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Crowdfunding and Other Private Venture Capital Ideas for Fraud Recovery

Canadian Fraud Lawyer

In one of our earlier blogs, we discussed Options for Funding Fraud Recovery Litigation.  This blog discusses third party litigation funding together with a relatively new concept known as “crowdfunding.”


The concept of crowdfunding is a recent phenomenon that has evolved as a result of e-commerce. It can be summarized as a website portal for individuals to offer financial contributions for projects that they believe in. The project creator sets a target for the funding, such as $250,000. If the target is reached the site takes a commission, such as 5%. In return for their respective contributions, investors are offered rewards instead of financial compensation. Contributions can be stipulated to be any amount the project creator deems reasonable.


So for example, if you fund the writing of a book you may receive a copy of the finished work before it is released to the general public. Some crowdfunding websites offer funding for ventures in such categories as the Arts, Design, Fashion, Film, Games, Music, Photography, Publishing, Technology, and the Theater. Essentially, it could be any idea, even the funding of litigation (although the Law Society of Upper Canada may have some concerns about ‘champerty’). And the compensation for investment can take many forms, including an equity position in the start up venture.


Fraud and Crowdfunding


Crowdfunding is susceptible, however, to fraud as funds could be requested by a company that has no intention of producing a product or of providing the services being promoted. As a result of this concern, on June 11, 2013, the Ontario Securities Commission (“OSC”) hosted an “investor roundtable” to hear from investors and potential investors on investing in start-ups and small and medium sized enterprises (“SMEs”). This event focused primarily on an OSC concept idea that contemplates allowing businesses to sell shares through equity crowdfunding.


FAIR Canada’s Ermanno Pascutto represented investor interests on the OSC’s panel, along with long-time investor advocate and former OSC Commissioner, Glorianne Stromberg. Both voiced serious concern over this concept idea and opposed the introduction of equity crowdfunding in Ontario. Brian Koscak of the Exempt Market Dealers Association of Canada represented the industry perspective and spoke in favour of allowing crowdfunding if certain regulatory protections are put into place. While billed as an “investor” roundtable, the event was attended primarily by industry representatives, including those involved in running or servicing SMEs, and who stands to benefit from a potential crowdfunding exemption.


More recently, while the OSC has publicly stated that it has not decided on whether it will proceed with the crowdfunding concept proposal, it has taken a step in that direction by granting an exemption from know-your-client and suitability requirements to MaRS VX, permitting it to operate an online portal that will “bring together” accredited investors and issuers that are social impact and/or environmental impact issuers. This exemption was granted in the absence of public consultation, despite its direct relevance to the current debate about the appropriateness of current exemptions (especially the accredited investor exemption), crowdfunding, and investor protection. For further information, see http://faircanada.ca/top-news/crowdfunding-update/.


If you have concerns that a crowdfunding opportunity may be a fraud, we refer you to the following links:


Better Business Bureau:






Harvard Business School:




Crowdfunding for Funding Fraud Recovery


With respect to using crowdfunding to fund fraud recovery litigation, as mentioned above, the Law Society of Upper Canada may have concerns about “champerty.” The common meaning of “champerty” is buying into (or investing into, or betting on) someone else’s lawsuit. The concern of legal regulators is that it promotes and encourages vexatious litigation. However, in modern times, legal regulators have permitted contingency litigation to permit impecunious plaintiffs the option of retaining counsel to “invest” in their litigation. In other words, access to justice ideals trump vexatious litigation concerns. Most contingency litigation currently takes place in the personal injury bar where recovery is primarily sought from insurance companies. In fraud recovery litigation, recovery from insurers is often not available and therefore the risk is higher.


Other concerns relating to third party funding of fraud recovery litigation is whether the fraud victim’s solicitor-client privilege is waived by permitting others to invest in their litigation. This concern has been addressed in various cases such as Re Kaiser, where the Court held that the identity of the persons paying for the litigation was privileged and need not be disclosed. The downside for the investor is that as an outsider to the litigation, they are not provided access to the privileged communications of the lawyer and fraud victim, thereby making it difficult to analyze precisely the risks in what they are funding.


For those passionate about assisting the victims of fraud and seeking a high risk investment return, crowdfunding the support of a fraud recovery cases may be a concept worth exploring. For further information, contact us at www.investigationcounsel.com.










Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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