By Debby Winters
Let’s start with the basics. What is “crowdfunding” and why is everyone talking about it? Crowdfunding is a way of raising capital from a large number of small donors. The number of crowdfunding portals available is expected to grow rapidly now that equity-based crowdfunding investments have become legal. This allows companies to sell up to $1 million of securities annually. Crowdfunding presents an exciting opportunity to raise money or to pre-sell a product while building product buzz and an engaged customer base.
But here’s the problem when it comes to your intellectual property. To engage the crowd, a large amount of information about the project is shared with the public. If this information sharing includes previously confidential technological details, it could be considered a public disclosure under U.S. patent laws, which could trigger patent filing deadlines.
Those using crowdfunding (either donation-based or equity-based) must be mindful of these filing deadlines to ensure they do not jeopardize their intellectual property rights. This is particularly true for crowdfund issuers who have used government funding or resources while developing their ideas, as they may be subject to the Bayh-Dole Act (BDA). The BDA allows government contractors to elect to retain title to an invention that was created with the aid of government funding, but only if they follow specific steps, in a timely fashion. Crowdfund issuers who have used government funding must ensure that their crowdfund offerings comply with the requirements of the BDA, particularly in light of the recent amendments to the BDA and patent laws affected by the America Invents Act (AIA) patent reforms.
A public crowdfunding disclosure may have an impact on the timing of two BDA requirements: 202(c)(2), the written election to retain title, and 202(c)(3), the agreement to file patent applications covering the subject invention before statutory bars. The deadline for electing to retain title to an invention under the BDA is two years after disclosing the invention to the government. However, this deadline may be moved up significantly by a public disclosure of the invention, including, in many cases, the disclosures associated with a crowdfund offering.
The BDA provides that if the AIA’s one-year grace period for filing a patent application would end before the BDA’s two-year grace period for electing to retain invention rights, the time for written election to maintain invention rights may be shortened by up to 60 days before the end of the AIA’s one-year grace period. Failure to act within the allotted time period could lead to forfeiture of rights to retain title to the invention.
Crowdfund issuers also should be wary of the AIA’s one-year grace period for filing patent applications. Because of this switch to first to file, inventors will no longer be able to “swear behind” art developed between an inventor’s date of invention and the patent application filing date. Thus, to avoid this potentially invalidating art, crowdfund issuers should file applications and elect rights to an invention as soon as possible and not rely on the one-year grace period for filing a patent application.
Additionally, crowdfund issuers must take care to disclose all required information to potential investors. For those subject to the BDA, this will include notifying investors about all rights that the government has or may have to the invention. This is particularly true if the company has not yet filed a patent application or has not yet made a written election to retain invention rights.
An investor may elect to purchase crowdfunded securities based on the perceived value of the technology described in the crowdfunding disclosure. However, if the company fails to follow the requirements of the BDA and does not properly elect to retain rights, the government, not the company, may obtain the patent rights to the disclosed technology. This may adversely affect the value of the securities and could trigger allegations of a material misstatement or omission.
Given the complexities of intellectual property ownership under the BDA, companies should take special precautions to ensure clean title their IP rights before they make a crowdfund offering. Here are some things to consider putting into practice:
• Once a federal agency is informed of an invention, the inventing entity should quickly follow the BDA procedures and make a written election to retain title to the invention. It should file a patent application as soon as possible, and under no circumstances should it file the application later than one year after any public disclosure.
• If the company will offer securities, it should elect to retain title to any IP that contributes to the basis for the valuation of a crowdfunding offering before the offering. This will help to ensure that the valuation properly reflects the company’s ownership of the invention.
• If the company cannot afford to file a patent application before raising funds, it should consider filing a provisional patent application as a filing date placeholder. Provisional applications can be less formal than regular patent applications and often can be filed using materials that already have been prepared for the crowdfunding disclosures. Provisional patent applications are an inexpensive way to preserve patent rights under the first-to-file system of the AIA.
• The crowdfunded security offering should clearly inform potential investors of the government’s rights or potential rights to the invention. Even if patent rights are elected in a timely fashion, the government still maintains certain rights under the BDA (e.g., “march-in” rights). Although these rights may be rarely used, they may still affect the company’s valuation and should be disclosed.
• Finally, the BDA only covers inventions made using government funding. To limit the BDA’s applicability, businesses should segregate out as much IP as possible by differentiating it from the subject matter covered by any government funding agreements.
Crowdfunding is a new and potentially powerful tool. Following these steps will help to ensure that a business has a clear title to its IP rights and that it has disclosed all necessary information to potential investors.