New website uses crowdfunding to finance lawsuits
A new website unveiled Wednesday uses crowdfunding to finance potentially high-value commercial lawsuits.
The new venture, LexShares, connects accredited investors with plaintiffs in commercial lawsuits, according to the Wall Street Journal (sub. req.), the Boston Globe and a press release.
LexShares’ staff of legal and securities professionals reviews the suits and only posts cases deemed to have strong merit, according to the press release. Co-founder and CEO Jay Greenberg told the Globe there are six staffers who review the cases. “We’re looking to fund a commercial lawsuit with $10 to $40 million in claim value,” he said.
If the plaintiff wins a settlement or court judgment, the investors will recover an amount “proportionate to the investment,” the press release says. If the plaintiff loses, the investors lose their money.
Greenberg told the Globe that LexShare’s first crowdfunded case—which sought $250,000 for a product liability suit—was “wildly oversubscribed.” The target return for investors is 50 percent, Greenberg said,
Greenberg is formerly a technology investment banker at Deutsche Bank. The other co-founder of LexShares is lawyer Max Volsky, who founded the litigation finance fund LexStone Capital. Volsky is the company’s chief investment officer.
Volsky responded to the ABA Journal’s questions in an email. Here are the questions and his edited answers:
ABA Journal: The press release talks about ‘accredited investors.’ How does one get accredited? Can anybody with a few thousand extra dollars get accredited? Is there a minimum investment required?
Volsky: Accredited investors are individuals and legal entities that meet certain financial and net worth requirements. The current SEC definition of an accredited investor is as follows:
An accredited investor, in the context of a natural person, includes anyone who:
–Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
–Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse. …
In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors, including:
–Any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
–Any entity in which all of the equity owners are accredited investors.
ABA Journal: When the plaintiff wins a crowdfunded lawsuit, what percentage of the win is distributed to the investors?
Volsky: The percentage of the recovery distributed to the investors depends on how long the case takes to resolve. The longer the case is outstanding, the higher the amount that is due to the investor group. The average case has an expectation of 50%+ annualized return.
ABA Journal: And how does LexShares make money? Does it take a percentage of the crowdfunding?
Volsky: LexShares makes money by receiving a portion of the funds raised by plaintiffs, but they pay us only if they reach their fundraising goals on the platform.
Investors pay no up-front charges or management fees on their investment.
If the plaintiff wins and collects money from the defendant, LexShares receives a portion of the profits returned to investors.
