Lawsuit Against the SEC Examines Securities Regulations Potentially Affecting Small Businesses in New Jersey and New York

dollarsNew business ideas and practices spring up all the time. Some, but not all, find a niche that leads to success. Government officials at the city, state, and federal levels often keep a close eye on new or unconventional business practices to see how they fit into existing laws and regulations. If regulators determine that a particular business activity falls under their jurisdiction, they may attempt to rein in what they view as regulatory violations. The businesses, of course, might disagree with this assessment. Any new business should be aware of regulations that apply—or might potentially apply—to them. A lawsuit currently pending in a New Jersey federal court demonstrates this sort of dispute. RD Legal Capital, LLC v. U.S. Securities and Exchange Commission, No. 2:16-cv-05104, complaint (D.N.J., Aug. 22, 2016).

The plaintiff alleges that the Securities and Exchange Commission (SEC), a federal agency charged with enforcing securities laws, exceeded its authority under both federal law and the U.S. Constitution by initiating a regulatory action against it for alleged violations of the Investment Advisers Act (IAA) of 1940, 15 U.S.C. § 80b-1 et seq. While businesses in New Jersey and New York that do not provide financial services of any kind are not likely to find themselves subject to this specific statute, the case is illustrative of how the government can seek to impose an existing regulatory framework on a business, even if the business believes in good faith that it is not subject to that framework.

The statute at issue in RD Legal Capital defines an “investment adviser” in part as someone “in the business of advising others…as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.” 15 U.S.C. § 80b-2(a)(11). Congress originally passed this law in the wake of important Great Depression-era statutes like the Securities Act of 1933 and the Securities Exchange Act of 1934. Each law uses a substantially similar definition of a “security,” id. at § 80b-2(a)(18), 77b(1), 78c(a)(10), and each has generated a considerable amount of regulatory opinions and caselaw regarding the scope of this definition.

Media reports on the plaintiff describe it as a hedge fund that finances litigation in exchange for a share of the eventual settlement or award. The plaintiff asserts that it does not “provide investment advice concerning securities, and neither is registered with the [SEC].” RD Legal Capital, complaint at 2. The plaintiff came to the SEC’s attention through a lawsuit against the country of Iran for its alleged involvement in the 1983 bombing of the Marine barracks in Beirut, Lebanon. A judge has ordered the country’s central bank to pay $1.8 billion to the families of some of the victims. See Bank Markazi v. Peterson, 578 U.S. ___ (2016).

The SEC initiated administrative proceedings against the plaintiff under the IAA, claiming that it “defrauded investors.” In re RD Legal Capital, et al, Adm. Proc. No. 3-17342, cease-and-desist order at 2 (SEC, Jul. 14, 2016). In its lawsuit, the plaintiff is claiming that it is not subject to the IAA and that the SEC’s proceeding violates the Appointments Clause of the U.S. Constitution.

Samuel C. Berger, a business transactions attorney who practices in New York and New Jersey, represents businesses, business owners, and entrepreneurs. We offer fixed-fee legal-service packages to our clients that address a wide variety of legal issues and needs. To schedule a confidential consultation to see how we can help you and your business, contact us today online, at (201) 587-1500, or at (212) 380-8117.

More Blog Posts:

SEC Allows Venture Capital Firm to Conduct Private Placements Online, New York & New Jersey Business Lawyer Blog, October 1, 2015

What New York and New Jersey Small Business Owners and Entrepreneurs Should Know About Regulation D, New York & New Jersey Business Lawyer Blog, August 20, 2015

Statute of Limitations for Civil Suits by the SEC is on the Supreme Court’s Docket: Gabelli v. Securities and Exchange Commission, New York & New Jersey Business Lawyer Blog, October 12, 2012

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