Crowdfunding – a passing phase or here to stay?
Crowdfunding has become increasingly popular in the UK over the last 12 months, particularly within the creative industries. There is a wide range of crowdfunding models available, but the speed at which these models have developed raises a number of concerns with regards to the intellectual property owned or controlled by those seeking funds.
Donations/rewards, equity or loans?
The traditional crowdfunding model (the donation/reward model) involves giving money to projects in return for a non-financial ‘reward’, which can range from a visit to a film set for a crowdfunded film project to specialised merchandise. The reward will rarely reflect the amount of money invested – indeed, many investors will simply ‘donate’ money to a project, without receiving anything tangible in return.
Some businesses offer investors an equity stake in return for their investment in a project. This model faces a number of regulatory hurdles and, therefore, has not developed at the same speed as the traditional crowdfunding model. Nonetheless, the Financial Conduct Authority recently approved a number of equity-based crowdfunding platforms, including Seedrs (July 2012) and CrowdCube (February 2013), thereby paving the way for future growth in this area.
Debt model, or ‘crowdlending’
The most common form of ‘crowdlending’ is peer-to-peer lending. This fast-growing model typically involves a group of investors lending to a project at higher interest rates. In December 2012, the Government announced its intention to lend £20 million to British small businesses through Funding Circle, a peer-to-peer ‘crowdlending’ platform as part of the Government’s Business Finance Partnership scheme (BFP), beginning with funding 20% of the total amount of each loan.
Here to stay?
Recent success stories suggest that crowdfunding is here to stay. Kickstarter was launched in the UK in October 2012, and achieved a total of £2m in pledges to UK creators within its first month. A public art project called the Chime Pavilion was the first successfully funded project, achieving three times its funding target. In addition, Crowdcube recently announced that they became the first crowdfunding platform in the world to raise over £10m.
The UK Crowdfunding Association (“UKCFA”) was established in 2012, with the aim of promoting crowdfunding. This self-regulatory body has published a code of practice, adherence to which is a requirement of membership of the UKCFA. As its membership grows, the UKCFA is likely to play a significant role in the development of crowdfunding as a viable method of raising funds.
Stay protected – and stay vigilant
Often, businesses that look to crowdfunding as a means of investment do so at a stage when their project is still in its infancy and despite the success stories, it remains important for any business to protect its intellectual property. Patents (where applicable) should be secured and trade marks registered well in advance of a launch. In 2010, the ‘TikTok Lunatik watch’ raised almost $943,000 in just 30 days but the design and trade mark had not been protected and they were very quickly copied.
Businesses should also do as much research as possible before launching a project to ensure that it does not infringe any third party intellectual property rights already in existence. The cost of defending infringement proceedings would be likely to exceed any sum raised through crowdfunding. In addition, a project is likely to become valueless if it already exists in another form elsewhere.
In addition, very little (if any) due diligence may have been carried out on a crowdfunded project whereas these matters would usually be dealt with at the due diligence stage in a traditional investment. Whilst crowdfunding has proved an invaluable way to springboard certain projects, entrepreneurs should take legal advice before launching their projects in order to protect the value of their intellectual property and reduce the risk of becoming embroiled in disputes later on.
MH Media and Technology
gTLDs and Trade Mark Infringement
The Internet is undergoing a major change this year, following the acceptance by ICANN (the Internet Corporation for Assigned Names and Numbers) of many new applications for generic Top Level Domains (“gTLDs”). In addition to the domain names that we have become used to such as .com .net and .co.uk, domain names will now include generic words, geographical locations and brands, such as .shoes .london and .google.
Domain names already cause a headache for organisations wishing to protect their brands and trade marks, with issues such as cybersquatting and intellectual property infringement to contend with. When the domain name server system was established it was not anticipated that domain names would have any value. However, as the internet has rapidly expanded, certain domain names have become valuable commodities, with disputes arising between parties with competing interests in the same domain name and disingenuous parties cybersquatting in domain names likely to be valued by a certain company or organisation.
In an attempt to tackle this problem, ICANN introduced a system for settling disputes over domain names, known as the UDRP (the Uniform Domain-Name Dispute-Resolution Policy), which is a mandatory dispute resolution process for all ICANN-accredited domain name registrars. Essentially, the UDRP requires that domain name owners arbitrate each dispute where a trade mark or common law mark owner raises claims of cybersquatting or infringement. Many disputes have been resolved using this procedure since its introduction. But will the UDRP be sufficiently effective to handle the likely influx of cases that will follow registration of these new gTLDs? The Association of National Advertisers has voiced concerns about trade mark infringement and the potentially substantial cost of making defensive domain name registrations.
Whilst watertight intellectual property (“IP”) protection is impossible, ICANN’s Trademark Clearing House (“TMCH”) is likely to become an essential medium through which trade mark owners may protect their IP. TMCH is open to brands around the world to record their trade marks, offering two protection services. Firstly, the Sunrise Service gives the registrant priority during the pre-launch (sunrise) period of each new gTLD. This is a period of at least 30 days where trade mark holders can register domains before they are available to the general public. The second function is the Trademark Claims Service. This is an alert service that will notify users if they try to register a domain that includes a brand in the TMCH database. It will also notify the registered brands. Once the trade mark holder has been notified of the proposed registration, it may then take legal steps to oppose the registration.
Whilst the TMCH will not stop anyone from registering a domain name, it does go some way to making the registration process fairer and it encourages disputes to be resolved on an individual basis.
Registration at the TMCH costs $150 for one year, $435 for three years and $725 for five years. The cost is not inconsequential, but it will certainly be less expensive than paying for hundreds of defensive domain registrations for each of the new gTLDs, in an attempt to protect a brand.
If you would like further information or advice on this please contact Tony Morris on 020 7209 2093 or firstname.lastname@example.org