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LexShares is a litigation financing platform, allowing accredited investors to purchase a share of future cash flows tied to successful lawsuits in exchange for an upfront payment. Today’s justice system is often a path available only to those who can pay for it, as corporations frequently win commercial lawsuits by prolonging trials or intentionally inflating costs to bankrupt plaintiffs or force them to settle. Consequently, a subset of compelling cases goes unrealized because individuals can’t afford to take a case to court or to continue a case that has become prohibitively expensive. LexShares’ platform democratizes access to capital for individuals and companies in commercial lawsuits, providing undercapitalized plaintiffs with funding while providing investors with access to a new asset class that is highly uncorrelated to the public markets.
While litigation financing has experienced growing media interest in the past few years, nearly all notable cases have been either on the behalf of hedge funds or nonprofit, cause-based crowdfunding platforms. In one case that attracted international attention, donors on the U.K. platform CrowdJustice funded a case challenging the rights of the U.K. Parliament to approve the results of the Brexit referendum. The case, which went to the nation’s Supreme Court, ultimately led to a ruling against the government and was widely hailed as a testament to the power of crowdfunding platforms. While they utilize the same distributed fundraising mechanism, LexShares is fundamentally different from a site such as CrowdJustice because, instead of accepting donations, it provides the opportunity to profit in the event of a successful lawsuit. LexShares is the lone publicly accessible platform with a singular focus on providing investors with the opportunity to make investments in litigation. Similar opportunities are also available through YieldStreet, however, these for-profit litigation cases are part of a suite of asset class offerings, not the site’s core focus.
In a typical case, LexShares will provide capital that is distributed across three areas. The first--and normally most capital-intensive--area of allocation is the legal team representing the plaintiff in a case. The second area of allocation concerns the plaintiff, helping to cover short-term liquidity crunches and other expenses. The last area, which tends to be less capital-intensive, encompasses any ancillary fees or expenses incurred. Assuming the case is successful, LexShares then receives a percentage of the settlement proportional to its investment, a fixed payment, or a certain multiple of its initial investment. The terms associated with such a return typically vary by case but are disclosed along with the initial offering for individual cases.
Given that investors must endure considerable downside risk in the event of an unsuccessful lawsuit, losing the entirety of one’s capital, the assessment of a case’s merits is perhaps the most important consideration for a platform in the litigation finance space. For those who invest in the site’s Marketplace Fund, which is meant to diversify exposure by providing access to a variety of cases, risk is partially mitigated but nonetheless remains a meaningful factor that should be carefully considered before investing. While cause-based crowdfunding sites in the space are often supported on the basis of political, legal, or social significance over likelihood of success (e.g. setting a precedent by limiting the UK government’s power or funding a case related to a cause such as gender discrimination), LexShares independently assesses risk using four factors – legal merits, legal team, defendant’s creditworthiness, and cost of litigation – and cases are supported based on upside and an investor’s risk profile. While the site is vague in outlining its risk assessment methodology, LexShares’ cases stand out as a unique offering, particularly for those with deep expertise in the legal sphere. For those with less experience in this area or who simply wish to take a more passive investment approach, LexShares' fund products present a differentiated investment opportunity worthy of consideration.