Tuesday, March 25, 2014

Is financing your law practice through "crowdfunding" ethical?

Can an attorney accept a loan from a private lender if the attorney must commit to pay it back by agreeing to grant the lender a certain percentage of the attorney's earnings for a number of years? This is a new issue raised by a new form of funding known as "crowdfunding." I must confess I don't know much about it, but I think it presents an interesting question for lawyers.

Starting a law practice can be difficult under any circumstances, and it becomes even more difficult when you consider a bad economy and student debt. So what can a lawyer do? Crowdfunding offers a source of funds that is different from traditional loans. In a traditional loan situation, the lender will recover the loan by charging a set amount per month (including interest). Crowdfunding allows you to raise capital in exchange for a portion of your future income. In essence, through some crowdfunding websites, you can ask people to give you money and then promise to give them a share of your earnings.

Is this just like the TV show "The Shark Tank" , but online and with "investors" who are just every day people? Would it be unethical for a lawyer to go on the TV show The Shark Tank and ask for money in exchange for a share of the law firm the lawyer wants to create? Assuming "the shark" is not a lawyer, it sounds to me a strong argument can be made the answer is yes because the end result would be that the shark would become a partner in the law firm.

Is crowdfunding different? This blogger says no. He argues that agreeing to the terms of a crowdfunding funding agreement would constitute a violation of rules against fee splitting with non lawyers. On the other hand, My Shingle argues crowdfunding is different and should not be considered to be a violation of the rules.

UPDATE August 19, 2015:  New York State Bar Association issues opinion on whether using crowdfunding is ethical.  Go here for the story and links.

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