Worried about lawsuits resulting from 3rd parties infringing copyright through your website or application?  The US Digital Millennium Copyright Act (“DMCA“) may be a solution!  The DMCA contains a safe harbour that protects online service providers from liability for copyright infringement committed by 3rd parties on/through the service.  At the outset, you should already qualify as a service provider as it is any businesses that operates a website or other Internet services (mobile applications, games connected to the Internet etc.) or facilities.

In order to take advance of the DMCA, your company will need to comply with a number of simple steps (in part):

1.  Designate a Copyright Agent to receive DMCA notices with the US Copyright Office;

2.  Post the Copyright Agent’s contact information on your website;

3.   Adopt, implement and communicate to users a policy to prevent/terminate repeat infringers; and

4.  Quickly respond to DMCA notices.

In addition to meeting a number of additional elements that are not covered in this post.

The focus of this post is on the Copyright Agent.  Frequently, companies are denied the above DMCA safe harbour simply because they have not complied with the Copyright Agent terms, a shocking result especially as compliance is relatively simple.

The first requirement is to appoint the agent.  This is done by filling out a form (http://copyright.gov/onlinesp/agent.pdf) that designates the agent and by sending it, along with payment, to the US Copyright Office.  The agent’s role is to respond to DMCA notices and, as such, needs to be a person within the company that understands the DMCA notice process or the company’s legal counsel.  Typically, the company’s legal counsel acts as the Copyright Agent barring sufficient internal DMCA expertise.

The second requirement is to post the agent’s information on your website.  Again, another simple step.  Usually the agent’s contact information is placed in the Terms of Service Agreement governing your website in a separate section concerning the DMCA, the copyright agent and the DMCA notice process.

If you are a U.S. company, check to see if you are in compliance with the DMCA so that you may take advance of the safe harbour described above.  Additionally, for certain Canadian companies, it may be a prudent business decision to comply with the DMCA (check with your legal counsel).

The U.S. Federal Trade Commission recently completed its first enforcement action against an undelivered Kickstarter project and resulting in an agreement to repay over $100,000 in campaign pledges.  The FTC alleged that the campaign deceived supporters and spent money on items unrelated to the campaign.   While not all undelivered crowdfunding campaigns will prompt FTC action, this first action lays out important rules to follow so as to avoid deceptive claims in your crowd funding campaign.

In the enforcement Action, the FTC implicitly set out four standards to comply with so as to not misrepresent a crowdfunding campaign to consumers:

1.  How will funds be used.  Don’t use campaign funds for purposes unrelated to the campaign, such as personal expenses or for other businesses or projects.  Where your project fails, don’t use campaign funds for a different project as backers never agreed to provide funding for a different project.

2.  Deliver your deliverables.  Don’t promise and not deliver the deliverables, including perks, you promised to each backer.  In order to avoid this issue, it is recommended that you research the exact cost of each deliverable to ensure that it is financially viable and can be manufactured on time and to the specifications promised to backers.

3. Don’t misrepresent the project.  Be honest as to the stage of development the project is at and the features that will be integrated into the project.  If a feature is not possible, don’t imply that it is part of the project or that it may be possible.  The FTC wants consumers to understand exactly what they are contributing to and not be mislead as to what the project delivers.

4.  Be honest about your skills.  You should set out the expertise/qualifications of any person associated with the crowdfunding campaign honestly.  Do not mislead backers as to team member expertise as the team is equally important as, and essential to the success of, the project.

Running through the above standards is a single rule:  don’t misrepresent, expressly or by implication, anything in your crowdfunding campaign.  Similar to a store selling goods, running a crowdfunding campaign requires you to clearly present to prospective purchasers what you are selling and who is involved in the item being sold.

New registration and prospectus exemptions adopted in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia permit startups (and other companies) to crowdfund investment in exchange for equity.  Importantly, investors do not need to be accredited or have a previous relationship with the company.

What are the company requirements?

1.  Have a head office located in one of the above provinces;

2.  Conduct crowdfunding through an online funding portal that meets certain requirements (to be detailed in our next blog post); and

3.  Use, and post on the online funding portal, the required offering document form that details, for example, certain information about your company, the securities being offered, the minimum offering amount and how funds will be used.  The offering document is available at https://www.bcsc.bc.ca/45-535_[F]_Form_1_05142015/.

How much can your company raise?

You can raise up to $250,000.00 per distribution in up to two crowd funding distributions a year.    As such, you can crowdfund a total of $500,00.00 a year (in two separate distributions).

What type of securities can you offer?

Common and preferred shares, convertible securities (that convert into common or preferred shares), non-convertible debt securities (fixed or floating interest rates) and limited partnership units.

Do the investors need to be accredited?

No.  However, each investor is limited to invest up to $1,500.00 per distribution.  As such, one person could invest a total of $3,000.00/year in your company where they invest the total permitted amount in two separate distributions.

You can receive concurrent investments under other securities exemptions, such as from accredited investors, and put these investments toward the minimum offering amount.

Do I need to raise the minimum offering amount?

Yes.  Like a Kickstarter campaign, the crowdfunding exemption requires that you raise the minimum offering amount.  Where you fail to raise the minimum amount, you cannot complete the offering.  Nonetheless, as noted above, concurrent investments under other securities law exemptions can assist with raising the minimum amount.

Are there other requirements?

Of course – this involves law, remember?  Other requirements include, but are not limited to:

1.  The crowdfunding campaign has a maximum duration of 90 days;

2.  Each investor has a right to withdraw their commitment within 48 hours of: (a) their subscription or (b) upon receiving notification that the offering document has been amended; and

3.  A report of exempt distribution and the offering document must be filed with the applicable securities commission no later than 30 days after closing.

The full text of the exemption is available at: https://www.bcsc.bc.ca/Securities_Law/Policies/Policy4/PDF/45-535__BCI___May_14__2015/

In upcoming blog posts, I will discuss funding portals as well as aspects to consider when structuring a crowdfunded investment round.

1.  Securities Law:  If your startup is selling shares or other forms of investment, securities law applies.  In the cross-border context, you may need to comply with the securities laws of your jurisdiction AND those of the purchaser’s jurisdiction.  For example, if a B.C. company sells shares to a U.S. investor, both B.C. and U.S. securities law applies.

Ultimately, as a startup founder, your role is to understand that the securities laws of multiple jurisdictions may apply to a transaction and ensure that your legal advisors address these laws.

2.  Privacy Law:  The privacy laws of every jurisdiction in which your startup has users (theoretically) apply.  In this respect, every startup has cross-border privacy law issues.  Nonetheless, to comply with the privacy laws of every  jurisdiction from which your users originate is, for an early-stage startup, incredibly expensive and time-consuming.

In my opinion, it makes financial sense to comply with the privacy laws of your startup’s jurisdiction and, as your company grows, the privacy laws of each jurisdiction in which you gain traction.  The basis for this approach being the assumption that a company may only face privacy law issues when it achieves traction in a particular market.

3.  Tax:  Need I say more?  Cross-border taxation issues are always a concern when your startup is doing business outside its home jurisdiction.  Tax is far too complex for a brief blog post – simply put, always keep tax in mind.

In sum, all startups face cross-border legal issues, if only due to the borderless nature of the Internet.  At a minimum, it’s important for startups to recognize the potential for the laws of other jurisdictions to impact their company and to plan compliance with these laws.