Initial Litigation Offering
Rise of Litigation Financing
With legislation barriers removed, litigation financing as an asset class opened up a plethora of opportunities for investors seeking an asset with consistent returns uncorrelated with the state of the economy. Other developed countries like Australia and the United Kingdom have used litigation financing type structures with class action lawsuits. These countries allow claimants to submit funding to a case and collect financial reparations when the case is settled. The United States did not use any form of this type of financing for class action lawsuits until the rise of litigation financing. Essentially, litigation financing allows for common investors and institutional investors to fund plaintiffs in court cases where they see fit, and they receive portions of any financial settlement in return. Several years after the Obama JOBS act, which opened many doors to such investments, the COVID-19 pandemic began a period of economic unrest and the need for hedging against an uncertain market. Both law firms and corporate legal teams have utilized the various marketplaces now available to raise capital for litigation financing . In 2020 alone, over $2.47 billion was deployed into commercial litigation financing, showcasing rapid growth and the designation as a safe haven asset. The average size of a total transaction was around $7.8 million, meaning each case raised around this amount. In addition, around 46 active litigation funders were identified in the US with a combined assets under management value of $11.3 billion in 2020, which is an 18% increase from the prior year .
Obama JOBS Act
At the start of his second term, President Barack Obama signed the JOBS act, which aimed to reduce barriers to investment and spur startup growth across all industries. Part of this act involved allowing increased funding of investments by accredited investors, and securitizing these assets . Allowing micro-loans and funding from investors granted equity in all investments, even in legal offerings. The Obama JOBS Act was not initially intended for such types of crowdfunding, but rather to help startups gain rapid equity investments through applications like Kickstarter, which aimed to secure small amounts of angel funding from family and friends, who could then send a link around to raise awareness and further funding. In the case of litigation financing, companies and law firms began to fund defense efforts and the accredited investors who agreed with the cause were able to donate. Yet because the financing required a specific equity investment, this opened up an opportunity to make investment gains through the court case as an asset by itself.
LexShares was founded shortly after the JOBS act in 2014, creating a marketplace for defendants to receive funding from investors and quickly becoming the industry leader for litigation financing across all types of clients and investors. This is primarily a digital medium used to fund plaintiff's cases and does not involve in directly affecting case outcomes in court. LexShares has funded millions of dollars in cases and returns pre-set portions settlement money back to investors as if the legal case were an asset. The primary aim of LexShares is to support smaller plaintiffs against larger defendants in cases where they see wrongdoing, and would believe the public also would sympathize with the plaintiff. Being a marketplace and financing company, LexShares also allows for portfolio investments, meaning the financing of multiple cases can be bundled together into one fund for investors . The key selling point according to LexShares of their asset class appears to be the emphasis on "justice" within the business, and the fact that the litigation financing asset class is largely uncorrelated with the market and can prove to be a "safe haven" asset. LexShares assures no control over the prosecution in a vast majority of cases and many major accredited investors both within and outside of LexShares have made large investments in litigation finance, leading to upside returns.
Use of Blockchain for ILO Financing
Blockchain technology, which is immutable and encrypted, can be used to create unique tokens and coins for decentralized investment in various assets. Tokens and cryptocurrencies can be used to either create alternative currencies or a form of backing for a specific asset class. Tokens, unlike cryptocurrencies, can be used to collateralize certain assets and effectively derive their value from an outcome or value of other assets. In litigation financing, the offering of such a token is called an Initial Litigation Offering. In the case of ILOs, tokens are preferred to currencies due to their specificity and reliance on other assets. Outside of the aforementioned technological advantages, the key driver of using blockchain is the ability to open investment to all common people, and not just accredited investors like prior litigation financing efforts.
Apothio LLC vs Kern County et al. The Kern County Sheriff's Department on the other hand, argues that the hemp company exceeded its THC production bounds in this 500 acre plot, leading to a necessary extermination of the hemp crop . The law firm Roche Freedman LLP entered this case on the side of Apothio, with proven experience regarding cryptocurrency, token issuance, and other blockchain cases. Once Roche Freedman had set themselves up as the primary litigator of the case, they began the process to issue the first ever tokenized Initial Litigation Offering of a case, in conjunction with Republic, Avalanche, and Ryval Labs. The aforementioned companies used their existing infrastructure in blockchain technology to tokenize and market the asset to the general public .
A token on the blockchain is a distributed ledger that can be appended regularly and assigned open market value based on supply and demand at a given moment. Often times, tokens are used in ICOs - or initial coin offerings - which are a crypto based alternative to a traditional initial public offering of stock from a company. In the case of litigation, the ILO is offered via a crypto token and assigned an initial value, which is then open to being traded until the settlement determined the final "cash-out" price of the token. The intermediary phase is very determinant of value, because as the token is traded, it can signify to investors what direction the trial and verdict may be headed in, despite what proceedings may be occurring in court at the moment, similar to a betting market. These crypto tokens allow for secured storage in wallets and compatibility with other blockchain assets, as a result of the direction of companies such as Avalanche and Ryval Labs which have specifically worked on the Apothio v Kern County Case to provide a designated crypto wallet for secure storage, trading, and pricing, as well as a certified token.
Another key use case of blockchain in the new web is the usage of smart contracts. Smart contracts allow for the immutable and encrypted technology of cryptocurrency to be applied to legally binding documents, making them theoretically more secure. Smart contracts can be used to determine payouts after certain terms of a contract are fulfilled, automatically transferring cryptocurrency or a crypto token to investors or users . When utilized without payments involved, smart contracts can keep secure records which are only able to be changed by authorized parties, proving to be a viable technology for keeping health records in the digital age. In the case of ILOs, using a smart contract to finalize the legal proceedings and determine a payout allows for immediate and secure regulation of the crypto token throughout trading and litigation. Decentralized applications such as those used in Apothio v Kern County are crucial in allowing public access to such contracts. In the case of class action lawsuits or typical litigation financing, all investors will be signing roughly identical contracts, and the utilization of a smart contract allows only authorized blockchain users to access this contract, and seamlessly transfers funds into a given crypto wallet. Additionally, smart contracts can be used to communicate with stakeholders as the contract progresses, allowing for transparency in "fine print" legal procedures. The idea of immutable blockchain smart contracts traces back to the late 1990s, but only recently has the technology caught up to the ideation, allowing for use cases such as legal settlements and real estate amongst others.
Avalanche Labs is the primary creator and distributor of the token utilized in Apothio v Kern County. They also are the creators of the avax wallet, which is the preferred secure crypto wallet for Ethereum assets including tokens issued by Avalanche. They are working directly in collaboration with Roche Freedman LLP in development and contracting of the Apothio ILO, leading to increased visibility and marketing to the crypto token community, as well as the litigation financing community . Through this partnership leading to increased marketing of the token, the potential investor pool increases leading to higher demand and therefore higher pricing of the ILO and more financing for the law firm. Avalanche has also committed to generating a long term marketplace for ILOs for retail investors specifically, and has created Ryval Labs for this purpose. Ryval Labs has a mission to allow completely decentralized investing of ILOs and other litigation financing products in an application accessible to anyone with sufficient capital. This has been reported on by multiple news outlets as a breakthrough in retail investing in highly niche alternative asset markets .
The primary ethical concern surrounding ILOs and litigation financing in general is the fact that it is wholly unregulated by the federal government. As a result, there is no way to protect against powerful investors potentially swaying legal proceedings and manipulating verdicts to redirect settlements. Parties such as corporations or lobbyists already have immense power in the legal system, and allowing for another outlet of exercising this could lead to increased imbalances. Tokenizing and financing cases that are no longer civil suits or class action suits, but rather those directly impacting how an industry is governed can remove many barriers to a company or industry’s profitability, benefitting those stakeholders and lobbyists . Because of the United States constitutional power of judicial precedent, the legal system is effectively creating laws, especially in newer cases with new technologies or substances, as seen in Apothio v Kern County. Allowing the creation of laws to be funded anonymously and fully democratically may greatly change how certain industries are regulated . In the court itself, witnesses or jurors may be invested at some point during the trial unknowingly, whether it is part of a portfolio investment or individually on the case. As a result, there must be an additional layer of investigation by the judge presiding over the case to determine these standings, which fundamentally changes jury selection and can alter the final results of a case. In a broader perspective, smart contracts can also create information disparity and as a result, undue advantages in litigation when communicating to token stakeholders and parties involved in litigation. Using a smart contract as a litigator when the defense team or presiding judge is unaware of or unfamiliar with the technology could lead to legal disputes on the side of a case, or could directly put one party at a disadvantage. In terms of cryptocurrency specifically, there is a plethora of topics that are debated surrounding its ethics. Primarily, the anonymity and security of a blockchain investor is built into the tokens by design, but can create complexities for the investors of an ILO. Not knowing which large lobbies or individual parties are financing the plaintiff immediately leads back to the initial problem of there being undue influence in trial procedures. Blockchain technology in general has a slew of potential ethical concerns, according to several scholars. Firstly, those of privacy and criminal activity using crypto tokens are of concern. The non-negotiable and untraceable anonymity and pseudonymity provided by blockchain technology could allow for felons and other general law offenders to invest in crucial things such as the US court system’s results. This gives them a spot to hold potentially unlawful assets, as well as a chance to affect laws that may ultimately impact their freedom and ability to commit crimes in the future. On the completely converse side, if a ledger is made totally transparent, those that do control the data are few in number and have limitless power to exercise upon each block. When tokens are offered in a highly decentralized manner, they may be fractionally invested in by many more people than there are tokens, due to the technology offered in new crypto wallets and contracts. As a result, the arbiters of the fully transparent token gain full access to the trading trends of blocks in the chain and every user’s tendencies, potentially allowing a party in high power to affect the results of a case based purely off capital gains of the token at the time in the case of an initial litigation offering . Effectively, in the case of either pure privacy - which exists with many cryptocurrencies and other blockchain assets today - has large ethical concerns from scholars, and the usage of blockchain technology to track and survey has issues as well. The United States has not truly addressed any of these issues, as objectively crypto technology is still in its early phases, but through more growth and expansion, the sector will likely continue to garner more attention and generate necessary regulation. Cryptocurrency experts compare it to the rise of the automobile industry in the United States, where initially, there was no need or requirement for licenses or registration, but as more people came to own vehicles, the US government swiftly acted to ensure regulations were in place. One broadly placed issue about blockchain technology is concerning environmental regulation. Once again, because of the novelty of both blockchain technology and climate change awareness, there is limited oversight by federal or state governments into emissions regulations. Cryptocurrencies can only be mined using extremely high powered computers which use immense amounts of energy and therefore leaves unnaturally large carbon footprints. Bitcoin mining alone, which is only one cryptocurrency (albeit the largest), generated around 22.5 metric tons of carbon dioxide emissions in 2019 alone, which would place it as a country somewhere between Jordan and Sri Lanka . These rates of mining will only continue to increase as more major companies and nations begin to adopt both cryptocurrencies and use smart contracts. These contracts, as mentioned in a prior section, primarily utilize Ethereum to transfer funds as a contract proceeds, which is a form of cryptocurrency that also requires mining and has a similar emission footprint to Bitcoin. Therefore if smart contracts that are predicated on payment continue to grow at a highly advanced rate, they will increase Ethereum demand and mining across the globe. These emissions related externalities have a massive impact on global climate change, as carbon emissions continue to grow at unprecedented rates in virtually all industries, with blockchain technology merely being one especially major industry.
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