Crowdfunding, raising money for a project or cause by getting small contributions from a large number of people, continues to gain traction in the United States and globally. Entrepreneurs use it to fund projects and ventures. Crowdfunding raises money for people with medical or financial needs. The legal field has been reluctant to embrace crowdfunding due to ethical concerns that may arise.
While law firms and lawyers need to proceed cautiously in this area, crowdfunding offers some benefits and may be worth serious consideration.
How crowdfunding works
Four types of crowdfunding campaigns can be used:
- Rewards-based: Backers get rewards or incentives for funding a project.
- Donation-based: Donors do not receive anything of value for their contribution. They may receive a small gift, like a tote bag, but mostly their reward is the satisfaction of knowing they have helped someone or contributed toward a worthy cause.
- Equity-based: Financial backers receive a share of the company they are funding.
- Debt-based: Backers loan money and get a repayment with interest over time.
Ethical considerations limit the type of crowdfunding by lawyers. For example, all states forbid a lawyer from sharing fees with a nonlawyer. So, a law firm cannot offer equity in the firm.
Crowdfunding for legal cases or causes
With crowdfunding, a client can get legal services that they cannot otherwise afford, or a law firm can bring a case that may bring about change. One of the keys to a successful crowdfunding campaign is to tell a story. Backers will get behind a project or litigation that has a good story.
If the client agrees, the firm gives the public enough information to understand the need for funding. A client may have life-long injuries, and the legal battle for compensation may take time, and the fees for experts may be significant. A client may be taking on a giant company. The relief sought may be an injunction to stop a particular environmental hazard. The client may not receive a monetary award at the end of the litigation.
According to a 2016 survey by the Pew Research Center, a majority of adults get their news from social media. A crowdfunding platform will make it easy to share a client's story or a worthy cause. People cheer for the underdog and are often willing to donate a small sum to help.
Broadening access to justice
Traditionally, plaintiffs use litigation funding, also known as legal financing or third-party funding, to fund lawsuits. The third party agrees to finance the litigation in exchange for a percentage of the money recovered by the plaintiff. Crowdfunding has the potential to eliminate the need for legal financing and broaden access to legal services by allowing law firms to take cases they might not accept otherwise.
Ethical concerns with crowdfunding
Crowdfunding presents ethical challenges for lawyers. Crowdfunding is relatively new to the legal profession, and only a few ethics opinions specifically address the issue. However, crowdfunding implicates some deeply rooted ethical considerations:
- A lawyer cannot share or split fees with a nonlawyer. A law firm using crowdfunding needs to include a disclaimer that it is not partnering or splitting fees with donors.
- A lawyer is bound to keep a client's information confidential. A lawyer must obtain the client's consent to share information about a client's case in a crowdfunding campaign.
- Lawyers can only charge a reasonable amount for their services. If a lawyer uses crowdfunding, they must address what happens if the campaign raises more money than the lawyer earns.
- A lawyer cannot allow a third party to control the litigation. Those who donate to a crowdfunding campaign cannot influence the lawyer; the lawyer must maintain his or her independence.
Ethics opinions on lawyer crowdfunding
Two 2015 ethics opinions address lawyer crowdfunding scenarios.
The Philadelphia Bar Association's Professional Guidance Committee issued an opinion (2015-6) addressing the scenario where a lawyer uses crowdfunding to finance litigation. The plaintiff was seeking equitable relief against a governmental entity. Because the client could not pay the attorney for time spent on the case, the lawyer proposed putting money from crowdfunding toward attorney fees. The Committee gave some guidance:
- The Committee saw no problem with the lawyer accepting fees from someone other than the client, provided the lawyer did not give the financial backers the impression they would have any control or stake in the litigation.
- The Committee acknowledged that some information about the case would have to be divulged to get people to contribute. The client would have to agree to the disclosure of confidential information, and the information disclosed should be limited to what is reasonably necessary.
- The Committee addressed the situation where the case ended abruptly, with the lawyer securing a large sum from the crowdfunding in comparison to the hours worked. The client and attorney should agree on the scope of the representation so that the amount of work the lawyer did was sufficient to justify the fee.
The New York State Bar Association issued an opinion (1062) on whether a group of recent law school graduates could use crowdfunding to raise money for their new firm. The Bar analyzed four forms of crowdfunding (donation, reward, equity and royalty). The Bar wrote that the equity and royalty models would violate the rule against fee-sharing with nonlawyers.
The Bar found the donation model was feasible as long as the lawyer made it clear that donors would receive nothing in return for their funds and that the firm was a for-profit entity. The Bar found the reward model viable if the lawyers offered things, such as pro bono work for a nonprofit legal organization, in exchange for funding.
Apps for lawyer crowdfunding
Some applications assist lawyers with crowdfunding:
- Crowdjustice: This online fundraising platform charges a percentage of the funds raised to cover its charges. The remainder goes into a trust account set up for a particular case. The campaign can be geared to the general public or limited to invited persons.
- GroupFund Legal: This platform charges a monthly fee for unlimited campaigns. This app maintains the client's privacy and confidentiality. It can conduct large projects for several law firms, cutting the cost for each.
- FundRazr: This app charges a percentage of the funds raised. Businesses, individuals and nonprofits use the app. It has a page dedicated to raising funds for legal fees.
Crowdfunding has potential benefits for law firms. A law firm using crowdfunding should exercise caution and pay close attention to ethical concerns. The law firm will want to research the most recent authority in its jurisdiction. It may also request an informal ethics opinion from its state bar on a specific scenario or an area of uncertainty.