Crowdfunding – the future for justice?

Crowdfunding gives retail investors a chance to back projects close to their heart and it’s no surprise that early successes have been in consumer-facing sectors such as clean technology, the arts and wine and beer ventures. Now the emotional pull is being used to attract funds to social justice litigation and fill an increasingly large hole in the availability of public money for these cases.

CrowdJustice, a website that crowdfunds public interest cases, has just launched its first action in the UK High Court. Gilberto Torres, a Colombian trade unionist, alleges that BP subsidiary Ocensa employed paramilitaries to kidnap and torture him. Torres’ has lawyers acting for him on a no win, no fee basis and he hopes to raise money via CrowdJustice to pay for court fees, translation of documents and a Colombian legal expert.

It is a timely breakthrough for CrowdJustice as the UK government moves to scrap the Human Rights Act and continues to make swingeing cuts to legal aid but it is difficult to see who the platform aims to target and how it might be used as a model for a wider range of litigation.

Unlike traditional crowdfunding that offers investors rewards, shares or the chance to share in any profit, CrowdJustice states that it gives backers the chance to have an “impact on a specific issue or even contribute to changing the law.”

In other words, CrowdJustice operates like a charity.

“It will work best where a group of people want an issue resolved, for example in the Human Rights arena or for a community dealing with a planning application,” says Harry Spendlove, a solicitor in the commercial litigation department at London-based Stewarts Law.

But could crowdfunding provide an alternative model for third party litigation funding which has evolved into the mainstream and is generally viewed as a mature, professional and increasingly popular resource for commercial cases.

Litigation involves risk – not only the risk of winning or losing but. in the UK, the risk that the loser will be responsible for the winner’s costs. For this reason crowdfunding is unlikely to be appropriate for complex commercial cases without some form of compulsory regulation.

It is over a year since the Financial Conduct Authority implemented regulation for crowdfunding, both loan-based and investment-based, and it has been applauded for providing a simple authorisation and verification process.

However, the FCA clearly distinguishes between protecting the investor against the credit risk of the borrower, in loan-based crowdfunding, and managing the more complicated risk in investment-based crowdfunding where consumers buy debt securities or shares, often in start-up companies. In the latter, FCA rules require that investors must be sophisticated or high-net worth individuals, have received advice or are investing no more than 10% of their net assets.

Crowdfunding litigation, which isn’t covered in the FCA rules, is more akin to investment-based crowdfunding in complexity because of the risk of litigation, in particular the costs implications. The chances are that the FCA would require safeguards to ensure that an investor fully understood the risks and that only cases with a decent chance of success, straightforward issues and a clear budget analysis were taken on.

Even then the costs implications would require special considerations.

“There are models recently launched in the US, such as LexShares, that allow investors to invest in litigation but the US doesn’t have a ‘loser pays’ protocol,” says Mr. Spendlove.

One way around this would be for investors to put in more than their contribution to cover an adverse order or otherwise provide some pool of money for an after the event insurance policy, suggests Mr Spendlove.

Again, some form of oversight would be required to analyse costs risks adding another layer of complexity and perhaps even triggering a contingency funding arrangement, rather like a solicitor’s conditional fee agreement.

In these circumstances it may be too early to introduce a crowdfunding model into the current third party funding market that is markedly different to existing third party funders.

27 May 2015

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