United States: Crowdfunding And IP In Health And Biotech Start-ups (Part 3): Potential Dangers

This is the third in a 3-part series about the use of crowdfunding in health and biotech start-ups. We started with the story of a tech start-up which set records for funding through a Kickstarter campaign, triggering the interest of entrepreneurs in capital- intensive industries. Part 2 discussed the JOBS Act and the government's attempt to overcome regulatory hurdles facing companies which want to use crowdfunding to raise equity investment capital. Part 3 addresses some Potential Dangers inherent in the system of crowdfunding being devised. We hope you find the series educational and invite you to contact the authors with questions.

PART III: First, the JOBS Act requires the SEC to issue complex implementing rules prior to crowdfunding becoming a reality. For any startup seeking funding through a crowdfunding source, the rules proposed by the SEC under the Act demand detailed disclosures regarding the company. The company must also describe exactly how the securities it is offering are being valued. Additionally, the Act requires ongoing, annual financial reports from the company after any successful crowdfunding campaign. These facts alone may scare off some entrepreneurs.

Startups will have to wait to see exactly how the JOBS Act is implemented and interpreted. But many entrepreneurs may be hesitant to disclose details on how their companies are being run. One of the benefits of being a small, privately held company is that competitors may not understand exactly how a company operates or what financial state it is in. With the disclosure requirements of crowdfunding, a company may need to disclose detailed information to hundreds or thousands of individuals with little control over what happens to that information after it is disclosed.

Second, health and biotechnology startups usually depend heavily on their intellectual property—especially patents. Using crowdfunding campaigns to raise capital creates concerns over patent rights in two main areas. First, the very disclosure required by the JOBS Act could potentially create prior art bars under US and foreign patent laws. Generally, prior art is anything that is available to the public before a patent application's effective filing date and is relevant to whether an invention is truly "new." Prior art commonly takes the form of journal articles or other patents. The US already had fairly strict prior art rules in place. But the US patent system recently went through a major revision, the America Invents Act (AIA). While the AIA altered many aspects of the US patent system, it made a few prior art bars even more onerous than they were before. Now if an invention is "described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date" of a patent application, the invention may be barred from being patented (see 35 U.S.C. § 102(a) (2012)). There are a series of exceptions in the US that create 1-year grace periods for the inventor in certain situations. But many foreign patent systems have strict novelty rules, which means that their prior art considerations do not have any exceptions or 1-year grace periods. Entrepreneurs need to be very careful about disclosing information through a crowdfunding campaign that they later may want to patent. The very disclosures allowing companies to get the capital to launch their product may end up being used as prior art to prevent the companies from obtaining patents at a later date.

Additionally, companies need to understand the terms and conditions of any crowdfunding platform they use. The current crowdfunding platforms operating in the US focus on selling goods or services. So the terms and conditions focus much more on trademark or copyright issues rather than patent issues. For example, Kickstarter requires users to grant it a "worldwide, non-exclusive, perpetual, irrevocable, royalty-free, sublicensable, transferable right to use, exercise, commercialize, and exploit the copyright, publicity, trademark, and database rights with respect to" content a user submits to Kickstarter (see Kickstarter Terms of Use). This grant may be required for crowdfunding platforms like Kickstarter to operate, but it is still incredibly expansive.

Health and biotechnology companies utilizing crowdfunding platforms where an interest in certain aspects of their company is being sold and patents are essential to their business need to be exceedingly careful about what agreements they reach with both investors and the crowdfunding platform itself concerning any patent licenses. The specifics will likely vary between crowdfunding platforms, and the specific rules of Title III of the JOBS Act must be implemented by the SEC before the true intellectual property implications can be appreciated. However, it is important for entrepreneurs to realize the potential dangers of granting licenses to their intellectual property through the use of any future crowdfunding platforms.

Finally, entrepreneurs need to realize fully the implications of using crowdfunding platforms created under the JOBS Act. Entrepreneurs are selling a small interest in their company to hundreds or thousands of individual investors. While this may be an excellent way to raise capital for a startup, it also dilutes entrepreneurs' ownership position over the company and effectively creates hundreds or thousands of business partners that may have varying expectations with regards to what input they should have on the running of the business. This issue is not a new problem for entrepreneurs, and it is certainly not limited to equity-based crowdfunding. Any entrepreneur who takes on angel investor funds or venture capital funds will need agreements with their investors over how much of the company the entrepreneur is selling and what level of involvement is appropriate for the investors.

But crowdfunding creates a new situation where hundreds or thousands of people are investing in a company at its founding. The rules created by the SEC implementing aspects of the JOBS Act and the terms and conditions of crowdfunding platforms will influence exactly how this issue plays out. But entrepreneurs need to ensure they understand exactly what they are agreeing to when they use an equity-based crowdfunding campaign to generate capital.

None of these concerns should be taken as general criticism or a lack of faith in crowdfunding, though. Crowdfunding is creating an incredible new channel for companies to raise capital and for startups to enter new markets rapidly. Using a crowdfunding campaign can be an excellent decision for a startup. Entrepreneurs simply need to ensure that they understand the potential drawbacks and unique issues they may face by using future equity-based crowdfunding campaigns.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.