• How blockchain can help small investors access litigation finance

  • Investing in litigation used to be reserved for the wealthy. However, the monetary value of a lawsuit can now be tokenized and sold to the general public. Is this a good plan?

    When an individual or small entity files a lawsuit against a larger, well-funded organization, they may lack the resources to fight a lengthy legal battle. Lawsuits are expensive and can drag on for a long time. For those who cannot afford it, the risk of losing money or having to wait too long for a return on investment is too great. This opens the door for a third party to step in and offer assistance in the form of litigation finance.

    If the plaintiff agrees, the third party may purchase a portion of the potential award. That portion is referred to as an “asset,” also known as a litigation asset. This gives the plaintiff the funds he or she needs to get started or keep going. The third-party will then contribute resources and expertise to assist in winning the case and receiving the award.

    The plaintiff faces no risk because they are not required to repay the third party if they lose the case. If they win, they will receive the majority of the settlement. It also places them in a position of power because they are no longer limited by their own resources and have gained a powerful ally. It allows them to pursue the case without fear of repercussions.

    Litigation finance adds value to society by providing a seat at the table for the underdog, allowing everyone to be heard. Despite the fact that many people choose to participate because of the promise of a high ROI, the end result is the same. In a game dominated by money, it evens the playing field.

    The return on investment is among the highest of any asset class. Successful businesses see annual returns of 30-50 percent. However, it is not without risk. If the lawsuit is unsuccessful, there is no return on investment. The funds used to purchase the litigation asset are no longer available. It’s also possible to win a lawsuit but not get paid.

    There will be nothing to collect if the defendant has no assets or is skilled at concealing them. Firms mitigate this by conducting months of due diligence before taking on a case. Finding cases with large awards, ensuring the plaintiff has a strong position, and locating and identifying the assets that will be used to pay the settlement are all part of this process.

    Firms also purchase a variety of cases, allowing investors to diversify throughout the year and see returns from winning cases.

    Another type of risk is the illiquidity of the assets and the duration of the lawsuit. Selling a litigation asset is not easy, and in some cases can take months to a year or more. Locking up funds in an investment for that long is a risk in and of itself. An investor may require those funds for another purpose and will be unable to withdraw them. Even if a company purchases multiple cases in the hopes of receiving multiple payouts per year, there may be large gaps between payments.

    Until recently, litigation finance was only available to the top 1% of investors. You must be accredited and have hundreds of thousands of dollars to spend. However, blockchain eliminates this barrier, allowing the asset class to be accessible to a broader range of investors.

    Companies can now convert their equity into tokens, a type of cryptocurrency that creates digital shares of the company that are stored on and interacted with via the blockchain. A litigation finance firm can sell those smaller pieces in order to raise funds for the purchase of litigation assets. The tokens provide token holders with the same benefits, rights, and safeguards that a stock would in the same situation.

    From the company’s perspective, lowering the barriers to entry allows millions of more people to invest. Using the blockchain expands global access. Companies will be able to secure funding much more quickly and effectively as a result of this.

    The main advantages of using blockchain technology are fast, cheap, and permissionless transactions. Transactions on the blockchain are completed automatically, which is much faster than waiting for a human to confirm them. Because no third-party or middleman is required, no large fees are deducted. This means that more money can be invested, resulting in higher returns.

    One of the primary advantages for investors is the availability of a liquid asset. Tokens can be quickly and easily bought and sold. Instead of tying up large sums of capital for extended periods of time, small sums can be speculated on or purchased when an interesting case is about to be acquired. This can also cause the price to rise above what it would have been otherwise due to price speculation. Litigation assets have fixed prices, whereas tokens have no reasonable limit.

    The blockchain also offers a safe and transparent environment in which to invest your money. It is the most secure medium of storage and employs cryptographic algorithms in a decentralized environment. It is almost impervious to hacks and data leaks. Because of the speed and transparency, investors can make decisions on a daily basis, staying informed and up to date on trading activity and market variables.

    Having access to a larger pool also helps to democratize the case selection process. When thousands or more retail investors buy tokens to fund a popular case, they are essentially voting with their dollars. The narrative shifts from the big guy helping the little guy to the little guy helping his own.

    Litigation finance is an important aspect of our society because it keeps large corporations from becoming immune to the rule of law. Putting it on the blockchain simplifies the process for both the company and the investor, lowering costs for both, increasing security, increasing cash flow, and giving the average investor a say in the process.

    What's your reaction?