Crowdfunding and compliance: What you need to know
Julia Salasky discusses the regulatory blueprint behind crowdfunding a case in the UK
Over the last five years, crowdfunding has emerged from the fringes of online giving to become a globally powerful form of financing, for anything from arts projects to equity investments in start-up companies. Forbes estimates that the crowdfunding industry has surpassed venture capital investment, with a $34bn global turnover in 2015, which is set to double in 2016.
Even the legal profession, which is notoriously slow to adopt new technologies, has started embracing crowdfunding as an alternative source of funding. While this may be a much-needed boon in a time of increasing hostility to low-income people facing an inaccessible justice system, and to lawyers who have been forced to take on more cases pro bono (or through conditional fee agreements), it has another benefit, too. At its core, crowdfunding is not just about raising funds - it is about distributing power, and allowing lots of Davids to come together to be a single Goliath.
Crowdfunding models vary, and in the legal space there are broadly two types: equity-based, which gives funders a financial return if a case wins, and donation-based, whereby 'pure funders' do not get a financial return. In the US, the former model prevails; LexShares, for example, gives funders a return if the case pays out. In the UK, CrowdJustice provides a pure funding model and offers no financial return for donating to a case. Instead of seeking a profit, funders on CrowdJustice give because they care about a legal issue or about helping someone access the justice system.
Crowdfunding is a new area for the legal profession and issues naturally arise around the provision of a safe environment for giving to legal cases. Donation-based crowdfunding is not regulated by the Financial Conduct Authority (unlike equity-based crowdfunding, which is). However, one of the key differentiators between CrowdJustice and other crowdfunding platforms is its attention to legal regulations and compliance issues. It is the only platform that has lawyer-client money rules built into its fabric.
Funds raised for a case on CrowdJustice go directly to the lawyer's client account, to give funders comfort that the person fundraising has a real case, but also so that the claimant is not responsible for opening a new bank account or ensuring funds raised for its litigation are segregated from its normal expenditures. Given lawyer-client account rules, CrowdJustice carries out sanctions and politically exposed persons
(PEPs) checks on all funders, and performs know your customer checks on the person raising funds, who must also be the
same person who has instructed the lawyer.
The fact that a claimant
must have instructed a lawyer
has another benefit, too - it means that there is a high standard of cases on the site.
To date, claimants on CrowdJustice have raised over £600,000 in donations for everything from legal and court costs to disbursements and potential adverse costs exposure, and are starting to consider funding for after the event premiums. What crowdfunding does not do is change a client's relationship with their lawyer or with the courts. The client remains responsible for all costs associated with the case - and often crowdfunding is just one funding stream among others.
CrowdJustice also enables people to crowdfund legal projects, including when the Ipswich and Suffolk Council for Racial Equality had a gap in its Lottery funding for its project tackling discrimination.
Adverse costs exposure
The principle of pure funding is well-established (Hamilton v Al Fayed (No.2)) and provides that donors who do not control the litigation and do not have a financial interest in it will not be exposed to further adverse costs. This is a pragmatic approach which acknowledges that a single person may not always be able to afford the full costs of a case, and one which provides a high degree of comfort for philanthropic giving to legal cases. In any
event, in relation to the typical crowdfunding donation (the average of which is £35), there is a de minimis aspect, which would make satellite litigation around costs inappropriate.
Judicial review practitioners will also be well aware of the changes brought in by the Criminal Justice and Courts
Act 2015, under which funders of judicial review who give
over a certain amount may
be identified to the courts.
That amount has not yet been published, but it is worth noting that it does not, in practice, change the basis on which a third-party costs order can
The future of law and technology is much talked about, but it is clear that crowdfunding is one way to enable people to come together to understand and participate in the law, to hold the government to account through the law, and to allow many Davids to have the power of a Goliath.