Can new lawyers raise start-up money for their law firm through online crowdfunding, and which crowdfunding models are allowed?

Plain-English summary

Recent law graduates planning to start a small firm wanted to raise start-up capital (rent, website, malpractice insurance, supplies) without taking on more debt, and asked whether they could use online crowdfunding (¶¶ 1-2). The committee described five crowdfunding models (donation, reward, lending, equity, royalty) and said it expressed no view on their business merits, only their ethical limits (¶¶ 3-10).

The committee ran through each model. Lending merely adds debt and does not meet the lawyers' goal (¶ 11). Donation crowdfunding raises no ethical issue as long as the lawyers make clear that donors receive nothing in return and that the firm is a for-profit enterprise (¶ 12). Two models are clearly barred: the royalty model, which gives the investor a percentage of revenues, violates Rule 5.4(a)'s bar on sharing legal fees with a nonlawyer; and the equity model, which gives the funder an ownership interest, violates Rule 5.4(d)'s bar on practicing in a for-profit entity in which a nonlawyer holds an interest (¶ 13).

The reward model can work if the rewards themselves are proper (¶ 14). The committee addressed two proposed rewards. Informational pamphlets, whitepapers, and progress reports may be governed by Rule 7.1 on advertising, but may fall outside the definition of "advertisement" if they are educational topical materials; the lawyers must avoid giving individual legal advice (¶ 15). Offering pro bono hours to a third-party nonprofit, drawing on N.Y. State 971 (2013), is permissible only if the firm complies with Rule 1.1(b) competence and does not take on a matter that would create an impermissible conflict under Rule 1.7 or Rule 1.9 (¶ 16).

In practice

Under the New York rules as they stood at the time of the opinion, the committee sorted the crowdfunding models by whether they give a nonlawyer funder a financial stake in the practice. Donation and reward models are permissible; equity and royalty models are not, because Rule 5.4 bars both nonlawyer ownership of a law practice and sharing legal fees with nonlawyers. The committee treated the reward model as conditional: the rewards have to be things a lawyer may lawfully provide, so informational materials are measured against the Rule 7.1 advertising rules and the bar on giving individual legal advice, and a pro bono reward is measured against Rule 1.1(b) competence and the Rule 1.7 and 1.9 conflict rules. The committee expressly declined to opine on whether any model would actually succeed as a fundraising strategy, calling that a business judgment outside its jurisdiction.

Common questions

Q: Can a law firm raise start-up money through crowdfunding?

A: Yes, through the donation or reward models. The committee concluded donation crowdfunding raises no ethical issue if donors are told they receive nothing and the firm is for-profit, and the reward model can work if the rewards are proper (¶¶ 12, 14, 17).

Q: Why are the equity and royalty crowdfunding models prohibited?

A: Because they give a nonlawyer a stake in the practice. The committee concluded the royalty model (a share of revenues) violates Rule 5.4(a), and the equity model (an ownership interest) violates Rule 5.4(d) (¶ 13).

Q: Can the firm offer informational materials or pro bono work as crowdfunding rewards?

A: Yes, with conditions. Informational materials must comply with the Rule 7.1 advertising rules and not give individual legal advice; pro bono rewards must comply with Rule 1.1(b) competence and not create a conflict under Rule 1.7 or 1.9 (¶¶ 15-16).

Background and rules framework

The opinion interprets New York Rule 5.4(a) and (d) (professional independence; the bars on fee-sharing with and ownership by nonlawyers), Rule 7.1 (advertising), Rule 1.1(b) (competence), and Rules 1.7 and 1.9 (conflicts), corresponding to ABA Model Rules 5.4, 7.1, 1.1, 1.7, and 1.9. The analysis turns on whether a crowdfunding model gives a nonlawyer a revenue share or ownership interest, and on whether a proposed reward is something the lawyer may lawfully provide.

Citations and references

Rules of Professional Conduct:

• MR 5.4 / NY RPC 5.4(a), (d) (no fee-sharing with or ownership by nonlawyers)
• MR 7.1 / NY RPC 7.1 (advertising; definition of "advertisement")
• MR 1.1 / NY RPC 1.1(b) (competence)
• MR 1.7, MR 1.9 / NY RPC 1.7, 1.9 (current- and former-client conflicts)

Other opinions cited:

• N.Y. State 967 (2013): an attorney blog is not an "advertisement" unless its primary purpose is retention
• N.Y. State 971 (2013): donating legal services for a charity auction must satisfy competence and conflict rules
• N.Y. State 897 (2011): marketing legal services on a "deal of the day" site, subject to conflict and competence checks

See also

• NY State Bar Op. 1086: Referral fee from an investment advisor
• NY State Bar Op. 1096: Letting a civil-rights client keep statutory fees

Source

• Landing page: https://nysba.org/ethics-opinion-1062/