Crowdfunding is new to the financing game and it’s posing a few problems when it comes to legitimacy.

There’s no doubt that the rise of crowdfunding has enabled businesses and projects to previously untapped wells of finance, but how well protected are investors?

Crowdfunding, in its current guise, ranges from equity investing, to debt provision, to incentive backing.

However, the concept is still shrouded in mystery when it comes to regulation. It’s hard to know how respectable companies are when all we as investors are presented with is a short blurb.

Now it seems that news from the other side of the Atlantic has cast further doubt on the mechanism.

Kickstarter, which launched in the UK in October, is now subject to legal proceedings from a 3D printing company which claims that a business listed on the crowdfunding platform has infringed on its patents.

Formlabs has secured £1.8 million from 2,000 users on incentives-based service Kickstarter, but is now being challenged by 3D Systems.

Two lawsuits have now been filed by 3D Systems: one against Kickstarter, and one against Formlabs.

The crux of the argument is a printing technique called stereolithography, a practice which directs an ultraviolet laser across a liquid synthetic to case a thin layer to solidify.

3D Systems claims that Formlabs has now infringed on its patent relating to this practice.

Since its launch in April 2009, Kickstarter has helped 30,000 creative projects raise in the region of $350 million from £2.5 million people. However, if lawsuits like this begin to add up then its mechanism for raising capital through incentives is in danger.

Regulation hurdles

In the UK, The Financial Service Authority’s (FSA) attitude towards crowdfunding has been one of caution and warning.

It states, on its website, that most crowdfunding should be targeted at ‘sophisticated investors’ who know how to value a start-up business as well as understanding the risks involved.

The FSA also raises the point that investors in a crowdfund have ‘little or no protection’ in the business or project fails. It is also concerned that some firms involved in crowdfunding may be handling client money without the FSA’s permission or authorisation, meaning there may not be adequate protection in place for investors.

To date, the only FSA regulated and authorised equity crowdfunding platform is Seedrs. This means that other services allowing businesses to raise capital through the power of the crowd could be putting investors money at risk.

What is needed is clear and concise legislation from the UK government about crowdfunding.  The United States has already made headway into addressing the subject through its JOBS Act, allowing it to possibly establish various different classed of investors, each perhaps with its own regulations.

Making rules crystal clear for businesses interested in raising money through the system, and individual backers hoping to put surplus capital to good use, will ensure crowdfunding can become a more viable option.

What we don’t want is an endless stream of litigation.