LexShares v Goliath: US website opens for third party litigation crowdfunding
In the first of two stories today by associate editor Caroline Hill, the Insider looks at some of the “New Law” new business models being explored by US legal start-ups that are combining the latest in legal technology platforms with social media business models, including crowdfunding.
Taking third party litigation funding to an entirely different level, newly-launched US website LexShares will now enable commercial litigants to fund their cases via online ‘crowdfunding’ investment. Pitched as both an investment opportunity and way to “level the playing field for those unable to afford access to the justice system,” cases submitted to LexShares will be reviewed on their merits and those deemed to be strong enough will be offered up for investment via registered broker-dealer WealthForge LLC.
Around 10% of the proceeds raised will go to LexShares and investors will receive a portion of the proceeds if the case is won, but if the case is lost the claimant will owe nothing. The website has already funded a case with an estimated claim value of $40m, with an investment of $250,000. While third party funding has been gaining traction and becoming more mainstream both in the US and the UK, LexShares co-founder Jay Greenberg, a former technology investment banker at Deutsche Bank told the Legal IT Insider: “There is a real lack of education around litigation funding and funders have typically been opaque but we aim to be outward facing and transparent and to address the supply and demand imbalance.”
Ongoing third party funded claims in the UK include an action led by litigation boutique Stewarts Law for institutional investors in a multibillion-pound dispute against the Royal Bank of Scotland, which third party funder Argentum has previously been named as an investor in.
Stewarts Law’s high profile head of commercial litigation Clive Zietman told the Legal IT Insider: “In litigation, it’s so important to keep your finger on the pulse and understand the risks and constantly reassess the risks in a case. The idea that you are one step removed could make this a fairly speculative investment. As with any investment you have to have faith in the lawyers and the experts.”
However, cases submitted for investment by LexShares, which will typically require between $100,000 and $1m in investment, will be reviewed by a team led by LexShares’ co-founder Max Volsky, founder of litigation finance fund LexStone Capital and author of Investing in Justice, who has successfully invested in lawsuits for 15 years.
LexShares’ website also assures investors that claimants must be represented by “experienced counsel with a strong track record of success in the related legal area” and that the claims listed have a sound legal basis, with the duration of the case also taken into account as a relevant factor in deciding whether to list it. Defendants must be well-capitalised with the ability to pay damages and the expected costs of the claim must be “foreseeable”.
The potentially game-changing crowdfunding model also means the litigation funding risk can more easily be spread and Zietman observes: “If you’re investing in 100 cases you’re more likely to hedge your bets.”
Greenberg agrees, adding: “The reason why investors are attracted is the lower threshold of $2,500 and that this is an asset class uncorrelated to the capital markets or interest rates, it operates in a vacuum and is only dependant on the outcome of the case.”