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Evaluating opportunities in pre-settlement funding

November 24, 2015 • 3 min read

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Pre-settlement funding provides cash advances to individuals or companies projected to win a significant settlement from a lawsuit who need funds to cover their expenses while they wait for the case to settle. Most states prohibit law firms from lending money to their clients and as a result, more and more law firms are turning to legal finance to help clients who need financial support. (Law firms also use legal finance to manage their own cash flow, this is often called law firm financing.)

Pre-settlement funding levels the playing field

Pre-settlement funding helps level the legal playing field by providing plaintiffs with the money they need to fight and win the settlements they deserve from better-funded opponents. Pre-settlement funding can be a godsend in personal injury cases. For example, a lawsuit advance enables the injured to fight as long as it takes to win instead of accepting inadequate, unfair settlements just to pay their bills.

Pre-settlement finance also helps small businesses fight intellectual property theft perpetrated by larger companies. Such poaching is commonplace. Previously, the high costs and delays of litigation prevented small business owners from effectively protecting their patents, trademarks, copyright, and proprietary information. Today, entrepreneurs can use legal finance to stop infringement and to receive damages for infringement of their intellectual property.

Initially, some investors were tepid about investing in the asset class because they felt uneasy about the ethics of funding potential lawsuits and affecting the justice system. But in recent years, those concerns have been addressed and studies have shown that legal finance can work as a way to level the playing field and help underfunded plaintiffs and law firms get their fair day in court.

Settlement finance surging

Before the JOBS Act legalized investment crowdfunding, investment opportunities in legal finance were available only to ultra-wealthy individuals and to institutional investors such as hedge funds. This once-obscure asset class has become something of a hot investment trend thanks to the potentially attractive yields and typically low market correlation provided by legal finance investments.

A new generation is investing millions in pre-settlement deals, which has spurred established financiers to step up their offerings in this asset class.

Increased accessibility through crowdfunding

While institutional investors accounted for the primary capital flowing into the industry a few years ago, investing platforms like Yieldstreet have democratized the field and allowed accredited investors to invest not just in individual cases but in portfolios of cases. The field is no longer confined to the ultra wealthy. Instead of an investor having to put up the entire value of a portfolio, they can invest only a portion and get repaid through event-based payments.

These portfolios, often further diversified through cross-collateralizing across case types and durations, can give first-time litigation investors further peace of mind by knowing that their return isn’t based on any single case settling, but instead on a majority performing as expected.

5 Questions to ask before investing in pre-settlement funding opportunities

At Yieldstreet, we ask five key questions when evaluating pre-settlement legal finance opportunities:

Is the loan originator experienced, with a solid track record?
Is the case(s) backed by credit-worthy Obligors?
What type of case(s) is it?
Are the risks carefully managed?
How and when are investors paid back?

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