By Colin Guy, An associate at Zimmerman, Axelrad, Meyer, Stern & Wise, P.C. CrowdFundBeat Guest Post,
Crowdfunding is not just a tool for innovators to raise money for their next project. It is now also a source that dissatisfied donors can use to finance litigation, including a potential lawsuit against other crowdfunding beneficiaries.
Through the website Funded Justice, launched in 2014, funds are being raised to retain counsel in a potential class action lawsuit against the creator of a Kickstarter project that allegedly raised $1,012,742 from 5,685 backers to develop a smartwatch. The campaign for the “AGENT” smartwatch states that donors who pledged $129 or more would be entitled to one of the devices with an estimated delivery date of December 2013. The campaign on Funded Justice complains that while it is not uncommon for Kickstarter projects to run behind schedule, the AGENT project, “is now two years overdue with no timeline, or even evidence of positive progress toward refunds or the delivery of promised rewards.”
Crowdfunding has been used for years to spur creative efforts. Since it was founded in 2009, Kickstarter has raised more than $1.5 billion to fund over 80,000 art projects, including $67,436 for a 10-foot, 1-ton bronze statute of Robocop intended to serve as a monument in Detroit. Donations for popular projects can become sizable. The developers of the palm-sized nano-drone, ONAGOfly, have received more than $2.5 million in pledged funds from 13,100 backers in response to its original goal of $150,000. In exchange for their donations, supporters receive various benefits depending on their pledge level, including discounts on the full purchase price and additional accessories.
Since the passage of the Jumpstart Our Business Startups Act (JOBS) in 2012, businesses have been able to raise venture capital through crowdfunding in exchange for giving up equity, as opposed to only offering rewards to donors. Initially, investment crowdfunding was limited to certain classes of accredited investors, such as individuals with net assets in excess of $1 million. In October 2015, the SEC passed rules to implement Title III of the JOBS Act, authorizing non-accredited investors to participate in equity crowdfunding by investing up to no more than the greater of $2,000 or 5% of their annual income or net worth.The new regulations require crowdfunding intermediaries to register with the SEC as “funding portals,” subjecting them, as with traditional securities brokers, to the Financial Industry Regulatory Authority’s (FINRA) regulatory oversight and reporting requirements. Advocates for expanding access to investment crowdfunding expect it will help small businesses, such as restaurants, to expand.
The Public Investors Arbitration Bar Association* (PIABA), an organization whose members represent investors in disputes with the securities industry, has raised concerns about some of FINRA’s crowdfunding rules, which took effect January 29, 2016. As with broker-dealers, the FINRA rules for investment crowdfunding require that disputes be subject to binding arbitration, which PIABA cautioned in a November 2015 comment to the SEC would prevent groups of crowdfunding investors who suffered small losses from pursuing relief through a class action and, “would essentially insulate those funding portal members from prosecution.”
Crowdfunding has also been used for “social entrepreneurship.” Through the website StartSomeGood, $4.8 million has been raised to raise funds for over 606 socially conscious projects, including efforts to feed the homeless, build infrastructure in developing nations, and improve the environment. Charitable crowdfunding has also been used to help on an individual level. In 2012, after a video of a 68-year-old bus monitor being harassed by middle-schoolers went viral, an Indiegogo campaign was established with the goal of raising $5,000 to provide the bullying victim a vacation. The campaign raised $703,168 from 32,251 people in one month.
It is this type of charitable spirit that the Funded Justice team hopes will inspire individuals to donate to the causes championed on the site, and in turn improve the nation’s legal system. Most of the campaigns seeking support through the site involve criminal and family law, but like the smartwatch campaign, there are campaigns seeking help in a variety of other legal fields such as immigration, intellectual property, and medical malpractice.
Funded Justice was founded by attorney Michael Helfand, who found there are often individuals who had good cases but could not afford to pay a retainer, according to Alan Savage, chief operating officer at Funded Justice. Helfand would refer individuals who could not afford to retain private counsel to resources such as the State Bar and pro bono groups, but was concerned by the prospect that people would not follow through and pursue the help offered by these organizations. Inspired by sites such as Kickstarter, he concluded that someone who may not be able to borrow $2,000 from one family member or friend might be able to raise the same amount by soliciting small donations from several supporters.
“It’s going to change lives,” Savage said. As an example, he said, in his hometown of Chicago a young man who is charged with possession of marijuana who depends on a public defender may be more likely to enter into a plea bargain than someone in similar circumstances who can afford a private attorney. The repercussions from having a conviction early in life can be long-lasting, Savage noted. He also said the site’s success could benefit society as a whole by providing individuals charged with minor offenses who cannot afford bail the resources they need, allowing them to return to work while awaiting trial and sparing taxpayers the cost of housing them. For a Funded Justice campaign to succeed, it helps to be fluent in social media. The Funded Justice website suggests that donation seekers contact 10 to 15 family members and friends with a personal email encouraging them to donate on the first day of the campaign so that there is evidence of public support for the cause. Supporters who cannot afford to help financially should be asked if they are willing to spread the word through Facebook, Twitter, and other social media in order to potentially garner donations from individuals who are not known directly by the donation seeker, according to the website. The website also suggests that those seeking aid create a short, simple video of no more than three minutes in which they provide brief details about their background, their problem, and their need for support.
The website offers two funding options: a “flexible spending campaign”, in which the campaign owner will receive all money pledged even if the funding goal is not met; and an “all-or-nothing campaign” in which no project pledges are collected if the campaign goal is not met. Although it is free to launch a campaign, Funded Justice collects a 5% fee from campaigns that meet or exceed their funding targets and an 8% fee from the flexible campaigns.
Even if a campaign goal is not met, a Funded Justice campaign owner may still obtain the relief they need. As an example, Savage explained, a site user may set up a campaign to raise the $5,000 retainer requested by an attorney but raise only $3,000. If the initial attorney contacted will not accept a smaller retainer, it may still be possible to find someone else who would, Savage said. Many of the campaigns currently running on the website have raised only a few hundred or a couple thousand dollars, but a few have raised more substantial sums and aim to raise even more before the fundraising deadline. As of February 3, 2016, a Funded Justice campaign for Ammon Bundy, the Oregon rancher leading an armed standoff at a federal wildlife refuge, has raised $14,081 from 220 supporters since starting the campaign on January 27, 2016. Bundy’s goal is to raise $100,000 by February 27, 2016.
John Coleman, an Orlando security guard, was already convicted and sentenced to 25 years but started a campaign to fund his appeal. According to Coleman’s campaign, he intervened in an apparent domestic dispute after seeing a man hit by a car. Coleman, a former U.S. Marine and Army soldier, alleges in the video on the Funded Justice website that he “was afraid for his own life when the driver of the car pinned him between his car and hers after striking him, and running over his foot” and “was able to pull his gun and shoot into the car.” His campaign, which has closed, raised $17,600 from 70 supporters.
Savage said site users should not put anything on the website they would not want the public to see, as such information could be used as evidence. Attorneys can work with their clients to prepare campaigns that will be effective without compromising a client’s case, he said. As the number of campaigns on Funded Justice grows, the success and failure of various campaigns could provide some insight into the merits of a potential case and provide feedback on how to present it. As the universe of data grows, it may be possible to develop some ideas as to what distinguishes a campaign that raises $15,000 from one that raises no more than $15. This data could even help decide whether taking on a certain type of case or a particular client is advisable.
At present, it appears that the Funded Justice model of crowdfunding will more frequently attract individuals in need of raising funds for a civil or criminal legal defense rather than potential plaintiffs. However, just as crowdfunding evolved to allow equity exchanges, legal crowdfunding could conceivably develop in the same direction. Several companies provide financial support to plaintiffs to assist with expenses such as medical bills or loss of employment during pending litigation, and others provide lines of credit based on anticipated future fees in order to fund law practices. Conceivably, attorneys could someday raise substantial sums to finance litigation through crowdfunding, encouraging contributors not solely through sympathy, but also with the potential for a return on their investment. Crowdfunding could finance litigation involving sums too small to attract an attorney on a contingency fee basis. In larger cases, crowdfunding could also potentially provide plaintiffs an alternative to giving up one-third of their recovery by allowing them to pursue large-pocket defendants on an hourly basis funded by many thousands of small pocket investors.
* In the interests of full disclosure, the author notes that the head of the litigation team at Zimmerman, Axelrad, Meyer, Stern & Wise, P.C. in which the author practices, Leonard J. Meyer, has been a PIABA member for over 20 years and part of his practice is representing clients in FINRA arbitration proceedings.