Lawsuit crowdfunding site taking off

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By Brandon Gee
Dolan Media Newswires

Since launching lawsuit-crowdfunding website LexShares two months ago, co-founder and CEO Jay Greenberg said they’ve seen thousands of users sign up, with strong demand on both the investor and litigator sides.

The litigation-finance service has raised $250,000 for a plaintiff’s products liability lawsuit against a Fortune 500 manufacturer and $110,000 for a finance company’s breach-of-contract case against an oil and gas developer, according to a recent review of LexShares’ website.

Even lawyers are investing. Which makes sense, Greenberg said, for the same reason you’d expect a financial analyst to be good at picking stocks.

“Attorneys are vetting cases for a living,” he says. “Attorneys are definitely able to understand the economics behind investing in a legal claim and also understand the intricacies of the legal claim itself. We think it makes a lot of sense.”

Greenberg says he’s also seen law firms use LexShares as an investment opportunity to diversify their portfolio of cases.

“They’re basically relying on another firm to go ahead and litigate that claim for them,” he says.

We recently talked to Greenberg about the fledgling concept.

Q. How does LexShares benefit lawyers?

A. Let’s say you’re a law firm that doesn’t take cases on contingency, but your client is not able to afford your hourly rate. That’s a case where, if your case qualifies, LexShares could get involved to help pay your hourly rate. It provides flexibility in fee structures that wasn’t available before. The funds from LexShares also could be used to cover litigation expenses such as expert witnesses and discovery. It also has the potential to increase settlement values because it can be used as working capital to give the [plaintiff] business time to wait out a larger settlement. It’s an opportunity to reduce risk and provide flexibility, and what it really does for attorneys is improve overall client retention.

Q. Are there any ethical concerns?

A. There’s been a lot written on ethics in regard to litigation finance, but no overarching rules or regulations. Regulation in regard to litigation finance is really a patchwork of state law. Massachusetts [where LexShares is based] is actually the most progressive state in the nation when it comes to upholding these litigation finance contracts.

Q. How would you respond to a critic suggesting LexShares gives plaintiffs an unfair advantage or encourages frivolous lawsuits?

A. We never start any new litigation, and obviously what we look for is claims that are meritorious. Funding frivolous lawsuits doesn’t make any sense. At the end of the day, this is a corporate finance transaction, so posting cases that are frivolous is not advantageous for LexShares or LexShares’ investors.

Q. You set a high monetary bar for cases to qualify for funding through the website, and exclude, for example, personal injury lawsuits. Can you explain why you also pitch the service as one that addresses the justice gap?

A. There’s certainly a component of equalizing access to justice here. A lot of the requests we get are small businesses taking on very well capitalized defendants. There already is a very large market out there for financing personal injury lawsuits. We are currently operating in a segment of the market that is underserved. There is a $200 billion market for litigation overall. If you look at all the commercial litigation funders and you add up all the capital they have to invest in legal claims, you’re looking at $1 billion to $2 billion. We really believe we can address access to justice in that extremely capital-constrained market — for example, a small technology company against a technology conglomerate. Maybe there is a reseller agreement in place. Maybe the large technology company was supposed to commercialize a piece of technology the small company created, but the large company never takes any steps to commercialize that technology. We see this kind of David and Goliath situation all the time in breach-of-contract claims. We want to see plaintiff’s counsel with a strong track record pursuing those kinds of claims.

Q. What else does a case need to qualify for funding through LexShares? And who can invest in the cases?

A. You can’t just go as an attorney or plaintiff and post a case to the LexShares platform. All the cases you see on LexShares have been vetted by our staff of legal underwriters and securities experts. This is a highly curated platform. The cases are highly meritorious with a strong procedural history and a high defendant’s ability to pay. A return is required, so we need to believe the defendant has an ability to pay any damages assessed. We only fund commercial cases, business-to-business litigation. The case already has to be on file, with a funding requirement of $100,000 to $1 million and estimated damages over $1 million. The investment minimum on our platform is as low as $2,500. The investors themselves need to meet the definition of “accredited investor” under the SEC. A broker-dealer partner called WealthForge ensures compliance.

Q. For lawyers who may look to invest, rather than fundraise, through LexShares, what kind of return on investment can they expect?

A. Generally, we aim for a 50 percent annualized return to investors if the plaintiff prevails. This is structured as nonrecourse financing, so the only time the plaintiff would have to repay LexShares is if they win. LexShares only will fund up to 10 percent of what we believe the damages are. We look to never run into a case where there’s not enough money to pay back LexShares investors as well as the plaintiff receiving funds from their settlement.

Q. What if the case goes to trial?

A. We try not to invest in cases where damages are highly unpredictable. That being said, we’re willing to fund cases at any stage of litigation. We’re willing to fund cases once the case has been filed, pre- or post-discovery, or even on appeal.

Q. What responsibilities do lawyers have to LexShares? Should they worry about being hassled by their investors?

A. Other than continuing to pursue their cases, it’s really just keeping LexShares apprised every 30 days on any material updates in the case. LexShares basically acts as the gatekeeper between the investors and attorneys. It would be a breach for investors to contact a plaintiff or attorney directly. This is strictly a corporate finance transaction. LexShares is in no way involved in the litigation.

Q. Where does the investors’ money go, exactly? Who’s responsible for maintaining and spending it?

A. Fee-sharing between lawyers and nonlawyers is illegal, and a lot of attorneys have concerns around that, so we contract directly with the plaintiff, with the use of proceeds clearly defined. Basically, how these deals are structured is one of our holding vehicles signs a claim funding agreement with the plaintiff that stipulates the use of proceeds. Depending on the use of the proceeds, it may be provided in a lump sum. Sometimes we will disburse funds over time as well. It depends on the fee arrangement with the lawyer and use of the proceeds.