AIA and Patent Trolls

A White House report estimates that in 2012 patent trolls threatened over 100,000 companies with infringement suits.

The America Invents Act gives patent holders a new weapon against the trolls, but it is not without drawbacks.  The AIA allows entities to challenge the validity of patents through the USPTO within nine months of issue (except for certain business method patents). 

This can be beneficial if you are a target of patent trolls but scary if you obtain a patent, because it is now easier to invalidate!

Reports are that entities have a better chance of winning a USPTO challenge than winning in court, and it is less expensive--about $300K vs. $650K through the courts. 

However, as the law now stands, when an entity uses the USPTO challenge, they may forfeit their ability to challenge the patent in court.  This is due to a mistake in the way the law was written, and legislation has been introduced by House Judiciary Committee Chairman Bob Goodlatte to allow subsequent use of the courts if an entity loses the challenge.

The details of the challenge process and other post-grant changes are too lengthy for a blog post, but a great summary can be found at the Pillsbury Law firm website.

Patent-troll Protection for the Little Guys!

I have found that many small companies are unaware that Google and NetApp in April of this year developed a service, Unified Patents, to help small-entity patent-holders pool resources with large companies in the battle against non-practicing entities (NPEs), or "patent trolls." 

Don't think that your small company is safe; according to a Boston University study, 50% of firms sued by trolls have revenue under $11 million.

Unified Patents provides a troll-monitoring news feed and also attempts to buy or license patents before the trolls get their hands on them, among other defensive strategies.

The Boston U. study put the cost of NPE activity at $29 billion in legal fees and settlement costs in 2011.  And this does not even include associated losses due to management distraction at the target firms.

The Unified Patents service is based on so-called Micro-Pools in key technology fields.  A company joins the Micro-Pool(s) to which their patent(s) pertain.  Subscription fees to Micro-Pools are based on revenue and may be free for startups or small companies.

Micro-Pools also provide intellectual property expertise and intelligence.  For patent holders, this service is definitely worth checking out!

Important Distinction in Crowdfunding Methods

It is important to understand when considering crowdfunding your business, that there are two very different means of raising the money. 

One is the existing method of pre-selling a product--taking paid orders for future delivery--and then using that money to fund your business and deliver the product.  This method has been around for years but has more recently gained greatly in popularity.  If you raise money in this manner, you are not selling equity (stock or membership units), the buyers are not investors in your business, and you are not subject to SEC and state securities laws.

However, the JOBS Act of 2012 allows for companies to raise up to $1 million per year through crowdfunding sites via equity investments.  This will be allowed once the SEC finalizes rules governing the process.  (See my post of October 24 for more details.)

Crowdfunding your business by selling equity will have far-reaching implications, and you should very carefully consider whether to do this.  The risks stem from the fact that you may end up with a large number of small investors, each of whom can become a pain in your side at a minimum and who have the right to sue you at a maximum.  Also, savvy future investors such as angels and VCs usually do not want to have to deal with a large number of co-owners of businesses in which they are invested.

Like almost every other decision, the decision whether to raise equity by crowdfunding is not a simple one.

My book Mastering Technology Commercialization has a long chapter on financing your business and will give you far more information to help you in your decision.

Finally... Some Movement on Crowdfunding Rules

The SEC yesterday proposed rules that would allow startups to raise capital online from small investors.  Congress in 2012 passed the JOBS Act allowing for such fundraising once the SEC finalized rules governing the process, but the deadline set by Congress for issuing those rules has long passed.

The rules proposed yesterday will be subject to public comment for 90 days after their publication in the Federal Register.  A few highlights are provided below, but you can go to the SEC website to get more complete information,

A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.

Investors over a 12-month period could to invest up to:

• $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
• 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.  During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Securities purchased through crowdfunding could not be resold for one year.

Among the things the company would be required to disclose in its offering are:

• Information about officers and directors as well as owners of 20 percent or more of the company.
• A description of the company’s business and the use of proceeds from the offering.
• The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
• Certain related-party transactions.
• A description of the financial condition of the company.
• Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.

Remember, that as I have pointed out several times previously, just because you CAN raise equity through crowdfunding does not mean that you SHOULD do so.