Attorneys May Use Crowd Funding To Finance Firm Expenses

“Go-fund-me” and other crowd funding resources have been steadily increasing in popularity as a means to fund a variety of activities from serious business ventures to Cancun vacations. Typically crowd funding is used in product development as a means to test the market. It therefore requires a large group of people raising large funds for that purpose.

Because of the great success many projects have had in using crowd funding as a source for their operations, recent law school graduates have inquired about the feasibility of using this tool to start their own firm.

Most recent law school graduates desiring to start their own practice are facing a mountain of student loan debt. As a result, these graduates are reluctant to take out additional loans to finance their first months of operation.

Crowd funding is marketed as a creative solution to avoid creating additional debt, but attorneys old and young must keep in mind the potential ethical limitations. According to the New York State Bar Association in their June 29th opinion, two methods of crowd funding create clear ethical violations under Rule 5.4: the royalty and equity models. Consequently, there are only two crowd sourcing models from which an attorney can benefit.

The donation model appears to be the most promising. In this case an individual can essentially give money towards a venture with the clear understanding that their donation in no way entitles them to an interest in the business. There are no ethical limitations relating to this model, so long as attorneys make it clear to donors that they receive nothing in return for their donations. There are valid questions relating to how effective a tool this might be in garnering funds, but at the very least a lawyer does not have to worry about violating any codes of conduct.

The reward model is the second available option. In exchange for his donation, a donor would receive informational pamphlets that report the progress of the firm or the lawyers’ performance of pro bono work for a third-party non-profit legal organization. Attorneys who opt to use this model have to ensure that materials are only distributed for educational purposes (i.e. newsletters, blogs, or client alerts) so as not to trigger advertising sanctions under Rule 7.1.

Also, an attorney must avoid offering legal advice in distributed materials to avoid potential malpractice exposure. As it relates to the promise of performing pro-bono hours for a third party organization, an attorney must condition his agreement on being competent in the subject matter and not subject to a conflict of interest.

As a whole, crowd funding is not a perfect tool with which to establish a new private practice. Attorneys must ensure that investors do not receive a share in the law firm’s revenue or an interest in the firm. Nevertheless, for young attorneys, crowd funding can be considered at best as a colorful option to circumvent additional loans as they embark on their exciting careers. With that said, “Go fund me!”

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