Litigation financing may tempt investors with high returns. What to know before buying in – CNBC

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For some investors, getting a piece of a legal settlement can happen without ever being part of a lawsuit.

It comes from investing in so-called litigation finance — a strategy that generally involves providing cash to litigants or attorneys to fund their cases in exchange for a portion of any awarded damages if the case is won.

If experts are right, it’s a market poised for growth: As investors search for returns uncorrelated to the markets, this small and largely unknown slice of the investment world may beckon. Additionally, demand from plaintiffs or law firms in search of funding also could rise as coronavirus-related economic fallout leads to more lawsuits — something that’s common in downturns — and more need for private funding.

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However, not everyone can access litigation-finance funds or similar options — you generally must be an “accredited investor.” That is, you must have at least $200,000 in annual income, a net worth above $1 million (excluding your home’s value) or joint annual income with a spouse of more than $300,000. 

And, there is a lot of risk. Among them: potential eye-popping returns that end up being a mirage. 

Here’s what to know.

The basics

Generally speaking, firms that provide litigation financing have a team composed of attorneys —
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