LexShares provides accredited investors access to uncorrelated, but high-risk, high-reward litigation financing opportunities for as little as $2500.
|Potential Return||-100% – 50%|
|Investor Requirements||Accreditation is required|
|Liquidity||None – No secondary market|
|Holding Period||Until the case is resolved (median of 18 months)|
|Other Highlights||Backing a winning case could net high returns. However, if a case is lost, you will lose the principal of your investment and make no return.|
If that sounds interesting to you, then take a look below. This post will help you get started with LexShares.
- What Is LexShares?
- How Does Investing On LexShares Work?
- Understanding Investment Listings
- The Investment Portfolio Page
- Frequently Asked Questions About LexShares
- Where To Learn More About LexShares
What Is LexShares?
LexShares is a bridge that connects two different groups of people that can support each other for mutual benefit.
Plaintiffs And Attorneys
Plaintiffs and attorneys need access to funding in order to pursue legal recourse.
Imagine being a small or even medium-sized company that suffered a breach of contract or trade secret theft from a very large company. This infraction may severely impact or even destroy your business. If you can not amicably resolve the issue with the other company, your options are to accept it or take legal action.
If you decide to take legal action, there’s an immediate problem – how are you going to pay for it? Lawsuits aren’t quick and they aren’t cheap, especially against a large corporation that might have billions of dollars in cash they can deploy in their defense.
LexShares is a possible solution. Plaintiffs and attorneys can submit the case to LexShares for review. If the case passes their selection criteria, plaintiffs and attorneys will be able to receive at least $200,000. There’s no upper limit to the amount that can be funded to an individual case.
This is where the other group, investors, come into play.
Approved cases will receive funding from LexShares. That funding isn’t a gift – it’s an investment. After a case has been selected and potentially pre-funded, an LLC structure is established. The new LLC will contract with the plaintiff and shares of the LCC will be available for investment on LexShares.
The litigation financing opportunities offer investors the chance to have completely uncorrelated returns. Contract or intellectual property law doesn’t change when the stock market goes down. However, it comes with enormous risk. The only way to get your principal back and make a return is for the plaintiff to win the case. If they lose, the investment is a complete loss.
What makes the risk worth it? Based on a CNBC piece from mid-2020, LexShares cases resulted in favorable outcomes 70% of the time. The median return for cases that had been resolved at the time (including the losses) was 52% annualized. After fees.
How Does Investing On LexShares Work?
There are two types of investment products on LexShares.
LexShares’ Marketplace Funds
LexShares has also had two “Marketplace Funds” that were previously open for investment. These funds hold a portfolio of litigation assets. By purchasing shares of the fund, investors get broader diversity across a range of different assets and cases.
Since links to the Marketplace Fund just redirect to the LexShares homepage, it doesn’t appear they are accepting new investments.
LexShares’ Crowdfunded-Style Offerings
LexShares also have an offering type that is effectively crowdfunding. In this model you can buy shares of an individual LLC that owns the litigation financing assets.
Investors will learn of new crowdfunded opportunities by email. The email messages contain very little detail and provide very little warning. Emails are typically sent about 24-36 hours prior to the investment opening up. They contain some basic details about the offering size and the type of funding/financing it is.
You can access the offering from a link in the email or through the website. The first time you attempt to view the investment opportunity, it will trigger an approval request. In order to see the details, you’ll have to be granted access. This typically happens very quickly if you already have your account setup. All details of the offerings are considered to be confidential.
If you decide to invest in the opportunity, there is a relatively standard “checkout” flow to commit your investment. It is also best to make a decision on whether you want to invest or not before the offering goes live. These crowdfunded-style offerings can sell out quickly.
The fee structures are different depending on the type of offering.
For individual cases, LexShares will take a share of the profits – typically around 30%. While they don’t charge a management fee, there’s a host of other fees that may be present in an individual listing:
- An administration fee
- A prepaid operating fee
- Interest and fees related to financing for pre-funded deals
- A broker fee
For the Marketplace Funds, there are less easily accessible resources available. However, this SEC filing mentions the profit sharing “carried interest” fee, a management fee, and sales commissions.
Understanding Investment Listings
How Confidentiality Requirements Will Affect This Section
Due to the confidentiality requirements we cannot include any images. There are also limited opportunities to even see what an investment page looks like. These two restrictions will impact the quality of coverage we can provide; however, we will still do our best to provide an overview of what you can expect to see on an investment listing for crowdfunding-style offerings.
Upon opening an investment listing, you will initially see a landing banner that will provide summary information about the offering. This includes:
- The type of funding/financing in the offering
- The name of the offering
- A brief summary of the opportunity – typically only a few sentences
- What stage the case is in
- How much in damages the plaintiff is seeking
- The size of the deal
After the initial banner is an important row. It has two tabs – one for case details and the other for documents. The contents of the page sections below will update based on what is selected. By default, “case details” is the selected option. Additionally, on the right-hand side of the banner is the minimum and maximum investment amount. These will vary based on the opportunity, so always take note of them!
The case details section contains a lot of important information.
To start with, it will introduce the plaintiff(s) and the defendant(s). Then, it will transition into a more detailed background of the case. The main purpose of this section is to give a simple explanation of the dispute and how the two parties in the case are involved. Additionally, there is information about the counsel – the law firm involved, when they were founded, and the lead counsel.
Cash Flow Model
Given the high-risk and illiquidity of the investment, the cash flow model is an important part of understanding the opportunity. This section features a graph of the projected returns, based on how long the case goes on for. It’s not a linear scale. The potential return generally increases in 6-month time increments. However, the first 12 months is a frequent exception. The graph is intended to be net of estimated fees and expenses.
Since that’s a bit hard to visualize, let’s put it into an example:
- If the case is resolved within the first 12 months, investors are projected to receive 150% of their initial investment.
- However, if the case takes 12-18 months to resolve, investors should receive 175% of their principal back.
- Then, in the case that it takes 3.5 – 4 years to resolve, the projected total return to investors is 300% of their investment amount.
The cash flow model is just a projection. If the case is lost, then 100% of principal will be lost and no return will be earned. Even if the case is won, it’s possible that the plaintiffs are not awarded the amount of damages that are expected. That could mean that returns also fall short of projections.
The documents section will contain a varying amount of information relevant to the case.
In some instances the bulk of material is from an “Investor Packet” that summarizes a variety of information – Subscription Agreement, Risk Factors, Operating Agreement, Funding Agreement, etc… into one document.
Other listings may have a large variety of legal documents such as a motion to dismiss, the response to the motion to dismiss, and more. It’s nice that LexShares provides these. However, it is extremely unlikely that any of us have the skills or expertise to use these filings to determine whether the case is more likely to be a win or a loss.
At the end of the day, you’re still relying on LexShares to source quality opportunities and accepting at least a 30% chance of losing your principal and earning no returns.
The Investment Portfolio Page
This page provides summary information about two investment portfolios – your and LexShares’.
Viewing the LexShares tab lets you see:
- Investing Activity by Quarter
- This shows both the number of case investments and the total capital invested over time.
- Case Investment Type
- A bar chart which shows the types of cases most frequently invested in.
- Investment Profile
- This section shows three pie charts aggregating different metrics about the portfolio of cases invested in. It includes a breakdown of the amount of damages being sought, the stage of the case, and the jurisdiction.
On your personal tab you can see:
- Case Investment Metrics
- This is mainly a summary of cases you’ve invested in. The name of the case, how much you invested, when you invested, and whether it is still active.
- All Investments
- The total number of cases and total dollars invested over the lifetime of your account on the platform. This section also shows a graph of active and fully resolved cases.
- Case Investment Type
- A bar chart which shows the types of cases you have most frequently invested in.
- Investment Profile
- As with LexShares’ version of this section, you can see three pie charts reporting on different aspects of the portfolio of cases you’ve invested in. It includes a breakdown of the amount of damages being sought, the stage of the case, and the jurisdiction.
Frequently Asked Questions About LexShares
How Frequently Are Investment Opportunities Available?
By our count, there were 7 crowdfunding-style opportunities in 2022. There has already been one in 2023. Opportunities have been relatively infrequent, averaging just over 1 every two months.
There have been two Marketplace Funds. The first opened in 2018 and raised $25M. The second opened in 2020 and grew up to $100M. As of press time, LexShares has not announced a third Marketplace Fund.
Where Is LexShares Based Out Of?
LexShares website lists their corporate address as a building in the Financial District of New York City’s Manhattan borough.
What is LexShares’ Minimum Investment?
LexShares’ minimum investment varies based on the offering, but can be as low as $2500-$3000.
Where To Learn More About LexShares
To learn more about LexShares, take a look at these helpful resources: