Game Business Law 2013

Game Business Law 2013 will be here in just over a month. It will be held January 24-25, 2013, at SMU Law School, as it has been since the conference started.

I will be moderating a panel on crowdfunding and Kickstarter this year, but all of the sessions are looking very strong. The iniital program has been posted, for those interested in attending.

The past four Game Business Law conferences have been truly excellent, and I would recommend that anyone involved in the industry consider attending.

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

Beware the Berner Convention: Terms of Use and Social Media

Nearly everyone uses social media. It is difficult find people who do not. There are many platforms with different concepts and target audiences. But across them all, there are questions about privacy, copyright, and contracts. This arose when a makeshift legal declaration recently trended on Facebook:

In response to the new Facebook guidelines, I hereby declare that my copyright is attached to all of my personal details, illustrations, comics, paintings, crafts, professional photos and videos, etc. (as a result of the Berner Convention).

For commercial use of the above my written consent is needed at all times!

Facebook is now an open capital entity. All members are recommended to publish a notice like this, or if you prefer, you may copy and paste this version.

There are so many things wrong with that. It is a remarkable word to red ink ratio. But, this is an opportunity to think about social media from different angles. So many sites are “free”. What’s the real cost of use? We will look at some of the legal issues.

First, there is no Berner Convention. There might be a Bernie Convention where people do this dance and wear cool sunglasses. No Berner Convention. There is a Berne Convention covering copyrighted works, and the United States and many other countries are parties. It is relevant to Facebook, but differently than the statement suggests.

“Declaring” your copyright to the world is meaningless. The Berne Convention directs that copyright exists when an idea takes form. Whenever a creative work becomes fixed, so do rights in the creator, regardless of any “declaration.” However, there are things creators can do to improve the protection that copyrights grants. For example, filing for a registered copyright can be a great investment for something that shows a potential to generate revenue (and might be taken by someone else for that purpose): a video game, a book, a movie, a song. Vacation photos might not be worth the fee, since there’s likely no value to third parties.

Second, things like this come far too late, and don’t change the basic proposition of Facebook. Facebook’s easily accessible Statement of Rights and Responsibilities makes clear that, “you own all the content and information you post on Facebook,” and:

For content that is covered by intellectual property rights, like photos and videos (IP content), you specifically give us the following permission, subject to your privacy and application settings: you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (IP License). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.

As long as your things are up on Facebook, Mark Zuckerberg is free to do what he pleases based on that license, but you still own the rights to the work in question. This is one of the click-wrap licenses we mentioned before. As long as the agreement is not unreasonable or unconscionable a court is unlikely to strike it down. If you are uncomfortable with this, you are not alone. But deciding whether these agreements are fair should happen before you click “I Agree”. Moreover, without the clickwrap license, Facebook would be unable to function. They would have no legal ability to share the photo you uploaded with anyone, be that friends, family, random strangers, or that ex you’re trying to make jealous.

When you join Facebook or any other social media site, you enter a contract. A contract needs an offer, acceptance and consideration. Facebook offers to let you use their platform to connect with friends, share photos, and so on: those services are consideration. In return, you offer the consideration of letting them use your intellectual property. It is important to be realistic about how they might use it. Maybe one of your photos ends up in an ad. But what is much more valuable is information about you.

By tracking your behavior, sites get an idea of who you are and what you like. They turn to advertisers with this information and sell the opportunity to reach consumers who are apt for certain products. Some companies have figured out how to turn this into a sustainable business models, but many observers remain skeptical on its long-term viability. Warren Buffet’s investment partner Charlie Munger said pointedly, “I don’t invest in what I don’t understand. And I don’t want to understand Facebook.”

The challenge of developing a new kind of business is risk. Facebook became ubiquitous rapidly. It remains to be seen whether that growth means they will be profitable in the future. No matter the era or the business, there is no free lunch. Money does not change hands when you sign up for sites like these, but they would not make the service if there was no cash involved. On balance, most people would probably decide that they are OK with sites using their information, provided it stays within certain bounds.

If you are not OK with it, take your profile and your content down. You cannot alter your agreement with Facebook by just saying so. Contracts can be modified, but both parties need to consent. The Facebook Terms of Use were unacceptable to the federal government, so the Government Services Administration negotiated different parameters with Facebook and many other sites. Like a copyright application for your vacation photos, this would probably not be worth your time and money. Even if it were, it seems unlikely you would be able to compel Facebook to negotiate these points.

This hoax did some good: it created a conversation about where these platforms fit in our lives. We share deeply personal things in ways that were not possible fifteen years ago, accessible around the globe. This convenience has its price. Is it right for you? Maybe, maybe not. Whatever you do, do not expect the Berner Convention to bail you out.

Zack Bastian is an official contributor to Law of the Game. A a recent graduate of George Washington University Law, Zack works at the Woodrow Wilson Center’s Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

International Bar Association: Dublin

For any readers who might be attending the International Bar Association Annual Conference in Dublin, I will be speaking in two sessions, Monday afternoon and Tuesday morning. More information on the sessions is below.

The global ‘gamification’ of online gambling
Joint session with the Leisure Industries Section and the Technology
Law Committee.

Session Co-Chairs
Trevor Nagel White & Case, Washington DC, USA
Gabrielle Patrick iSeed, London, England; Vice-Chair, Electronic
Entertainment and Online Gaming Subcommittee
Gamification, and online gambling, are among the booming global
phenomena of the past decade. Given the highly polarised reactions to
gambling across different jurisdictions, yet the boost it can provide to
governmental coffers in these trying economic times, few are surprised
that online gambling has generated both political controversy and a
plethora of cross-border regulatory and legal issues. This session initially
explores these critical issues through the eyes of major online gambling
companies. The second segment will be interactive and include a
debate between an online gaming hacker and a representative of a
gaming /gambling company. Hot topics to be discussed will include
both the commercial and legal implications of:
• recent trends in online gambling – products, channels and
geography;
• laws, enforcement and operators’ duty;
• regulation internationally – the past and the future;
• is harmonisation of online gambling laws feasible in the EU?
• cross-border payments issues;
• compliance issues and cybersecurity;
• management of players’ accounts and fraud;
• privacy expectations and regulation in a digital existence; and
• ‘pathological’ gambling and public policy issues.

Speakers:
Andrew Algeo Paddy Power, Dublin, Ireland
Peter Cercone Playtech, Tel Aviv, Israel
Marcus Clinch Eiger Law, Taipei, Taiwan
Mark Methenitis Metro PCS Wireless, Richardson, Texas, USA
Diane Mullenex Ichay & Mullenex Avocats, Paris, France; Senior
Vice-Chair, Communications Law Committee
Brendan O’Connor Malice Afterthought, Madison, Wisconsin, USA

Cornices, cupolas and copyrights: protection and infringement of architectural copyrights
by remote sensing, media use, virtual worlds and construction changes

Joint session with the Art, Cultural Institutions and Heritage Law
Committee and the Space Law Committee.

Session Chair
Souichirou Kozuka Gakushuin University, Tokyo, Japan; Website
Officer, Space Law Committee

This session will examine the validity of architectural design
copyrights, and the potential infringement by remote sensing
imagery, incidental or deliberate use in media and social media, and
by construction variance, remodelling or demolition. The architect
of a striking new building has copyrighted its design. To the
architect’s distress, the design is now being copied and modified.
Images from space are widely distributed; print and online media
capture and replicate the image in film, virtual worlds, and other
incidental uses. During construction and renovation, the design has
been modified. In this session, our mock architect will prosecute a
copyright infringement case against these industries. Participants
will hear the evidence and arguments and act as jurors to decide
the fate of the architect’s claims.

Speakers:
Helen Conlan Bird & Bird, London, England
Jean-Frédéric Gaultier Olswang, Paris, France; Senior Vice-Chair,
Media Law Committee
Roberto Hernández García COMAD, Mexico City, Mexico; Latin
America Regional Officer, Anti-Corruption Committee
Mark Methenitis MetroPCS Wireless, Richardson, Texas, USA
Peter Polak Fiebinger Polak Leon & Partners, Vienna, Austria
Massimo Sterpi Jacobacci & Associati, Rome, Italy; Chair, Art,
Cultural Institutions and Heritage Law Committee

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

Don’t Forget to Read the Manual: Apple v. Samsung and the Challenge of Jury Instructions

A jury has enormous responsibilities. The judge decides all questions of law, using their legal expertise to interpret the problem presented by the case and determine which law or laws apply. The jury’s job is to resolve all questions of fact. Sometimes it’s simple. Is there enough evidence to show that the accused committed a crime beyond a reasonable doubt? Sometimes it’s difficult. This is particularly true in patent cases. A group of ordinary people is called to reach a shared conclusion on complex technical issues. That’s not a slight to the intelligence of the jurors. These questions are challenging for the attorneys and engineers that work in the field all their lives. Thus, jury instructions become very important. Today, we will consider the jury instructions in the recent Apple v. Samsung case and some post-verdict statements by the foreman that highlight just how hard it can be to follow the directions. The case is far from over, but its eventual resolution could determine the biggest hardware supplier in the mobile gaming market.

Within jury instructions, the court sets specific parameters on what questions the panel must answer and the legal rules they must follow. For common cases, model instructions are available. There has been a lot of debate on how to tailor these rules so that the jury receives the best guidance possible. Even if they are written perfectly, there are numerous variables that are impossible to eliminate. Jurors, just like everyone else, have biases and opinions that frame the way they look at the world. They also come in with different levels of education and expertise. No one is a professional juror. Most people have things they would rather be doing, so there’s a risk that they might gloss over more complex problems to save time.

In Apple v Samsung, there were no model instructions available. This case involved a mountain of issues. Apple commands serious market share and enormous customer loyalty, but Samsung’s recent smartphone offerings have shown they’re unafraid to challenge the house Jobs built. Steve was apparently so infuriated by the November 2007 announcement of Google’s Android (the operating system for the disputed Samsung phones) that he promised “thermonuclear war” over what he considered a “stolen product.” There will be many books written about this battle, but we will focus on the jury instructions.

First, they were incredibly long: 109 pages. These had to be read aloud by the judge, which took hours. They listed roughly 700 separate questions the jurors had to answer to reach a verdict. One important detail was underlined. This jury could not include punitive damages. These damages typically come up in tort cases where the defendant did something especially terrible. To deter that type of behavior in the future, punitive damages are awarded. States have discretion on what types of cases can offer them and how high they can go. This is a contentious topic. Perhaps most infamously, it arose in Liebeck v. McDonald’s, where a woman sued the burger chain after suffering third degree burns from their coffee. That touched off a vigorous debate over tort reform: laws designed to limit civil judgments and discourage lawsuits.

But whatever your opinion is about punitive damages, they were not available in Apple v. Samsung. If the jury concluded that a patent was violated, their judgment was to put the holder in the place they would be had the infringer paid an appropriate licensing fee. Sending a message or discouraging future violators wasn’t to come into the equation. The jury instructions made this crystal clear, stating, “You should keep in mind that the damages you award are meant to compensate the patent holder and not to punish an infringer.” But recent comments by the foreman, Velvin Hogan, cast serious doubt on whether the jury internalized that rule. In a Reuters interview, Mr. Hogan said, “We wanted to make sure the message we sent was not just a slap on the wrist. We wanted to make sure it was sufficiently high to be painful, but not unreasonable.” That could easily be interpreted as intent to punish Samsung.

Mr. Hogan also made some comments on prior art that throw into question whether the jury followed their instructions. Prior art is a bedrock concept in patent law. It is all knowledge available to the public that can impact a patent’s claim of originality. To take an extreme example, let’s say you decided to sue Huffy for violating your patent on a “two wheeled rider propelled vehicle with shifting gears and handlebars.” Huffy would easily defeat your claim, because they would point to the fact that bicycles and how they work has been freely available public knowledge for over a century. This principle reins in many patent claims by asking whether the invention in question is truly an original work, or an idea that is already making the rounds.

Prior art was an important piece of the smartphone lawsuit. Which of the features available on the iPhone were wholly original, and which were concepts that others had already explored and published? But on a Bloomberg TV interview with Mr. Hogan, he made a statement that could indicate confusion on the topic. The specific item was the “bounceback” patent, dealing with the way your phone screen “bounces” when you scroll down to the end of the page. According to the foreman, what convinced him that prior art didn’t apply was that, “The software on the Apple side could not be placed into the processor on the prior art and vice versa.” But this is a misinterpretation. Prior art does not hinge on whether it can run on the same system, but instead on whether the invention has been used or even explained elsewhere.

This is not meant to suggest that the jurors in Apple v. Samsung did a bad job. Patents are an incredibly difficult subject, and equally qualified scientists can reach opposite opinions on the validity of a case. Even if the jury had followed every instruction perfectly, this case was going to be appealed. Smartphones are big business, and companies with skin in the game would logically spend large sums to settle who would decide the future of the market. Some influential legal scholars have pointed to cases like these as a sign that patent law is overdue for reform. Whatever the result, Apple v. Samsung shows just how hard these cases and their instructions can be. You can read the manual, sure, but 109 pages mean things might slip through the cracks.

Zack Bastian is an official contributor to Law of the Game. A a recent graduate of George Washington University Law, Zack works at the Woodrow Wilson Center’s Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

New Law Review Article

I just had a new article published in Cybaris, the Intellectual Property Law Review at the William Mitchell College of Law.  The piece is titled “Intellectual Property 2.0: Revisiting the Copyright and Trademark System for a Digital Reality.”

It’s available for download here.  The full listing of articles can be found here.

Many thanks to the staff over there for everything, particularly Brian Bender, the co-Editor-in-Chief.

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

ABOSG and DIGDA – Saturday, May 19

I just wanted to make everyone aware that this Saturday, there are two events at the NTEC in Frisco. I will be speaking in the first, and moderating the panel in the second.  My understanding is both are open to the public at large, but you need to register on Eventbrite.

A Bunch of Short Guys
10-noon
The Business of Animation
Panel discussion with local experts in entertainment law, freelance and contract employment, taxes, tips and tricks:

  • all professional animators
  • freelancers
  • students

Solid ground information needed after the initial starry eyed dream begins.

Dallas IGDA
2-4
Big changes in State and City Incentives Learn about the increase in money for you and decrease in effort on your part!

Speakers:

  • Evan Fitzmaurice, Director Texas Film Commission, Office of the Governor
  • Trish Avery, Executive Director of Screen Actors Guild For Houston and DFW
  • Janis Burkland, Director of the Dallas Film Commission

Both events are at:
NTEC
6170 Research Road
Frisco, TX 75034
(972) 987-1400

Hope to see some of you there!

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

Free to Play: It’s Addictive. Should We Regulate It?

As the Zynga empire has shown, free-to-play online games have become an incredibly lucrative part of the industry. Free-to-play allows anyone to take part without paying a dime, but the games become profitable by inserting advertising and by offering features that will cost you. This could be extra levels, special items, or skipping ahead to later stages. Is calling a game “free” but then later charging fees a deceptive practice? Is it legal, and more fundamentally, is it ethical?

Deceptive trade practices are an important branch of business law. Federal and state law control what qualifies as deceptive practice, and many states have been influenced by the Uniform Deceptive Trade Practices Act. A lot of the doctrines deal with trademark law, a topic we recently covered with respect to Joustin’ Beaver. Pretending that a good is made by a company when it is not is a deceptive practice. So is selling something as new if it is used, disparaging the goods of another by misrepresenting facts, advertising things you do not intend to sell, and so on. Deceptive practices set basic standards of honesty between businesses and consumers. These rules, generally, are at the state law level, and accordingly do vary from state to state. What follows is a general discussion without any particular state’s viewpoint guiding.

Most of those concepts come into play when advertising a product, but there are additional deceptive practices that govern how businesses can behave in their ongoing relationships with customers. This would likely be the area of the law relevant to free-to-play games. It prohibits unfair adhesion contracts, which is when a “take it or leave it” agreement exists between parties with unequal bargaining power. For it to be considered unfair, courts look to whether the terms are outside reasonable expectations, whether the less powerful party would know a term was there, or if the contract is unconscionable or oppressive.

An outgrowth of this concept is the shrink wrap-contract, which directly applies to buyers and sellers of software, like games. The terminology comes from the fact that you cannot see the terms without opening the product. In the case of downloads or websites, web-wrap, click-wrap, and browse-wrap terms only appear when you use the program. There is no nationally controlling decision on the subject. Some major cases like ProCD v. Zeidenberg suggest that these types of contracts are perfectly legal, while others such as Specht v. Netscape found them invalid. Of course, any decision is specific to the facts of the case, so a court would consider an agreement by analyzing it for reasonableness and unconscionability, just like adhesion contracts. Unless a company misled players into believing nothing in the game was ever going to cost money, it seems like free-to-play games with monetized aspects are fine under these principles.

Some countries are extremely concerned about the addictive nature of gaming and have regulated it accordingly. Ars Technica noted that Japan is set to restrict certain practices that prey on compulsive behavior. The new regulations would deal with games that offer random items for a price. Japan’s Consumer Affairs Agency has received complaints after some customers burned through enormous amounts of money while attempting to complete rare sets of digital items. Even though some social gaming companies already voluntarily capped the amount children could spend, authorities have argued the practice violates Japan’s lottery laws.

But as we noted previously, the US is a different story. Japan may be tightening the screws on social games with aspects that resemble gambling, but the Justice Department’s new interpretation of the Wire Act points in the opposite direction. As long as the wager is on the game itself and not some outside activity, the American government seems willing to tolerate it. If a game company does not make promises it cannot keep or step outside of reasonable behavior, they are legally safe building costs into a free-to-play game.

Of course, legal and ethical principles do not always overlap. As free-to-play has boomed, many have wondered whether it is right. When people go overboard and dedicate too much money and time to any game, it makes us uncomfortable. People can become addicted to anything, and games are not an exception. Free-to-play is ripe for criticism because the costs are not immediately apparent.

With other games, the sticker price is immediately obvious. (Some companies have also been criticized by making additional features available only after spending more money, but that is only getting more popular.) With free-to-play, a gamer could end up spending as much or more than they would on your average console title. Some developers are opposed to this because they consider it misleading, while others have it built into their business model. There is no widespread agreement on how to handle this, and gamers will set the industry standard by voting with their wallets.

A challenge with resolving this question is that it raises a larger point about the ethics of sales. Producers of anything from food to video games face a very competitive market. There are a myriad of options and it is a battle to get noticed. One of the most effective ways to court customers and establish an audience is to give them a complimentary taste. That is the logic behind the free samples in the grocery store, or the coupons offering deep discounts for new items. It also underpins the tried and true technique of the game demo that is offered shortly before the full release. You let someone give your product a try, decide if they like it, and hopefully they choose to pay for it.

Free-to-play operates the same way. The developer provides a base version that introduces you to the engine, allows you to have some fun, and then they make their money once you are hooked.  Some believe that because games are ripe for compulsive behavior, they must be regulated. But that is a slippery slope. People can have an unhealthy relationship with food: does that make dropping the price on a new kind of chip unethical? If we started down this road, we might never stop. But it is also possible that the way we perceive games will evolve, and we will shift closer to Japan’s approach. As free-to-play’s market share expands, so does the chance for regulatory scrutiny.

As a gamer, you have influence on how this plays out. If you dislike free-to-play, then do not download the games. Governments might choose to respond, but the market will always be more nimble. As long as free-to-play is a cash cow, it is going nowhere.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center’s Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.

Good News for Small Developers: Crowdfunding in the JOBS Act

As we discussed recently, today’s gaming market has ample opportunities for independent developers. There is distribution across multiple consoles, personal computers, and smartphones. Development costs for a top-tier title on the Xbox360 may prevent a start-up company from competing, but you do not have to push the graphics to the limit to find an audience. While indie game development might be cheaper, it is not free. If you do not have money to finance your project, what are your options?

Many people have been looking to the crowd. “Crowdfunding” is a variation on crowdsourcing. The idea is elegant, simple, and well suited for the internet. Rather than taking inputs from just a few sources, crowdsourcing casts a wide net. By receiving feedback from many individuals, you are more likely to arrive at a better solution. As internet connectivity has proliferated, people have taken this basic concept and applied it to many different situations.

It has been used in public safety. In the aftermath of the devastating Haiti earthquake, geographic information systems experts and programmers pooled their efforts to build working maps of ground level conditions. During the recent civil unrest in the Middle East, journalists looked to the crowd on sources like Twitter to place their coverage in context. Tracking the crowd is also being applied to global development, as experts hope it can forecast shifts in commodity prices and economic conditions.

Crowdfunding works by gathering funds by receiving smaller amounts of cash from many people rather than big contributions from just a few. President Barack Obama famously looked to the crowd for a significant portion of his 2008 campaign financing. Comedian Louis C.K. made $1.1 million from a stand up special financed by the crowd, and other creatives are following his lead. For those without an established audience, there are sites like Kickstarter where people with ideas can propose a project and receive crowdfunding. Recent successful proposals have included REM dreaming sleep masks, an encyclopedia of Golden Age Superheroes, and a side-scrolling adventure game. There have been some very famous projects in both the game and tech space.

While Kickstarter and similar sites offer incentives for funders, such as a personalized copy of the project, post cards, or exclusive content, they do not offer ownership. By opening your e-wallet to an idea that looks good to you, you receive no share or stake in their success, other than a name in the credits (which brings no financial benefits). With the recent passage of the JOBS (Jumpstart Our Business Strength) Act, that could change. The new law has numerous regulatory adjustments meant to help small businesses get access to capital. It works to make private capital formation simpler, and reduce the administrative burden for a fledgling business looking to go public.

A particularly exciting portion of the law shows that Congress has been watching crowdfunding, and believes it could provide the economy a shot in the arm. The JOBS Act amends the Securities Act, allowing a company that does not register with the SEC to raise up to $1 million in a year. There are a few requirements to qualify. First, if the interest sold exceeds $1 million, the company no longer qualifies. Second, there are limits to the amount a company can receive from individual investors. If a funding party has a net worth or annual income less than $100,000, they cannot provide more than $2,000 or 5% of their annual income or net worth. If an investor earns more than $100,000 a year or has a net worth above that number, they cannot invest more than 10% of their income or net worth.

The JOBS Act also requires that a company seeking investment through this exemption to use a broker or funding portal, similar to Kickstarter, and has a series of basic guidelines for the broker or funding portal. They have to register with the SEC, provide necessary disclosures to investors, and perform due diligence on companies seeking investment. They may only provide funds once the target is reached. They must protect investor privacy, avoid conflicts of interest, and make sure any individual investments do not exceed the limits described above. The Act also requires that companies seeking investment limit their advertising, file a disclosure document with the SEC, avoid undisclosed compensation for promoting the offering, and provide the SEC with an annual report. (This is a brief digest, but the law firm Akin Gump has released a much more detailed explanation.)

Why does this matter? Looking over these regulatory adjustments, the law recognizes the potential of crowdfunding and shifts the burden away from the company seeking investment and towards the processor of investments, be it a broker or a funding portal. For a small company looking to get the ball rolling, this is a big deal. Companies will still have to make sure they are keeping their financial statements in line and being very careful with investor funds: that does not change. But by relaxing these registration regulations, a growing company can let a broker or funding portal do the heavy administrative lifting. This makes sense. As a company that handles investments for a lot of different companies, a broker or portal will already be familiar with how to navigate the SEC and can remove a lot of anxiety, stress, and time for someone who needs crowdfunding. It also gives creators an alternative to bootstrapping or asking friends and family for investments. It may be an intermediate step before seeking angel funds, or a viable alternative to traditional angel investors. It is a much needed step for early entrepreneurship to have access to this kind of capital.

These regulations could support a huge variety of crowd-funded projects, including games. As long as a company was looking for under $1 million within 12 months and obeyed the individual investor limits, they could receive support from many different everyday investors instead of a few big ones. This also creates an incentive for investors. Kickstarter is great, but what if the rewards such as a copy of a game are not interesting to you? The JOBS Act means you could end up with a stake in the success of a particular project, or the company as a whole. There will likely be a lot of flexibility in what is crowdfunded and how these opportunities are structured and offered by the crowd portals. See a proposal for a game you think is the next big thing, and believe that the developers can make it a reality? By getting in on the ground floor, you could see a financial return if the project succeeds.

There are caveats. Although this law has passed, it still needs to be interpreted by the SEC in light of its current regulations. There is strong bipartisan support for the law, so it is unlikely the SEC will throw any curveballs. Still, always better to wait for the agency to make a statement before plowing ahead. Also, anyone who chooses to invest in a project should do their homework and make sure they are not over committing themselves. Investments of all kinds have risks, and crowdfunding does not change this fact. Funding portals will need to decide whether they are comfortable crossing into the area of providing a real public offering. Some companies might think it is too much trouble and stick with the Kickstarter “reward” model.

Still, it is exciting to see legislative acknowledgement of a technological tool that has been applied in fascinating ways around the world. The crowd has come to the rescue many times over the last few years, and now it could be used to finance the next great indie game.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center’s Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Disclaimer
The content of this blog is not legal advice.
It only constitutes commentary on legal issues,
and is for educational and informational purposes only.
Reading this blog, replying to its posts, or any other
interaction on this site does not create an
attorney-client privilege between you and the author.
The opinions expressed on this site are the opinions of the author only and not of any other person or entity.