Equity crowdfunding and intellectual property - a quick guide
Thursday 21st April 2016
Baldwins’ Associate, Tim Stirrup has written a blog post for equity crowdfunding platform, Snowball Effect. Tim provides an introduction to the various types of intellectual property and a few useful tips for those considering crowdfunding offers or investment.
Equity crowdfunding is undoubtedly here to stay. It’s an excellent way for SMEs to access growth capital from both retail and wholesale investors. Having even a rudimentary intellectual property (IP) strategy demonstrates that you recognise the value of your knowledge, and are taking steps to protect it. It boosts your credibility with investors and discourages copycats from stealing your ideas.
The public nature of the online investment process raises some serious IP issues that all companies taking this route should be aware of. Here’s a rundown of the types of IP you should think about before your offer goes live, and some traps and pitfalls to avoid along the way…
A patent is an IP right granted by the government to the owner of an invention. Patents normally cover new products or methods and are the main way to protect ideas that can be easily copied or reverse engineered.
A patent gives the owner a 20 year monopoly for the exclusive use, manufacture or sale of a product or method in a particular country. One key criterion that an invention must meet to be granted a patent is novelty. Novelty means that the invention hasn’t been made available to the public, anywhere in the world - ever. So if you disclose your invention in a share offer before you file a patent application, you’ve shown it to the world and you can pretty much forget about trying to protect it with a patent, at least in most countries. There are some exceptions – in the USA and Australia you can file a patent application up to 12 months after you disclose your invention – but in general… disclosure before filing = bad idea.
A much better idea is to file a provisional patent application before you launch your offer or show your invention to investors. Provided your invention hasn’t been independently conceived and published elsewhere before you file, you should have priority for the patent in New Zealand and overseas.
But what about cost I hear you say. Well, realistically you should expect a cost of around $5,000 (NZD) to have a patent attorney prepare and file a provisional patent application. Extending your protection overseas costs significantly more but a provisional application means you can safely publicise your invention without losing the right to protect it with a patent.
There are many instances where patents aren’t the best way to protect your IP, for example new apps or software where speed to market is often key to building a successful business. However, if your invention is a novel product or process then patents are generally the best way to protect it. They’re also great marketing tools. Don’t blow your chance by disclosing the idea before at least talking to an expert who can give you the right advice.
If patents aren’t the answer then other forms of IP might be. Consider registered designs – these cover new designs of existing products. You know the distinctive shape of a “Crocs” shoe? – that’s protected by a registered design. Kanye West’s shutter shades? Same story. The iPhone handset design? You guessed it. Registered designs need to be novel to be granted. So, like with patents, it’s no good showing the world your fancy new design and saying you’ll get around to protection later – you’ll be out of luck.
What about your brand? You might have heard the old adage that the company brand is worth more than any other company asset. While this might not be true for start-ups, you have to start somewhere, and that’s where trade marks come in. Trade marks protect your brand and are an essential part of company and product development. They can protect your logo, company name, product name, tagline or jingle. They allow the public to recognise your product or service from the myriad of others.
There are two types of trade marks – registered and unregistered. Anyone can gain rights to their unregistered trade mark simply by using it. If someone copies your unregistered trade mark then you can take action to protect your trade mark under the Fair Trading Act and the law of “passing off”. However, these actions can be difficult to prove and involve lengthy and costly litigation.
Registered trade marks take the brand protection to a different level. The trade mark owner is given exclusive rights to use the trade mark NZ-wide. Also, any legal action to stop infringement is much more straightforward than with unregistered marks. A registered trade mark adds value to your business in the form of ‘goodwill’ that can increase substantially over time as the brand becomes established in the market. Registered trade mark protection can also be extended overseas to accommodate your plans for global domination!
You can still apply to register your trade mark after launch so it’s not essential that you get in early like patents or registered designs. But to keep your customer engaged and build a solid reputation, a strong brand and trade mark protection are vital.
You don’t need to register copyright in New Zealand. It automatically exists to protect your new literary, artistic or musical works from unauthorised copying. In New Zealand copyright protects books, brochures, labels, software, multimedia, databases, films, photos, sketches, plans, packaging, and three-dimensional models. However, the protection given by copyright is limited. It’s also expensive and time-consuming to prove that a competitor actually “copied” your creative work. Although useful in the creative industries, the protection afforded by copyright for gadgets or designs is somewhat limited and hard to enforce.
Trade secrets (or “confidential information”) cover pretty much everything about your company that you wouldn’t want your competitors to know. A trade secret is information not generally known within the industry and has commercial value to a business. Trade secrets therefore provide the business with an advantage over its competitors. For some companies, these are the crown jewels that give the company value – think Google’s search algorithms – no patent on these, just some serious cybersecurity. KFC’s “secret” mix of ingredients and the Coca Cola formula are presented as closely held trade secrets known only to a few employees.
With a share offer it’s a fine line between giving away enough to attract and inform investors while not helping your competitors or compromising your business strategy. With innovative products, a key way to avoid disclosing your trade secrets is to demonstrate their value without giving away the technical details – videos, testimonials, reviews etc.
Be careful how much you expose
The exposure that equity crowdfunding provides can have massive benefits for companies looking to attract investment and customers. However without the right protection, this same exposure can work against them by compromising the novelty of inventions, and putting other players on notice of innovative new brands or products. The exposure can’t be avoided, so make sure you’re ready by understanding what IP you have, and putting the right protection strategy in place before the offer goes live.
This article was originally published on the Snowball Effect Blog.
This article is intended to summarise potentially complicated legal issues, and is not intended to be a substitute for individual legal advice. If you would like further information, please contact a Baldwins representative.