According to Statista, litigation spendings by US companies are growing every year. In 2021, lawsuit costs are projected to be over $23 billion.
COVID-19, in its turn, has spurred business court complaints such as force majeure, insurance, mergers and acquisitions, etc.
Winning a settlement is hard even if the truth is on your side, litigation transaction and processing costs and court fees are sky-high.
For a long time, individuals and businesses had enlisted financial aid from litigation finance players. With the rise and development of Fintech, a new type of litigation angels appeared – crowdfunding companies.
Let’s figure out how crowdfunding for litigation and arbitration works and what it takes to set up a portal for crowdfunding lawsuits.
What is litigation crowdfunding?
The first cases of commercial litigation financing emerged in the late 1980s and early 1990s. Later, litigation financing firms started offering help to individual plaintiffs, which led to many ethical concerns like that external financial help “can inappropriately influence cases”.
Given that, we’d like to focus more on business litigation funding practices.
November 2014. LexShares applies a crowdfunding model for a products liability suit.
The company lets only accredited investors take part in the scheme.
That was a big step forward, earlier only institutional backers were able to provide help.
Any company that is in the middle of a lawsuit can reach out to LexShares and, in case it passes the check, LexShares posts the offering on the platform.
Backers earn money only if the plaintiff wins, so does the platform.
In the press release dated 2014, LexShares partner Chris Lynch said “this is a multi-billion dollar market but it’s closed to investors”.
Now, this market is still in its infancy, but it has already enhanced access to justice for businesses and individuals.
In a broad sense, crowdfunding for litigation is a provision of funds to claimants which they need to litigate or arbitrate a claim.
Dedicated crowdfunding platforms act as middlemen matching fundraising and investors.
Crowdfunding for commercial legal disputes works similarly to traditional legal financing.
Crowdfunding litigation can be investment-based (LexShares) or non-investment-based (CrowdJustice).
In the latter case, platforms encourage backers to have a real impact on a specific issue, change the law or even the life of an individual plaintiff.
The LexShares investment-based model of litigation financing works this way:
- Attorneys and plaintiffs submit their cases with expected costs of litigation. Min funding size is $200,000. The platform evaluates the case by several factors: legal merits, team, the defendant’s creditworthiness, litigation costs. LexShares acts as a passive investor and takes carried interest in each case.
- If all criteria are met, the case is accepted and investors (high net worth individuals and institutional) can pledge. LexShares thoroughly vets every backer and checks their proofs of status.
- To prefund a deal, the provider forms an LLC to make investments. Each LexShares’ backer receives equity in the LLC. If a deal is prefunded, investors immediately receive an interest in it. If not, they have to wait until LexShares creates a pool.
Litigation investments are speculative and high risky: they come with long holding period requirements, they’re illiquid and not publicly traded.
State of legal crowdfunding in UK and US
LakeWhillas, a US-based litigation finance company, has conducted a survey on litigation-finance practices among legal players in 2020. And here are a few interesting facts:
- 35% of respondents stated that law firms and outside companies are the main drivers of litigation financing. Therefore many crowdfunding companies establish a partnership with leading litigators;
- other drivers include lack of financing, contingency and mix-contingency options, efficiency;
- the strongest motivation to seek funds (44% of respondents admit that) is the lack of funds;
- individuals and small private companies are the target audience of lawsuit funding providers;
- for 75% of respondents, litigation finance has become more relevant to their practice in the last year and 99% said that they would apply this practice again;
The takeaway: the growing number of law firms and counsels advise their clients to turn to litigation finance providers to fill the funding gap, which creates new opportunities for crowdfunding companies.
As Marketwatch predicts the commercial litigation crowdfunding market will grow at a steady rate during 2021-2026.
For now, there are very few statistics on legal crowdfunding. We’ve dug some numbers related to the global litigation funding market (LF) that includes the crowdfunding sector:
- the EU market of litigation services has grown at a substantial pace recently with the B2B intra-borders sector prevailing;
- In Europe, the UK presents the largest market for LF, due to London’s leading position in arbitration and finance;
- the United States of America (USA) is the region with the largest legal services market (55%);
- litigation returns are higher than those observed in private equity, real estate, traditional credit and hedge funds;
- the highest costs for claimants are in the UK and US followed by the EU and Australia.
Leading crowdfunding platforms for commercial litigation
LexShares (New York)
LexShares is an alternative investment technology platform specializing in litigation finance. The company funds litigation-related assets through both its online marketplace and dedicated litigation finance fund.
LexShares frequently work with boutique law firms to directly finance a portfolio of cases, including MDLs and class actions.
Types of cases to fund via LexShares: anti-competitive claims, banking and insurance disputes, construction and real estate disputes, contract disputes, conversion, fraud.
AxiaFunder (London)
AxiaFunder is an online crowdfunding platform that connects investors with carefully vetted commercial litigation opportunities.
Only certified high net worth individuals, self-certified sophisticated investors, and professional investors can get access to AxiaFunder’s case portfolio.
For now, 12 litigation cases have been fully funded via AxiaFunder, of which 5 have been successfully resolved, generating a 40-94% return.
AxiaFunder focuses on breach of contract, copyright infringement, unfair competition, commercial fraud, etc.
CrowdJustice (New York)
CrowdJustice is a crowdfunding platform that allows communities to access the courts to protect their communal assets.
The company helps individuals, families and communities raise funds to protect their assets and rights.
Anyone can raise funds with CrowdJustice, there’s only one requirement – a campaign creator should have a lawyer instructed or be working with a registered organisation (such as a charity).
The company mainly works with such cases as an inquest, environment, public interest, employment, human rights.
CrowdJustice in numbers: £10m raised, 200k backers, 2 weeks is an avg time to hit the market, 4 in 5 campaigns funded.
How to set up a litigation crowdfunding platform with LenderKit
Companies offering investment-based litigation crowdfunding in the US and UK are subject to industry laws and rules established by the SEC and FCA.
According to Reg CF and FCA requirements, all crowdfunding campaigns should be run via an online platform equipped with necessary functionality such as customer onboarding, AML/KYC modules, dashboards for fundraisers and investors, payment management and processing, reports and analytics, secondary market, etc.
Building such a platform from scratch is a huge challenge. To simplify your development path and shorten time to market, we offer you a ready-made solution – LenderKit.
LenderKit is an investment software for any type of crowdfunding business and company that has all the above basic features out-of-the-box and is compatible with third-party solutions.
Benefits LenderKit offers you:
- source more deals;
- attract new investors;
- grow your business online;
- increase efficiency and ROI;
- automate KYC and payments;
- facilitate regulatory compliance;
- expand your business internationally.
Wrapping up
- Legal crowdfunding is a relatively new and rapidly growing niche. Companies help small businesses and individuals cover lawsuit expenses with the wisdom and money of the crowd.
- Legal funding cases vary from human rights protection to fraud and unfair competition. Due to the high risk of investments, currently, lawsuits crowdfunding deals are available only for sophisticated and institutional investors.
- Despite the critical approach of some experts, litigation crowdfunding is beneficial to fundraisers and backers. The former get the necessary funding to cover crowdfunding litigation expenses, expertise and consulting. The latter is a chance to diversify investment portfolios and earn appealing returns.
