“Initial litigation offering” (ILO) is a term that was recently coined by Apothio LLC, an agricultural research and commercial hemp company. This new concept is being spearheaded by Apothio to fund its response to officials in California who allegedly destroyed its billion-dollar hemp crop in 2019. The goal is to attract investors interested in a piece of the lawsuit filed against these California officials by launching a $5 million public offering.
This innovative approach to litigation funding has not been previously explored. Long the province of funding groups, this ILO instead allows small investors to spend as little as $100 to acquire a stake in this civil litigation’s outcome. Apothio’s legal team at Roche Freedman structured the plan with blockchain platform developer, Ava Labs, allowing non-accredited investors to put down money on the outcome.
This is possible because the offering is registered in a unique fashion. By registering under the SEC’s Regulation CF, Apothio can raise up to $5 million via crowdfunding without the need for a traditional securities offering. Never has litigation funding been “tokenized” through a blockchain, issuing and awarding investors with ILO tokens.
One interesting aspect of this concept is the potential for a new crowd-sourced litigation financing paradigm. This model makes it possible for plaintiffs across the country to access untapped resources of capital. According to Kyle Roche, of Roche Freedman, “The rise of litigation funding in the United States has provided individuals and smaller organizations access to the resources necessary to assert their legal rights against well-funded entities [and] the advent of the ILO has the potential to provide even greater access to justice.”
Kern County and the California Department of Fish and Wildlife are being sued by Apothio for ordering its 500-acre hemp harvest to be destroyed in late 2019, and the alleged violations of Apothio’s constitutional rights. Apothio contends this crop was legally grown, based on research and internship agreements with local community colleges, only to be destroyed illegally by the state.
The state, on the other hand, asserts Apothio was illegally growing a crop of cannabis with the intention of commercial distribution. This contrasts with the plaintiff’s argument, as cannabis and hemp are cultivated for different purposes despite being variations of the same species of cannabis. Cannabis is still considered an illegal controlled substance under federal law and can only be grown in California for recreational use. This interpretation of the situation categorizes Apothio’s crop as contraband, and thus eliminates the potential for the plaintiff’s constitutional claims.
Despite the defendant’s motions to dismiss based on this interpretation, Judge Jennifer Thurston is not rushing to rule on these motions. The complexities of this case are clear, especially as it relates to Apothio’s relationship with the local community colleges and the potential interpretations of where hemp falls within the Controlled Substances Act.
For investors, there are safeguards in place should the case be dismissed that limits their loss; the contract stipulates that if the case is dismissed, Apothio investors will lose 20% of their investment. While everyone waits for Judge Thurston to come to a decision on the defendant’s motion to dismiss, 80% of the investors’ funds will be held in an escrow account managed by Roche Freedman. Should Apothio lose the suit at this stage, Roche Freedman will return the investors’ money. However, if the plaintiff loses at a later stage, investors will not be able to reclaim their initial investment.
When considering the future of ILOs, there is a significant lack of public information for potential funders to assess when considering whether a case is a worthwhile investment. Furthermore, smaller investors might not be as risk-averse as traditional commercial litigation funders who usually put forth significant amounts of money for single-case deals. This may lead to situations in which problematic suits arise due to the lack of practical gatekeepers making nuanced evaluations on whether to fund a case. This is because retail investors are not equipped with experience and knowledge and are at a fair risk of losing their investment.
This is very much an experiment in crowdfunding litigation finance, and one that may lead to interesting future iterations.
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