Legal Ethics

Strapped for cash to start a law firm? Crowdfunding may be permissible, ethics opinion says

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Lawyers who want to start a law firm but are short on cash may be able to use some types of crowdfunding, according to an ethics opinion.

Lawyers may not use any funding, however, that gives the investor an interest in a law firm or a share of its revenue, according to the June 29 opinion by the New York State Bar Association. The ABA BNA Lawyers’ Manual on Professional Conduct has a story.

The opinion responds to an inquiry by recent law school graduates who need to raise capital to cover the start-up expenses of a new law firm. The recent grads have substantial student loan debt and want to avoid further borrowing. But they need money to cover costs such as rent, website development, professional liability insurance and office supplies.

The opinion notes five approaches to crowfunding. Two approaches that would “clearly violate” ethics rules are the royalty model, which rewards investors with a percentage of revenues, and the equity model, which provides investors an ownership interest in the venture.

The lending model of crowdfunding is similar to a traditional loan and would not meet the law grads’ goal of not incurring more debt, the opinion says.

Two other models—the donation model and the reward model—may be allowed under ethics rules, the opinion says.

Under the donation model, donors get nothing in return. The opinion noted that donors may be reluctant to give away money for a startup law firm. “But we see no ethical issues with the donation model,” the opinion said, “as long as the lawyers make clear that donors will receive nothing in return and that the law firm is designed to be a profit-making enterprise.”

The reward model may also be permissible. The recent law grads had suggested rewarding donors with informational pamphlets, reports on the firm’s progress, or pro bono work for a third-party nonprofit legal organization.

The ethics opinion said informational pamphlets and progress reports would have to comport with advertising rules, if they are applicable. Reports with topical news designed to educate recipients about new developments in the law would not be considered advertising. The lawyers should take care that their writings don’t give individual advice, the opinion added.

If the reward consists of pro bono service for an outside organization, the lawyers would have to make sure they are competent to handle the legal work and have no conflicts of interest.

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