Posted by Alex Heshmaty, a legal copywriter and journalist, sponsored by AxiaFunder on 02/04/2019

Litigation crowdfunding: Socially Inclusive or ambulance chasing?

                         

Litigation funding - where third-party financing is used to pay for legal action - has been around for many years now. Although successfully applied to a certain segment of the legal market, until now it has generally been restricted to hedge funds and private equity firms generating attractive returns from large cases. That seems to be about to change with potentially positive implications for social inclusion. 
 
CrowdJustice, a donation-based litigation crowdfunding platform enables a group of like-minded individuals to support cases – often those involving an aspect of social or political change. In terms of social impact it can perhaps be categorised alongside social activism platforms - such as Change.org and Avaaz.org - albeit with a legal dimension. But the reliance on donations as opposed to investment inevitably means that the supply of capital is limited.

By contrast, AxiaFunder is a for-profit litigation crowdfunding platform, which invites investors to fund pre-vetted litigation claims that it believes have strong merits and a high likelihood of succeeding. A minimum investment of only £500 per case means that the litigation risk for any particular litigation can be spread across a large group of investors. So, private individuals looking for new investment opportunities in an era of low interest rates, a subdued housing market and a lacklustre stock market, can instead support a meritorious legal action thereby potentially generating an expected healthy return. There are of course significant risks to capital and the returns are not guaranteed.

Crowdfunded Litigation, a force for social good?

Small and Medium sized Enterprises (SMEs) and individuals which enter contractual agreements with large companies often find themselves exposed to additional commercial risk due to the prohibitive cost of protecting their legal interests. Taken to extremes on a broader level, this could lead to an increasingly unhealthy concentration of wealth that would be corrosive for society as a whole and would  retard economic growth (e.g. see Lord Neuberger’s reference [1] to the book ‘Why Nations Fail’), relative to more inclusive societies where property rights can be enforced. 


In a business context, the David and Goliath parable has often been linked to employees, where unionisation has given a more powerful voice to workers (inspiring family films such as Pixar’s ‘A Bug’s Life’). This idea of the many holding the powerful few accountable is equally applicable to the inequality between well-capitalised large corporations and SMEs that effectively have only limited legal protections due to the costs and risks involved in litigation. Crowdfunding commercial litigation helps level the playing field in favour of SMEs, and of course from a macro policy perspective SMEs are widely regarded as key to employment growth and improving standards of living. 

According to Cormac Leech, CEO at AxiaFunder: “Some see commercial litigation funding as 'ambulance chasing'. However, it can help play a vital role in protecting the property rights of less affluent companies and individuals (property rights, which history shows, are key for economic development). Technology-enabled crowdfunding will further increase its impact through less cash-drag, lower capital costs and lower overheads.”

Fairer capitalism?

Although litigation crowdfunding may be a force for social change, at least within the realm of business, it is by no means a rebuff of capitalism; instead it seeks to open up the opportunities of capitalism to a larger portion of society. Investors can have a socially useful impact while generating expected returns of 20-30% per annum with little or no correlation to the stock market.

The legal profession has been slow to embrace the digital revolution, but this has changed over recent years, with a now burgeoning legal technology scene. The AxiaFunder model combines fintech and legaltech to connect sophisticated and high net worth investors with SMEs that have meritorious cases but limited capital. The general requirement in the UK legal system, that the loser pays their opponent’s costs, means that every case vetted by AxiaFunder for funding has already been assessed and approved by an insurer (that insures against adverse cost risk), thereby helping to exclude weaker cases from the AxiaFunder platform and increasing the likelihood of success for investors. 

Regulators are generally supportive of the development of litigation funding as an asset class see e.g. point 3.8 on this lecture [2] by Lord Justice Jackson. In time, as litigation funding matures, returns are likely to decline to circa 10% per annum, as seen in other uncorrelated markets such as Property and Casualty insurance. Before that happens, now may be an ideal time to dip a toe into the still nascent litigation crowdfunding market. To find out more, visit www.axiafunder.com. 


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