Terms of the offering vary by deal, so it is important to research the offering documents before investing in any litigation financing. Some material terms regarding returns include:
Downside Protection
Some offerings may contain “downside protection” characteristics where a portion of investors’ funds are held in escrow until a milestone is reached. If the milestone is not reached, a portion of the funds may be distributed back to investors on a pro-rata basis. There is no guarantee, however, that every deal has downside protection.
Potential Returns
Distribution to investors typically depends on three factors:
The length of time it takes to litigate the case;
The outcome of the litigation; and
The terms of the security issued
Notably, potential returns are dependent on the multiple types of outcomes that arise from a litigation. They also vary in duration, so investors need to review the terms of each deal individually. Typically, litigations with longer durations or those deemed to be higher-risk may yield higher returns (multipliers).