The Model Contract and the Securities Laws, Part II

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Q:  If a law firm introduces a funder and a plaintiff who engage in litigation proceed rights financing, is the law firm a broker/dealer?  If the answer is, “it depends”, what does it depend on? What bright lines can be drawn?

A: A “broker” would be a person or entity that is in the business of effecting transactions in securities for the accounts of others.  A broker typically helps find a buyer or a seller for a security and facilitate the transaction – e.g. matches sellers with buyers in exchange for payment of a fee from one side of the trade or the other.   Brokers are sometimes required to register with the SEC and/or the CFTC. Most law firms are not in this “business” and the mere fact that they connect investors with litigants in their cases is unlikely to cause them to be deemed “brokers.”  Law firms that expand their business to include linking buyers and sellers of Litigation Proceed Rights in other cases in which they do not also represent a party, might however be deemed to be brokers.

A “dealer” is a person or entity that buys or sells securities for his own account as part of a regular business.   Most individual investors who trade for their own accounts are not deemed to be dealers, but entities can be.   A law firm that starts trading in Litigation Proceed Rights could be deemed to be a dealer.  Dealers are in many situations required to register with the SEC and/or CFTC.

A law firm that matches plaintiffs with funders could also be deemed an “underwriter” of the securities if there is a “distribution” of the securities.  Most private placements are not deemed to be a distribution under the federal securities laws, but public offerings are distributions.   Underwriters in securities distributions are exposed to substantial liability with respect to sale of unregistered securities (1933 Act Section 12(a)(1)), securities sold pursuant to a misleading prospectus in a public offering (Section 12(a)(2)) or securities sold pursuant to a misleading registration statement (Section 11).

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