Crucial Crowdfunding Guide

Legal & Financial Considerations

  • Get to know the regulations that apply to you
  • Regulations can vary from country to country
  • Apply for a patent / register your trademark where possible
  • Have a financial plan for both campaign failure and extraordinary success
  • Plan for taxes and other unexpected costs
  • Be honest, keep your promises, and you will be fine

There are financial and legal considerations you need to be aware of before you start your crowdfunding campaignYou need to protect your ideas from being stolen by competitors. Your business practices will also be subject to public scrutiny, especially if you choose the equity crowdfunding route. The best advice anyone could give is to be honest and keep your promises. If you also follow the rules (which vary slightly from country to country) regarding taxes and financial reporting you should be OK. Make sure you understand all the relevant regulations before you begin your campaign

It’s great that you are embarking on a crowdfunding campaign, or at least are considering doing so. Before you make your final decision, however, you should understand the risks that are associated with crowdfunding, so that you can manage them effectively and remain in control of your business, even when things go slightly differently than what you had originally planned.

Intellectual property (IP)

IP assets are immaterial but they add real value to a business. These include patents, copyrights and trademarks. For instance, a new product that is patentable (or has patentable components), or an art work that is subject to copyright might be presented as a crowdfunding project. Protecting rights to intellectual property is an important consideration when publishing your crowdfunding campaign. Two main types of intellectual property issues have emerged with crowdfunding:

  • Disputes about ownership of a patent or copyright,
  • Ideas or concepts on crowdfunding pages being stolen by competitors.

Publishing a new product on a crowdfunding site exposes the creator of the product to the possibility that his or her idea could be copied. If you have a patentable product, it might be a good idea to file a provisional patent to give you at least some protection while you begin your crowdfunding campaign.

If you want to use images, music, video, or other copyright protected artwork for your crowdfunding campaign, you must have the copyright or a licence to use this content. If you want to protect content of your own, copyright it before you publish it on a crowdfunding site. The same is true for trademarks (and service marks). You need to use the appropriate symbols to show that you have applied for a trademark  or that you own the copyright.

Fulfillment of promises

During a crowdfunding campaign, make sure you do as you have promised. This is especially important if you use the donation model. If you promise something and end up not delivering, the consequences can be serious. The costs of the fulfillment of those promises should be accounted for in all your financial calculations. Most crowdfunding sites are essentially  go-betweens, and are treated as such by the law. If you fail to deliver on your promises, it is you that will be held accountable.

Fraudsters can go to prison

Equity crowdfunding involves the sale of securities, and there are laws in every country that govern the sale of securities. If you do something wrong, your company and its managers can be sued. In some cases, they could be imprisoned.

The bottom line is simple: Tell the truth. Under most securities laws, being 100 percent truthful and not making any misrepresentations about your business guarantees relatively safe passage through any turmoil, be it legal or financial.

What if you do extremely well and exceed all your expectations?

As well as planning for success, and for failure, you should also have a back-up plan for extraordinary success. If you really catch the public’s attention you might receive far more in donations or investment than you had ever planned. What then? There are many examples of very successful campaigns that raised so much more cash than they had initially wanted that it was difficult to manage, administratively and production-wise.

Taxes

One aspect of business whose importance is often overlooked by beginners, are taxes. You need to remember that the income you receive from a crowdfunding campaign may be considered as income by the tax authorities. If it is taxable you have to abide by the law, ensuring that you file and pay as required. Always include tax issues in your calculations. There are different regulations regarding Value Added Tax in crowdfunding situations in different countries and depending on what kind of campaign you are conducting. It is always worth a consultation with a trusted accountant or tax adviser about the tax code in your jurisdiction.

Financial Reporting

For companies that have already begun a crowdfunding campaign or that are planning on beginning one, there are unique questions that need to be answered when it comes to financial reporting. As the concept is fairly new, regulations regarding these types of investments continue to evolve around the world. Consult the web pages of your national regulatory agency for more information, and don’t be shy to ask advice over the telephone or by engaging a competent professional. It’s better to be absolutely clear about all relevant regulations than to make mistakes and be sorry later.

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CRUCIAL is co-funded by the EU through ERASMUS+. Project: CRUCIAL (Crowdfunding Capital) 2015-1-IE01-KA202-00862The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein