As the clinic winds down its office hours with startup founders, we are turning our attention toward one of the next phases of the clinic’s work: researching and developing policy papers that dive deeper into the questions and challenges we heard about firsthand.

In speaking with my fellow student caseworkers, one theme continued to come up again and again: Many founders, in advance of meeting with us, had already turned to general AI tools to help draft employment contracts, shareholder agreements, privacy policies, NDAs, terms of service, and other foundational documents.

In almost every instance, the AI generated documents founders shared with us contained significant errors or omissions.

As student caseworkers, this placed us in a unique position. The clinic can provide legal information, but not legal advice. As such, we could not correct errors directly, but rather tried to explain what different documents typically should and shouldn’t include. These interactions highlighted both the limitations of AI drafting legal documents as well as how Ontario’s regulatory framework restricts who can provide legal advice.

Ontario’s regulatory framework on providing legal services is quite straightforward. Unless you’re a licensed lawyer or supervised by one you cannot provide legal advice and services. While the restriction is intended to protect the public and ensure that consumers receive services from individuals who meet high standards of learning, competence, and professional conduct, it also creates a big access problem. Most startups will face legally significant business decisions early, well before they have the financial resources to hire a lawyer. Incorporating a business, hiring employees, and issuing equity can all come up in the first few months of starting a business.

As a result, founders are left looking for creative, cost-effective ways to balance the need to make sound business decisions early on with the equally important need to conserve resources to scale their business. Without the resources to hire a lawyer, and the regulatory framework in Ontario leaving them with few other options, some early-stage founders have come to rely on general AI tools for legal advice and guidance.

How to Innovate in the Legal Services Space

In developing our policy paper, we started researching how regulators from different jurisdictions are trying to rethink legal services delivery beyond the traditional lawyer-for-hire approach.

We found that most of the innovation in this space falls into three main categories:

Regulatory Sandboxes (including for AI legal tools)

A regulatory sandbox is essentially a test space. Innovators are encouraged to develop new models for the delivery of legal services, often involving technology or AI tools that would not be permitted under existing regulatory requirements. Regulators allow these innovations to operate under limited conditions, and monitor how the services perform before deciding whether it would be appropriate to adopt permanent reforms that would allow these innovations to scale.

Sandboxes are common in the financial services sector and are growing in popularity in legal services. Ontario, British Columbia, Alberta, Utah, and the United Kingdom are noteworthy jurisdictions that have launched legal innovation sandboxes.

Ontario’s Access to Innovation program, for example, has already approved several incorporation tools as part of its five-year pilot project that began in April 2021.

Limited Licenses for Non-Lawyers

Several jurisdictions have approved or are experimenting with models where specially trained non-lawyers are issued limited licenses to provide certain legal services on a case-by-case basis.

Just last month, Saskatchewan announced it will be moving forward with amendments to its legal profession legislation to allow non-lawyers to apply for a limited license to provide specific legal services.

In the U.S., states like Washington, Utah, Arizona, and Minnesota are experimenting with similar models, including by offering a new tier of legal service provider called Allied Legal Professionals, who can perform limited services in discrete areas of the law. Although the areas of law currently identified are not oriented towards startups, regulators could use these innovations as a starting point for implementing something similar in the realm of business and corporate law.

Alternative Business Structures

Traditionally, only lawyers can own law firms. An alternative business structure (ABS) is a law firm with non-lawyers in its management ownership structure. For consumers, this can lead to more choice and potentially lower prices as ABSs can realize savings and efficiencies through economies of scale.

For example, the United Kingdom issued its first ABS licences in 2012, allowing for multidisciplinary firms that mix legal, tech and business expertise. Arizona has fully embraced ABSs and removed professional conduct rules that barred non-lawyers from fee-sharing and holding an interest in law firms. Utah, through its sandbox, has done something similar by allowing non-lawyer owned entities, including businesses that offer monthly subscriptions for unlimited phone access to lawyers.

What’s Next?

Our conversations with founders made it clear that there is a demand for accessible and affordable legal services tailored for startups. In the meantime, founders will continue to fill the gap however best they can. However, there is a desire for regulators to evolve and meet the needs of modern-day entrepreneurs.

Ontario is not alone in facing this challenge, and it is already taking meaningful steps to address it. However, there is room to go further. Ultimately, regulators will need to rethink how and by whom legal services can be provided and find ways to ensure that both innovation and access to legal services work together.

If you are interested in exploring this topic in greater detail, stay tuned for the clinic’s final policy report, where we’ll share our full analysis.