Popular community-driven craft marketplace Etsy took a stock hit today after Wall Street analysts estimated that 5 percent of all of the goods sold through the storefront could violate other companies’ copyrights and trademarks.

“Our research indicates as many as 2 million items on Etsy (>5% of all merchandise) may potentially be either counterfeit or constitute trademark or copyright infringement,” analysts wrote in a report by Wedbush. “Counterfeit candidates include items infringing on Louis Vuitton, Chanel and Michael Kors, as well as a wide range of Disney and NFL brands.

“Sample of high risk listings indicates some violations may be 20x more likely on Etsy than eBay and even more likely than Alibaba’s Aliexpress. We believe Etsy is unlikely to be directly liable for the infringements based on the Tiffany v eBay precedent and protection under the Digital Millennium Copyright Act.”

“We expect added scrutiny”

While Etsy itself may not be liable for copyright violations, as Wedbush notes, it could be forced to delist thousands of fake items, significantly reducing its stock and losing out on any commissions that could be made from those sales.

“Considering the broad backlash on Alibaba regarding inauthentic merchandise, we expect added scrutiny given the social responsibility ethos at the core of its Etsy’s brand,” Wedbrush said. “If Etsy chooses to continue to ignore these potential violations, we believe it could tarnish its brand with both buyers and sellers.”

Copyright violations are a continuing issue faced by many community-driven services. Storefronts like Etsy and Ebay, as well as media sharing sites like YouTube and DeviantArt, are all frequently forced to remove material that uses brand names, logos, designs, or other intellectual property that belongs to other companies.

Wedbush’s analysis led to a more than 10 percent drop in Etsy’s stock, which has already suffered since the company initially went public earlier last month. Etsy’s stock has lost nearly a third of its value since its initial price on its first day of trading.

Image credit: Etsy