Understanding the different types of litigation finance

the-capitol-understanding-litigation-finance

What is litigation finance?

You’ve no doubt heard of a lawsuit in which one party was clearly in the right, but had to fold because of inability to match the financial power of its opponent. Too often, lawsuits are won by those who can afford to fight for a long period of time. Litigation finance (also called “litigation funding,” “lawsuit funding,” and “lawsuit loans”) levels the playing field for plaintiffs and defendants. Litigation funding unlocks the value of legal claims by advancing funds to plaintiffs or defendants before their cases are resolved.

For example, let’s say a driver is rear-ended and injured, and the insurance company refuses to pay her claim or offers a sum far lower than what she needs for long term costs and care associated with the accident and its aftermath. If the driver can’t afford to wait to pursue her claim, the insurance company may skate away without paying anything at all, or may pay far less than the plaintiff would receive if she had the financial staying power to remain in the lawsuit. By turning to a litigation finance provider for pre-settlement financing, the driver can recover the appropriate and needed amount from the other party without being bankrupted by the expense of a protracted lawsuit.

Knowing the plaintiff doesn’t have to accept a low-ball offer may and often does force defendants and insurers to settle cases for higher amounts, and enables just compensation for plaintiffs. The plaintiff must repay the litigation funding company only if she wins or settles her case. If she doesn’t win or settle the case, the litigation funding company receives and is owed nothing in return. It is important to note that litigation funding is not a loan, although many people call the service “lawsuit loans.” Rather, litigation funding is an advance as there is no obligation to repay until and unless the plaintiff prevails.

The foremost reason for litigation funding’s rise in the U.S, U.K. and Australia since the 1990’s is that the field began–and continues to operate– as a low-correlated asset class with high yields. Investors looking for a way to reduce exposure to the stock market have found litigation funding as an increasingly viable option to generate the large returns they expect from the stock market without the frustrating ups and downs. Groups like Bentham IMF and Lake Whillans thrived in the field by allowing investors to access lawsuit funding and law firm funding with the potential for huge returns. As word and profits spread, the field began to grow, with investors internationally looking to generate similar yields.

washington-dc-litigation-finance

Yieldstreet connects litigation finance investors with lawsuit plaintiffs

Yieldstreet provides an investment marketplace which connects investors in litigation finance with plaintiffs and law firms who have strong cases and need capital to win them.

Yieldstreet offers investors opportunities in the following areas of litigation finance: 1) Pre-settlement funding, 2) Law firm financing, 3) Financing for leveraged buyouts of law firms or case portfolios, 4) Strategic capital for legal advertising, 5) Post-settlement funding.

1. Pre-settlement funding is essentially a cash advance against the anticipated settlement of a personal injury lawsuit. While many call these advances “lawsuit loans,” in fact lawsuit funding advances are provided on a non-recourse basis, which means that if the plaintiff loses the lawsuit, the plaintiff does not have to repay the litigation finance company. Litigation finance companies accept the risk that the case may not succeed, and carefully vet all lawsuit funding requests in order to be very confident that the plaintiff will win before extending pre-settlement financing.

In the United States, specialty finance companies have been successfully providing consumers with non-recourse advances secured by the future proceeds of personal injury claims since the early 1990s. This growing business has a proven track record. Specialty finance companies often sell off portions of their pre-settlement advance portfolios to raise capital to grow their businesses.

At Yieldstreet, our investors can participate in and invest in pre-settlement portfolios secured by these mature and well-diversified portfolios, or in pre-settlement advances for single cases. Previously, these lucrative opportunities were available only to institutional and hedge funds.

2. Law firm financing helps plaintiff’s law firms, or “trial attorneys” who offer contingency fee representation to manage their cash flow. Trial attorneys often represent worthy class action, mass tort, and patent or complex litigation plaintiffs for years (think Erin Brockovich) without any payment. Contingency-fee attorneys do not get paid until suits are settled or won. As a result, many trial attorneys and contingency fee law firms turn to law firm financing to cover their expenses, including expert witness fees, case costs, and any expense necessary to prosecute a lawsuit.

Yieldstreet makes loans to law firms who have large diversified inventories of contingency lawsuits. Yieldstreet investors in law firm financing can earn high targeted yields while providing the financing these firms need to negotiate the largest possible settlements for their clients.

3. Financing for leveraged buyouts of law firms or portfolios of cases comes into play when law firms are for sale. A law firm sale might occur due to the death of a senior partner, a partner breakup, insufficient capital or for other reasons.

Yieldstreet Originators make leveraged-buyout loans to law firms looking to acquire another firm with strong assets. For example, the firm may be a valuable earner based on a portfolio of settled or pre-settled cases. The revenue stream from the acquired firm in such situations is used to pay principal and interest to Yieldstreet investors on the loan.

4. Strategic capital for legal advertising helps law firms finance major advertising campaigns. You’ve probably seen legal ads on television informing consumers of a bad drug or a malfunctioning car and encouraging them to contact the law firm if they have been harmed and want to participate in a class action lawsuit. Such advertising can cost millions of dollars and is well worth the expense as it gathers together consumers for a significant class action suit.

Experienced law firms can accurately estimate how many cases they will generate per advertising campaign and can define their cost per case. A best-in-class law firm seeking to finance a mass advertising campaign brings this information to a Yieldstreet Originator, who vets the investment and if approved provides a loan the firm can use to execute a national television campaign.

Originators of legal advertising loans specifically target late-stage cases already in the settlement phase, or where plaintiff trials have already succeeded. In these cases, the goal of the advertising is simply to make more potential plaintiffs aware of the suit. The security which comes with a strong likelihood of mass settlements greatly reduces the risk to the Originator and to Yieldstreet investors. Our investors can also feel good about the social impact of these investments: these investments help fellow consumers who have been adversely affected by the actions of irresponsible or even unethical corporations.

5. Post-settlement financing helps plaintiffs who have seen their case settle but–often for a variety of reasons–are awaiting settlement funds. Like pre-settlement finance, funding is distributed to the plaintiff in order to cover their cost of living expenses while they await the funding due to them in their settlement. There is often much less risk associated with post-settlement finance opportunities since the settlement has usually been finalized but has failed to start distributing. Investors must still deal with inconvenience risk and face uncertainty of when they will receive repayments, but they can take solace in knowing the case has already settled.

washington-dc-types-of-litigation-finance

An example of how the Yieldstreet legal financing marketplace works

  1. ABC Developers is a multi-million-dollar real-estate partnership that develops old factories into expensive condo lofts in a rapidly gentrifying neighborhood of Newark, New Jersey. The two partners have an agreement on file with their bank requiring two signatories on any payments made from the business’s bank account.
  2. Unfortunately, the bank is lax about enforcing the two-signatory rule and one of the partners, who has a secret gambling problem, embezzles millions from the business.
  3. The honest partner appeals to the bank to take responsibility for its mistake. The bank refuses, confident that the financial losses have left him too insolvent to sue the bank for breaching the two-signatory mandate.
  4. The honest partner turns to a Yieldstreet Originator for litigation finance and, based on the merit of his claim and the Originator’s underwriting criteria, is approved by the Originator for the loan.
  5. Armed with litigation financing, the honest partner sues the bank. Realizing that it faces a strong, well-capitalized plaintiff, the bank offers to settle and pay for its mistake.
  6. The partner is able to restore the missing funds and save his business. It is now the bank’s responsibility to go after the dishonest partner for embezzlement.
  7. The honest partner’s lawyers are paid. The Yieldstreet Originator and Yieldstreet investors in this litigation finance deal receive a healthy return from their portion of the settlement.

Previously, investments in carefully-vetted litigation finance opportunities were not available to the public. Instead, expert institutional funds have profited from this socially worthwhile and justice-promoting industry.

This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).

How helpful is this content?

Since inception, over has been invested on Yieldstreet

Join today for free to access alternative investment opportunities.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

2 Represents a net estimated, unrealized annualized internal rate of return (IRR) of your portfolio and is based by reference to the effective distribution dates and amounts to and from the investments, as well as any outstanding principal and accrued and unpaid interest as of the current date, after deduction of management fees and all other expenses charged to the investments.[read more]

3 "Annual interest" represents an annual target rate of interest and "term" represents the estimated term of the investment. Such target returns and estimated term are projections of the returns or term and may ultimately not be achieved. Actual returns and term may be materially different from such projections. These targeted returns and estimated term are based on the underlying agreement between the SPV and borrower or originator, as applicable.

4 Reflects the initial quarterly distribution declared by the board of directors on February 6, 2020, which will be payable to stockholders of record as of June 10, 2020, and the initial offering price of $10 per share.

5 The Fund will cease investing and seek to liquidate the Fund's remaining portfolio no later than 48 months after the Fund's initial closing. It may take up to twelve months thereafter to fully monetize any remaining illiquid investments in the Fund's portfolio.

6 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

Banking services are provided by Evolve Bank & Trust, Member FDIC.

Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.