Crowdfunding, which began in the late 2000s, is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically through the internet. With growing reliance on technology, crowdfunding campaigns are becoming more visible. During local news reports of tragedies, links to a GoFundMe campaign to help with medical bills, funeral costs, or living expenses often appear. Social media users are encouraged to contribute to causes in celebration of friends’ birthdays.1
In fact, 64 percent of U.S. consumers are aware of crowdfunding.2 “Donation crowdfunding,” which is used to pay for life events and causes, is the second largest type of crowdfunding.3 Funds raised through crowdfunding grew 33.7 percent in 2020.4
Crowdfunding Basics
Crowdfunding usually consists of three basic elements: 1) someone who proposes a project; 2) people who want to fund the project; and 3) a platform to handle the dissemination of information and any monetary transactions. There are many crowdfunding platforms to choose from. A list of the platforms and their features (such as fee structures, customization options, and restrictions) can be found by a quick internet search. One platform specifically for legal matters is CrowdJustice.org.5
There are four basic types of crowdfunding campaigns:
-
Rewards-based, where financial backers get rewards or incentives for funding a project;
-
Donation-based, where donors do not receive anything of value for their contribution;
-
Equity-based, where financial backers receive a share of the company they are funding; and
-
Debt-based, where backers loan money and get a repayment with interest over time.
This article addresses donation-based crowdfunding.
Crowdfunding differs from, and should not be confused with, third-party litigation finance, known as alternative litigation finance (ALF). ALF refers to the funding of litigation activities by entities other than the parties themselves, with a contractual relationship often including an assignment of interest in the proceeds from the cause of action.
Donation-based Crowdfunding for Legal Matters
Although crowdfunding has opened up access to capital for entrepreneurs and small-business founders, law has not experienced the same trend. One possible explanation is that – unlike entrepreneurs and small-business founders – lawyers are limited by ethical considerations.
Donation-based crowdfunding may provide financial resources for individuals who might otherwise be unable to afford legal services, but lawyers must proceed cautiously. Two ethics opinions provide guidance: District of Columbia Bar Association Ethics Opinion 375 (Nov. 2018) and Philadelphia Bar Association Ethics Opinion 2015-6 (Dec. 2015).
The ethical considerations vary depending on the lawyer’s level of involvement in the donation-based crowdfunding effort. In some situations, the client directs the crowdfunding effort, and the lawyer is merely aware of it. In others, the lawyer directs the crowdfunding effort.
Crowdfunding by the Client
The Rules of Professional Conduct do not prohibit a lawyer from accepting funds from a client who has raised or is raising money through crowdfunding. Clients often rely on money collected from family or friends to pay for legal services. “The practical reality that a client may, through social media or other platforms, cast a broad net and collect funds from acquaintances and strangers does not, standing alone, impose specific ethical obligations on a lawyer.”6 Lawyers must, however, be aware of both the legal and ethical risks.
Lesson 1: There may be a “heightened risk of fraud, money laundering, and other criminal activities in connection with any such exchange of funds.”7
Consequently, lawyers should be cautious “to avoid unwittingly engaging or assisting in unethical or illegal conduct.”8 In addition to avoiding legal risks, a lawyer must be aware of the accompanying ethical risks.
Lesson 2: Wisconsin lawyers are prohibited by SCR 20:1.2(d) from counseling a client to engage, or from assisting a client, in conduct that the lawyer knows is criminal or fraudulent.
Under SCR 20:1.2(d), the lawyer is permitted, however, to discuss the legal consequences of any proposed course of conduct with the client, and to counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning, or application of the law. Moreover, when a lawyer suspects or knows that a client has obtained the funds fraudulently or illegally, the lawyer has an obligation under SCR 20:1.4(b) to explain the risks to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. The lawyer also has an obligation under SCR 20:1.4(a)(5) to consult with the client about any relevant limitation on the lawyer’s conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.
Lesson 3: The lawyer should consider counseling the client about disclosures to third parties.9
Crowdfunding usually involves some disclosure of information to third parties about the need for counsel. “A crowdfunding website making a plea for financial assistance can be a treasure trove of case details littered with personal information and emotional vulnerabilities.”10 Due to the risk of waiver of the attorney-client privilege, the lawyer who knows that a client is crowdfunding should provide guidance to the client regarding disclosures to third parties.11 The lawyer should also consider what “damage control needs to be discussed or action taken.”12
Crowdfunding by the Lawyer
A lawyer who undertakes or exerts control over the crowdfunding effort has specific ethical responsibilities under the Rules of Professional Conduct.
Lesson 1: A lawyer may accept compensation from third parties but must comply with the three requirements of SCR 20:1.8(f).
Under the first requirement of SCR 20:1.8(f), the client must give informed consent. Informed consent, as defined in SCR 20:1.0(f), requires the agreement by the client to the proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.
Under the second requirement of SCR 20:1.8(f), there must be no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship. “In the context of crowdfunding, a lawyer may not allow donors, whether family members or strangers, to exert undue influence with respect to the objectives of the representation or the legal strategies employed. This duty remains unchanged notwithstanding the social media and other connections that often accompany crowdfunding.”13 While there is no reason to think that by raising funds from a crowdfunding site, the lawyer’s duty of loyalty and independent judgment to this client would be compromised, the lawyer should give consideration to this issue and make sure that the lawyer does not imply in describing the matter on the crowdsourcing site that donors will be granted any right to direct or otherwise control the litigation.14 SCR 20:5.4(c) also prohibits a lawyer from permitting a person who pays the lawyer to provide legal services to a client from directing or regulating the lawyer’s professional judgment in providing those legal services.
Under the third requirement of SCR 20:1.8(f), information relating to representation of a client must be protected as required by the duty of confidentiality under SCR 20:1.6. The duty of confidentiality prohibits a lawyer from disclosing information relating to the representation of a client unless the client provides informed consent, the disclosure is impliedly authorized to carry out representation, or the disclosure falls within one of the enumerated exceptions. One of the keys to a successful crowdfunding campaign is to reach likeminded and sympathetic donors by telling an effective story. “While lawyers should always be mindful of their duty of confidentiality, the informal nature of communications made through social media platforms warrants a reminder of this duty when using these platforms for crowdfunding.”15
Funds received from a crowdfunding campaign are client funds and must be treated as such consistent with the Rules of Professional Conduct.
Lesson 2: The lawyer must comply with the communication requirements of SCR 20:1.5. The lawyer should also include in the fee or engagement agreement other provisions relating to fees and costs, such as termination of representation and disposition of any unearned funds.
SCR 20:1.5(b)(1) requires that the “scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate as in the past.”
SCR 20:1.5(b)(2) requires that “[i]f the total cost of representation to the client, including attorney’s fees, is more than $1000, the purpose and effect of any retainer or advance fee that is paid to the lawyer shall be communicated in writing.” The rule requires that this information be communicated to the client in writing: the rule is not limited to matters for which the client pays the fees and other costs.
In addition to the communication requirements of SCR 20:1.5(b), the fee or engagement agreement should include other provisions relating to fees and costs. For example, in the absence of an appropriate agreement, unearned crowdfunds are the property of the client and should be returned to the client upon termination of the representation.
A matter may be terminated for several reasons. The lawyer may carry the matter through to its conclusion, the client may decide not to pursue the matter, the client may decide to settle the matter, or the client or lawyer may decide to terminate the relationship. Each of these reasons may have different implications for unearned fees and costs and should be addressed in the fee or engagement agreement.16 The lawyer and the client should consider these possibilities and describe their understanding about the fee and the scope of representation carefully in the fee or engagement agreement. In addition, the lawyer should consider whether the fee is reasonable under all the circumstances of the representation.
Lesson 3: Communications with donors and prospective donors to solicit funds must be truthful and must not violate the duty of confidentiality.
SCR 20:4.1(a)(1) prohibits a lawyer from making “a false statement of a material fact or law to a third person” when representing a client. In addition, SCR 20:8.4(c) prohibits a lawyer from engaging “in conduct involving dishonesty, fraud, deceit or misrepresentation.” A lawyer is also prohibited by SCR 20:7.1 from making a false or misleading communication about the lawyer or the lawyer’s services.
In addition, donors should be informed that their donations are nonrefundable, that they will not receive information relating to the representation of the client, and that they may not interfere with or otherwise exert control over the lawyer’s work.
Lawyers should also be mindful about their duty of confidentiality under SCR 20:1.6. “In order to seek funds on a crowdsourcing site, the lawyer will of course have to reveal certain information about the matter sufficient to interest the public in making contributions.”17 That will require obtaining the client’s informed consent. “The level of detail and transparency required will depend on the circumstances but must take into account Rule 1.6 and any other confidentiality obligations. For instance, a lawyer should avoid providing specific information about how the funds will be used to effectuate the legal strategy.”18
A lawyer should have a plan that is approved by the client to terminate crowdfunding when it appears that sufficient funds have been raised.
Lesson 4: Funds received from a crowdfunding campaign are client funds and must be treated as such consistent with the Rules of Professional Conduct.
SCR 20:1.5(f) requires that “unearned fees and funds advanced by a client or 3rd party for payment of fees shall be held in trust until earned by the lawyer” unless the lawyer complies with the alternative protection requirements of SCR 20:1.5(g). In addition, SCR 20:1.5(f) requires that funds advanced by a client or third party for payment of costs be held in trust until the costs are incurred.
Although a lawyer is permitted to deposit advanced fees in the lawyer’s business or operating account if the lawyer complies with the requirements of SCR 20:1.5(g), the lawyer should exercise caution in doing so. For example, if the amount donated does not distinguish between fees and costs, then the entire amount must be held in trust until the lawyer earns the fee or incurs the costs. Moreover, the District of Columbia ethics opinion recommends caution even if the lawyer is permitted to place unearned fees in the lawyer’s operating account:
“Crowdfunding increases the risk that a lawyer could be perceived as seeking an unreasonable fee under Rule 1.5(a). This is in part because of the ease by which the amount of money in excess of what is required to fund the representation may be raised and in part because some clients may exercise less scrutiny over the lawyer’s bills since the client is not personally, or at least not solely, responsible for payment. Placing crowdfunds in a trust account until the lawyer earns the fee or incurs the expense ensures that there is a clear delineation of lawyer funds and client funds.”19
It is also recommended that the lawyer monitor any fundraising activity that the lawyer controls. A lawyer who solicits and receives excessive funds on behalf of a client may run the risk of violating one or more ethics rules.20 To mitigate this risk, a lawyer should have a plan that is approved by the client to terminate crowdfunding when it appears that sufficient funds have been raised.21 As an alternative, the contributions could be made to a separate entity that would hold the amounts contributed in trust in accordance with a separate fee agreement between the lawyer and the client, which would specify how and when the lawyer would be paid.22
Conclusion
The Philadelphia Bar Association Ethics Opinion provides a cautionary scenario in which a lawyer agrees to represent a client in a litigation matter against a government entity. The client will be seeking equitable, nonmonetary relief, but the client is unable to pay the lawyer’s fee or expenses. A fee-shifting statute may result in the payment of some fee in the event of success, and the client agrees to assign any award of attorney fees to the lawyer. The lawyer proposes soliciting compensation for his or her work on a crowdfunding platform, anticipating that certain members of the public might be interested in supporting what they would view as a worthy public cause. The lawyer proposes that “any contributed funds received from the crowdfunding appeal would be payments to counsel, not the party [client] and that these fees would remain counsel’s property even in the event of a recovery of attorneys’ fees under the fee shifting statute.”
The opinion enumerates the various ethical obligations of a lawyer. Among these obligations are the requirements when accepting payment of fees by a third party, the duties of confidentiality to the client and truthfulness to others when soliciting funds on a crowdfunding platform, the requirement that fees be reasonable, and the trust account requirements for unearned fees and costs.
The opinion concludes by acknowledging both the value of crowdfunding and the care that lawyers should take in complying with their ethical obligations when using crowdfunding campaigns. “Crowdfunding sites can be a beneficial source of funds allowing the public to assist in the assertion of valid legal claims that might otherwise go without recourse. Thus, great care should be taken to make sure that the initial development of such sites not affect the ability of subsequent persons to use such a source.”23
Endnotes
1 Social media usage is one of the most popular online activities. In 2019, 79 percent of the population in the United States had a social networking profile. Statista, Percentage of U.S. Population Who Currently Use Any Social Media from 2008 to 2019, (last visited Feb. 15, 2021). Social media often plays a huge role in publicizing a crowdfunding campaign. Posts or newsfeeds that offer stories of compelling cases attract attention, and most crowdfunding platforms make it especially easy to share through social media.
2 Fundly, Crowdfunding Statistics.
3 Id. Of the $34 billion raised globally by crowdfunding, peer-to-peer lending accounted for $25 billion and donation crowdfunding accounted for $5.5 billion. Equity crowdfunding accounted for $2.5 billion. North America leads the way in crowdfunding revenue at $17.2 billion.
4 Fundera, Crowdfunding Statistics: Overview.
5 “Built by lawyers, CrowdJustice is the leading online fundraising platform specifically designed for legal action. … Raising funds on CrowdJustice works for all kinds of issues, large and small. Our experienced team will support you in building your page and help you towards fundraising success. … Trusted by lawyers across the country, CrowdJustice’s donation-based funding is a proven way to pay for legal services.” crowdjustice.com.
6 District of Columbia Bar Ass’n Ethics Op. 375 (Nov. 2018) [hereinafter Ethics Op. 375].
7 Id.
8 Id.
9 Id.
10 www.attorneyatwork.com/is-crowdfunding-legal-services-ethically-permissible/.
11 Ethics Op. 375, supra note 6.
12 www.attorneyatwork.com/is-crowdfunding-legal-services-ethically-permissible/.
13 Ethics Op. 375, supra note 6.
14 Philadelphia Bar Ass’n Ethics Op. 2015-6 (Dec. 2015) [hereinafter Ethics Op. 2015-6].
15 Id.
16 Ethics Op, 2015-6, supra note 14, posed the following questions: Does the lawyer anticipate that if the client agrees to allow the lawyer to retain the total raised on the crowdfunding site that the lawyer is promising that the lawyer will handle the matter from its inception to its conclusion in return for whatever the crowdfunding campaign raises? That is, in return for the fee, does the lawyer promise to remain in the case through its termination, regardless of what the fee is, or may the lawyer withdraw in the event certain contingencies arise but still keep the fee? The opinion also posed two possible scenarios.
“For example, suppose the [lawyer] raises $20,000 under this arrangement and that the entire fund immediately is paid to him or her, and, then, the lawyer manages to get a result in the case by devoting only 10 hours of work. That situation could produce a fee at the rate of $2,000 per hour. On the other end of the spectrum, suppose the funding site raises $20,000, and then the [lawyer] finds out the matter will go on for years and require thousands of hours of work, much more than anticipated, and more than the [lawyer] can possibly handle without a fee. Could the [lawyer] then keep the whole fee and withdraw?”
17 Ethics Op. 2015-6, supra note 14.
18 Ethics Op. 375, supra note 6.
19 Id.
20 For example, a lawyer who claims unearned fees at the conclusion of such a representation risks making an agreement for, charging, or collecting an unreasonable fee in violation of SCR 20:1.5(a). In addition, the lawyer may risk violating SCR 20:4.1, which requires a lawyer to be truthful in statements to others, and SCR 20:8.4(c), which prohibits a lawyer from engaging in conduct that is dishonest or deceitful.
21 Ethics Op. 375, supra note 6.
22 Ethics Opinion 2015-6, supra note 14.
23 Id.
» Cite this article: 94 Wis. Law. 18-23 (March 2021).
