Apothio introduction
Research institution focused on the commercialization of hemp
Apothio, LLC, an Indiana limited liability company, is an agricultural research institution that researches and commercializes hemp. The company was incorporated in 2016.
Apothio's focus is on proprietary genetics, the efficacy of whole plant C-B-D oil, developing proprietary formulations to specific clinical outcomes, and industrial-scale hemp production. It collaborates with patients across the country to develop the most unique and customized plant-based formulations on the market.
The case
Apothio, LLC
v. Kern County et al.
This case arises out of one of the largest alleged wholesale destruction of crops by a state official in the history of the United States.
In October 2019, Apothio anticipated harvesting and extracting the byproducts from approximately 17 million plants cultivated on more than 450 acres for research and commercial purposes.
In October 25, 2019, Kern County Sheriff’s Office (“KSCO”) and California’s Department of Fish and Wildlife destroyed roughly 450 acres of Apothio’s plants, estimated to be worth between $500M and $1B at the time, without prior warning, justification, or opportunity for Apothio to be heard.
As pictured below, government authorities brought in bulldozers to destroy Apothio’s crop in what is believed to be the largest government sanctioned crop destruction in U.S. history.
Apothio has brought suit in the Eastern District of California against Kern County, KCSO, the California Department of Fish and Wildlife, Sheriff Donny Youngblood, Sergeant Joshua Nicholson, and Charlton Bonham for damages arising from this alleged wrongful destruction.
On April 10, 2020, Apothio sued Kern County (and others) for monetary damages totaling $500M to $1B—the approximate market value of the legal hemp, hemp derivatives, and research that was destroyed by the defendants.
The firm
Roche Freedman LLP
Founded in 2019, Roche Freedman LLP is a national law firm comprised of innovative and tech-savvy attorneys with stellar credentials. With experience from some of the most prestigious litigation firms in the country, RF’s legal team has a successful and decades-long track record of consistently achieving outstanding results in high-stakes and notable disputes on behalf of sophisticated clients.
RF’s legal team has extensive experience litigating complex commercial, securities, antitrust, class action and derivative matters on behalf of both plaintiffs and defendants in a broad range of industries. RF couples a unique brand of creative thinking and technical expertise with well-balanced aggressive advocacy to achieve impressive results in complex, high-value, and class action matters.
As the firm continues to grow, it has focused on building a diverse attorney pool with cross-functional expertise:
Katherine Eskovitz—the lead attorney for Apothio—is a former federal prosecutor and an accomplished trial and appellate lawyer who has spent over two decades successfully trying civil and criminal cases to judges, juries, and arbitrators across the country, as well as arguing before federal appellate courts.
Katherine was a litigation partner at Boies Schiller Flexner, and an Assistant United States Attorney for the Eastern District of New York. She has handled significant antitrust, white collar criminal defense, intellectual property, contract, securities, copyright, computer crimes, and First Amendment matters. She has a broad practice that has included the representation of plaintiffs and defendants in, among other industries, media and entertainment, finance, insurance, agriculture, gaming, manufacturing, publishing, and real estate.
Before becoming a federal prosecutor, Katherine served as a trial attorney in the U.S. Department of Justice’s Federal Programs Branch. There, she handled constitutional challenges to federal laws, including trial and appellate work across the country. In particular, Katherine defended the United States in a lawsuit seeking compensation under the Fifth Amendment Takings Clause for President Nixon’s White House tapes, photographs, and documents. For her government work, she received Letters of Commendation from the Attorney General and Associate Attorney General.
Assisting Katherine on the matter is Joseph Delich. Joseph has advised clients on matters that range from commercial contract disputes and securities litigation to internal investigations, regulatory and criminal defense, and compliance with anti-money laundering and sanctions laws. He has been appointed lead counsel in multiple class actions involving cryptocurrencies, including one bringing CEA, antitrust, and RICO claims based for manipulation of cryptocurrency prices. Joe also maintains an active pro bono practice, and received the Legal Aid Society’s Pro Bono Publico award in 2018 for his work responding to proposed changes in “public charge rule.”
Litigation funding
What is litigation funding?
Overview
Litigation is costly, both in terms of the monetary expenses incurred in pursuing meritorious claims (i.e. attorney and expert witness fees, discovery costs, and trial expenses) and the extensive time commitments to reach a resolution.
Because of these costs, the US judicial system is oftentimes stacked against those without significant resources, especially when their adversaries are well-funded government or corporate enterprises with top legal teams at their disposal.
The advent and rise of litigation funding in the United States have been a positive development to address this issue. Litigation funding, also known as legal financing and third-party litigation funding, provides individuals who otherwise lack the necessary resources the funds to either (1) litigate or arbitrate a claim or (2) operate their business activities as a result of the harm done by the defendant in the litigation.
Through a typical litigation funding arrangement, the fund agrees to provide an individual with a legal claim cash typically in exchange for either (1) interest/multiplier on the investment or (2) a percentage of the overall recovery in the litigation.
History
Over the past ten years, the litigation funding industry has exploded. As of June 2020, the top 40 litigation financing firms operate in the US with over $9.5B AUM. Most are privately held and target institutional investors with minimum investments of $1 million or more. For financial players with the know-how and connections to operate in the space, the financial benefits are considerable. Some litigation funds have achieved annualized returns of 40-50% over the past 5-year period, beating out most, if not all hedge funds.
However, like many performative asset classes, this segment of finance is generally not accessible to retail investors. In addition to substantial capital investment requirements, investing in litigation can tie up funds for considerable periods of time, as complex litigation can take many years to reach a resolution.
Opportunity
The Apothio ILO represents an opportunity to invest in the same kind of assets that a litigation funder would have in its portfolio. However, unlike a traditional litigation fund, the Apothio ILO is an investment in a single litigation, not a portfolio of many litigations. Accordingly, the Apothio ILO may be more risky than an investment opportunity that is spread across multiple litigation outcomes.
Initial litigation offering
The funding structure
The Initial Litigation Offering (“ILO”) is an offering with a blockchain-enabled payment to finance an individual litigation. This financial product is offered under Regulation Crowdfunding, and open to all investors regardless of accreditation status. ILOs tokenize the funding required to pursue litigation in civil cases where a plaintiff (party initiating lawsuit) or a plaintiff’s counsel wishes to raise capital to ease the financial burdens of litigation.
This Offering is being raised to fund ongoing operating expenses in return for litigation proceeds Apothio, LLC—an Indiana limited liability company—may receive in connection with the lawsuit it filed against Kern County, Kern County Sheriff’s Office, California Department of Fish and Wildlife, Donny Youngblood, Joshua Nicholson, and Charlton Bonham in the Eastern District of California on April 10, 2020 (together with any refiling, counterclaim, appeal process, settlement, arbitration or enforcement action related thereto, collectively, the “Litigation”).
Investors will be issued Initial Litigation Offering (“ILO”) tokens in the amount equal to their investment whereby one ILO token is equal to one US Dollar. In the event the lawsuit is ultimately successful, investors will get a multiplier based on the amount of ILO tokens they hold and the time it takes to resolve the litigation. In connection with their purchase, investors will be required to provide an Avalanche wallet address (https://wallet.avax.network/). Within 60 days after executing the agreement to purchase ILO tokens, investors will receive the ILO tokens at the Avalanche wallet address they provide.
Multiplier and limitations
As detailed below, investors will be entitled to a multiplier that increases over time as the case continues. If the litigation results in a recovery, investors will be entitled to receive a multiplier on their investment (in the form of a stablecoin payment to the Avalanche wallet holding the ILO tokens). However, there are a few important limitations to the investors right to receive its multiplier upon a recovery in the litigation.
The first is that the Law Firm’s claim to its Contingency Fee and reimbursement of its expenses is senior to, and payable in advance of, the investor receiving any portion of the recovery. The Law Firm’s Contingency Fee is:
33.3% of any Litigation Proceeds received up to $100M;
30.0% of any Litigation Proceeds received in excess of $100M up to $300M;
25.0% of any Litigation Proceeds received in excess of $300M
The second is that, at the time of this offering, Apothio LLC has outstanding debt already in existence.* It is the intention of Apothio LLC, through the purchase agreement, to treat the ILO transactions as a true sale, and thus, to put investors senior to any other entity or individual except for the Law Firm.
*Some of Apothio's outstanding debt is past maturity.
The tokens
ILO Tokens
You will be purchasing ILO tokens through the Offering. ILO tokens represent tokenized interests that together comprise the Purchase Agreement. ILO tokens will be issued by Apothio, LLC and secured against any potential monetary recovery obtained by Apothio LLC (“Apothio”) in the litigation captioned Apothio, LLC v. Kern County et al., Case No. 1:20-cv-00522 (E.D. Cal.) (the “Litigation”) or any appeal or related case stemming from the Litigation.
The tokenization of the ILO tokens will be hosted on the Avalanche platform, which offers the technical capabilities and ecosystem partnership to support tokenization and subsequent trading. Investors can buy ILO tokens in the initial raise with U.S. dollars. After the Closing Date, all ILO tokens will be subject to a 1-year programmatic lockup, after which, the ILO tokens will be transferable.
To receive their ILO tokens, investors will be responsible for creating a digital wallet on the Avalanche platform (accessible at https://wallet.avax.network/). Initially, Roche Freedman will hold 80% of the proceeds in escrow until a motion to dismiss is decided in the litigation. If both motions to dismiss are granted, and the case is dismissed with prejudice, the funds held in escrow will be redistributed pro-rata to investors, that is, investors will receive 80% of their investment back. If either of the two motions to dismiss are denied, in whole or in part, Roche Freedman will release the proceeds to Apothio, LLC.
Assuming a motion to dismiss is denied, and in the event of a recovery, Roche Freedman will hold all proceeds of any settlement in escrow and will distribute the contemplated return to each ILO token holder pursuant to the Purchase Agreement. For returns to be realized, there must be a recovery in the litigation. In the event that the claims survive a motion to dismiss, but there is no successful recovery in the litigation thereafter, the associated ILO token will no longer have value; the ILO tokens will become non-transferable. In the event that there is a resolution of the litigation, the ILO token contract will enable Roche Freedman to (1) communicate to all ILO token holders the outcome of the litigation; (2) distribute funds to the ILO token holders through a U.S. dollar backed stablecoin, like USDC, commensurate with the multiple of return described in Schedule I of the Purchase Agreement; and (3) remove the ILO tokens from circulation.
Until the law firm representing the Company removes the ILO tokens from circulation, individuals will be able to transfer the tokens on the Avalanche blockchain after the one-year lockup period. The ILO token value may fluctuate as a result of market conditions. Pending the one-year programmatic lock-up period, the secondary market structure may create liquidity in a market that is traditionally illiquid.
Offering terms
Details of the Offering terms & conditions for investor returns
Risk protection
For investor downside protection, 80% of funds will be held in escrow by Roche Freedman LLP until the Motions to Dismiss are decided. There are currently two motions to dismiss, filed on June 12, 2020 and June 15, 2020, by the defendants in the case Apothio, LLC v. Kern County (collectively, the "MTD")
A copy of the complaint, the motion to dismiss briefing, and other court filings can be found here.
The Company has agreed to return 80% of all funds upon the entry of an order in the Lawsuit resolving one or more motions to dismiss against the Company that has the effect of dismissing all claims against all defendants, with prejudice, i.e., without the ability to file an amended complaint.
If the MTD are granted by the court without prejudice, 80% of the funds will remain in escrow. Apothio LLC will have an opportunity to file an amended complaint at that point in time. At that point, the funds will continue to remain in escrow until either (1) the case is dismissed with prejudice or (2) Apothio survives renewed motions to dismiss.
Potential Investment Returns
The distribution made to ILO token holders will depend on two factors: (1) the length of time to litigate the case and (2) the outcome of the litigation. Estimated returns for one-whole token purchased ($1/ILO Token) measured from the Closing Date:
- 200% (2x) of the Purchase Price if a recovery occurs between 0 and 12 months from the Closing Date. For example, if the Purchase Price is $100 (i.e. 100 ILO Tokens), the Buyer shall be entitled to receive $200 (or $200 in USD, or digital equivalent, such as USDC).
- 250% (2.5x) of the Purchase Price if a recovery occurs between 12 and 24 months from the Closing Date. For example, if the Purchase Price is $100 (i.e. 100 ILO Tokens), the Buyer shall be entitled to receive $250 (or $250 in USD, or digital equivalent, such as USDC).
- 300% (3x) of the Purchase Price if a recovery occurs between 24 and 36 months from the Closing Date. For example, if the Purchase Price is $100 (i.e. 100 ILO Tokens), the Buyer shall be entitled to receive $300 (or $300 in USD, or digital equivalent, such as USDC).
- 350% (3.5x) of the Purchase Price if a recovery occurs at any point after 36 months from the Closing Date. For example, if the Purchase Price is $100 (i.e. 100 ILO Tokens), the Buyer shall be entitled to receive $350 (or $350 in USD, or digital equivalent, such as USDC).
In the event that the Litigation Proceeds are not sufficient to pay the Investment Return in full, Buyer shall be entitled to its pro rata portion of the Investment Return.
By way of illustration, in the following example, the Litigation Proceeds are not sufficient to pay the Investment Return in full. This means that while Buyers are entitled to 300% returns, only 200% will be payable by Seller to Buyers after the payment of Litigation Proceeds and Claims Expenses.
For example, if
- $5 million was invested pursuant to the Investment Documents in the Offering;
- The Buyer’s Purchase Price is $1,000;
- The Litigation settles for under $100 million;
- The Litigation Proceeds are $18 million;
- The Claims Expenses are $1 million; and
- The recovery happens 25 months after the Closing Date;
Then
- The Contingency Fee shall be ~$6 million (i.e. ~33% of $18 million).
- The Claims Expenses shall be $1 million.
- Buyer’s entitlement to Litigation Proceeds is pari passu with the other buyers in the Offering and Buyer shall receive a pro rated payment out of the remaining $11 million (i.e. 200% return shall be payable on each buyer’s Purchase Price as opposed to 300%).
- Therefore, Buyer shall be entitled to $2,000 in USD, or digital equivalent such as USDC, in full satisfaction of Seller’s obligations hereunder.
Litigation is unpredictable and highly variable and the example presented is merely one of many potential outcomes.
*Roche Freedman’s contingency fee and claims expenses will be paid out ahead of an ILO distribution. It is the intention of Apothio LLC, through the purchase agreement, to treat the ILO transactions as a true sale, and thus, to put investors senior to any other entity or individual except for the Law Firm.
Potential returns
*Above is a non-binding, non-exclusive chart depicting the possible payout scenarios of the Offering, and terms and conditions thereof. Not every scenario is depicted. Litigation is generally highly variable and unpredictable with a multitude of potential outcomes. Payment is not guaranteed, and there is a high likelihood that you will lose all or part of your principal. Conduct your own diligence, inclusive of the litigation pleadings to form your own opinion on the underlying litigation.
**The Closing Date means the closing date of the Offering as determined by Section 4(a)(6)
Additional terms
Additional investor considerations
- The Law Firm’s claim to the Contingency Fee and reimbursement of Claims Expenses is senior to, and payable in advance of, the payment of Litigation Proceeds and the Buyer receiving any portion of the Investment Return.
- The purchase of ILO tokens does not transfer to the investor control over the Lawsuit, any right to require the Apothio LLC to continue the Lawsuit or to pursue the Claims, or any approval or veto rights over any proposed settlement. Apothio is at all times and remains wholly in control of the Lawsuit and its resolution.
- The purchase of ILO tokens is made on a non-recourse basis. In the event the Lawsuit fails to result in a recovery, Apothio LLC has no further obligations to any investors, including making any payments to investors.
- The information disclosed in connection with litigation financing is complex, nuanced, and oftentimes more detailed than the information disclosed in connection with prospective investments in most asset classes, such as investments in corporate entities that disclose financial statements and discuss their business models in public disclosures.
- Depending on the time of investment, hundreds of pages of documentation from the plaintiff, defendant, and the court may be available on the public docket. Investors should carefully review such documentation prior to investing, and investors should understand who is writing each such document when reviewing them. For example, documents drafted by plaintiffs and defendants are primarily written from a position of advocacy. Lawyers write these documents with the goal of zealously advocating for their respective clients rather than informing a potential investor.
- Standards employed by the court at different stages of litigation do not represent a fair indication as to whether a plaintiff will ultimately be successful on the merits of a claim if litigated through trial. A court uses different criteria to determine whether a claim survives a motion to dismiss, a motion for summary judgment, as compared to how a court will rule or instruct a jury at trial. The varying nature of these standards should be understood by investors.
- The amount of damages claimed in the Lawsuit may be aggressively contested by the parties. There may be significant variance in the amount of damages claimed by a party and the amount of damages ultimately awarded by a court or jury. The Lawsuit may settle for amounts significantly lower than the amounts claimed.
- As part of this investment, the investor must provide his or her Avalanche Address. The Buyer understands that Apothio LLC is in no way responsible for the Buyer providing an accurate Avalanche Address nor is the Apothio LLC responsible if the investor loses access to his or her Avalanche Address.
- If an investor loses their ability to access their Avalanche Address, it may result in a total loss of their investment and their right to receive any proceeds.
- No public market now exists for ILO tokens.
- ILO tokens are being offered in a regulation crowdfunding offering. All participants in the offering will have the same rights and obligations.
- The law firm, Roche Freedman, could withdraw from the case. In that event, Apothio would have to substitute counsel to litigate the case moving forward.
- The case could settle at any point for an amount that is not sufficient to pay all ILO token holders their investment plus their multiplier. In the event that there is a settlement for a nominal amount, the ILO token holders would have first priority and would be paid out pro-rata after the law firm takes its contingency fee.
- At the time of this offering, Apothio LLC has significant outstanding debt and obligations already in existence, some of which may be matured or in default. It is the intention of Apothio LLC, through the Purchase Agreement, to treat the ILO transactions as a true sale, and thus, to put investors senior to any other entity or individual except for the Law Firm.
- The Lawsuit could result in no recovery, resulting in a total loss for investors
- Investors are investing in the underlying litigation, not the issuer, Apothio LLC. And, therefore, will have no direct interest in Apothio LLC.
- Litigation can be lengthy and there is no way to predict how long the Lawsuit will take before its final resolution.
- Litigation is highly unpredictable and variable and there is no way to contemplate every type of potential resolution.