The Model and the Securities Laws, Coda

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Richard Painter has given very useful guidance on the the interaction of securities laws and a possible litigation funding marketplace based on litigation proceed rights. Because of the breadth of topics covered, we decided it would be useful to tie it all together and relate it explicitly to the model contract. In particular, we are encouraged that the model contract’s features — including heavily restricted securities, which are privately placed, and sold to sophisticated players and not to consumers — mean the implication of securities regulation is minimal.

First, as Prof. Painter noted in his first post, the anti-fraud provisions of the securities laws apply. As a result, he counsels limiting disclosure (with appropriate notice), perhaps simply to the public record, such as pleadings not filed under seal. If Litigation Proceed Rights are to be marketed to many investors, we agree that such limited disclosure is smart. However, if only a few investors are involved in the transaction, work product can be shared pursuant to an appropriate confidentiality agreement.  Further, the implication of the applicability of anti-fraud provisions is that the funders get an extra layer of protection from fraud by the issuer (the plaintiff). (We have in the past elaborated on this advantage here).

Second, also from that post, the idea that financing an individual’s litigation could be considered a financial product covered by the Consumer Finance Protection Bureau is very interesting and we note his comment applies equally to the standard financing structure of a nonrecourse loan. We also wish to clarify, as we have in our Assumptions, that the model is not intended to be used for consumer transactions. Frankly, a securities structure created by a 10+ page contract is simply too complex for financing consumer claims, which should be done using contracts that are in plain English, short, and simple as possible, and written in a standard format that facilitates side by side comparison of terms offered by various funders. In addition, the disparate bargaining power that characterizes consumer contracts means that the model approach, which assumes parties capable of customizing financial terms such as the price of litigation proceed rights, is inapplicable.

Third, from Prof. Painter’s second post, the idea that firms could arrange model-based financing for their clients without becoming SEC-regulated brokers–at least for cases that the firms are doing the litigation representation–supports the workability of the model approach. Moreover, if a litigation proceed rights marketplace fully developed, individual firms might find becoming brokers, even with the SEC regulations, to be commercially reasonable. However, it is hard to imagine any firm ever wanting to become an underwriter with all of the attendant liability risk. As a result, a public offering of litigation proceed rights seems impractical. That conclusion reinforces the model’s private placement approach.

Fourth, as Prof. Painter explained in his third post, making litigation proceed rights freely transferable creates myriad risks, particularly related to disclosures and securities fraud. These concerns reinforce the model’s heavy restrictions on the securities’ transfer.

Fifth, Prof. Painter’s conclusion in his last post, that investment adviser status only comes into play when advising funders, again reinforces the practicality of the model’s approach from the plaintiff and plaintiff counsel’s perspective. Funders should have their own counsel regarding the desirability of investing in litigation proceed rights. As we’ve emphasized in the past, the model is based on a VC analogy; investment adviser issues should arise in the model contract transactions only to the extent that they do in the VC world.

We really appreciate Prof. Painter’s insights into these important issues.

 

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