Litigation Financing

Crowdfunding can be a great way to finance your case--or destroy it

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Henry Perlstein

Henry Perlstein: Helping the little guy litigate. Photo by Doug Scaletta.

Hollywood directors use it to bankroll movies. Musicians do it to finance records. A man named Zack Danger Brown raised $55,000 this way to make potato salad.

We’re talking about crowdfunding. The concept of crowdfunding is thought to have been invented in 2006, but has quickly become a popular way for people to raise money for a cause or to finance a project or business.

And those projects now include litigation. A litigation crowdfunding website or application lets anyone in need of backing for a legal matter raise money from anywhere in the world. And typically, when people invest in a matter, they are given a stake in the claim they have funded.

“I looked at litigation financing and couldn’t understand why more people weren’t investing,” says Jay Greenberg, CEO and co-founder of LexShares, a legal crowdfunding company. “I think the biggest gap is education or understanding the process. The crowdfunding mechanism makes investing more transparent and accessible to more people.”


There are two emerging crowdfunding models at opposite ends of the funding spectrum. On one end there are nonprofit efforts like CrowdDefend, which raises money from donors, not investors, for criminal defense cases. Another new entrant is CrowdLaw, which offers crowdfunding for small-scale criminal defense cases or nonprofit organizations trying to launch legal or political campaigns.

“In litigation finance, it seems that investors reap the benefits,” says Henry Perlstein, the founder and sole full-time employee at CrowdLaw. “When I heard about Kickstarter and other crowdfunding sites, I had to ask: ‘Why can’t we use this technology to help people who are shut out of the legal process reach their goals?’ “

At the other end of the spectrum, LexShares competes with established litigation investment firms like Burford Capital or Gerchen Keller Capital. LexShares lets accredited investors bet on the outcome of corporate lawsuits, which is an estimated $1 billion market.

“Investing in litigation is not new. The new wrinkle is in how these investments are capitalized,” Greenberg says. “It connects investors who may have been shut out of the market with litigants who have a meritorious case but don’t have access to the funds they need to move forward.”

In the past, Greenberg says, investing in litigation was available only to limited liability partnerships or pension funds. He says the minimum investment for large corporate matters started around $3 million.

LexShares’ crowdfunding model has made it possible for litigants with relatively small corporate disputes, often between $100,000 and $1 million in value, to line up individual investors. Those investors must meet the U.S. Securities and Exchange Commission’s Rule 501 of Regulation D, which sets the minimum level of income and assets an investor must have to invest.


Crowdfunding for a movie is a relatively straightforward process: The movie maker takes money from investors and makes a movie. If the movie makes money, investors recoup their investment.

Litigation financing is a lot more complex and fraught. The biggest problem is how to disclose the facts in a potential matter that will attract sympathetic investors without giving away compromising information to opposing counsel. Unfortunately, parties that need crowdfunding are often likely to be desperate and incautious.

“Your crowdfunding profile is like a legal selfie. The danger of the Internet is that people who don’t know better put too much information online,” says Nate Cade, co-chair of the ABA Section of Litigation’s Ethics and Professionalism Committee and a litigator from Milwaukee. “If I was opposing counsel in a crowdfunded case, the first thing I would do is subpoena the crowdfunding company for all of the communications between them and the litigant.”

Both CrowdLaw and LexShares retain attorneys to certify the validity of a claim to assuage the concerns of potential investors and prevent the disclosure of confidential information. In addition, LexShares insists that potential litigants only share publicly available information or court filings with the company and potential investors. LexShares also employs a legal underwriting team to consider the prevailing law, potential damages, recent decisions in similar matters, attorneys’ track records, litigants’ backgrounds and how the case has progressed so far.

Though LexShares and CrowdLaw have different business models and different client bases, they have settled on a similar solution.

“Crowdfunding in litigation is not like other commercial forms of crowdfunding,” Greenberg says. “Everything has to be thoroughly investigated and vetted.”

This article originally appeared in the September 2015 issue of the ABA Journal with this headline: “Mass Actions: Crowdfunding can be a great way to finance your case—or destroy it.”

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