Crowdfunding has become a go-to fundraising apparatus for intrepid entrepreneurs in many different business sectors. However, the phenomenon has yet to truly catch fire in the legal industry.
The slower rate of adoption among law firms and legal departments is understandable when considering the additional ethical and privacy standards involved in legal work.
Despite these concerns, crowdfunding offers the opportunity for both clients and law firms to fund lawsuits and other projects that would have otherwise been unrealistic or conceptually less than pragmatic.
Types of Crowdfunding
The idea of funding a venture using smaller contributions from a larger pool of people is not new. Crowdfunding sites supply various types of platforms to organize those efforts into a single location.
The typical crowdfunding model consists of a person, group, or organization that presents a project to be funded, those who choose to fund or support the project, and the platform from which to launch and maintain the campaign and subsequent transactions.
Within this model, there are four types of crowdfunding campaigns commonly employed.
The most prevalent type is called rewards-based crowdfunding. It entails the use of incentives to entice potential backers to help fund the project. One of the most successful crowdfunding campaigns to date – the Pebble smartwatch – was funded using a rewards-based campaign. First editions of the watch were offered as an incentive, effectively making the campaign a pre-ordering opportunity. The idea worked, as the company was able to raise over $9 million – the fourth-highest amount in Kickstarter history.
Donation-based campaigns are likely the next most ubiquitous. These campaigns function largely on the same as rewards-based campaigns, with the major difference being that backers of donation-based campaigns are promised no incentive for their contributions. Gifts can be given out of appreciation by the project initiators, but they are not a formal aspect of the transaction.
A newer type of campaign comes in the form of equity-based crowdfunding. Instead of direct incentives like t-shirts or smartwatches, backers are offered the opportunity to buy shares in the company. This type of crowdfunding is more intricate than the others as securities laws and regulations and protections come into play.
Lastly, there are debt-based campaigns. Debt-based crowdfunding consists of promising backers a fixed repayment plan and predetermined interest rate in return for funding.
Crowdfunding a Legal Matter
It’s understandable why people want to help fund technological advancements, new gadgets, or any campaign that offers choice incentives.
But, why would anyone want to help fund someone else’s legal matter?
The answer has to do with the fact that the outcome of a legal matter often has farther-reaching implications than most other projects. In addition, a large or complicated research project may be present budgetary hurdles for a single company, but at the same time may also be valuable for other companies in the same industry. Moreover, a legal matter involving one person might be too expensive to take on alone, but not if several family members and friends chipped in.
In fact, several attorney bar associations, as well as state attorney regulators, offer guidance on crowdfunding legal projects. Even when specific guidance is not available, applying existing rules governing attorneys’ fees and other existing ethical guidelines adequately address the majority of potential concerns.
Potential Ethical Concerns
Many successful crowdfunding projects make extensive use of social media. It helps get the word out efficiently.
However, some clients or firms may not want the details of their legal action to become a part of public discourse. It’s difficult to create a compelling story when you can’t tell anyone the who, what, when, where, or why.
In fact, confidentiality is one of the major ethical concerns when it comes to crowdfunding a legal matter, at least in its current form. Rule 1.6 makes it clear that even if the disclosure of information would ultimately be beneficial to a client, it is unethical to do so without the client’s informed consent.
Nevertheless, even though confidentiality is one of the hallmarks of the legal profession, it is not something that the majority of high profile crowdfunding platforms prioritize.
Moreover, third-party funding is another ethical touchpoint in legal matters. It has the potential to draw focus away from the fact that an attorney’s priority must always be their actual client.
As Rule 5.4 dictates, a lawyer or law firm cannot share legal fees or form partnerships with non-lawyers if the activities of the partnership pertain to the practice of law. This effectively removes equity-based crowdfunding from the table automatically (with the possible exception of Washington D.C., because of lobbying).
Perhaps the most complicated ethical concern takes the shape of reconciling crowdfunding with the principle of a “reasonable fee.” No matter how much money is raised in a crowdfunding campaign, lawyers and law firms are only entitled to what would be considered reasonable for the work they completed. To take anymore might be considered excessive or unreasonable billing practices.
Fortunately, there are crowdfunding platforms directly tailored to the legal sector. For example, GroupFundLegal allows both attorneys and clients to confidentially raise funds for their legal projects, and limit the total amount of funds obtained. In addition, other platforms allow sponsors to donate any leftover funds to a chosen cause or charity.
Increasing Access to Justice
The additional access that the internet and mobile devices have provided to generally all industries is inarguable. Crowdfunding specifically has allowed projects and businesses that would likely have never received funding 30 years ago to get off the ground and prosper.
Much like taking out loans, partnering with other firms, or other conventional forms of litigation financing in the legal sector, crowdfunding offers legal professionals additional freedom to take cases that may not have been feasible in the past.
More wide-spread use of crowdfunding could broaden the number of people capable of obtaining representation, and give a voice to the many who have gone unheard due to financial limitations.
Despite the additional intricacies associated with the legal industry, crowdfunding offers a new way for lawyers and clients alike to fund matters that they may have hesitated to take up in the past.
Although this is somewhat new territory, existing ethical guidelines provide fairly clear direction in terms of the usage of crowdfunding – a tool that could revolutionize the legal industry.
The article was first published in Lexology on 11/14/2019.