Crowdfunding, Startups & Everything In-between

Litigation Crowdfunding: A Digital Revolution Of The Legal System?

 

“We know all men are not created equal in the sense that..some men make more money than others”, said once Harper Lee in her famous book “To Kill a Mockingbird”.

Starting from this point, let’s assume that you’re involved in a lawsuit and don’t have enough resources to actively pursue it. What do you do? Do you quit from the very first beginning or do you agree for a premature settlement?

In either cases you are at complete disadvantage in comparison with other much wealthier litigants.

And you are not alone!! This is also the case 81% of the low-income Americans, according to LexShares, who often can’t afford to pay the high legal fees which range up to $50.000 on average in the US.

But what if I told you that you can actually fund your case through the aid of third parties? How? Through the aid of litigation crowdfunding.

 

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The idea behind it is quite simple, standing on the pillars of litigation financing. This one assumes that third parties unrelated to the lawsuit may pay for the case costs in return for a share of the potential gains (i.e. if the case wins). If the plaintiff loses, he or she doesn’t have to pay anything at all.

The situation is a win-win one, since plaintiffs get quick access to capital and top legal talent, while investors may benefit from much greater returns as compared to other alternative asset classes.

Apart these two players, the mechanism involves another one, the attorneys, who normally act out as referees, securing and distributing the funds through the aid of a multi-party litigation funding agreement.

Is this legal? Almost everywhere (except China). In fact, Fortune 500 companies, top universities and businesses have benefited from it. While in the past the method was labeled as “champerty”, more and more US and UK courts recognize its applicability towards ensuring a fairer legal system, as related to promoting and fast forwarding meritorious cases.

So far 2 litigation crowfunding platforms have set themselves apart from the crowd: Invest4Justice and LexShares.

 

Invest4Justice

invest4justice

Invest4Justice claims to be the #1 litigation crowdfunding platform in the world, with aprox. $3.157.000 pledges at the moment of writing, offering returns of 500% or even more on the sum initially pledged. In fact, there are registered cases who offer 1200% returns, although I’m quite skeptical about them (information asymmetry, duh).

Plaintiffs can sign up for free on the network, having to pay a contingency fee and a 2.5% platform fee (which Invest4Justice reinvests it in other meritorious cases) if their case turns out to be successful. Campaigns allow for an unlimited amount of funding and an unlimited number of investors (non-accredited ones included), who can support the case up to 100%. They can also withdraw their pledges any time prior to the signing of the multi-party litigation funding agreement, which legally secures the transaction between the parties.

The platform also claims that almost anybody, from any country (except China and India) can crowdfund their case (provided they are adults), even if the case is an ongoing one (provided that it hasn’t been ruled upon in a binding manner, or settled).

 

LexShare

lexshares

LexShare allows for the same free access at a new asset class, along with top attorneys and law houses, but it distinguishes itself as being more premium, i.e. each case is individually vetted by the LexShare expert team, which has overseen investments in over 10.000 legal cases. This translates into the fact that cases must own strong merits in order to qualify for the final round, while plaintiffs need to be represented by an experienced counsel with a proven track record. The network’s selective character also stems out from the fact that only accredited investors can be part of it, with it being solely addressed to the US $200 billion litigation market.

 

They also pride themselves in terms of revenues, with an annual rate of return of over 50% in the last 10 years.

 

Now I consider these platforms to be the first 2 choices of contributors willing to engage in this type of crowdfunding, depending on their geographical location and investor status.

 

Further thoughts

 

All in all, the process in itself proves to be quite democratic, right? However, even though litigation crowdfunding is set up to make justice more rightful and provide access to the legal system for the less favored ones, there are still some unanswered question left like:

  • Who will enforce this crowdfunding method and when will it be harmonized throughout the whole world (or at least Europe)?
  • The method resembles in small lines binary options, with a 50-50 chance to win a case, even though these type of litigation assets are not correlated to capital markets. Will it lead to a new financial bubble if a bandwagon effect interferes, due to its high rates of return?
  • Who will actually pay for the investors’ contributions if the case loses?
 

You think you have the answers? Don’t hesitate to comment below.