Crowdfunding has become one of the most popular funding and backing sources in recent years. The biggest crowdfunding platform of all is Kickstarter.
Kickstarter has been used to fund all sorts of projects such as new books, video games, videos, and yep, business ideas and products. Over 1.6 billion dollars have been invested into Kickstarter projects since 2009.
It has been used to successfully fund many new ideas so it’s only natural entrepreneurs will consider using it. When you look at all the success stories, it would seem like Kickstarter is almost perfect. The perfect tool for any entrepreneur to get funding to get their ideas and products off the ground.
However, it’s not that black and white. There are legal issues involved. Legal issues that too many people don’t realise or simply don’t pay attention to. You need to make sure your Kickstarter campaign is legally sound before you launch it.
1. Form Your Business Structure
Gathering support and funding for a business idea or project using Kickstarter is a great idea. Before you do that, you need to make sure you understand your legal liabilities. This is determined by the kind of business you’re running.
If you’re registered as a sole proprietor then you’re going to be facing some legal problems if the project or idea falls apart. Just like in the real world, in Kickstarter you need to be able to deliver the products you get funding for. But if you’re registered as a sole proprietor and something goes wrong and the project never gains legs then you’ll be held personally liable.
You only need to look at the case of Seth Quest who successfully crowdfunded a product called Hanfree. He failed to deliver this product to backers (for numerous reasons you’ll see in the next point) and now he’s personally liable for any lawsuits against him. All because he never incorporated his company.
To limit this as much as possible, make sure your business is registered as a Limited Company. Then if something goes awry with your Kickstarter project, your liability will be massively reduced and you won’t be held personally responsible legally (at least to some extent).
2. Get A Contract Written
If you’re working with other people on your Kickstarter project, then you need written contracts. There is no such thing as handshake agreements especially if there’s a potential for large sums of money to be involved. The only way everyone can truly be on the same page is if it’s written into a legally binding contract.
However, it’s not just the people you work with that you need contracts with. If you are offering a product that requires manufacturing, designing or anything similar then you need contracts written as well. You only need to read about the case between Seth Quest, who created a product called Hanfree.
Quest put his idea for this product on Kickstarter and raised $35,004. While this seems great at first glance, problems began emerging. Quest was a designer and had no idea about how to run a business. Eventually, he tried getting the product manufactured in China, Singapore, and Los Angeles. But Quest’s downfall was not getting contracts written up with manufacturer’s before he went on Kickstarter with his idea.
Eventually, those manufacturers were able to dictate negotiations for manufacturing the product, which eventually cost Hanfree all the money raised from Kickstarter. They ended up with nothing left to actually make the product at a profitable level. That’s not all, because then other design members within Hanfree began challenging Quest for a greater stake in the company.
Written contracts between the manufacturers and his own team quite possibly would have saved Quest and Hanfree. It would have reduced any petty infighting between members of the Hanfree team and would have secured manufacturing costs for the product at a reasonable rate.
Now, a great idea is in complete disarray and it’s all because no contracts were created. If this doesn’t convince you of why a written contract is so important then we’re not sure what will.
3. Protect Your Intellectual Property
Whether it’s a copyright, trademark or patent, you need to make sure your intellectual property is protected. There are all sorts of problems that can occur when it isn’t protected.
Without proper IP protection, you could find copycats stealing your treasured idea, and risk losing any profit that otherwise could have been gained from it. There has already been countless examples of people’s ideas being undercut and stolen on Kickstarter.
It’s great to have an idea for something, feel passionate and enthusiastic about it, but too many people foolishly go straight on Kickstarter trying to get money from backers without doing their due diligence. Then they end up with their idea being stolen or undercut from other users.
It could all be prevented with a little due diligence. Speak with a lawyer first and find out whether you need to patent your idea. You may even be able to just get a copyright or trademark over it. Regardless, the most important thing is to make sure your intellectual property is protected first and foremost before you put it on Kickstarter.
4. Deliver On What You Promise
You need to deliver on what you promise. Just because Kickstarter isn’t a storefront, it doesn’t mean you can make a promise about your product and then not deliver on it. It’s only fair that you deliver on your promises and of course, there are legal ramifications if you don’t.
Previously, there was very little backers could do if a project they contributed money towards failed to get off the ground. However, due to numerous failed projects and many complaints raised by backers, Kickstarter has amended a new set of ToS that states companies that fail to deliver on their promises for projects successfully funded, could be subject to legal action.
Previously, this wasn’t in Kickstarter’s ToS but now it gives greater assurances to backers that don’t get what they’ve been promised. If you don’t deliver your product there is a strong chance you’ll be sued.
The smartest thing to do is to make sure in advance that you have processes established in advance to deliver the product if you successfully get enough backing for it.
5. Money Laundering Issues
One of the more frightening negative aspects to emerge recently in the crowdfunding scene is money laundering. This is becoming more of a risk, especially given the current political and economic climate in many parts of the world. There is a very real growing concern that crowdfunding platforms like Kickstarter can be used to launder money by criminal organisations or finance terrorist groups.
Investment-based crowdfunding carries a risk of misuse for terrorist financing, particularly where platforms carry out limited or no due diligence on project owners and their projects. Project owners could use investment-based crowdfunding platforms to raise funds for terrorist financing, either overtly or secretly. - European Securities & Markets AuthorityClick To Tweet
The risk here is that certain individuals will raise money for malicious purposes under the disguise of crowdfunding. The way you can minimise coming under any investigation for this is to make sure that any money you raise is not held in a personal bank account. Rather, it needs to be held in a recognised business bank account.
This further emphasises why your business structure is so important, and we’ve already mentioned that we think your best bet is to opt for a Limited Company. Also, make sure that any credit institution you use is based in the EU because those institutions are subject to anti-money laundering laws.
Don’t think that we are trying to put you off crowdfunding with Kickstarter in this post. We acknowledge it’s a great way to get backing and support for a product. You only need to look at the many success stories to see that.
However, we also acknowledge there are serious legal ramifications if you don’t make sure your Kickstarter campaign is legally sound first. We don’t want your business to end up in the gutter because you didn’t do your due diligence. Really, due diligence is the most important thing before you put your project on Kickstarter.
If you take the time to go through everything in this post, your Kickstarter project will be legally sound and you can get funding for your project in confidence.
Still feeling confused? Then speak with one of our legal experts and make sure the legal fine print is covered before you launch your crowdfunding campaign. It’s better to be safe than sorry.