Legal pitfalls of crowdfunding campaigns
You have the next big idea and need some cash to make it happen.
Crowdfunding campaigns, such as Kickstarter and IndieGogGo, can be effective ways to get a boost, offering contributors a reward in exchange for a financial contribution to the future of your business.
Before you jump in, it’s important to be aware that these campaigns aren’t without risk.
The first thing to pay attention to is the language you use to explain and present your product or project.
When you make an agreement to receive funding in exchange for a reward to your supporters, it amounts to a contract. That means you need to be clear about what you are, and aren’t, going to provide.
You must make good on whatever you’ve promised. If you agree to give them a product and don’t deliver it, or don’t deliver it at the quality you promised, you could be on the hook for a breach of contract claim. An individual can bring a claim, or it could become a class action on behalf of many or all of your backers.
On many crowdfunding sites, the terms of service state that you must return any money raised if you don’t deliver whatever you promised.
One of the best ways to protect yourself is to communicate regularly with your donors, informing them about the status of the campaign and the delivery of the product.
Another way to protect yourself is to form an LLC or other corporate entity. These business arrangements protect your personal assets if you ever had to pay a legal judgment against you.
Crowdfunding sites typically have provisions to protect themselves from liability, but do not protect the entrepreneur using their service.
In addition to breach of contract claims, your campaign can open you up to consumer protection or fraud claims if you don’t deliver what you promise. Government agencies can also sue to enforce such laws.
Protect yourself by looking at your description as if you were a potential funder, and make sure what you are promising is clear.
For most typical, rewards-based crowdfunding campaigns, you should state clearly in your description that your supporters will not obtain any equity in your company or any share of your profits. To be safe, you should be sure that the words “invest,” “investor,” and “investment” do not appear anywhere.
Also, remember that any income from your crowdfunding campaign is taxable. It can get complicated if the related expenses will be incurred in future years or if you need to capitalize the expenses.
A business attorney can help you minimize your risk and help prepare you for a legally sound crowdfunding campaign.