Structuring the Issuer

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I have reviewed the draft Model Litigation Financing Contract proposed by Professor Steinitz and Ms. Field. I commend them on their hard work, sophisticated scholarship and ingenuity in developing their proposed Contract. I also applaud their willingness to invite others to engage in a serious conversation about that Contract.

From a securities law perspective, the Model Contract raises many interesting questions about mandatory disclosure requirements and anti-fraud remedies. In this post, however, I would like to pose the following question: could the basic financing approach be done in a way that avoided the regulatory infrastructure of the securities laws?

Although the Contract simply has the plaintiff sell interests in the proceeds, if the issuer were a Registered Limited Liability Partnership (structured like a General Partnership in which all of the partners had management rights) or a Member-managed Limited Liability Company in which the members manage the business, the investment interests would likely not be securities because the venture’s profits would not be derived primarily from the “efforts of others.”

The disadvantage of course of using these business entities is that the investors (funders) would have to be given significant control. That in turn could raise champerty issues, depending on the jurisdiction. Alternatively, the plaintiff and the funder could form an entity whose issuances would remain subject to the securities laws but perhaps could facilitate structuring the relationship to address some of the other complexities Steinitz and Field have identified without raising the control issue. One option would be a limited partnership, with the plaintiff as general partner and the funders as limited partners.

Perhaps the drafters of the Model Contract could suggest alternative entity structures, and leave it to the parties to decide which of those structures to employ? The decision would involve a negotiation in which the benefits of avoiding securities law coverage would be considered in light of the parties’ relative positions on giving to the investors significant control over the venture.

I am sure that Professors Steinitz and Field have thought through this threshold inquiry much more carefully than I have, and I look forward to their further insights.


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