A Hemp Company Uses Crypto Tokens To Crowdfund Lawsuit
An Indiana-based hemp company is funding a civil and criminal case by a crowdfunding initiative asking investors to buy crypto tokens.
In 2019, the Kern County Sheriff’s Office and California’s Department of Fish and Wildlife destroyed around 450 acres of hemp cultivation. Crops belonged to Apothio LLC, an agricultural research institution focused on the commercialization of hemp.
Kern County and the state argued that Apothio grew illegal cannabis for commercial distribution as THC levels exceeded legal limits.
In April 2020, Apothio sued in the Eastern District of California against Kern County, the California Department of Fish and Wildlife, and several officials for damages arising from the alleged wrongful destruction. The company estimated the loss of hemp crops to be worth between $500 million and $1 billion at the time of the hemp destruction.
Apothio decided to use crypto tokens to fund the lawsuit on Republic, a private investing platform. For the first time, a plaintiff asked investors to buy crypto tokens in a crowdfunded ‘initial litigation offering’ (ILO).
The ILO is an offering with a blockchain-enabled payment to finance individual litigation. Apothio wishes to raise capital to ease the financial burdens of litigation.
Apothio’s ILO aims to raise to $5 million with a minimum goal of $200,000. As of Tuesday, November 1st, 120 investors have put over $220,000 in the offering.
The potential investment returns depend on two factors: the time of the litigation and its outcome.
Individual Investors can buy ILO tokens in the amount equal to their investment, whereby one ILO token is equal to $1. If the lawsuit is successful, investors will get a multiplier based on the amount of ILO tokens they hold and the time to resolve the litigation.
Apothio’s litigation investors will receive ILO tokens provided by Avalanche, a smart contracts platform in the blockchain industry. Investors will receive the payment of their share via their Avalanche tokens. However, investors will lose 20% of their investment if the case is dismissed.
Apothio’s crowdfunding represents a breakthrough in the legal financing field. The ILO is the first attempt to raise money for a civil case through crypto. Also, the offering is not limited to accredited investors. The offering was registered under the SEC’s Regulation CF, allowing the company to raise up to $5 million through crowdfunding without the traditional procedures.
Lawsuits have become common in the hemp sector among producers, processors, and manufacturers. While the 2018 Farm Bill legalized hemp cultivation nationwide, it also created a physiological increase in hemp-related litigations. Litigations on the THC threshold are also recurrent as hemp flowers must not exceed 0.3% THC.
Other litigations cover a wide range of aspects of the hemp industry and hit different stages of the hemp supply chain.
In October, MJBizDaily reported that two Illinois companies sued cannabis business licenses regulators in Illinois, claiming the lottery system for awarding permits is unconstitutional because it doesn’t meet the state’s goal to promote social equity in the hemp industry. In September, three Illinois companies sued Illinois’ cannabis regulators, claiming their applications for cultivation and transportation permits were wrongly rejected, and regulators didn’t allow them to amend errors in the application.
The mechanism of legal financing is a recent phenomenon. However, it has created a profitable market worth some billions, although there are no consensus figures on how much money investors put into litigation each year.
Using crypto tokens for crowdfunding litigations is seen as an innovative way to attract individual investors. But most importantly, the combination of crowdfunding and crypto to fund a lawsuit of hemp company represents an unprecedented study case.
However, it also raised some concerns. In particular, a commentary published on Reuters highlights how small investors don’t have enough litigation knowledge and insight to make informed investment decisions.
Funders often have access to non-public information in commercial litigation, which is vital to decide if the case is a good bet. However, in Apothio’s offering, the crowdfunding platform provides investors links to public filings. Such information can represent a limit for investors because they don’t have valuable non-public insights to make the right decision about the litigation risks.
The case of Apothio may be interpreted as a unique case or as the first light of a new trend of litigations in the cannabis industry. But to assess this, investors will need to wait for the outcome of the litigation.Source