Crowdfunding Theft – New Liability For Entrepreneurs 

A Washington court ruling against a Kickstarter creator who didn’t produce exposes legal risks. Here’s what lawyers should know.

http://nwsidebar.wsba.org/2015/11/05/advising-a-crowdfunded-creator-avoid-bob-fergusons-kickstarter-wrath/

NYSBA Crowdfunding Ethics Opinion

In January and April I blogged about the ethics of crowdfunding. In May, when I co-authored Tread Carefully: Crowdfunding Your Law Practice with Amber Hollister, we reported:

No jurisdiction, including Oregon, has published an ethics opinion or other formal guidance on the propriety of crowdfunding. As with all legal applications of new technologies, the ethics law can be slow to catch up with modern-day practice. Nevertheless, a preliminary look at crowdfunding suggests that it is not per se prohibited by the Oregon Rules of Professional Conduct. As with any novel approach to practicing law, whether crowdfunding is permissible depends on the type of funding model used by the lawyer and the specifics of how the lawyer implements the fund-raising campaign. Wise lawyers will proceed with extreme caution.

This changed in late June, when the NYSBA issued Ethics Opinion 1062.  The opinion digest states:

A law firm may engage in certain types of crowdfunding but not others.  Any form of fundraising that gives the investor an interest in a law firm or a share of its revenue would be prohibited.  However, in some circumstances a law firm may give the funding source some kind of reward. For example, a law firm may send a funder non-confidential memoranda discussing legal issues (provided the law firm complies with any applicable advertising rules), or may agree that the law firm will provide pro bono legal services to certain charitable organizations, provided that the lawyer complies with Rule 1.1 regarding competence and the representation does not involve conflicts in violation of Rule 1.7 or Rule 1.9.

The NYSBA opinion is the first of its kind in the nation.  It addressed the issues of competence and conflicts head-on, but did not touch on some other points that my co-author and I raised relating to trust accounting, third-party payment, fees, advertising/promotion, use of disclaimers, and taxation.  Lawyers interested in crowdfunding would be well-advised to give our article a second look.

The Ethics of Crowdfunding, Revisited

When we last visited the subject of crowdfunding in January, I pointed out some of the ethical barriers to this method of fund raising.  While much depends on the lawyer, crowdfunding could implicate:

  • Improper communications concerning a lawyer’s services – Oregon RPC 7.1
  • Dishonesty, fraud, deceit – Oregon RPC 8.4
  • Fee sharing with a nonlawyer – Oregon RPC 5.4

I also noted that money raised via crowdfunding may well be taxable, even if the lawyer did not meet the minimum threshold to trigger a 1099.

This month I join forces with the venerable Amber Hollister, Assistant General Counsel of the Oregon State Bar.  We have co-authored an article for the OSB Bulletin entitled “Crowdfunding Your Law Practice.”  The article is scheduled for publication in the May issue.

In addition to the above, we identified other troublesome ethics concerns:

  • Potential third payment and trust accounting issues – If you are rewarding donors with a legal consultation in exchange for a donation and receive funds in advance or a donor is construed as “buying” a legal consultation for a third party, be sure to comply with all trust accounting rules.
  • Conflicts of interest are also a concern.  If a consultation is offered as a “perk or reward” in exchange for a donation, will the lawyer be able to perform?  Lawyers would be well-advised to forewarn donors of the necessity of conflict screening.
  • Running afoul of the rule prohibiting the lawyer from giving something of value in exchange for recommending the lawyer’s services – lawyers can’t give enthusiastic donors anything of value for promoting the lawyer’s crowdfunding campaign via social media.

None of this is shared to discourage Oregon lawyers from crowdfunding.  Rather, you need to go in with your eyes open and be sure you are tuned in to the ethics issues.  For a thorough analysis of this subject, refer to the article.

[All Rights Reserved 2015 Beverly Michaelis]