On December 3rd, the legal fintech company LawCoin announced that it will tokenize its investment vehicle, LawCoin Investments. The firm claims it is the first company in the world to provide a platform to invest in litigation finance using blockchain technology.
The startup worked with ConsenSys Codefi and its tokenization platform to digitize the asset on the Ethereum blockchain. The intention is to create security tokens and make them available to institutional and accredited investors.
The litigation finance sector has grown rapidly in the past decade and is estimated at $9 billion by Bloomberg Intelligence. The strategy involves investors putting up money for legal cases, where neither the plaintiff nor the counsel is ready to bear the financial burden.
Perhaps the most famous example was when billionaire Peter Thiel financed Hulk Hogan’s litigation against Gawker. The resulting damages of $140 million put the publication out of business. However, in that case, the objective wasn’t simply a financial return.
Meanwhile, the criteria for investment decision making include the merit of the case, the potential financial gain, and the estimated duration of the case. If the litigation has a successful outcome, the investor earns a percentage of the settlement.
Since legal cases do not depend on market or economic performance, these investments can produce returns even in recessions and uncorrelated with other markets. This makes it attractive to hedge funds. Plus there are now specialist investment vehicles such as IMF Bentham and Burford Capital, although the latter has recently encountered headwinds.
Coming back to LawCoin, it has created tokens which will represent an equity interest in LawCoin Investments.
“Now that we have tokenized LCI, we will continue to look for quality assets to add to the fund’s portfolio,” said Noah Axler, LawCoin CEO and Co-Founder. “We are also currently working to tokenize individual litigation finance deals through our network of investors.” Axler is a lawyer himself, a partner and co-founder of Philadelphia firm Axler Goldich which specializes in class action lawsuits. His named partner Marc Goldich is the other LawCoin co-founder and President.
The background of the founders is a significant advantage because judging the potential profitability of litigation is a survival skill for class-action lawyers.
This development represents a growing trend in the tokenization of assets, where digital tokens are used to represent a share in some real asset.
Tokenization and securitization are closely related. Many point to the 2008 crisis as being caused in part by a lack of visibility into securitized debt. What if there had been more transparency about the underlying assets? In many cases tokenization can provide that greater visibility.
So how would that work for LawCoin? “Since most documents are publicly filed, you actually get a level of detail not available with other investments,” Marc Goldich responded via email. “For the cases and case portfolios listed on the platform for investment, in addition to a private placement memorandum, we will have available the pleadings and other publicly filed documents in the case.”
Goldich continued: “As the case or cases progress, we will be providing updates and posting other publicly filed documents, such as motions, decisions, and court orders.”
In the U.S., witnesses give evidence in private depositions before the main court date. And often these depositions are critical to the outcome of the case. Goldich didn’t address that point directly but stated: “To the extent a prospective investor or investor that is a member of the platform wants more detailed information, for due diligence or otherwise, we can accommodate that as well.”
The range of assets that are capable of being tokenized varies from cash, securities and derivatives, to mortgages, real estate and other illiquid assets. The intended benefits include fractional ownership, 24/7 trading, and increased liquidity. While making assets more accessible should increase the pool of investors, tokenization won’t necessarily improve liquidity.