LexShares is a Reg D platform open only to accredited investors that offers the opportunity to invest in the outcome of commercial litigation. Plaintiffs apply to LexShares to raise $100K to $1M in financing to fund their case, and if approved following a detailed review by LexShares (fewer than 1% of applicants end up listing on LexShares), investors can buy in for as little as $2,500. The total amount invested is generally no more than 10% of the expected value of the case. Investors receive a return if and when the plaintiff wins or the case settles. If the plaintiff loses, investors lose their entire investment.
Types of investments LexShares offers
Litigation finance as an investment type has been around for a long time, but as with many of the investment types we profile here, until recently was only open to institutional investors like hedge funds or wealthy family offices. Investors are helping to finance a commercial plaintiff in a civil lawsuit, such as breach of contract, negligence, or patent infringement. Litigation finance (especially in individual cases) is very risky and highly speculative, and even if the plaintiff eventually wins or the case settles, there could be a high opportunity cost if the case drags on for a long time.
What do you get when investing with LexShares?
As with many Reg D investment crowdfunding portals, investors receive a membership interest in a special-purpose investment vehicle – an LLC created for the specific investment.
How does LexShares make money?
LexShares doesn’t charge any up-front or specified annual AUM fee, but does collect carried interest on any investment proceeds, as well as charging various administration and management fees (as well as fee to WealthForge, their affiliated broker-dealer), which may add up if the case drags on for many years, and would reduce the effective return to an investor.
Potential returns and cashflow
Litigation finance is very risky and highly speculative. There is no return on the investment at all unless the plaintiff wins or the case settles (and for an amount that is greater than the amount financed). While details and performance of course varies considerably on a case-by-case (pun intended) basis, in general the returns tend toward binary – either a very strong positive return (well over 50% or more), or a total loss.
Breadth of offerings on LexShares
In part because of the extensive review process, new cases are only posted periodically, and likely because of significant press coverage about several very positive case outcomes, the cases typically sell out within minutes. Unfortunately that means prospective investors have very little time in practice to review the cases in much detail. If you’re considering an investment via LexShares, you may want to request details about prior cases including sample investment documents to become familiar with the general structure and terms.
Regulatory framework and due diligence expectations
LexShares has a contractual affiliation with WealthForge Securities, LLC, a Broker-Dealer registered with the SEC (you can see their entry in FINRA’s Broker Check service here). That means that when you invest with LexShares, the security you are technically purchasing is via Wealth Forge, which receives a fee for that service paid for out of the total investment amount. Broker-dealers are subject to specific due-diligence requirements to ensure an investment is “suitable” for their registered customers, or they can face fines and civil action. (That does not of course provide any guarantees about investment return or performance!)
So while a broker-dealer platform (or one that has a contractual affiliation with the one, the way LexShares works with WealthForge) will typically disclaim that they do not offer formal financial advice (even though they are entitled to), you can still expect that the investments they offer have been screened. You should of course do your own due diligence (including research outside of what you find on the platform.) There’s more about broker-dealers and other platform types over on our blog.
LexShares emphasizes their role in curating and selecting cases, stating that they accept fewer than 1% of plaintiffs that apply. (That should of course not be a substitute for your own due diligence before making any investment.)