March/April 2015 Intellectual Property: Crowdfunding and Confidentiality for Tech Start‐Ups By: Gregory Perleberg I recently attended Launch Festival 2015 requirements of state and federal laws, and certain (www.launchfestival.com) in San Francisco and Angel written disclosures and information must be made, or Launch’s LaunchFEST Mixer: Doing Deals with Silicon made available, to investors so they can have the Valley—Attracting Funding, Angels, and Tech Trends appropriate information to make an investment decision. (www.angellaunch.com) in downtown Los Angeles. The events were very different in terms of size and scope, but Whenever possible, focus on “accredited investors,” each showcased new technologies with an eye toward which are essentially those persons who have one million connecting business owners with investors looking to dollar net worth excluding their house. The disclosure fund start‐ups. As expected, there was a lot of chatter requirements are the least for these sophisticated about the importance of intellectual property, such as investors. Even if you have an exemption from whether or not software apps are patentable, the registration, liability for any fraud by the issuer still importance of branding, etc. (at each of the events, remains. While new technology and social networks may investors definitely tended to gravitate towards make raising capital easier, securities laws still prohibit companies with strong, and protectable IP portfolios). certain activities in order to protect unsophisticated But, the big topic of conversation with start‐up owners investors. So, if you are trying to raise funds via postings was how to lure‐in and legally raise money as a start‐up on social media websites such as Facebook, Twitter or business. LinkedIn, only approach friends and connections with whom you have “substantive, pre‐existing relationship.” Crowdfunding: Fact or Fiction The consequences for not complying with federal and Finding suitable financing for a start‐up tech venture can state securities laws are severe and can include be difficult, and that is perhaps why many companies administrative, civil and criminal penalties. turn to private funding sources for their new venture. When private funds are sought, federal and state In 2012, President Obama signed the Jumpstart Our securities laws must be complied with (the Securities and Business Start‐ups Act, otherwise known as the JOBS Act. Exchange Commission (SEC), directly and through its The law purported to open up the capital markets and oversight of the NASD and the various Exchanges, is the create jobs by loosening regulations on initial public main enforcer of the nation's securities laws, and each offerings and allowing for “crowdfunding.” Approximately individual state has its own securities laws and rules – three years later, the SEC still has not published the final these state rules are known as "Blue Sky Laws"). The rules, and it may be well into 2016 or beyond before we definition of a “security” is very broad and is not limited have crowdfunding under the JOBS Act. In the interim, a to shares of stock. It includes partnership and limited number of services (often times referred to as liability company (LLC) interests, promissory notes and “collaborative funding via the web”) exist to help raise many other financing instruments. Securities must either money, each subject to their own separate terms and be “registered” or “exempt” from the registration conditions. A number of the more popular services This bulletin is published as a service to our clients and friends. The material contained here is provided for informational purposes only and is not intended to constitute advertising, solicitation or legal advice. The views expressed herein are solely those of the authors and do not necessarily reflect the views of Buchalter Nemer or its clients. For more information, visit www.buchalter.com. March/April 2015 include: CROWDFUNDER, CROWDRISE, GOFUNDME, techniques, designs, marketing analyses and plans, INDIEGOGO, INVESTEDIN, KICKSTARTER, PATREON, computer software, marketing plans, business plans. ROCKETHUB, SOMOLEND, and TEESPRING. • Information not readily available by proper means – others must not be able to obtain otherwise secret Top Secrets for Protecting Trade Secrets information simply by examining a product or Both recent tech events featured great presentations, information available to the public. product demonstrations, fun giveaways, and plenty of • Information must be protected – a plaintiff must take meet and greet opportunities. The conversations were reasonable steps to protect the secrecy of the rich with entrepreneurial spirit and innovation, but there information. Secrecy efforts do not have to be perfect. were also questions and answers about product They do not require extreme measures (e.g., recipes for development, market opportunity, investor strategies, Coca‐Cola, Big Mac secret sauce, KFC Original Recipe, and the like—often within the earshot of others, Angostura Bitters). including potential competitors. • Information must derive economic value from secrecy. Trade secrets have moved from the background into the Here are a few tips related to confidentiality: foreground of business legal issues (considered the fourth • Confidential information should never be disclosed prong of IP—but, unlike other IP which requires public without an appropriate written agreement (including disclosure to protect/enforce, trade secret law requires non‐circumvention obligations), which can provide for precisely the opposite – no public disclosure). For many either one‐way or mutual disclosures. clients, trade secrets are their greatest asset. Unlike • Patent applications, assuming publication was not patents, copyrights, etc., which are governed exclusively requested, should remain secret unless and until the by federal statutes, regulations and case law, trade applicable patent issues. secrets are regulated by state law. Unlike other IP, there • Review presentations, publications, etc., for is also no formal requirement related to “novelty” or inadvertent disclosures. “tangibility.” No federal legislation directly addresses • Unsolicited ideas—companies receive these all the trade secret protection. time—consider a responsive letter to turn unsolicited ideas into solicited ones to protect from the Although the definition varies from state to state, trade uncertainties associated with this area of law. secrets include “information” that is generally not known • Restrict access to confidential information, and apply and is “not readily ascertainable” through proper means labeling (e.g., Confidential & Proprietary”), and physical (and generally must be protected and have economic security and technical safeguards. value): • Employee education programs—emphasizing the importance of trade secrets. • formulas, methods of treating chemicals of foods, • Document and data handling policies, and memorialize methods of doing business, customer lists, special trade secret protection plan. customer needs, credit ratings, blueprints, architectural plans, tables of data, information on manufacturing This bulletin is published as a service to our clients and friends. The material contained here is provided for informational purposes only and is not intended to constitute advertising, solicitation or legal advice. The views expressed herein are solely those of the authors and do not necessarily reflect the views of Buchalter Nemer or its clients. For more information, visit www.buchalter.com. March/April 2015 • Termination procedures and wind‐down processes the area of trade secrets. Using confidentially agreements (send follow‐up reminder related to non‐disclosure may not put the cat bag in the bag, but they do provide a agreements and specific duty to not disclose. roadmap for disputes and damages in the event of misappropriation. Trade secret status may be lost forever by any disclosure of the secret. Many companies refuse signing Conclusion confidentiality agreements—or significantly modify them Before seeking financing for your new venture, be sure to (e.g., disclaimer or caps related to liability, to avoid the consult with an attorney who is qualified to handle risks associated with disclosure (including inadvertent securities matters. This includes loans from friends and and negligent disclosures) by employees or contractors). family, and offering ownership interests in your newly Many clients consider utilizing patent rights where formed business venture. Choose your business partners feasible. It is important to note the following: carefully, and understand the ramifications of soliciting, taking‐in and spending investor monies. When disclosing • There is no affirmative protection against the use of the information about your company and its products, be same IP that is independently derived or reverse mindful of situations where confidentiality may be lost, engineered by a competitor. potentially devaluing, and consider protections available • If a trade secret is published in such a way that it may to you under copyright, patent and trademark laws. In be “translated into practical application,” then it will many cases, to recover damages, registration may be not be protected as a trade secret. required, but must also be balanced against the • If the information can be obtained by starting with a potentially long term protection available under trade publicly available product and working backwards, the secret laws. The ever‐changing legal