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-Spencer L. Simons, former Director, O'Quinn Law Library and Associate Professor of Law



Sunday, November 30, 2014

Crowdfunding Lawsuits

Has the popularity of crowdfunding reached the litigation realm? With the appearance of companies like LexShares, it appears so. Crowdfunding, or funding a project or venture by raising monetary contributions from a large number of people, typically via the internet, has grown tremendously in popularity over the last five years. In a typical crowdfunding endeavor, the person with the idea or project seeks funding from individuals who are interested in benefiting from, or being related to a funded project, through a third-party platform that brings the groups together. Kickstarter and GoFundMe are among the popular crowdfunding platforms that have been used successfully to fund filmmaking, video games, technology products, and even Super PACs for political campaigns.

Just as it is expensive to finance the making of a film or the development of new technology, funding litigation can be equally costly. Though, for example, a small business may have a claim that is likely to lead to a large verdict or settlement, the costs of initiating the litigation and pretrial proceedings may be prohibitive. While plaintiff’s attorneys have long recognized this reality and have negotiated contingency agreements to bring cases that plaintiffs could not otherwise afford, crowdfunding allows for a few or many unrelated investors to share in the risk. LexShares is one of the first companies to do this- the company selects from its applicants commercial claims determined by its team of experts  to have strong merit. Then, the claims are offered to accredited investors through a registered broker-dealer. Investors must be accredited, as defined by the SEC, and meet certain financial and net worth requirements. If enough accredited investors decide to fund the litigation that the fundraising goal is met, LexShares receives a portion of the fund for its fee, and the balance goes to the commercial plaintiff to fund the suit. Should the plaintiff prevail, the investors receive a return based proportionally to their investment. If the claim fails, the plaintiff does not have to repay the investors.

The company hopes that this will be a way for smaller companies to gain leverage against larger companies who may have stolen ideas, but have almost limitless litigation resources. Though this David vs. Goliath concept is appealing for many, the success of this new style of litigation financing will likely depend on the size of investors’ returns in a market that is far from certain.  

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