The Model Contract and the Securities Laws, Part IV

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Q: If the only investors are specialized litigation finance firms, are there any issues regarding investment advisor status or suitability (for either the funder or the law firm)? If not, when if ever are such issues implicated? Does it matter only who the investors are, or does it matter who the plaintiff is as well?

A:  Federal and state antifraud laws apply regardless of how sophisticated the investor is.  The sophistication of the investor, however, may help assure private placement status and avoid the registration requirement, although other factors such as the net worth of the investor can be at least as important (see SEC Regulation D definition of an “accredited investor” which is based on net worth and income not sophistication).

Also any person or entity that is in the business of evaluating Litigation Proceed Rights and then advising prospective investors could be deemed to be an “investment advisor” and required to register with the SEC.  The sophistication of the investors receiving this investment advice is not likely to change the advisor’s status or relieve the advisor of registration requirements.   Thus a law firm that opens up an ancillary business of advising investors about Litigation Proceed Rights – particular with respect to cases the firm is not also litigating — will need to be cognizant of the Investment Advisors Act and regulations thereunder.

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