Far too often, money—or the lack of it—is the deciding factor in the courtroom. Now, entrepreneurs are looking to litigation crowdfunding for an opportunity to secure equal justice for all, regardless of socio-economic status. On today’s edition of the Arora Blog, we’re taking a hard look at this newcomer to the industry, and making a preliminary judgment about its potential.
You might have never heard of litigation crowdfunding before, and that’s because it’s not as mainstream as other forms of crowdfunding. In fact, there has only been one litigation crowdfunding offering on an official platform open to unaccredited investors in the US—ever.
But litigation funding isn’t a new concept. Historically, this type of funding has come from a third party—usually a specialized legal financing company—providing funds to the person litigating to cover legal expenses. If the claim succeeds and the litigator wins, the investment is repaid judgment or settlement money. And if the claim fails…well, the financing company gets nothing.
Litigation crowdfunding shares many similarities with traditional litigation funding. However, there is one crucial difference: instead of one third-party backer, multiple individual investors (the crowd) come together to back the litigation attempt in exchange for a profit from the settlement.
Like equity crowdfunding, the litigation investment is not a loan, and if the litigation is successful, investors are repaid with the profit. Another similarity? Litigation crowdfunding is risky. Legally, litigants are only required to repay their investors if the settlement is successful, they cannot be held liable for a failed litigation, and investors have no recourse for recouping their investment.
But as we know, with great risk comes the potential for even greater rewards. A diverse portfolio that includes “dark horses” such as litigation can prove to be highly profitable, largely because legal claims are not affected by economic fluctuations. “Lawyers make money in good times and in bad” is a maxim for a reason.
Is Litigation Crowdfunding Ethical?
There are compelling arguments on both sides of this question, and there’s no one-size-fits-all answer.
On the one hand, litigation crowdfunding has the potential to make tangible social change and bring justice to those who would otherwise not be able to afford legal action. Fighting for deserved justice and taking any legal steps available to win litigation with crowdfunding serves the double purpose of being ethical and potentially very lucrative.
On the other hand, a lawyer’s obligation to their client is of the highest priority. Litigation crowdfunding could muddy the waters when the person paying their retainer isn’t the client themselves. At that point, does attorney-client privilege extend to every investor? Does every investor get a say in the legal representation chosen? We have yet to find out.
What’s Arora Republic’s Verdict?
Over the years, it’s become common for defendants to unjustly resist negotiation or fair practices when they know their opponent lacks funds to pursue justice. As long as this remains the case, socially conscious investors interested in diversifying their portfolio could encourage this fledgling industry to evolve.
As a general rule, we are always pro-democratization and pro-anything that drives innovation in our industry.
Even so, it’s unlikely that litigation crowdfunding will hit the mainstream levels that equity has risen to in recent years—litigation is niche by nature and not always worth the risk for investors. But we’ve said it before, and we’ll say it again: risk is the spice of life. If investment into litigation has the opportunity to make the world more equitable, we’re here for it.
Are you looking to crowdfund your litigation? As an official partner of Republic, where the United States’ first litigation crowdfunding campaign is hosted, we’re ready, willing, and able to help launch your campaign. Apply now.