Litigation funding has recently been a hot topic around the world. In this post, we explore how a new crypto approach could turn traditional funding on its head.
In December 2020, Ava Labs (www.avalabs.org) announced the first Initial Litigation Offering (ILO) through Avalanche, “an open-source platform for launching highly decentralized applications, new financial primitives, and new interoperable blockchains.”
I won’t pretend to understand the details of blockchains but appreciate the premise:
Avalanche democratizes financial markets and bridges all blockchain platforms together into one interoperable ecosystem. … Build your own custom blockchains or digitize any assets with arbitrarily complex rulesets.
ILO’s resemble Initial Coin Offerings (ICOs), but rather than raising money for a new coin, app, or service, they’re used to fund specific litigation. Think micro-investing for lawsuits. In an ILO, investors receive tokens entitling them to shares of potential recoveries, an economic right converted to a digital asset. If cases fail, they lose their investments. Ava Labs says it’s “working on the regulatory processes to enable primary issuance and secondary trading of the litigation offering tokens minted on the Avalanche blockchain”, which will presumably fluctuate in value with the litigation prospects.
Just as Special Purpose Acquisition Companies (SPACs) significantly replaced traditional initial public offerings (IPOs), ILOs could in the future undercut traditional litigation funding with a massive influx of capital from smaller investors. However, like SPACs, ILOs have good and bad features.
Removing the intermediary: SPACs lack underwriters – ILO’s could eliminate professional funders. Rather than buying into big funds with investment teams that scrutinize case opportunities, investors themselves pick specific matters for direct investment. Removing professionals could result in a system whereby cases are picked based on what’s ‘in vogue’ rather than on merit. With litigation risks more concentrated, in one matter rather than diversified portfolios, we could see lawsuits by investors following failures, as we’re seeing with some SPACs that perform poorly.
More money for more cases: SPACs can extend funding to less traditional businesses. ILOs may extend funding to less traditional suits. That can be good or bad.
- The law firm: For the ILO, Ava Labs partnered with Roche Cyrulnik Freedman, a New York City and Miami based law firm founded in January 2020 by lawyers from Boise Schiller Flexner, LLC, a leading US contingency law firm. They were joined by lawyers from Robbins Geller, another leading plaintiff firm, and from leading defense firms Paul, Weiss, Rifkind, Wharton & Garrison, and Cleary Gottlieb Steen & Hamilton. The Roche firm specializes in litigating “newer” areas like cryptocurrency and cannabis.
- The first matter: The first matter to be funded is Apothio, LLC v. Kern County, et al., 20-cv-00522 (ED CA). Filed in April 2020, the complaint alleges county and state officials violated Apothio’s civil and constitutional rights by razing 500 acres of hemp crops worth $1 billion. In January, the Magistrate Judge stayed further discovery pending a decision on the defendants’ motions to dismiss.
Regardless of how this first ILO goes, the use of blockchain technology for litigation funding could be a bellwether for things to come. And if, like SPACs, problems arise and plaintiff law firms sue on behalf of investors that suffer losses, ILOs could ironically provide funding for those recovery efforts, too. Only time will tell.
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