If you are looking for investment opportunities that don’t correlate to the economy, you’ve come to the right place. In this review, we’ll tell you everything you need to know about litigation funding as an alternative investment, and LexShares, our first choice for getting started with this lucrative asset class.
In this LexShares review I share all that we learned about the company and it’s services to feel confident about making an investment. We studied the industry, scoured the LexShares site and poured over their educational materials. We also got the chance to chat with the incredibly knowledgeable LexShares Co-founder and CEO, Jay Greenberg. Finally, we invested some of our own cash in one of their individual funds. Here we go with the LexShares Review!
LexShares Review: Cons
- Open to accredited investors only
- High risk
- Illiquid investment: no withdrawal or redemption option, no public or secondary market to sell your interests
- New opportunities are posted irregularly and sell out quickly
- There is no way to build investments into something long term. When the case pays out, you have money to reinvest. However, there is no cash flow like there is in real estate investing.
LexShares Company Snapshot:
- Website: https://www.lexshares.com
- Launched in 2014
- Offices in New York, NY and Boston, MA
- Investment types: litigation funding, commercial litigation finance, legal claims
- Sector/Class: Litigation, FinTech, Legal, Financial Services, Crowdfunding
- Minimum investment: $5k – $15k for individual cases
- Open to accredited investors
- Historical returns: 52% median Internal Rate of Return (net fees and expenses), 1.6x median Return on Investment Capital
- Customer support options: Phone or email (I was impressed by their quick and friendly response to several of my emails)
- Regions served: U.S. or non U.S. investors
The Full LexShares Review
What is Litigation Finance?
Litigation finance is when a third party funds litigation in exchange for a cut of any proceeds that result from the lawsuit. The party that can afford to fight for the longest amount of time usually wins the lawsuit. However, litigation funding can help level the playing field. Justice served! Underdogs unite! (Not going to lie, that part got my attention right away!)
Legal funding firms try to estimate risk as accurately as possible. This is important for two reasons. Firstly, they can invest in cases that are likely to win. It’s a business. They want an ROI. Secondly, this helps prevent investment in frivolous cases with long drawn out legal battles. This is a common concern of critics.
Firms negotiate terms at the very beginning. It can be a percent of the settlement or a multiple of the investment amount. Terms often depend on the expected
duration of the case.
When there is a win, the funder receives a cut of the settlement in return for the risk taken. However, when a case is lost, the return is $0.
Litigation financing is always non-recourse, which means if the plaintiff loses, they don’t owe any money back to the funder/investors. This translates to risk for the investor. On a positive note, there is always a resolution so you get your closure win/loss at some point.
What is LexShares?
Founded in 2014, LexShares is an online marketplace for investing in commercial litigation. You can invest in specific lawsuits or in dedicated funds that include a portfolio of cases and legal assets.
Plaintiffs can apply to LexShares to get funding for their case. Funding covers legal expenses, witnesses, working capital, etc. LexShares also uses their Diamond Mine software to identify cases that fit their criteria. We’ll get into that a little later on.
Investors can buy in to the recently launched LexShares Marketplace Fund II for a minimum of $250,000. Buy-in for individual cases is much less. The minimum investment for an individual case ranges from $5k – $15k.
LexShares has offices in Boston and New York.
Who Invests in LexShares?
High net-worth investors (you must be accredited), institutional investors (family offices, hedge funds, asset managers) and U.S. and non-U.S. investors.
What are LexShare’s historical returns?
LexShares media IRR is 52% net of fees and expenses. They have a 70% win rate for resolved cases and a 1.6x median Return on Investment Capital net of fees and expenses.
LexShares Important Insights
- 103 case investments to date
- 29 case investments since 1/1/2019 (48% of total capital deployed)
- 43 resolved investments (70% win rate)
- 60 investments currently in progress
- 15 months median duration of resolved investments since inception
- $158,737,438 accrued value of current investments
Minx Tip: Plan ahead if you need to verify accreditation. A verification letter or asset proof is valid for 3 months. Verification through income proof is valid until April 15th of following year.
How Does LexShares Work?
When you sign up, you must prove you are an accredited investor by submitting one of the following:
1. an accreditation verification letter from a third party (CPA, attorney, investment advisor, etc.)
2. tax return or W2s for the past two years
3. asset proof; a copy of recent account or brokerage statements showing value of your account to be in excess of $1 million and credit release form
When you are member, you can invest in a fund if one is available. Since LexShares has a tough vetting process, there is not always an individual case available on the platform. In the time it took to write this LexShares review, two individual cases posted, filled and closed. In other words, things move fast! Prepare to act quickly.
In order to view the details of an investment opportunity, you must request access to it. This is where being a member is crucial. Members get a “heads-up” email a day or two before a new case posts. This gives them a chance to request access A.S.A.P. and review details as soon as they become available. Consequently, they have a chance to join the fund before it fills up.
Minx Tip: As a member you get a “heads-up email” about upcoming cases. The best thing to do is request case access as soon as you get the email. Cases sell out quickly and this gives you a leg up on timing.
How Do I Invest in Individual Cases with LexShares?
So, let’s say you’re a LexShares member already. You signed up for a LexShares account. Proved accreditation. Did your due diligence and are ready to invest. LexShares sends you an email that they will post an individual case tomorrow. You request access to the case documents.
Once LexShares grants you access, you can review the opportunity details and choose to invest directly in that case. They focus on commercial litigation so expect business to business lawsuits. Some of the case types you can expect include theft of trade secrets, patent infringement, law firm funding, breach of contract, among others.
Minimum investments in individual cases range from $5k – $15k depending on the size of the offering. Typically the larger offerings have a larger buy-in minimum. LexShares offers are 3C1 Funds, which the SEC limits to 99 investors. As a result, the company sets the minimum investment amounts to help meet that limit.
Once you are invested in a case, you get access to your personal dashboard and can follow the case. You can read legal documents, get updates and follow the lawsuit as it progresses.
Minx Tip: New cases tend to sell out quickly leaving investors with little time to review lawsuits in depth. Do yourself a favor and review the case studies on the site ahead of time. Email the company with questions to better understand the terms and structures of LexShares opportunities. They provide very responsive, friendly and helpful support.
How does the LexShare Marketplace Fund II (LMFII) Work?
When you join the new marketplace fund you invest in a portfolio of legal claims and litigation assets. This increases your diversification in one shot.
The target size for this fund is $100 million. The minimum investment is $250,000. It’s a 7 year fund life with 2 discretionary one year extensions.
What happens over those 7 years? The first 36 months is the investment period where capital is invested in claims. Next is the harvest period. Any cases resolved during this time is distributed back to investors (principle plus gains/losses). There is no re-use or recycling of capital from resolved cases.
You can’t request a redemption or “pull your money out.” However, you may get your money back quicker than expected as cases are closed. For example, LexShares’ Marketplace Fund I (LMFI) just ended its 30 month investment period and returned 20% of the committed capital already.
Investing in the marketplace fund allows investors to diversify within the litigation category, across a number of cases.
When I Invest in LexShares, What Do I Own?
Each opportunity is an indirect investment in legal claims via single purpose pooled investment funds. They are managed by LawShares, LLC and sold through WealthForge Securities, LLC (registered broker dealer and member FINRA/SIPC).
Investors purchase equity in an LLC as a limited member and the LLC contracts with the plaintiff.
How Does LexShares Make Money?
LexShares collects carried interest (a share of the profits) on each investment along with various management and administration fees.
LexShares does not charge any up-front fees to investors.
A Technology Edge: How Does LexShares Evaluate Cases to Fund?
We love when companies leverage technology to gain an edge.
LexShares uses a proprietary software called Diamond Mine. It scans federal and state court dockets for quality cases that score high on specific LexShare criteria. First it searches for relevant keywords like “breach of contract.” Next, it downloads the cases and converts them to raw text for efficient scanning. Finally, a 17-point scoring system is used to find a baseline investment opportunity. LexShares uses this info to contact litigants about interest in funding.
Potential cases can also be submitted to the platform to apply for funding. LexShares emphasizes how their stringent vetting process allows only 1% of applicants to post claims on the site.
LexShares uses traditional due diligence before investing. Investment pros and former litigators assess each case’s claims and viability. LexShare evaluates cases on the following:
- Legal Merits: a sound legal basis and clear understanding of value is a must
- Legal Team: experienced counsel with a strong track record of success in a related area is required
- Defendant’s credit worthiness: defendants must be well capitalized and able to pay any damages that come out of the case
- Cost of Litigation: expected costs must be estimated and submitted in order to be considered for funding
LexShares emphasizes their stringent vetting process many times on their site and documentation. It’s impressive but should not convince you to skip your own due diligence – that’s a must for LexShares, as it is for any investment.
LexShares Review: Our Experience
Our personal mission is to diversify as much as possible. Therefore, we were instantly curious about LexShares since the cases don’t follow public market swings. Plus, I loved the idea of leveling the legal playing field. But, honestly, you need to read the details of each case. It’s idealistic to think lawsuit funding is always looking out for the little guy. But that is an article for another time. And another place. Anyhow, back to the investment opportunity!
We invested in an individual case to start. Once a part of the investment, we got access to LexShares’ user-friendly dashboard. It provides a breakdown of investments on a case by case basis. Case details include information about the plaintiff, defendant, plaintiff’s legal team, case documents and updates on the status/progress. We’ve received two updates so far – about 2 months apart for each. Covid did delay some of the case proceedings.
The details of each case are confidential so I can’t share anything further about it. However, I can say that the user experience, customer support, investment dashboard and educational resources are impressive. At first I thought investing in lawsuits sounded sketchy but then I dove into the materials and learned more about this asset class. There is no denying that it’s a smart way to diversify an investment portfolio.
We are still waiting for the case to resolve so we’ll have to update this article in the future. Hopefully we’ll be telling you about a big return.
Want to learn more about alternative investments that will help diversify your portfolio? Read our Fundrise Review and take a look at a great real estate option.