101 A.B.A. J. 32 (2015)
Mass Actions

handle is hein.journals/abaj101 and id is 671 raw text is: 





Business of Law


Mass Actions

Crowdfunding can be a great way to finance your case-or destroy it By Jason Krause


E         HOLLYWOOD                                  3
          DIRECTORS USE
          IT to bankroll movies.
          Musicians do it to finance
records. A man named Zack Danger
Brown raised $55,000 this way
to make potato salad.
  We're talking about crowdfund-
ing. The concept of crowdfunding
is thought to have been invented
in 2006, but has quickly become
a popular way for people to raise                   4%
money for a cause or to finance a
project or business.
  And those projects now include
litigation. A litigation crowdfunding
website or application lets anyone
in need of backing for a legal matter
raise money from anywhere in the
world. And typically, when people
invest in a matter, they are given a
stake in the claim they have funded.
  I looked at litigation financing and couldn't understand
why more people weren't investing, says Jay Greenberg,
CEO and co-founder of LexShares, a legal crowdfunding
company. I think the biggest gap is education or understanding
the process. The crowdfunding mechanism makes investing
more transparent and accessible to more people.


WISDOM OF THE CROWD
  There are two emerging crowdfunding models at opposite
ends of the funding spectrum. On one end there are nonprofit
efforts like CrowdDefend, which raises money from donors,
not investors, for criminal defense cases. Another new entrant
is CrowdLaw, which offers crowdfunding forsmall-scale
criminal defense cases or nonprofit organizations trying
to launch legal or political campaigns.
  In litigation finance, it seems that investors reap the benefits,
says Henry Perlstein, the founder and sole full-time employee
at CrowdLaw.When I heard about Kickstarter and other
crowdfunding sites, I had to ask: 'Why can't we use this tech-
nology to help people who are shut out of the legal process
reach their goals?'
  At the other end of the spectrum, LexShares competes with
established litigation investment firms like Burford Capital or
Gerchen Keller Capital. LexShares lets accredited investors
bet on the outcome of corporate lawsuits, which is an estimated
$1 billion market.
  Investing in litigation is not new. The new wrinkle is in
how these investments are capitalized, Greenberg says.
It connects investors who may have been shut out of the
market with litigants who have a meritorious case but don't
have access to the funds they need to move forward.


V


!I


      In the past, Greenberg says,
    investing in litigation was available
    only to limited liability partnerships or
    pension funds. He says the minimum
    investment for large corporate mat-
    ters started around $3 million.
      LexShares' crowdfunding model
    has made it possible for litigants
    with relatively small corporate
    disputes, often between $100,000
    and $1 million in value, to line up
    individual investors. Those investors
    must meet the U.S. Securities and
    Exchange Commission's Rule 501
    of Regulation D, which sets the
    minimum level of income and assets
    an investor must have to invest.
A


                  DON'T OVERSHARE
                          Crowdfunding for a movie is a
                        relatively straightforward process:
                        The movie maker takes money
from investors and makes a movie. If the movie makes money,
investors recoup their investment.
  Litigation financing is a lot more complex and fraught.
The biggest problem is how to disclose the facts in a potential
matter that will attract sympathetic investors without giving
away compromising information to opposing counsel.
Unfortunately, parties that need crowdfunding are often
likely to be desperate and incautious.
  Your crowdfunding profile is like a legal self ie. The
danger of the Internet is that people who don't know better
put too much information online, says Nate Cade, co-chair
of the ABA Section of Litigation's Ethics and Professionalism
Committee and a litigator from Milwaukee.If I was opposing
counsel in a crowdfunded case, the first thing I would do is sub-
poena the crowdfunding company for all of the communications
between them and the litigant.
  Both CrowdLaw and LexShares retain attorneys to certify
the validity of a claim to assuage the concerns of potential
investors and prevent the disclosure of confidential information.
In addition, LexShares insists that potential litigants only share
publicly available information orcourt filings with the company
and potential investors. LexShares also employs a legal under-
writing team to consider the prevailing law, potential damages,
recent decisions in similar matters, attorneys' track records,
litigants' backgrounds and how the case has progressed so far.
  Though LexShares and CrowdLaw have different business
models and different client bases, they have settled on a similar
solution.
  Crowdfunding in litigation is not like other commercial
forms of crowdfunding, Greenberg says. Everything has to
be thoroughly investigated and vetted. U


32    ABAJOURNAL SEPTEMBER 2015

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