The following is a guest post written by Max Volsky, Co-Founder of LexShares, a valued WealthForge partner.
Litigation finance for commercial lawsuits—also called lawsuit financing or litigation funding—is a powerful and distinctive form of investment that traditionally has been available only to law firms and institutions with considerable financial resources at their disposal.
Similar to how crowdfunding platforms have connected investors with products, ventures, and creators worthy of their support, LexShares has combined litigation finance expertise with an online venue that connects accredited investors to pre-vetted plaintiffs and cases, opening the door to a new asset class that taps into the undercapitalized $200 billion U.S. litigation market.
Offering investors outsized return potential, litigation finance is uncorrelated to traditional asset markets and provides a moderate time to liquidity as compared to other alternative assets like venture capital and private equity. It also allows legal claim owners to finance the costs of pursuing their claims without depleting or exceeding their own budgetary constraints. In this way, litigation finance not only facilitates potentially outsized returns on investment; it furthers public policy and promotes both justice and access to justice. It achieves this by empowering plaintiffs with meritorious claims to exercise their legal rights and fully participate in the justice system, especially where their financial limitations might otherwise have barred them from their due redress.
So what exactly is litigation finance, and how does it work? Litigation finance is an arrangement where a third party—one who is unrelated to a lawsuit—provides capital to the plaintiff in return for a portion of any financial recovery that results from the litigation. It is readily distinguishable from a loan because the third party providing capital only receives a portion of future proceeds when the lawsuit results in a recovery. Because an investor’s return depends on the success of the plaintiff’s case, traditionally only legally sophisticated investors with the know-how to accurately assess the merits of a case could participate in litigation finance—and benefit from the high rate of return that comes with it. In addition, the high cost of commercial litigation often meant that only institutional investors had access to the capital necessary to single-handedly invest in a lawsuit.
Today, however, specialized knowledge and deep pockets no longer serve as barriers to entry. The launch of LexShares.com, a specialized platform that connects plaintiffs with capital, makes the litigation finance process straightforward for all involved. Plaintiffs in need of capital to help pay for litigation costs or keep their businesses running apply for funding. Their cases are reviewed by an experienced team of legal professionals, and those which are found to have strong merits are posted as investment opportunities with a specific funding goal. Accredited investors can then review case details and decide whether and how much to invest. Once the funding goal is reached, the plaintiff receives the funds needed for litigation expenses and working capital. The case is continually monitored during all stages of litigation, and if the plaintiff settles or receives a judgment, investors receive their agreed-upon portion of the recovery. If the plaintiff loses the case, he or she does not have to pay investors a return.
Litigation finance offers numerous benefits to all parties involved. For investors, it provides access to a new asset class—legal claim investments—which are uncorrelated to capital markets, provide moderate times to liquidity, and a potential for outsized returns when compared to other alternative asset classes. It helps undercapitalized plaintiffs finance their legal expenses, providing capital injections for ongoing cases that encounter funding constraints, while also offering a cushion for working capital and personal expenses. Litigation finance enables attorneys and law firms to take on cases from plaintiffs who would otherwise be unable to afford the high costs of litigation, allows them to offer more flexible payment arrangements to their clients, and makes fairer recoveries more readily achievable.
LexShares’ innovative online model allows investors to easily understand case details and track the progress of litigation throughout the lifecycle of the case. No legal experience or knowledge is required to participate, as all listed investment opportunities have been reviewed by a team of legal professionals with extensive experience in overseeing investments in claims. In addition, investors need not fund a case single-handedly; instead, many investors can contribute a certain amount until plaintiffs reach their funding goals. Investors can fund a plaintiff for as little as $5,000, and investment commitments are not debited until the plaintiff’s fundraising goal is achieved.
The emergence of LexShares and similar platforms have made the opportunities presented by litigation finance more accessible for accredited investors by connecting them with pre-vetted plaintiffs and their cases.
To learn more about litigation finance, download a complimentary whitepaper
written by the experts at LexShares:
Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. This post is an industry update from WealthForge. The message does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees and expenses of a fund.
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