in a pitch packet, similar to the one above, is not a guarantee that someone will not try to steal an entrepreneur’s idea, but it may act as a deterrent and it may provide the entrepreneur with more legal standing to pursue infringers.
Furthermore, entrepreneurs should attempt to establish some level of implied confidential relationships with third parties. This implied confidential relationship occurs when the conduct of the parties indicates that they intend to create one. Creating this type of relationship will give the entrepreneur legal rights similar to those created by a written agreement. However, entrepreneurs should be warned that it is more difficult to prove that such an implied confidential relationship existed. Of course, entrepreneurs can attempt to have investors sign a non-disclosure agreement, establishing the relationship between the parties and binding the investors from disclosing or using the information revealed to them, but it is very unlikely that any investor would consider signing such an agreement, and it could serve to set a negative tone between the parties.
Although there is no guarantee that potential investors will not try to steal an idea pitched to them, being proactive in preparing for a pitch will prepare the entrepreneur for the best course of action for the situation. Thus, entrepreneurs should get out there and create something that may be a good or bad idea, and selectively pitch it to potential investors.
By: Suzan Hixon and Brittany Riley
Trademarks usually encompass words, logos, and images that are used to identify the source of a product or service. They appeal to our visual sense and our ability to relate what we see as an identifier. However, the scope of trademarks has been expanded to include four of the five senses: hearing, sight, touch, and smell. Companies have successfully registered sound, motion, texture, color, fragrance, product shape, and product packaging through the United States Patent and Trademark Office.
Some sounds automatically register with us as belonging to a certain product. A certain sound of a quacking duck immediately makes us think of Aflac. “Yahoo!” sung in a yodeling style causes us to picture an internet search engine. Although there are numerous sounds that are associated with certain services and products, not just any sound can be registered. Additionally, the sound cannot be commonplace in that it is normal in the course of operation. The sound must have an “acquired distinctiveness” in that it must be unique and distinctive. A distinctive sound is one that is capable of distinguishing the goods or services upon which it is used from the goods or services of others.
Motion marks on television and websites can be a very effective marketing tool. Unfortunately, researching motion trademarks in the United States can prove difficult. Although not much information exists regarding registering motion trademarks in the United States because it is rare, motion trademarks may be easier to register than sound trademarks because registrants do not have to prove acquired distinctiveness. The difficulty in registering a motion is in producing the drawings required by the USPTO.
Motion marks also include holograms. A hologram is used to perform the trademark function of uniquely identifying the commercial origin of products or services. In order to register a hologram as a trademark, there must be evidence that consumers would perceive it as an indicator of source. This standard is hard for trademark applicants to meet because the common use of holograms for non-trademark purposes means that consumers are less likely to perceive the use of holograms as trademarks.
Unlike a motion trademark, to register a texture trademark the registrant must prove that the mark has an acquired distinctiveness. However, a texture trademark has an additional requirement that may lead to difficulty in registration: the texture being registered cannot be a functional feature of the product. For instance, The David Family Group, LLC was able to register a mark that consists of a leather texture wrapping around the middle surface of a bottle of wine. On the other hand, the maker of BAWLS soft drinks was unable to register the bumpy textures of its bottles because the “bumps” served as grippers to keep the bottle from slipping out of consumers’ hands.
In the past, color, by itself and not as part of a design, has been considered incapable as serving as a trademark. The USPTO relied on numerous reasons for this conclusion, mainly mere functionality. Color was viewed as an enhancer of the aesthetic quality of the object or design. These conclusions regarding color marks still remain in some instances; however, a color mark can be registered if it consists solely of one or more colors and is not functional. A color will be deemed functional if it has a utilitarian advantage/purpose, is more economical, or is aesthetically pleasing and helps to improve the salability of a good or service. Companies such as UPS and Christian Louboutin have successfully registered color marks.
Successful registration of scent marks in the United States has been limited. The doctrine of functionality is the main reason for the restricted registration of fragrances. A seminal case allowed for the registration of scented sewing thread and embroidery yarn; however, at the time of registration, no other company had ever offered these products for registration. Recently, Amyris Biotechnologies, Inc. registered the citrus scent for biofuel.
With ever-changing technology, the registration of non-conventional trademarks is prevalent. Although the requirements for registration can be difficult to achieve, registration of such trademarks is important in protecting entrepreneurs’ rights to their products. The creation of new technology will allow us to see how far trademark protection will span; however, the definition of trademark inherently allows for a wide range of protection and flexibility.
By: Suzan Hixon and Brittany Riley
We usually immediately think of designer purses, shoes, and electronics when talking about counterfeit goods. In the case of logos and brands, counterfeiting results in trademark infringement. However, the illegal imitation of products is expanding to food and drink. Recently, a renowned wine dealer, Rudy Kurniawan, was arrested for auctioning 84 bottles of counterfeit wine purporting to be from Domaine Ponsot in Burgundy, France, which were expected to sell for approximately $600,000. Prosecutors maintain that the wine was not authentic. Unfortunately for Mr. Kurniawan, the crime he is charged with is serious, as the bad-faith sale of any commodity that is known to be a counterfeit, fake or forgery is a felony.
Unfortunately, instances of “label fraud” are not new to the wine industry. Label fraud is where counterfeit labels from cult wines and other rare and expensive wines are affixed to bottles of less expensive wine and then resold. During the 1980s and 1990s, wine collector Hardy Rodenstock was infamous for selling fake “Jefferson bottles,” rare Bordeaux wines bottled for American President Thomas Jefferson.
At the surface, counterfeit wines seem to only hurt the buyer; nevertheless, label fraud can have serious repercussions for the wine market as a whole. For instance, the presence of counterfeit wines in the market has the greatest potential to impact the wine industry in the areas of financial loss, damage to brand reputation, and liability. The potential cost to vintners has caused them to look to new technologies—from security inks to micro-chipped corks to laser-coded bottles—in order to protect their brands from fraud. Other producers have worked with printers to develop graphics or micro-printed multicolored codes that are only visible with magnification. Some vintners even use holograms or unique etchings on their bottles.
The expansion of fraud within the wine industry can serve as a lesson to all trademark owners. Expanding technology will allow counterfeiters to copy almost any product, especially luxury and high-end products. Trademark owners who are worried that their product will be subject to counterfeit techniques can learn from the wine bottling and labeling industry by applying protective techniques to their own products. The use of micro-chips, microprinted multicolored codes, and holograms can be applied to various products depending on the material and cost. Although the methods used by vintners to protect their brands from fraud may seem expensive and excessive, it evidences how costly and damaging counterfeit products can be to the success of a brand and/or an entire industry.
By: Suzan Hixon and Brittany Riley
Startups and small businesses must constantly balance the desire to cut costs with the need to effectively pursue protection of the intellectual property. One way that companies attempt to save costs is by performing a knockout or preliminary trademark search on their own, and then go straight to filing a trademark application if the preliminary search results look “clear.” A knockout search is the first search performed to determine the availability of a proposed trademark for use in commerce in connection with particular goods and services. The purpose of the knockout search is to determine whether the trademark in question is already being used by a third party in connection with the same or similar services. If it is, the proposed mark is “knocked out.”
However, a preliminary search only provides a rough idea of obvious problems. Knock out searches only help the searcher determine whether there are obvious conflicts, and whether it is worth investing in a comprehensive trademark search. Although these rudimentary searches are useful, comprehensive searches offer a much more thorough analysis and report of the search results that allows entrepreneurs to evaluate risks before investing in and building their brand. The comprehensive search, which is often performed by a searchers specifically trained in the art of trademark searching, will permit an attorney to form a formal legal opinion–unlike the preliminary trademark search—that analyzes known risks that entrepreneurs could face if they pursue use and registration of their proposed trademark.
Again, comprehensive searches are typically outsourced to specialized search firms, which have access to databases of company names, state trademark registries, Dunn & Bradstreet reports, domain name databases, business publications, and press releases. The researchers at these companies who work on the entrepreneurs’ behalf are able to search efficiently and effectively for different iterations and alternatives of the same words, in unique ways. Often, it is very difficult for an entrepreneur or a trademark attorney to perform a search of this nature this efficiently and effectively due to time constraints, and that fact that, simply, we haven’t been trained in the art of searching! A proposed trademark only has to be likely to cause confusion in order to be considered a potential conflict. The danger is that an entrepreneur could start using a trademark, pay to apply for registration of a said trademark, and begin investing heavily in marketing and advertising, only to discover that their beloved trademark actually conflicts with someone else’s trademark! If that person used their trademark before the entrepreneur, then the subsequent user would not be able to register their trademark and would likely have to change it. This could lead to multiple expenses, including litigation costs resulting from infringement suits or the cost of having to completely rebrand a product or service.
Most startup companies cannot afford to change their trademark after investing in branding, advertising, and/or product packaging. To circumvent having to change a business name or brand after launching, which could cost businesses thousands of dollars, it makes a lot more sense to make a small investment in an initial comprehensive search early in the game. Keep in mind that a comprehensive search is not a guarantee of successful registration, because there is always the possibility that a potentially conflicting trademark is not revealed in a database. However, having a thorough analysis and report of the search results allows companies to invest a small amount of money in order to evaluate risks, before a larger amount is spent investing in and building their brand. A comprehensive search may seem too expensive at the outset of starting a business; however, it is a cost smartly accrued, as it will protect the entrepreneur’s goods and/or services as well as the overall brand.
By: Suzan Hixon and Brittany Riley
For years, women of all ages have spent countless hours creating collections of ideas in scrapbooks for outfits, future weddings and homes. In the same way that email and Facebook virtually eliminated handwritten letters, scrapbooking in its tangible form is surely dwindling with the creation of the social media site, Pinterest.
Pinterest is an internet based pin-board site where users “pin” their favorite recipes, books, clothes, photos, and quotes on customized “pinboards” for other “pinners” to follow. According to VentureBeat (www.venturebeat.com), Pinterest has become one of the top trafficked social network sites online. However, success is not always sweet.
Pinterest’s increasing popularity creates significant issues in terms of piracy and copyright law. Many Pinterest users post photographs on their pinboards without ownership of the copyright to the image. Thus, questions arise as to the potential for copyright infringement. Unsuspecting pinners use bookmarklet to pin as they browse the web. When they see an image they want to pin, the pinner simply clicks “Pin It” on their browser, designates the board to be pinned, and the image is “magically” transferred it to the designated pinboard. The process is seemingly innocent and all-too easy, but the consequences can be dire.
Pinterest warns users in the Copyright and Trademark section of their site that pinners may receive a notification that a pin has been removed due to a copyright complaint if the content’s owner makes a complaint. Those users who receive numerous copyright complaints can lose their ability to pin new images or, even worse, have their account terminated. Loss of one’s account or pinning capabilities is an insignificant consequence compared to the legal and financial ramifications that users could suffer.
Whether or not copyright owners will assert claims for infringement is yet to be seen. It could be argued that Pinterest increases website traffic and sales for owners, but not all copyright owners are retail businesses. Like the defendants in suits associated with Napster, many users are unsuspecting, well-meaning people with little or no legal knowledge. In fact, attorneys and law students alike failed to read the “fine print” when creating their Pinterest account. Now users must decide whether to take a risk and continue to discover and share their favorite images, only pin and re-pin images they own or have permission to use, or delete their account altogether.
If you decide to keep your Pinterest account, be “copyright friendly” and protect yourself by pinning the original source. By ensuring that the image you are pinning goes back to its original site you can help protect yourself from infringement claims. Also, give the original site credit for the image. See http://www.graphicsfairy-crafts.com/2012/03/how-to-find-original-source-of-image-on.html for a great tutorial on how to find the original source of an image!
If you are the owner of an image, watermark your image. Pinterest does not currently permitting the cropping of images; therefore, you should always receive credit as the original owner. If you do not wish for your image to be on Pinterest at all, take advantage of the code that Pinterest offers that can be added to the head of any page of a website to prevent images from being pinned.