A New Opportunity to Invest in Litigation?

One of the freshest faces on the alternative investment scene is TrialFunder, Inc. The company, and a few others like it, offers investors a chance to buy a stake in pending lawsuits. The new crowd-funding idea came about when TrialFunder’s founding members were looking for a method to assist plaintiffs who needed funds to pay legal fees.

The way it works: TrialFunder (TF) accepts a client for a funding campaign. They place all the data about the case on their website. This includes all court documentation, police reports, any pre-trial testimony that has been entered into the record, and other important information that might have an impact on the outcome of the eventual trial or the pre-trial settlement.

Right now, TF invites “accredited investors” to take part in the funding of particular cases. Pending legislation would change that restriction and average investors would be able to put their cash on the line and get a piece of the settlement action.

A visit to TrialFunder’s website is instructive. Investors can review all the cases that are open for investing. The company plainly states that there are inherent risks involved. Any case may end up settling for a miniscule amount of money or for nothing at all. Others might settle for many millions of dollars. TrialFunder claims that the average return on one of its cases is quite high. This is apparently due to the fact that the company meticulously examines each potential lawsuit before accepting it as a potential investment vehicle.

Indeed, many cases settle out of court when defendants realize that a company like TrialFunder has listed it for financial backing. This tactic typically scares defendants into settling because, the reasoning goes, they are reluctant to go to court against a plaintiff who has firm financial backing.

TrialFunder realizes that average investors might not flock to this new method of raising capital for legal plaintiffs, yet. With the success of crowd-funding in general, and the sometimes astonishing financial success of similar business models, TF could soon see a major segment of the public flocking to its website. Many of the company’s current investors are well-heeled folks who want to back a legal claim that has a high probability of winning. Others want to provide financial backing for a cause that they morally believe in.

Either way, TF claims to be enjoying early success; and the company’s own press releases note that they choose cases based on high likelihood of victory in court and on quick turnaround. These are not cases that will spend years in the docket, but monetary appeals that are usually settled quickly and for a sizeable amount of money.

Indeed, TF avoids the kinds of lawsuits that may end up headed for the state or U.S. Supreme Court. Most of the cases are ordinary injury suits that are simply asking for monetary settlements. A good number of cases like these, even the ones TF does not accept, never see a courtroom; that’s because the defendants want to avoid costly trials and public airing of grievances. Sometimes the issues involved could be a marketing nightmare for the defendants, as is true with many product liability cases in general.

TrialFunder is a new entrant to the alternative investment scene. Here are a few of the key elements about this new business model that investors should note:

  • At TF’s website, interested investors can fill out a form to determine if they are eligible to take part in a funding campaign. As it stands, only “accredited investors” are able to join. Anyone with a net worth greater than $1 million or who earn something above $200,000 is considered to be “accredited.”
  • Once qualified to invest, it is possible to research the various cases listed at the TF site. At any one time, there might be several cases up for funding. Depending on the particulars of a case, TF rates of return hover in the “over 50 percent” category.
  • Even investors who put funds up for a plaintiff for whom they want to offer “moral support,” will get some or all of their money back if the case settles favorably for them.
  • Right now, there are two high-profile cases listed at the site. One concerns an NFL concussion case and the other one involves alleged police abuse. Anyone who wants to can view news videos about the particular cases, read official documents like statements and court depositions, and do their own research if need be.
  • Crowd-funding in general is one of the fastest growing segments of the alternative investment scene. In 2012, crowd-funding crossed the $6 billion mark but is set to soar to at least $40 billion by the end of this year.
  • Television channels devoted to legal trials have been among the biggest hits in the U.S. and Europe. That might be one of the reasons behind the success of companies like TF. Real-life litigation is an area of massive public interest, and TF is likely to continue to benefit from that trend.
  • Before a case is listed on the TF site, it is personally examined by the company’s CEO, an attorney who once specialized in financial cases.

Now that the public has a firm grasp on the concept of crowd-funding, TF need not worry about reluctance from investors who don’t understand their business model. All sorts of companies raise funds through online efforts, so TF is not really doing anything new in that respect.

However, using a crowd-fund model to bring financial backing to legal plaintiffs is a new concept, and many investors will be eager to try it out. Look for numerous competitors in the near future as the TF model for litigation investment becomes more commonplace and investors get used to the idea of buying a piece of a potential courtroom settlement.

SEC regulations that are still in the works could have a profound effect on companies like TF. As the world of litigation investment goes mainstream, companies like TF might be the next big thing in the alternative investment sector.

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Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.