Ethics Opinion 375
Ethical Considerations of Crowdfunding
Lawyers are generally free to represent clients who pay for legal services through crowdfunding. The ethical implications of crowdfunding a legal representation vary depending on the lawyer's level of involvement in the crowdfunding. When the client directs the crowdfunding and the lawyer is merely aware of it, the lawyer incurs no specific ethical obligations although the lawyer should consider potential risks associated with receipt of such funds and may counsel the client on the wisdom of publicly sharing confidential information. When the lawyer directs the crowdfunding, the lawyer must comply with the Rules governing a lawyer's receipt of money from third parties. Further, a lawyer who directs the crowdfunding should be cognizant of ethical obligations regarding fee agreements, communications with donors, and the management of the funds raised.
- Rule 1.2 (Scope of Representation)
- Rule 1.3 (Diligence and Zeal)
- Rule 1.4 (Communication)
- Rule 1.5 (Fees)
- Rule 1.6 (Confidentiality of Information)
- Rule 1.8 (Conflicts of Interest: Specific Rules)
- Rule 1.15 (Safekeeping Property)
- Rule 2.1 (Advisor)
- Rule 4.1 (Truthfulness in Statements to Others)
- Rule 5.4 (Professional Independence of a Lawyer)
- Rule 8.4 (Misconduct)
The Committee has received numerous inquiries asking whether and how lawyers may ethically raise money (or accept money raised) via crowdfunding to pay for legal services for one or more clients. In general, crowdfunding is the process of raising money from third parties for the benefit of another. While the term is most often used to describe the practice of raising small amounts of money from numerous people through social media and other platforms, as used in this opinion, "crowdfunding" refers to the solicitation and acceptance of such funds to pay for someone else's legal representation.1
Crowdfunding may provide financial resources for individuals who might otherwise be unable to secure counsel. This opinion outlines the ethical considerations of crowdfunding and provides guidance about doing so consistent with the D.C. Rules of Professional Conduct ("Rules").
Crowdfunding is generally structured in one of two ways: 1) equity-based funding, in which the investor retains an ownership interest in either the recipient (here, the law firm or its client) or in future recoveries/earnings/profits of the firm or matter, or 2) donation-based funding, in which the donor receives no financial interest in the legal matter,2 but may receive other incentives. This opinion focuses solely on donation-based funding and does not address equity-based funding, though some of the same ethical considerations apply.3
The Committee notes, at the outset, that the ethical implications of crowdfunding a legal representation vary depending on the lawyer's level of involvement in the crowdfunding.
I. Lawyer's Receipt of Funds Raised by Client
There is nothing in the Rules prohibiting a lawyer from accepting funds from a client who has raised or is raising money through crowdfunding. It is not unusual for clients to rely on money collected from family or friends to pay for legal services. The practical reality that a client may, through social media or other platforms, cast a broad net and collect funds from acquaintances and strangers does not, standing alone, impose specific ethical obligations on a lawyer. However, because there may be heightened risk of fraud, money laundering, and other criminal activities in connection with any such exchange of funds, a lawyer should be cognizant of such risks and take reasonable precautions to avoid unwittingly engaging or assisting in unethical or illegal conduct.
For lawyers, ethical risk accompanies the legal risk. When illegal conduct of a client is suspected or known, specific ethical duties arise under the Rules.4 For example, when a lawyer suspects or knows that a client has obtained funds to pay for the legal representation in a manner that is illegal or otherwise poses risk for the client, the lawyer has ethical obligations to counsel the client on such risks and/or the limits of what the lawyer is able to do for the client under the ethics rules and in light of the lawyer's own obligation to comply with the law.5
A lawyer should consider counseling his or her client regarding disclosures to third parties. Crowdfunding typically entails some level of disclosure to third parties about the predicate need for counsel. Because of their financial support, crowdfunding contributors may be interested in the status of or information about the client's matter. Due to the risk of waiver of the attorney-client privilege, or simply for strategic reasons, a lawyer who knows that a client is crowdfunding should provide the appropriate level of guidance to the client regarding disclosures to third parties, whether such disclosures occur on a social media platform or privately in discussions with friends and family.6 In addition, depending on the circumstances, a lawyer may also consider discussing the wisdom of the client's funding choices under Rule 2.1, which provides that "[i]n rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social, and political factors, that may be relevant to the client's situation."
II. Crowdfunding by a Lawyer
A lawyer who undertakes or exerts control over the crowdfunding effort has specific ethical responsibilities under the Rules.
A. Lawyer's Acceptance of Fees from Third Parties
Whether a lawyer may accept compensation from third parties for legal fees is governed by the requirements of Rule 1.8(e). The Rule states that,
A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) The client gives informed consent after consultation;
(2) There is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and
(3) Information relating to representation of a client is protected as required by Rule 1.6.
Thus, when a lawyer assists a client in crowdfunding a legal representation, each provision of Rule 1.8(e) must be met. With respect to Rule 1.8(e)(1), "informed consent" is a defined term under Rule 1.0(e), and "denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct."
Under Rule 1.8(e)(2), the lawyer must ensure there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship. Rule 5.4(c) also prohibits a lawyer from allowing a person who pays the lawyer to provide legal services to a third party from "direct[ing] or regulat[ing] the lawyer's professional judgment in rendering such legal services." In the context of crowdfunding, a lawyer may not allow donors, whether family members or strangers, to exert undue influence with respect to the objectives of the representation or the legal strategies employed. This duty remains unchanged notwithstanding the social media and other connections that often accompany crowdfunding.
In addition to the guidance a lawyer provides to the client regarding disclosures to third parties (as discussed in part I), under Rule 1.8(e)(3) a lawyer is also prohibited from voluntarily sharing a client's confidential information with donors. Rule 1.6 provides that, in the absence of the client's informed consent or other enumerated exception, a lawyer shall not use or reveal a client's confidences or secrets. While lawyers should always be mindful of their duty of confidentiality, the informal nature of communications made through social media platforms warrants a reminder of this duty when using these platforms for crowdfunding.
B. Fee Agreements
Although it may be tempting to forgo a written engagement agreement in a crowdfunded representation that has the appearance of being "free" from the client's perspective, lawyers must meet the requirements of Rule 1.5 regarding fees. Specifically, Rule 1.5(b) requires that, "[w]hen the lawyer has not regularly represented the client, the basis or rate of the fee, the scope of the lawyer's representation, and the expenses for which the client will be responsible shall be communicated to the client, in writing, before or within a reasonable time after commencing the representation."7 Even when a lawyer has regularly represented a client such that a written engagement agreement may not be required, crowdfunding can trigger areas of confusion that may not be present in a traditional client-self pay situation, such as ownership of excess crowdfunds raised and responsibility for payment if crowdfunds fall short of legal fees and expenses incurred. Accordingly, the Committee strongly encourages lawyers to have a written fee agreement for every representation involving crowdfunding by the lawyer.
C. Communications with Donors and Prospective Donors
A lawyer who conducts the crowdfunding on behalf of a client must ensure that the communications used to solicit the funds are truthful.8 The level of detail and transparency required will depend on the circumstances but must take into account Rule 1.6 and any other confidentiality obligations. For instance, a lawyer should avoid providing specific information about how the funds will be used to effectuate the legal strategy. A lawyer's professional obligations to exercise his or her independent judgment and to zealously represent the client remain paramount, regardless of the source of the funds.9 The Committee recommends informing contributors that their donated funds are nonrefundable, that they will not receive confidential information about the client's matter, and that they may not interfere with or otherwise exert control over the lawyer's work.
D. Management of Funds
The fact that crowdfunds come from sources other than the client does not alter the fact that they are client funds and must be treated as such consistent with the Rules.
Funds collected on behalf of a client by the lawyer through crowdfunding must be treated as advanced fees. Unless there is an agreement with the client under Rule 1.15(e), these funds must be placed in trust for the client, as required by Rules 1.15(a) and (b). The lawyer should invoice the client and transfer funds to the operating account only as fees are earned and expenses incurred, or as otherwise consistent with the guidance provided in D.C. Legal Ethics Opinion 355.10 A lawyer should monitor any fundraising activity that he or she controls, as a lawyer who solicits and receives excessive funds on behalf of his or her client may run the risk of violating one or more ethics rules.11 To mitigate this risk, a lawyer should have a plan (approved by the client) to terminate crowdfunding when it appears that sufficient funds have been raised.
Although lawyers are generally able to seek informed consent, under Rule 1.15(e), to place unearned fees and expenses in a lawyer's or law firm's operating account rather than the trust account, the Committee recommends caution around this exception when crowdfunding. Crowdfunding increases the risk that a lawyer could be perceived as seeking an unreasonable fee under Rule 1.5(a).12 This is in part because of the ease by which the amount of money in excess of what is required to fund the representation may be raised and in part because some clients may exercise less scrutiny over the lawyer's bills since the client is not personally, or at least not solely, responsible for payment. Placing crowdfunds in a trust account until the lawyer earns the fee or incurs the expense ensures that there is a clear delineation of lawyer funds and client funds.
Crowdfunding may also increase the risk of disputed ownership of funds. For example, if a donor claims that he or she donated more money than intended, or directed it to the wrong recipient, a lawyer would mitigate his or her ethical risk by ensuring such funds remain in trust until they are earned.13
In the absence of an appropriate agreement, unearned crowdfunds are the property of the client and should be returned to the client upon the matter's conclusion or termination of the representation, unless the client directs the lawyer to do otherwise. A matter may conclude for any number of reasons, including a natural conclusion, the client's decision not to pursue the case, settlement or any other resolution, or because the attorney-client relationship terminates, and each has different implications for prepaid legal fees and expenses, including crowdfunds. Pursuant to Rule 1.5(b), this point should be addressed with clients in engagement agreements and may be included in disclosures to donors, subject to Rule 1.6.
A lawyer may suggest that the client donate excess crowdfunds to a charity of the client's choice. Ultimately, however, the lawyer must abide by the client's decision and/or an appropriate agreement regarding disposition of unearned crowdfunds.
The Committee believes it would be unethical for a lawyer personally to claim unearned crowdfunds at the conclusion of a representation. Unlike a contingency fee case, where a lawyer may on occasion obtain a "windfall" due to an unexpected early settlement or other turn of events (and runs an equal risk of earning nothing at all if an unfavorable outcome results), in this situation the lawyer incurs no equivalent risk. A lawyer who claims unearned fees at the conclusion of such a representation risks violating Rule 1.5(a).
Although the term crowdfunding is relatively new, payment by third parties for another's legal representation is not. The Rules apply to a lawyer's receipt and disposition of all funds received in connection with a client representation, regardless of their source.
Published: November 2018
1. Some D.C. lawyers have expressed an interest in starting a general "benevolent fund" that would allow them to raise money for the purpose of providing legal representation to clients unable to pay the lawyers' fees. The Committee notes that lawyers who wish to engage in such fundraising along with the provision of legal services may need to do so through a separate nonprofit organization with the appropriate level of supervision and review by an independent board of advisors and in accordance with applicable law.
2. The language used to describe crowdfunding arrangements varies. In this opinion, the Committee uses the term "donation-based funding" to describe arrangements in which contributors have no expectation of receiving any personal economic return in exchange for their financial contributions. While contributors may enjoy philanthropic good will and perhaps receive non-confidential information about the legal representation, they will not receive a financial interest in the matter or any recovery, nor will their donated funds be repaid absent express agreement (see part II D. Management of Funds.)
3. For a helpful summary of crowdfunding terminology and approaches, see N.Y. State Bar Ass'n Comm on Prof'l Ethics Formal Opinion 1062 (2015).
4. See, e.g., Rule 1.2(e) (prohibiting a lawyer from assisting a client in criminal or fraudulent conduct), Rule 8.4(b) (prohibiting a lawyer from engaging in criminal acts), and Rule 8.4(c) (prohibiting a lawyer from engaging in dishonest conduct). Lawyers must also be cognizant of their obligations under substantive law to avoid participating in or counseling their clients on activity that may constitute money-laundering. See American Bar Ass'n Standing Comm. on Ethics & Prof'l Responsibility Formal Op. 463 (2013). Similarly, crowdfunding does not alter a lawyer's professional responsibilities prohibiting the knowing acceptance of illegally obtained funds as payment for services. See "Houston, We Have a Problem: Clients Who Engage in Unlawful Conduct During Your Representation," Winter / Spring 2015 Edition of the ABA White Collar Crime Committee Newsletter, pages 1, 9-11, discussing ABA Model Rule 1.2(d) (ethical issues and other considerations when criminal proceeds are used to pay attorneys' fees).
5. See Rule 1.2(e) (permitting a lawyer to "discuss the legal consequences of any proposed course of conduct with a client" and to "counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning, or application of the law") and Rule 1.4(b) (requiring a lawyer to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions about the representation")
6. For further discussion of this topic, see D.C. Legal Ethics Opinion 371 (2016) (Social Media II: Use of Social Media in Providing Legal Services).
7. Comments  through  to Rule 1.5 further describe how a lawyer may fulfill his duties under Rule 1.5(b)
8. See Rules 4.1 (Truthfulness in Statements to Others) and Rule 8.4(c) ("A lawyer should not engage in conduct involving dishonesty, fraud, deceit, or misrepresentation.).
9. Rule 5.4(c) (see discussion supra Part II.A) and Rule 1.3 (Diligence and Zeal).
10. Rule 1.15 obligates lawyers to treat unearned fees and expenses, including "flat" or prepaid fees, as the property of the client until the money has been earned, unless a different arrangement is reached. See Rule 1.15(e). This analysis, which was promulgated by the D.C. Court of Appeals in In re Mance, 980 A.2d 1196 (2009), is outlined in D.C. Legal Ethics Opinion 355 (2010).
11. See, e.g., Rule 4.1 (Truthfulness in Statement to Others), Rule 8.4(c) (which prohibits a lawyer from engaging in dishonest or deceitful conduct) and Rule 1.5(a) (which prohibits a lawyer from seeking an unreasonable fee).
12. The Philadelphia Bar Association Professional Guidance Committee highlighted the possibility of an unreasonable fee as a risk of crowdfunding a litigation. See Phila. Bar Ass'n Prof'l Guidance Comm., Op. 2015-6.
13. Rule 1.15(d) requires a lawyer to keep disputed funds in trust.