The Model Contract and the Securities Laws, Part 1

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Q:  Litigation Proceed Rights can be sold in a private placement, exempt from registration requirements under federal securities laws.  What other securities or commodities laws might still apply?

A:  First, there are anti-fraud provisions in both federal and state securities laws and in other statutes such as those prohibiting mail fraud and wire fraud.  Any material misrepresentation made to investors about Litigation Proceed Rights, or any omission of material facts that need to be disclosed in order for what has been disclosed not to be materially misleading, could result in civil or even criminal liability. Because of these anti-fraud laws and the potential for lawsuits, it will be important that investors be told that the disclosure they get about particular cases is limited and that certain facts about the strengths and weaknesses of particular cases will not be disclosed if disclosure could compromise the success of the litigation.   It may be advisable simply to make filed pleadings (except those under seal) available to investors without making any other statements about the strengths and weaknesses of a particular case.

Second, just because a private placement is exempt from registration under federal securities laws, does not mean it is exempt from registration under state law.  Many states have a uniform limited offering exemption that resembles the federal exemption for private placements but there are important differences from state to state.   Anybody involved in offering Litigation Proceed Rights to investors should make sure to know and comply with the securities laws in each and every state in which they are sold to investors.

Third, Litigation Proceed Rights, if used to help individual litigants cover litigation costs and other expenses, could be deemed a consumer finance product subject to disclosure and other requirements under federal law, as amended by the Dodd-Frank Act of 2010, and relevant state law.  It may be advisable for this reason to avoid a contract structure that could be characterized as a “loan” or “financing arrangement” vis a vis the litigant. [MS: while this comment is interesting and an important general consideration, the model is not intended for consumer financing, nor does it allow the proceeds from the sale of the rights to be used for personal expenses.

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