The guide provides information on a Direct Public Offering (DPO) – a type of offering in which a company offers its securities dir...
Read this guide to find out what a new concept of Initial Litigation Offering (ILO) can offer to investors.
The world of cryptocurrencies moves fast, with new technology and innovations coming in every year. Considering this, you might have heard recently about a new form of fundraising, called “Initial Litigation Offering” (ILO), announced by Ava Labs – an open-source platform for DeFI (Decentralized Finance) apps. This guide will help you understand this new financial model and what it has to bring to the public.
Ava Labs announced the first ILO offered to retail investors under the Avalanche blockchain as a way of financing tokenized shares from legal claims. This way, people who don’t have the capital to cover their legal costs (which, often, can be quite expensive) can benefit from retail investors looking to profit from the financial outcomes of the litigation by financing the case.
But traditionally, ILOs have their downside. It is reserved for wealthy investors and high net-worth institutions due to how expensive legal cost is. This makes it difficult for retail investors to stake any capital in litigations. Even more, ILOs demand several years of capital commitment. This is why investors looking to make profits in a short amount of time get discouraged.
The tokenization of litigation shares comes after a Sheriff from Kern County, California, deliberately destroyed 500 acres of a legal CBD farm, which is derived from hemp plants – the farm was owned by an Institution called Apothio LLC.
Ava Labs brings fundraising for Apothio by joining forces with Roche Cyrulnik Freedman LLP, and Republic Advisory Services. By doing this they have successfully integrated ILOs to the Avalanche blockchain. There’s an estimated outcome of $10 billion into the crypto market – and a better, more accessible financial opportunity for investors globally, making it the world’s first ILO launched under blockchain technology.
Now, by tokenizing the shares of litigations, we can see two major opportunities:
Simply put, think about Initial Litigation Offerings as investing in litigations. A new financial strategy in which you stake your capital in return for a profit. You become a third-party funder for people who lack the money to cover their legal costs. Depending on how the process goes, you receive a share of the financial outcome, similar to Initial Public Offerings (IPO).
Now let’s put an example to help you get down to the core concept.
Supposed Person A, which is the plaintiff, is suing Person B, the defendant, for damages of up to $300M. This type of lawsuit is quite expensive and runs the risk of failure. This is where the investor comes at hand: Person C gives the plaintiff an amount of money to cover the expenses, let’s say, $10M in return for some percent in the payouts.
In this case, the plaintiff is Apothio and the Kern County Sheriff Office is the defendant. The ILO will begin in the first quarter of 2021.
You could say that this is a blockchain-based token to finance lawsuits. However, as in any investment, your capital is a risk – if the plaintiff losses the legal claim, you lose your invested capital.
But how do ILOs distinguish themselves from Initial Exchange Offering, Initial Coin Offerings, and Security Token Offerings?
First, an IEO (Initial Exchange Offering) is a financial modality that emerged due to the crypto market crash in 2018-2019. Crypto companies try to serve as a platform for the launch of new tokens while increasing their profitability.
An exchange house launches and manages them, and unlike ICOs, it’s not offered to the public. These offers are executed from an agreement (called Smart Contract) between developers and one or more crypto exchanges. the issuers must pay the exchange house a fee as the token sale is carried out, together with a percentage of profits based on the number of tokens sold.
Initial Coin Offerings (ICO) work in a similar way, the difference is that fintech startups offer their products to the public to finance their services. Thus, fintech companies launch their digital coins for fundraising. This is the equivalent of an Initial Public Offering for the crypto market.
On the other hand, a security token offering (STO), or a tokenized IPO, is a public offering for tokenized digital securities, known as security tokens. These are sold in cryptocurrency exchanges or security token exchanges.
But the tokenization of this old fundraising model changes the course. In ILOs, each token represents a claim to a portion of the litigation’s financial outcome. A major key difference is that by tokenizing this model, retail investors can access this market, trade positions throughout the lawsuit.
IPOs offer shares of a private firm or company to the public to raise capital. Similarly, by tokenizing the shares, ILOs make litigations open to the global markets.
This first ILO could start in early 2021, with an estimated worth of $10B. This may attract the attention of many investors seeking liquidity and entering the litigation market. It also offers a lucrative opportunity for other companies and individuals in general seeking to finance legal processes.
Take for example LexShares, a leading finance litigation firm that has invested in more than 100 cases since it was created in 2014. Out of all their financed lawsuits, they have achieved a 70 % win rate from 43 cases – surpassing the 8.7% annualized return of the S&P 500, one of the largest stock indices in the United States.
We could start to see more ILOs over time with new companies summing up to this new financial strategy. ILOs can provide a great opportunity both for people who do not have the capital to cover the legal costs of a lawsuit, as well as a market that is more accessible to the public, easy to trade, and open to global markets.
Now investors can trade ILO tokens in markets globally. Price speculation could exceed the initial budget required to fund litigations. This creates attractive opportunities for investors by making huge profits even before a judgment is made.
Avalanche is an open-source platform created by Ava Labs. It works as a launcher for decentralized applications and interoperable blockchains. With Avalanche, developers can create their own applications with custom blockchain networks on existing private or public subnets.
Subnets are networks inside networks. Subnets improve the main network and they allow traffic to travel directly to its destination without going through several routers first.
ICO is an acronym that stands for Initial Coin Offering. Think about ICOs as similar to IPOs (Initial Public Offering). Companies use this term when they want to go public by offering shares to potential investors in exchange for money. ICOs has to do with the financing of a business project.
But in the case of an ICO, the only thing to finance is the birth of a new cryptocurrency, in the style of Bitcoin or Ethereum. These are scarce virtual tokens, protected by cryptography, which have value due to their scarcity and their demand.
Miners create cryptocurrencies by verifying transactions between users and adding them to the blockchain. Miners provide computational high-power GPUs (Graphics Processing Unit) to any company creating a coin. What they received in exchange are mined and commission fees when they verify commercial transactions between users of that coin.
An STO (Security Token Offering) is basically an ICO where the nature of the tokens issued represents securities – tokens that grant economic rights over the company that issues them – either in the form of equity or in the form of debt and are backed by something tangible: profits, cash flows, assets, etc.
Smart Contracts issue these security tokens, giving them the technological and legal support where they rely on. Smart Contracts are a new type of agreement adapted to this new environment – written in a programming language (script) that makes them self-executing and capable of enforcing themselves autonomously and automatically, without the need for third-party intervention.
These contracts make the digitization of a legal relationship with the automation of the contractual terms possible.
Exchanges issue IEOs (Initial Exchange Offerings) destined only to clients of that specific exchange. If Binance announces an IEO, for example, only the clients of this exchange will receive the tokens of that IEO. In no other place or exchange will it be possible to acquire them. Right from the start, this system guarantees that an intermediary will deposit the funds and the entity that launched the offer is not going to leave with the money of the first investors.
In IEOs, it is the exchange itself that in some way gives its seal of quality to the project it presents.
In the case of ICOs, a project starts unnoticed, and it needs to reach potential investors by its own means. Initial Exchange Offerings allow alleviating the workload of the project since the diffusion of the exchange allows the product to reach the market in a faster way.