This Article has been written by Ms. Khushboo Sharma, a 5th year law-student of Vivekananda Institute of Professional Studies, Delhi.
Abstract
Investment for any project is a basic requirement. Having a plan but no means to tangibly create it is futile. Therefore, some companies choose to pitch their plan to a larger audience altogether to raise funds for their dream project. Investors too look for lucrative opportunities in such projects as investing in these projects yields greater returns as these entails greater risk than any other investment opportunities. However, there is an inadvertent threat to the Intellectual Property Rights of the Project undertaker. Let us discuss about these challenges related to Intellectual Property Rights in context of Peer-to-Peer Lending and Crowdfunding Platforms in this article.
Keywords: Intellectual Property Rights, Crowdfunding, Peer-to-Peer Lending, Challenges, investors, funds.
Introduction
As Fintech is a multi-faceted aspect, it includes Peer-to -Peer lending and crowdfunding within its subject matter. Today, any business or company can simply put their project models on any such online platforms and raise funds easily provided that it is interesting enough to captivate a potential investor.
These platforms reduce intermediaries between the company and investors and is beneficial to both the lender and the creditor. However, even if it seems to be a lucrative option, one must keep an eye on the IP concerns that might sprout when a product/ service model is put in public disclosure to attract investment.
UNDERSTANDING PEER-TO-PEER LENDING
Peer-to-peer lending, often abbreviated as P2P lending, is a type of online lending that directly connects the borrowers and the lenders, without having the need for intermediaries like banks or credit unions. There are variety of benefits that P2P lending offers that extend to both the parties in transaction, like for example: lower interest rates, more flexibility, faster approval, etc.
P2P lending is also known by the names of social lending or crowd lending. The growth of P2P lending majorly sprouted around the year 2005. Few websites that are involved in this form of FinTech are: Lending Club, Upstart, LenDen Club, Peerform, SoFi, Mobiwik Xtra, Mintos, Crowdestate, Paisadukaan and many others.
Lenders in such system can earn interest higher than that from bank savings, while on the other hand, the borrowers can obtain funds at an interest rate lower than what a bank offers, hence creating an environment favourable to both.
WHAT ARE CROWDFUNDING PLATFORMS?
Crowdfunding is a digital fund-raising strategy that enables individuals or businesses to raise money from other people. It is also done through online platforms for any reason, be it to support any cause, projects or businesses.
Through such platform one is able to raise money without going to the bank. It is just about using the internet to talk about your cause or business and make the investors interested in funding your requirements. Crowdfunding lets you make gather funds from different people, hence sometimes it could be reward based, donation-based crowdfunding as well which might not be that big of burden on the shoulders of the borrowing companies. It is crucial to note here that these crowdfunding platforms not only perform as transactional hubs but are existing to offer a safe and user-friendly experience both to the one who requests and the one who invests.
Crowdfunding platforms are based on two types of models namely,
- Investment Models
- Debt-based crowdfunding is Peer-to-Peer lending. Investors lend money and expect that the sum will be repaid with interests which is as per agreed-upon terms of loan.
- Equity-based crowdfunding allows the investment makers to purchase the shares in a project or a company. Such investors become partial owners having a stake in the potential success of the project.
- Non-Investment Models
- eward-based crowdfunding lets the investors give money in expectation of a non-financial reward as a return.
- Equity-based crowdfunding entails that the donors (being the investors) may support by giving money to a project without expecting any tangible / financial return.
Some of the most known Crowdfunding Platforms are; Kickstarter, Indiegogo, ImpactGuru, GoFundMe, Milaap, Patreon, Wishberry, Ketto, etc.
LEGALITY OF P2P LENDING & CROWDFUNDING PLATFORMS IN INDIA
The P2P Lending model is based on the crowd-funding model. P2P lending Platforms are organised as Non-Banking Financial Companies (NBFCs)- Fintech companies. The P2P lending is regulated by the Master Directions for NBFC issued by RBI in 2017. Hence, is legal.
Crowdfunding is legal in India except equity-based crowdfunding which is held to be unauthorised and illegal in India. It is due to the fact that every investor cannot be assumed to be skilled and experienced enough to identify different and unique risk attributed to such form of funding. The equity-based crowdfunding is recognised illegal in order to protect the interests of the investors in India.
INTELLECTUAL PROPERTY CHALLENGES IN PEER-TO-PEER LENDING AND CROWDFUNDING PLATFORMS
The projects that require investment at Peer-to-Peer or Crowdfunding Platforms have to share the information/ details of the project thoroughly to attract investors. This information is crucial and therefore, it is advised that before pitching your concept to an online platform one must carry out research on potential consequences of making the information available to all and must take measure to protect its intellectual property rights.
Failure in doing so could potentially result in theft, and infringement of the Intellectual property rights of the pitcher/ borrowing company. You may not have to share the rights, but it may be compulsory to share information/ details about your invention in full public disclosure which can inadvertently lead to challenges in protection of your Intellectual Property rights.
Even though there may be slight distinction in Peer-to-Peer Lending and Crowdfunding Platforms, they are not altogether distinct or unrelated to each other. In other words, they both work on the same logic of investing money in someone’s project or business over a platform where investors get wide opportunities easily to decide in which project, they may make an investment.
It is due to the same reason that they both have similar IPR challenges/ threats as these platforms handle sensitive financial information and data.
Some of the potential Intellectual Property threats relating to the Peer-to-Peer lending are as follows:
Trademark Infringement
Ideas are unique from person to person. When ideas take a material form, it is necessary that the project envisioned has a name or mark which could indicate towards its identification. Companies opt for catchy names in order to attract investors and later on, the buyers. When a project is open to funding at online platforms, it is possible that rivals might want to take benefit of the company’s earlier reputation and for which they might copy the name, logo or mark of the project intended for raising investment for.
It is for this reason that a company/ business must be prudent in registering its trademark. The registration is significant because it gives an enhanced protection to the project from its predators/ rivals and help preserve the unique identification.
If someone wants to be the exclusive owner of name or domain name, they must consider registration of the same in order to reduce the chances of copying or infringement.
Copyright Infringement
Copyright extends to all literary, dramatic, musical and artistic works. It is enforced automatically on the unique work of the authors. The copyright even extends to computer codes, website’s layout, algorithms, etc. In crowdfunding or P2P lending platforms, it is possible that one might want to copy the original idea of the project as the same is available to public at large.
For example, there is a particular toy that your business needs investment for manufacturing, and on the other hand, there is some rival that may try copy your design. The copyright protection would be extended to your toy design in case it has not been registered under the Designs Act. This will save your idea from being getting copied, while the rival would be legally restrained to make use of such design and you can enjoy your moral and financial rights on your product/ service.
Patent Infringement
Patent is another one such aspect of Intellectual Property rights. It is a legal right granted for invention that excludes others from making, using or selling the patented invention. A patent is granted to an invention for a maximum period of 20 years after which the patent expires.
The sole purpose of the Patent is to reward the innovation of the inventor so that he can enjoy financial and other benefits for a considerable period of time.
Before going for funding online, it is considered as a safety measure to opt for filing a provisional or complete patent application. Provisional patenting helps in protecting the pitcher’s idea with a priority date and also buys some time to later filing the complete application in due course. It is especially helpful to gather money first and financing the patent completely later on. The filing of Patent application secures the invention and a public disclosure on such online platforms will not hamper the security of the invention. It is also important to note that failing to make an application and going ahead with the publication of your invention first, might lead to IP infringement and debars the invention for any patent grant later.
Important Points to note:
Selecting Appropriate jurisdiction
While choosing a crowdfunding platform, make sure to check out the area/ region where it operates. It is necessary to choose a jurisdiction in which one has obtained the patent for their product/ services. In certain cases, one may fall victim to public disclosure in other country where no patent protection is obtained. Owing to this fact, it is highly recommendable to make an analysis of your target markets primarily and then continue with a thorough background search on the platforms you may be interested in, before selecting any such platform for your project in order to receive potential funding.
Suggestions / modifications by investors
More often the investor would approach the business holder to make amends or modification in the original plan of action. While it is good as a suggestion, it may create some IP concerns later. For example, if an investor suggests a unique modification to the product of the borrower, he may ask for his copyright or patent on the same. This situation can give rise to an infringement or dispute between the parties.
Therefore, the borrower companies are advised to practice caution while choosing to opt for any such modifications in their projects.
Intellectual property protection on the platform
Some of the crowdfunding platforms do give the inventors some protection on their Intellectual Property rights. This is distinct from the Non-Disclosure Agreement. In such case, we often see the imposition of restriction on the comments or the message that are posted on such platforms.
However, in case where there is a visible infringement, these platforms must undertake strict measures to correct the issue or abandon the campaign altogether in order to protect IP rights.
CONCLUSION
In this Article we discussed about the role of Peer-to-peer lending and crowdfunding platforms being the aspect of fintech, its legality in the Indian landscape and the Intellectual Property challenges that might pose serious harm to a business/ company. It is a fascinating idea that one might borrow money in small amounts by attracting interested investors on an online platform, however the borrower must exercise due-diligence on their part in securing the Intellectual Property rights that are associated to with their product/ service.
Failing to take necessary precautions can lead to theft/ infringement of their business models which is undesirable for any business because ultimately it is what sustains the business itself in the long run. Therefore, patenting any innovation, having a copyright and registration of the project’s Trademark and design, is a wise choice and one must refrain from ignoring such aspects while putting the business model on such platforms, in order to secure their ideas/innovation put into material form.
References
The information is gathered from different sources, the links to which are mentioned as:
- https://www.investopedia.com/terms/p/peer-to-peer-lending.asp
- https://p2pmarketdata.com/articles/crowdfunding/
- https://cleartax.in/s/peer-peer-p2p-lending-india
- https://www.tramatm.com/blog/category/startups/importance-of-trademark-protection-for-crowdfunded-businesses
- https://www.linkedin.com/pulse/crowdfunding-careful-your-intellectual-property-riccardo-ciullo/
- https://www.michiganitlaw.com/Intellectual-Property-Rights-Crowdfunding-Platform
- https://patentpc.com/blog/patent-challenges-fintech-crowdfunding
- https://photonlegal.com/5-ways-to-protect-your-ip-in-crowdfunding/?utm_source=mondaq&utm_medium=syndication&utm_term=Intellectual-Property&utm_content=articleoriginal&utm_campaign=article
- The Trademarks Act, 1999
- The Copyrights Act, 1957
- The Patents Act, 1970