Monday, February 8, 2016

Is it ethical to finance your law practice through "crowdfunding"? Opinions from New York and now Philadelphia address the issue -- UPDATED

I am updating this story with a new note (with links) about a recent opinion from Philadelphia at the end.  

Back in March of last year I wrote about the differences of opinion as to whether it would ethical to finance the practice of law through "crowdfunding".  See here.   But there are different types of crowdfunding.  In one type, the person seeking funds essentially is asking others to contribute out of the goodness of their hearts and promises nothing in return, other than the feeling of satisfaction they would get from contributing to a good cause.  In the other, the person seeking funds raises capital in exchange for a portion of future income. In other words, through this type of crowdfunding websites, you can ask people to give you money and then promise to give them a share of your earnings.

The first type of crowdfunding is no different than asking a relative to give you money to start your practice; only instead of the relative you are asking strangers.  In the second type of case, you would be sharing earnings with a stranger.  And that would be a problem.

One of the most debated questions in Professional Responsibility circles today is whether to relax or eliminate the rules that ban lawyers from forming partnerships with non-lawyers or from sharing fees with non lawyers.

Because of these rules, it is not too surprising that the New York State Bar Association has decided that crowdfunding would be allowed only in instances where the result of the crowdfunding does not include sharing of fees with non lawyers.  According to the opinion, available here,
A law firm may engage in certain types of crowdfunding but not others. Any form of fundraising that gives the investor an interest in a law firm or a share of its revenue would be prohibited. However, in some circumstances a law firm may give the funding source some kind of reward. For example, a law firm may send a funder non-confidential memoranda discussing legal issues (provided the law firm complies with any applicable advertising rules), or may agree that the law firm will provide pro bono legal services to certain charitable organizations, provided that the lawyer complies with Rule 1.1 regarding competence and the representation does not involve conflicts in violation of Rule 1.7 or Rule 1.9.
For a more detailed discussion of the opinion go here.

UPDATE 8/20/15:  Professional Liability Matters just posted a comment on the issue here.

UPDATE 2/8/16: Legal Ethics in Motion has a short comment on a recent Philadelphia Bar Association opinion on the same subject here.   The opinion itself is available here.  It raises a few interesting questions but I don't think it addresses the key issue: whether the people contribute to the fund acquire an interest in the litigation.  The opinion seems to assume that the people who will fund the litigation do so out of the generosity of their hearts and will expect nothing in return.  This is the type of crowdfunding that the NY opinion would allow because it does not involve any type of fee sharing.  Thus, the Philadelphia Opinion does address a few important issues about that type of agreement, including whether the fund can be non-refundable, and whether it has to be kept in a trust account until earned.

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