Cannabis, crypto and crowdfunding in the first litigation financing offer of its kind

[ad_1]

Chemdawg marijuana plants grow at a facility in Smiths Falls, Ontario, Canada, October 29, 2019. REUTERS / Blair Gable / File Photo

(Reuters) – An agricultural and commercial hemp research operation called Apothio LLC is officially the first plaintiff to attempt to fund a civil case by asking individual investors to purchase crypto tokens as part of an “initial offer of litigation “funded by crowdfunding.

It’s not just any official terminology, but it’s the tagline you’ll find on the crowdfunding site Republic, which kicked off Apothio’s $ 5 million public offering on Tuesday. Apothio is hoping investors want part of his lawsuit accusing California officials of inappropriately destroying his $ 1 billion hemp crop in 2019.

The ILO tag was designed by the lawyers for Apothio at Roche Freedman, who worked with Republic and blockchain platform developer Ava Labs to structure and implement the offering after first announcing the concept. last December.

The offer innovates in several ways. This is the first time that small investors can invest as little as $ 100 to acquire a stake in the outcome of civil litigation. (Individual investments are capped at $ 500,000.) Lender LexShares also allows individuals to invest in litigation finance transactions, but these investors must meet state Securities and Exchange Commission accreditation criteria. -United.

The Apothio offer, on the other hand, is not limited to accredited investors because, in an important milestone for litigation funding, the offer was registered under the SEC’s CF regulations, which allows companies to raise up to $ 5 million through crowdfunding without the formal rigamarole of a traditional securities offering.

The Apothio offer also appears to be the first time that litigation funding has been “tokenized” via a blockchain. Investors in Apothio litigation will receive Avalanche ILO Tokens. If the company ends up winning the deal and receiving a payout, investors will receive their share through their Avalanche tokens.

As of Wednesday afternoon, a day after the launch of the offer, 85 investors had agreed to pay $ 156,500 into the Apothio file. That’s over 60% of the minimum target of $ 250,000 that Apothio set in registering the offer with the SEC.

“I’ve never done this before and I’m interested in how it all works,” one investor said in a comment posted on Republic. “Looks like this could be a fun ride.”

Apothio’s attorney, Kyle Roche of Roche Freedman, said in an emailed statement that the new model of crowdfunding litigation will allow more plaintiffs to exploit pools of capital.

“The increase in litigation funding in the United States has provided individuals and small organizations with access to the resources necessary to enforce their legal rights against well-funded entities,” the Roche statement said. “The advent of the ILO has the potential to provide even greater access to justice.

For an unbiased assessment of the litigation crowdfunding model, I reached out to Charles Agee, CEO of litigation finance consultancy Westfleet Advisors. Agee has a more holistic view of the commercial litigation finance industry than anyone else I know. He told me that he is generally in favor of innovation that democratizes and expands the litigation finance market and is intrigued by the concept of Apothio.

But he also said he had two big concerns about the offer.

Agee’s first fear is that small investors do not have enough litigation knowledge and inside information to make informed investment decisions. In large commercial litigation finance deals, Agee said, backers often have access to non-public information that helps them decide whether the deal is a good bet. In Apothio’s offer, Republic provides links to the public documents of its case in federal court in Fresno, Calif., But no insider is risking litigation.

Agee said he was also concerned that crowdfunding could open the door to questionable lawsuits. (He was speaking broadly, without expressing his perspective on the Apothio case.) Commercial litigation funders, Agee said, are effective gatekeepers precisely because they carry out sophisticated risk assessments. litigation. After all, when commercial lenders support a deal, they typically invest a lot of money – an average of $ 4.5 million for one-off deals, according to Westfleet’s analysis of 2020 deals. Individual investors who contribute as little as $ 100 may not be so risk-averse, Agee said.

The Apothio deal protects investors from the imminent risk of non-suit. Apothio sued Kern County, the Kern County Sheriff’s Office and the California Department of Fisheries and Wildlife after government officials ordered the bulldozer of his 500-acre hemp crop in October 2019 The company, which conducts research on hemp and has research and internship agreements with two local community colleges, says the crop was cultivated legally and illegally destroyed. He claims violations of his rights under the US and California constitutions.

Both Kern County and the state decided to dismiss Apothio’s case, arguing, in general terms, that Apothio was cultivating an illegal crop of marijuana for commercial distribution. (Hemp and marijuana are variants of the same species of cannabis, cultivated to contain different levels of the psychoactive chemical THC.) Marijuana, the defendants argued, remains an illegal substance controlled under federal law and does not is permitted to be cultivated only for recreational purposes under the state. law. Apothio’s harvest, they said, was contraband that does not give rise to property or constitutional claims.

The law and underlying facts, including the nature of Apothio’s relationship with community colleges and interpretations of the federal law exempting hemp from the Controlled Substances Act, are complex, and the United States trial judge Jennifer Thurston does not seem in a hurry to comment on the accused. motions for dismissal. They have been fully informed since the summer of 2020, but the next hearing on the case is not scheduled until next January.

If the case is dismissed, Apothio investors will only lose 20% of their investment, under the Apothio investment contract. Until Thurston renders a decision on the defendants ‘motions to dismiss, Roche Freedman will hold 80% of investors’ funds in an escrow account. If Apothio loses, the law firm will return the investors’ money. If Apothio loses later, investors are out of luck.

The Apothio experience can be short lived. But even if it does, I don’t think this will be the last use of the crowdfunding model in litigation funding.

The opinions expressed here are those of the author. Reuters News, under the principles of trust, is committed to respecting integrity, independence and freedom from bias.

Our Standards: Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias.

Alison frankel

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A graduate of Dartmouth University, she worked as a reporter in New York covering the legal and law industry for more than three decades. Prior to joining Reuters, she was a writer and editor for The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin. Contact her at [email protected]

[ad_2]