Crypto crowdfunding opens a new door for litigation claims

The claim concerns one of the largest alleged crop destructions by a state official in the US. Apothio LLC, a California-based hemp producer, is seeking compensation from Kern County Sheriff's Office for the alleged bulldozing of 450 acres of crops worth up to USD 1 billion.

On 26 October 2021, the ILO was launched: investors purchased 'tokens' which represented a stake in the claim. Each token purchase (i.e. each investor's stake) was recorded on the Avalanche (AVAX) blockchain. If the lawsuit is successful, investors' tokens will be multiplied relative to the amount of damages recovered. If no damages are recovered, the tokens will be worthless.

At the time of writing, the ILO has raised c. USD 380,000: over USD 100,000 more than the minimum fundraising required by Apothio to bring its claim.

A market disruptor for litigation funding?

Litigation funding is where third-party investors provide funds to a litigant and earn a return on their investment linked to the outcome of the case. Whilst lucrative (the global market is valued at USD 10 billion and growing), litigation funding is mainly reserved for private institutions who target institutional investors with minimum investments of USD 1 million or more. The Apothio ILO, however, is open to the public – and requires a minimum investment of only USD 100.

As shown by Apothio, ILOs can be an effective and innovative fundraising tool. They have the potential to overcome significant barriers faced by potential claimants to bringing good, arguable claims – especially in proceedings against large corporations.

However, potential limitations may prevent ILOs from becoming mainstream:

1. Is the pool of retail investors willing to invest in litigation via blockchain technology sufficiently wide?

2. The crypto-community is famously anti-establishmentarian, perhaps reflected in the strong support for a hemp grower against a government body. Would the same support be shown towards less politically charged claims?

3. A claimant may have concerns about future funding. Even if enough money is raised to get the claim off the ground, litigation costs are unpredictable – there is no guarantee the public will fund future costs.

Risks

More serious, however, is the question of whether the litigation funding investment market should be open to the general public.

Litigation is often unpredictable. Private litigation funders will only fund a case that has prospects of success of 60% or higher – usually based on a QC's opinion. However, the average layperson is ill-equipped to assess the prospects of a claim.

This problem is exacerbated by the lack of regulation. For example, the only official document regarding the Apothio ILO is the Pitch prepared by Apothio's lawyers. There are no rules about what information must be included, and there is an inevitable conflict of interest between: (i) potential investors, who want an independent assessment of the claim; and (ii) the intended claimant, who wants to obtain funding and commence proceedings. It is therefore unsurprising (although alarming) to note that the Pitch omits certain information that investors ought to be entitled to know – for example, that a criminal charge has been brought against one of Apothio's founders on the basis that the destroyed crop was illegal marijuana rather than hemp. There is a real risk that investors will not be provided with sufficient information (including for reasons of legal privilege) to make an informed decision about an investment in the ILO.

Further, private litigation funders participate in a competitive market. However, because the ILO is made to the public at large, the investment is on the intended claimant’s own terms, which are onerous for investors. For example, if the claim is summarily dismissed, investors will only receive 80% back – even if the withheld 20% has not been used.

Tread with caution

ILOs may still prove to be a valuable tool for claimants and a worthwhile investment for the public. However, until regulation is introduced ensuring thorough and independent due diligence is conducted and communicated, and appropriate investment terms are offered, potential investors should tread with caution. Although headlines of 3.5x returns on a USD 1billion dollar claim may seem appealing, a contribution to an ILO may be better considered a “donation” akin to crowdfunding, rather than an investment on which to expect returns.