By Litigation Futures’ Associates AxiaFunder
Using a platform, such as AxiaFunder, to fund commercial litigation is relatively innovative and therefore requires careful consideration by lawyers and claimants before engagement. One framework with which to assess litigation crowdfunding is the Code of the Association of Litigation Funders (ALF). This Code provides a useful checklist of the basic attributes that a funding solution should have. The Code has been endorsed in a speech given by Lord Justice Jackson in November 2011 (Lectures of the Civil Litigation Costs Review).
While crowdfunding is regulated in the UK, in general, the financing of litigation is not, at the time of writing. There is, however, an Association of Litigation Funders in which its members self-regulate, ensuring compliance with its Code of Conduct (Code) that sets out some minimum standards for funders. In this article, we examine how AxiaFunder relates to the key elements of the code (we also, in passing, flag a possible addition to the Code).
Which Criteria of the ALF Code Does AxiaFunder satisfy?
In summary, we believe that AxiaFunder meets all the criteria of the Code with respect to the following: provision of non-recourse capital; a pre-agreed capital plan for each case; confidentiality of information; helping ensure proper claimant advice; non-interference in the litigation; financial transparency; and maintaining marketing material which is clear and not misleading.
ALF Code Capital Requirement – Not Strictly Satisfied
However, the capital requirement of the Code requires further discussion. AxiaFunder sets up a dedicated Special Purpose Vehicle (SPV) for each case and based on the cost budget provided by the claimant’s solicitor (precedent H or equivalent) raises sufficient capital, via equity issuance, to fund the case to the end of trial. Since most cases settle pre-trial, most of the time we expect that only a portion of this dedicated capital within the SPV will actually be required. If more capital were required due to unforeseen costs (above the original budget and any contingency buffer), AxiaFunder would seek to raise further capital from investors.
This risk of not being able to raise any additional required capital might appear a material disadvantage. Bear in mind, however, that, under the Code, any funder can terminate funding where the merits have deteriorated. If a case is progressing well but requires more capital, it seems likely that the required funds will be forthcoming for investors on the AxiaFunder platform, particularly since the terms can be improved (if needed) to attract the capital. It is also worth noting that AxiaFunder has some underwriter relationships which can provide contingent capital for specific cases as required.
The Code requires that each funder maintains at least £5m of capital. On a strict reading, AxiaFunder does not meet this requirement. More broadly however, it seems highly likely that the network of hundreds of registered investors on the AxiaFunder platform (institutional, high net worth and sophisticated) in aggregate have well in excess of £5m of available capital.
Possible Fee Disclosure Addition to the ALF Code
In passing, it is worth considering whether funders should be required, under the Code, to disclose all fees paid to intermediaries such as brokers. This would help mitigate potential conflicts of interest which may arise, particularly due to the one-time use of funding by many claimants.
Will Platform Solutions Gain Market Share?
Solicitors and claimants are understandably conservative in their approach to new solutions. However, we hope that this analysis will encourage more solicitors and claimants to consider accepting financing via litigation marketplaces. In many instances, we believe that AxiaFunder and similar platforms offer a financing solution which is competitive in terms of flexibility, cost and convenience.
If developments in other sectors of the economy are any guide, platform funding solutions seem likely to play an increasing role in the funding of commercial litigation in the years ahead – due to the inherent efficiency gains that are available – albeit with an understandable lag given the relatively traditionalist approach of the legal profession.
For a line by line analysis, please refer to: https://www.axiafunder.com/news/evaluating-litigation-crowdfunding-in-light-of-the-code-of-the-alf