To gain publicity and to finance their early fashion lines, many young fashion companies are now using crowdfunding campaigns. While this can be a very smart way to minimize the risks of creating apparel or accessories before finding buyers, a campaign can cause legal headaches for a company that hasn’t planned ahead. Below are some topics that you and your team may want to discuss with an attorney before setting up a crowdfunding campaign.
Below is just general information, and not legal advice. It is always recommended to speak to an attorney about your specific crowdfunding plans. If you would like to contact Law On The Runway, please email Rachel@lawontherunway.com.
Protection of Idea & Intellectual Property
When using a website like Indiegogo or Kickstarter, you will be offering a lot of information about how the product is made and the details of the design. Since you are in the early stages of the company, do consider how easy it would be for a more established company, with the appropriate finances, to quickly create your idea and bring it to market before you. A campaign will not only attract potential buyers, it will also attract attention from competition.
To address this issue, before you make the product public, explore if the product is patentable. Utility patents are issued to product designs so long as the inventor can prove that the product will function as planned, even if the product was never actually made. In the fashion industry, it is difficult to gain a patent (design or utility) on a traditional garment design. A design patent can be used to cover a ornamental (non-functional) design. If you feel their is a unique technological component or an extremely unique design component, you may be able to file for a patent. To see examples of fashion designs with patents, view this previous post.
You may also want to file for your trademark and applicable copyrights to further protect the design and branding of the product. If you creating a garment with a pattern on the fabric, you may be able to file a copyright on the fabric design.
Offering Equity Into the Company
Currently, the Securities Exchange Commission does not allow companies to offer the public equity, or a percentage of ownership into the company without going through the formal Initial Public Offering (IPO) process, which is not suitable for most young companies. Therefore, when setting up your campaign, it must be a simple exchange of money for a product. Shares may only be offered to accredited investors.
Uncertainty of Oversuccess
When setting up your crowdfunding campaign, most websites allow you to set a minimum needed before you will follow through with the project. However, sometimes a campaign is so overwhelmingly successful that you suddenly have a much larger project that you imagined. When that happens, consider if you and your suppliers can handle the volume of orders. You may incur unexpected additional costs, such as needing to hire help or renting a storage facility to hold the items until they are ready for shipment.
Setbacks & Delays in Production
When you are creating your campaign, keep in mind the old adage, “new products typically take twice as long to make and are twice as expensive as planned.” When you are setting up your crowdfunding campaign, you are creating a contractual agreement with those who are funding you. You are promising a particular product, at a particular time. If you cannot deliver, you are breaching a contract. If you can, make a few prototypes, and a few small batches of products. Be sure you truly know the timeline and costs of production.
Delivering Promised Items
As a company delivering products to consumers, the Federal Trade Commission (FTC) requires that companies honestly and accurately describe their products to consumers. Be sure that you can deliver a product that achieves the promises you make in your funding campaign. To avoid this hassle, once again prototyping with the exact manufacturers and the materials that you plan to use for the final products is essential. Speak to your suppliers & manufacturers about their ability to expand to large orders, should you have a very successful campaign. Do everything you can to eliminate any mysteries of how the final product will perform. For garments, run these quality assurance tests.
Accounting & Taxation of Income
Keep careful accounting records of the costs involved with making the product (manufacturing & materials) verses costs of marketing & employees, including yourself. You or your accountant may need this information to accurately file applicable sales and income taxes. Before starting the project, reach out to an accountant to see what type of documentation would be most helpful.
If you are a San Francisco based fashion company, you may want to work with SFFAMA & Indiegogo, as they have partnered to help emerging designers.
Should you have questions about the information in this article, please contact Rachel@lawontherunway.com