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Rewards Crowdfunding

Rewards Crowdfunding

Today, I'll be focusing on rewards crowdfunding. Kickstarter and Indiegogo are the big players. I'll talk mostly about Kickstarter, since it had many of the initial successes (and failures).

For those of you who aren't familiar, Kickstarter allows creators to raise money for a project. In exchange, the contributors to a project get something related to that project. The proceeds from the project could be taxable income for that year, which could come as a nasty shock.

The Pebble Smartwatch raised over $10 million for its first campaign on Kickstarter, and $20 million for a second project. The Coolest Cooler raised $13 million.

The Doom that Came to Atlantic City, a board game based on the Cthulhu mythos of H.P. Lovecraft, raised $122 thousand, but ran behind schedule. The Federal Trade Commission busted the creator, Erik Chevalier, for using proceeds for personal rent and moving expenses.

Chevalier couldn't pay, so the contributors to the project didn't get their money back. Another company picked the board game up, and even offered the contributors from Kickstarter the copies of the game they had pledged for. 

Fraud like that is actually very rare on Kickstarter. Most projects deliver after their estimated dates, but the cause is often inexperienced project creators. Coolest Cooler blew through its money without being able to deliver.

Contributors can sue the project creator, but most failed projects have no money. There may not be breach of contract, if there's no product at the time. Kickstarter itself has deeper pockets, but they're not responsible for the outcome of any projects.

Occulus Rift raised $2.5 million for a virtual reality headset. Contributors were entitled to a headset. In 2014, Facebook acquired Occulus for $2 billion. None of that money went to the fans on Kickstarter. At the time it was illegal to offer shares in a company through crowdfunding, so the early fans had no opportunity to invest. Even so, some fans felt shut out.

At the extremes of failure and success, rewards crowdfunding ends up being the worst of investing and shopping. If it fails, you can't sue or get a refund, like an investor. If it's wildly successful, you don't share in that windfall, like a shopper. In the middle though, it's a great way for fans to get a cool product.

[lawdabble]

Crowdfunding is like Dessert

Crowdfunding is like Dessert

For a single term, crowdfunding has a lot more meanings than you might expect. Chances are, you're already familiar with websites like Kickstarter and Indiegogo. You might know about Kiva, or Gofundme. But how much do you know about Lendingclub, AngelList or WeFunder?

The biggest problem with crowdfunding is that it encompasses all of these companies, even though they have quite different business models. Crowdfunding is a blanket term, like dessert. I'm going to talk about the different types of crowdfunding, in the same way that cookies, puddings, and candies are different varieties of dessert.

Today I'm going to go into the main divisions, so you can hopefully understand why these companies are different from each other. In later posts I'll go into greater depth on legal distinctions between them.

First, let's talk about Kickstarter and Indiegogo. These two companies allow users to pledge money towards a project, and in exchange they will receive some benefit. These arrangements are called “rewards crowdfunding,” because the user receives some kind of quantifiable reward for their money. The most common reward is a copy of the product being produced by the project. It's easiest to think of this type of crowdfunding as a pre-order before the product has even been finished.

Kiva, Gofundme, and similar sites have a completely different model. With these companies, the user typically gives money to the beneficiary and receives either nothing in return or a promise to pay back the money at a later date, interest-free. This is occasionally called “donative crowdfunding,” because it's essentially giving money away for nothing except the satisfaction of helping someone down on their luck. It's like giving a friend some money to help them with a difficult situation.

Lendingclub, Prosper, and a few other companies engage in loan facilitation. Basically, they allow users to provide part or all of a loan issued to a debtor. These can be called “lending crowdfunding,” though they're not often included in the common understanding of crowdfunding. It's easiest to think of this as basically a loan from the bank, though it's a bit more complicated than that.

AngelList, Crowdfunder, and others provide crowdfunding for stock or shares in a copmany by allowing accredited investors  to invest in the companies that put offerings up. I'll call this “rich people crowdfunding,” because, unlike all of the other forms of crowdfunding, only people with high income or net worth are legally allowed to participate in this type of crowdfunding. You can think of this as a venture capital firm investing money.

Sites like Wefunder, Startengine and Dreamfunded also provide crowdfunding for stock or shares in a company,  but for anyone. This is called “equity crowdfunding,” because the users receive some form of ownership of the company they give money to.1 It's similar to buying stock in a company's initial public offering, but with much higher risk to the investor.

1 Rich people crowdfunding is also technically equity crowdfunding, but I'm distinguishing the two because plain equity crowdfunding allows people with any income level to invest.

[lawdabble]

Of Magic Cakes and the 14th Amendment

This interesting cake has one batter, but three distinct layers. The bottom is like a thick crepe. The center has the consistency and flavor of custard. The top is a light angel food cake. It all comes down to where the eggs are. The whites form something akin to a meringue at the top, the yolks in the middle form the custard, and the flour mostly ends up at the bottom.

4 egg whites 4 egg yolks 3/4 cup sugar 1/2 cup melted butter 3/4 cup flour 2 cups milk

First, preheat the oven to 325 Fahrenheit. Grease an 8x8 inch square baking dish, or something of similar dimensions.

Separate the egg whites from yolks. Beat the egg whites until they are stiff. In a separate bowl, mix the egg yolks with the sugar, until the mixture lightens in color. Add the melted butter to the yolks, and when that is mixed in, slowly add the milk.

Fold the egg whites into the yolk mixture. You can instead add a third of the egg whites to the yolks, mix lightly, and slowly add the yolk mixture to the rest of the egg whites.

Pour the batter into your baking dish, and bake for 40-70 minutes, until the top is light golden brown.

Congratulations! You now have a three layer cake! You know what else has three layers? Constitutional scrutiny under the 14th Amendment.

Equal protection is getting a lot of press lately with the lawsuits surrounding the legality of various states’ gay marriage bans. The difficulty that opponents of the bans face is the level of scrutiny the federal courts subject these bans to.

The highest level of scrutiny, strict scrutiny, requires that the government to show that the law: 1) serves a compelling state interest; 2) is narrowly tailored to address that interest; and 3) is the the least restrictive means of achieving that interest.

Few laws will be able to survive this scrutiny. It’s really hard to show that there’s no better way to achieve any given purpose.

Strict scrutiny only applies when the law targets a suspect class of people. The suspect classes are race, national origin, and alienage (whether one is a citizen or not).

The middle level of scrutiny, intermediate scrutiny, requires that the government show that the law: 1) serves an important government interest; and 2) is substantially related to achieving that interest.

This level of scrutiny only applies when a law discriminates based on a quasi-suspect class. Currently, sex and legitimacy (whether one was born out of wedlock) are the only quasi-suspect classes.

Rational basis is the lowest level of review, encompassing all subjects of discrimination that does not fall into any of the categories covered by intermediate and strict scrutiny. Right now, this is where discrimination based on sexuality sits. The government need only show that the law: 1) serves a legitimate state interest; and 2) is rationally related to achieving that interest.

This level of review is relatively easy to meet, so long as the law has some plausible purpose other than harming the persons it discriminates against.

With the supreme court weighing in on the question, the level of scrutiny they decide to use may well determine the outcome. If the court decides to add sexuality to the list of suspect or quasi-suspect classes, it would make it much easier for opponents of laws discriminating against persons based on their sexuality to successfully challenge those laws.

[lawdabble]

Of Snickerdoodles and IP

Hi everyone! Welcome to my new blog, Lawdabble! It’s going to be about law and legal issues, mixed in with whatever creative project I’m dabbling in at the moment.

For the introductory post, I thought I'd give a quick rundown on intellectual property, or IP, law. It’s one of my favorite areas, so I’ll talk a lot more about it in the future. To briefly explain IP, I’ll take a page out of my old IP professor’s book and talk about baking recipes in relation to IP.

Tldr, if someone posted a recipe, you can do what you like with it, as long as you don’t use their brand like it’s yours.

So, a big area of IP is patents. Patents are basically inventions, but they have to fall into one of four distinct categories.

A cookie recipe is a composition of matter, which is one of the four categories. There’s a mix of stuff in it.

However, because of the strong rights associated with a patent, the requirements for registration are exacting. It has to be novel, non-obvious, and useful. Now, cookies are definitely useful (yum!), but they’re not exactly new, and bakers know most of the tricks to changing up a recipe (more on that later.) So, despite being patentable subject matter, a cookie recipe isn’t going to be patentable.

The next big IP subject is copyrights. Copyrights are creative works, fixed in a tangible medium. Cookies themselves are not really permanent enough to be copyrighted themselves. If your cookies last more than a couple weeks, you’re doing something wrong! But the recipe is another story.

Copyrights don’t protect ideas (that’s what patents are for), just the particular expression. There’s really only so many ways to tell someone how to make a cookie. Mix these ingredients and then bake. That’s the idea behind cookies, and most recipes just won’t deviate from this enough. Perhaps if you express your recipe entirely in riddles, or something equally strange, it might be copyrightable, but a simple list of ingredients and directions probably won’t be.

So, what about trademarks? Well, trademarks are a bit different from copyrights and patents. Trademarks aren’t limited by the type of thing that it is. You could conceivably trademark the smell or taste of cookies. What trademarks do need to do is help consumers identify the source of a good or service.

Essentially, trademarks are a brand name, something that allows you to identify the company who makes a particular product. An example would be Toll House, which is a brand owned by Nestlé. Toll House brand chocolate chips even have the Toll House cookie recipe on their package.

But remember the purpose of a trademark. Simply copying the recipe from the package isn’t going to make it harder for consumers to identify the source of any good or service, at least if any references to Toll House are removed from the recipe.

Trade secrets are where recipes receive the most protection. This is why Coke tastes different than Pepsi (or so people say, I’m not a cola person myself). The Coke recipe is kept secret.

Trade secrets are tricky because they require secrecy. Obviously, posting something to the internet at large  is not very secret. Trade secrets also don’t protect against someone reverse engineering the product. That’s not a huge deal in baking, because it’s pretty hard to identify all of the components of food.

There’s are one other area of IP, but it’s not closely related to cookies. The right of publicity protects people from having their likeness used without their permission. I hope it goes without saying, but cookies aren’t people. If someone’s face was attached to cookie recipes, that might be an issue, but the recipe itself would still be fair game.

Since you’ve been good sports and read this far, I’ll give you my favorite recipe for snickerdoodles!

.5 cup butter, softened (preferably not in the microwave) .5 cup shortening 1.5 cups sugar 2 eggs 2.75 cups flour 2 teaspoons cream of tartar 1 teaspoon baking soda .25 teaspoon salt 2 tablespoons sugar 1 tablespoon cinnamon

Heat the oven to 400 Fahrenheit. Mix the butter, shortening, sugar, and eggs. Blend in the flour, cream of tartar, baking soda, and salt. Shape dough into roughly 1 inch balls. In a separate bowl, mix cinnamon with 2 tablespoons of sugar. Roll the dough in the cinnamon sugar mixture. Place on baking sheet, and bake for 8-10 minutes.

If you don’t have cream of tartar, another acid can work, like vinegar. Your snickerdoodles may end up a little flatter or less cohesive though. If you prefer your snickerdoodles more cake-like (heathen) then substitute three teaspoons baking powder for cream of tartar and baking soda. Remember when I was talking about obvious alterations in the context of patents? This is what’s going on here. A good baker will know a number of ways to mix up the recipe, or be able to change a recipe to suit their tastes.

This blog post is not intended to provide legal advice. You should consult an attorney if you need help with any of the legal topics discussed in this article.