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Hemp Biz Launches Blockchain-Based Litigation Funding

Law360 (October 26, 2021, 8:58 PM EDT) — Retail investors can now bet on litigation finance via a blockchain-based token offering — a so-called initial litigation offering — that will fund hemp company Apothio while it battles a California county in federal court, according to a Tuesday announcement.

Indiana-based Apothio LLC and its counsel, Roche Freedman LLP, are hoping to raise up to $5 million for Apothio while it pursues a lawsuit alleging California’s Department of Fish and Wildlife illegally bulldozed hundreds of acres of hemp crops on one of its farms. Investors in the tokens will have an interest in proceeds Apothio may win from the suit, according to regulatory filings.

The initial litigation offering, or ILO, is proceeding under crowdfunding rules and is available to retail investors on Republic, an online platform that curates investment opportunities in startups, cryptocurrency companies, gaming and real estate, according to its website. Republic called the offering the first “tokenized litigation funding.”

“The Apothio ILO represents an opportunity to invest in the same kind of assets that a litigation funder would have in its portfolio,” Republic’s website said, adding that the Apothio investment may be riskier since litigation funds frequently invest in a portfolio of cases.

Apothio said in regulatory filings it’s planning to sell a minimum of $250,000 worth of the litigation tokens, with a minimum individual investment amount of $100. The investment window is open until Jan. 1. The tokens will not be freely tradable until one year after purchase, according to regulatory filings.

The tokens are hosted on the Avalanche blockchain, which is associated with blockchain startup Ava Labs, the filings said.

Investors will receive one ILO token for each dollar invested. Should Apothio’s suit be successful, they’ll get back a “multiplier” based on how many tokens they hold and the length of the litigation, according to Republic’s website. Investors’ claim will be junior to Roche Freedman’s contingency fees, which are 33.3% of litigation proceeds up to $100 million and smaller percentages for higher recoveries, the site says.

If Apothio loses the motions to dismiss, which are currently pending, investors will receive back 80% of their investment, according to regulatory filings. 

The filings list a range of potential risk factors to investors, including the risk that “material” information about the lawsuit can’t be disclosed because it’s the subject of attorney-client privilege.

And even if Apothio is successful in its claims, it may not win damages “sufficient to fully pay out investors,” the filings said.

Apothio also has outstanding debt, some of which is past maturity, according to Republic’s website.

In the lawsuit in question, Apothio accuses California’s DFW and local law enforcement of destroying 17 million of its hemp plants, ignoring the company’s status as an approved hemp research organization. The defendants have argued that law enforcement testing found the THC levels of the plants were above the legal limit. 

The suit was paused in January, with a magistrate judge finding that further discovery did not appear necessary while the motions to dismiss are decided.

Litigation finance has been a growing area of investment in the U.S. in recent years. Roche Freedman partner Kyle Roche told Law360 on Tuesday that litigation funding can help smaller litigants in legal battles with deep-pocketed adversaries, and the tokenized litigation offering can build on the growing trend.

“The advent of the ILO has the potential to provide even greater access to justice in our society, and I’m excited that our firm will be leading the charge along with the innovative minds at Ava Labs and Republic,” Roche said.

–Additional reporting by Grace Dixon. Editing by Janice Carter Brown.

 

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