Securities Regulation of Alternative Litigation Finance
Securities Regulation Law Journal, Vol. 42, p. 5, 2014
25 Pages Posted: 19 Sep 2013 Last revised: 25 Apr 2014
Date Written: September 18, 2013
Alternative Litigation Finance – or ALF – is a rapidly growing, largely unregulated industry, which poses myriad potential benefits and problems. Although ALF has attracted significant scholarly attention, the potential role for securities regulation of ALF has not been widely discussed. This Essay seeks to begin that discussion by analyzing the potential securities regulation of the ALF contract – which is the agreement between the ALF client (the recipient of ALF funds) and the ALF company (the supplier of ALF funds).
First, this Essay provides an overview of ALF, including a summary of the potential pros and cons of ALF and the various regulatory responses proposed by scholars. Second, this Essay analyzes whether an ALF agreement satisfies the definition of "investment contract" so as to qualify as a "security," concluding that an ALF agreement probably qualifies as a security in those jurisdictions that apply a vertical commonality test. Third, this Essay considers whether ALF agreements implicate the central policy of the securities laws – full and fair disclosure – and concludes that ALF agreements are rife with information asymmetry, thus implicating this policy. Fourth, this Essay analyzes how securities regulation would affect ALF contracts, focusing on the prohibitions on the sale and advertising of unregistered, nonexempt securities and the antifraud provisions and concluding that these provisions would partially redress the informational imbalances. In conclusion, this Essay argues that the flexibility of securities regulation makes it a particularly effective method of regulating an evolving industry such as ALF.
Keywords: Securities Regulation, Alternative Litigation Finance, Litigation Funding, Investment Contract, Howey
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