Product Overview of LexShares
LexShares is a litigation finance company that offers a unique investment opportunity by allowing accredited investors to participate in litigation financing, a traditionally inaccessible asset class. Here’s a detailed look at what the product does and its key features and functionality.
What LexShares Does
LexShares connects accredited investors with plaintiffs and lawyers in need of funding for their legal cases. The company provides working capital for lawsuits that it deems likely to yield profitable outcomes. In return, LexShares and its investors receive a share of the profits if the plaintiff wins a financial verdict. This model not only provides access to justice for plaintiffs but also offers investors a chance to diversify their portfolios with an asset class that is largely uncorrelated with traditional markets.
Key Features
Investment Options
LexShares offers two primary ways for investors to participate:
- LexShares Marketplace: Investors can browse and invest in individual cases on an “a la carte” basis through single-purpose, pooled investment funds. The minimum investment amount for these marketplace offerings is typically $5,000, although some may be lower.
- LexShares Marketplace Fund II: This is a more structured fund that operates like a “lock-up” hedge fund, requiring a minimum investment of $250,000 and a holding period of 7 or more years. The fund manager makes decisions on how to deploy the investor money, with oversight from LexShares.
Investment Process
The investment process involves several stages:
- Origination: Cases are sourced through marketing activities, attorney referrals, and broker services.
- Underwriting: Eligibility checks are conducted using databases and consultations with legal experts.
- Structuring: Investment agreements and budgets are outlined.
- Funding: The transaction is settled, and post-transaction activities include payment monitoring and case compliance.
Use of Technology
LexShares employs an in-house algorithm to evaluate prospective cases by comparing them to historical datasets. This use of machine learning helps in predicting profitable outcomes and maintains a competitive advantage in case selection.
Fees and Returns
Investors only pay fees if the investment is profitable. LexShares takes a carried interest fee, typically 20-25% of the profits, if the case results in a financial recovery. For example, if an investment yields a $100,000 profit, LexShares might take $20,000 to $25,000 as carried interest, leaving the remainder for the investors.
Investor Tools and Transparency
After registering, investors gain access to a personalized dashboard that displays performance data for their specific investments. This includes metrics such as return on investment, quarterly investment activity, and portfolio breakdowns by case type and jurisdiction. The platform provides clear disclosures of risk and detailed breakdowns of each case.
Investor Requirements
To invest with LexShares, individuals must meet the SEC’s definition of an accredited investor, which includes having an annual income exceeding $200,000 or a net worth exceeding $1 million (individually or jointly with a spouse).
Functionality
Prefunding of Cases
LexShares often prefunds case investments using capital from its affiliates, which demonstrates confidence in the deal and ensures certainty of funds for plaintiffs and attorneys. This prefunding allows for expeditious closings and immediate ownership of the investment for participating investors.
Risk and Liquidity
Investments through LexShares are high-risk and high-reward, with the potential for significant returns if the plaintiff wins but a complete loss of principal if the case is lost. There is no secondary market for these investments, and liquidity is limited, with a median holding period of 15-18 months until the case is resolved.
In summary, LexShares offers accredited investors a unique opportunity to diversify their portfolios by investing in litigation finance, leveraging advanced algorithms for case selection and providing transparent and detailed investment metrics. However, this investment comes with significant risks and illiquidity.