It was about two years ago when a man from Ohio put up a Kickstarter to raise $10 to make potato salad and ended up receiving tens of thousands of dollars in donations. I’m sure there were many people who were familiar with this concept before then, but for me that was the first I’d heard of the online phenomenon of crowdfunding. Most recently, it seems like a good bit of the news on crowdfunding has been of the weird variety where people use it to raise money for police officers who shoot unarmed people.
I never thought I’d see lawyers interested in using crowdfunding to actually permit them to set up a law practice. I didn’t think I’d see it for two reasons: (1) the ethics rules prohibiting nonlawyer investment in law firms would never allow something like that; and (2) if you are going to hope a collection of strangers with too much money on their hands will throw some your way, why wouldn’t you leverage it to do something much less stressful than practice law?
Yet, yesterday I read the stories about the new law school graduates drowning in student loan debt who were kicking around the idea and the resulting New York State Bar Association ethics opinion. It is not entirely clear why this opinion, written and issued back on June 29, 2015, is just now surfacing in the news, but in tooling around and reading a few stories about the opinion I came across a second unexpected development — much of the reporting on this opinion appears to be giving it a positive headline as if the newsworthy aspect of the opinion indicates that maybe a lawyer could pursue this.
Yet, thoughtful reading of the opinion demonstrates that is the wrong sort of headline. The NYSBA opinion explains that from what it can decipher there are 5 types of crowdfunding endeavors. One is sort of just syndicating a loan with many, many small loans from individuals for a project that might not get a large amount of funding from a bank or other institutional investor. The committee spends no time talking about the ethical implications of that option because that still would just be more debt for these new law grads and the law grads making the request indicated that they were interested in crowdfunding to avoid being saddled with additional debt.
Two of the other five approaches, the investment model and a royalties model, are ones the committee explained are nonstarters from an ethics perspective because they involve either (the investment model) nonlawyer ownership in the firm in violation of RPC 5.4(d) or they amount to an arrangement in which there would be fee sharing between lawyer and nonlawyer in violation of RPC 5.4(a). These obvious answers to the ethical issue are one of those two reasons stated above that I didn’t think I’d see lawyers exploring this model.
Finally, the two other types are the straight, no-strings-attached donation approach and the “reward” model, where you are overpaying for some small item in return approach. As to the donation approach, the committee did not see any ethical problem with it. (Also they were kind enough to not explicitly state that the only chance this would work is if you threw in an offer of some potato salad. And, if you didn’t actually follow the potato salad story back when it happened, the guy did end up throwing a big party with the proceeds and giving some funds to charity so that at least had something of a happy ending.)
As to the reward model, the inquiring lawyers said that perhaps they would offer an informational pamphlet or agree to provide pro bono services to some charitable organizations. The committee says that could be ethically viable but that there were some land mines, like making sure the informational pamphlet didn’t offer legal advice and complied with advertising restrictions and making sure that, if offers were made to do pro bono work for a charitable organization, that the lawyer could remain available to do so ethically. In addressing this approach, the committee offered a call-back to a 2011 opinion it issued about “deal of the day” websites like Groupon.
What is really disappointing is, having gone to all of the trouble of putting out an opinion on this topic and even referencing its prior Groupon analysis, it might have actually been more helpful to address a variation on the reward approach which might be economically viable. Could lawyers put up a crowdfunding offer where anyone who contributes say $50 today receives $200 in free legal services from this firm at any time in 2016? Such an approach might just provide the level of seed money needed to start up the infrastructure of a law practice and might, assuming the lawyer can develop some regular clients (who weren’t also investors), allow the lawyer to eventually turn a profit. Such an approach also would, in theory, be no more perilous from an ethics perspective than the Groupon situation.
But, really, the most valuable thing this ethics opinion does — in a fairly easy to observe way — is to lay bare how the absolute restriction on nonlawyer investment in a law firm goes way beyond what would be necessary to protect the espoused public interest being served — which it says in the Comment to the Rule is “to protect the lawyer’s independence of professional judgment.” The regulatory concern is that if lawyers practice in a law firm that is controlled by non-lawyers then the lawyers will not adhere to their ethical obligations and will instead allow themselves to be directed to do whatever is necessary for the firm — and therefore the investors — to turn a profit. Yet, if a law firm raised $50,000 in start up capital $25 at a time from 2,000 investors, would you really be worried that any of those 2,000 individuals would be in a position to control or direct the independent professional judgment of the lawyers in the law firm? No, of course not.