A “life settlement,” generally, is a transaction in which a person or entity owning a life insurance policy (usually the insured, a relative of the insured or a legal entity connected with the insured) sells the policy together with the rights to receive and collect all death benefit proceeds from the policy. “Life settlements” can be purchased individually or structured through private investment funds (each, a “Portfolio”). These portfolios acquire and hold a diversified mix of whole life settlement contracts. The Manager of each Portfolio (the “Manager”), has full authority over the management, conduct and operation of each Portfolio. Portfolios can be structured with a “Sponsor” who will assist and monitor the Manager as well as serve as the purchasing agent for the Portfolio. Neither, the Sponsor or the Manager needs to be registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser.
In 2009 the SEC established a Life Settlements Task Force, which issued a Staff Report to the SEC dated July 22, 2010 (the “Staff Report”). The Staff Report generally describes a life settlement as “any transaction in which an insurance policy owner sells a life insurance policy to a third party for an amount that exceeds the policy’s cash surrender value, but is less than the expected death benefit of the policy.” Insured individuals or policy owners, particularly those who are elderly, are willing to sell their policies in a secondary market rather than allowing the policies to lapse or surrendering them to the insurance company for cash value. This enables the policy owner to maximize and benefit from the value of the asset during his or her lifetime.
The general view is that non-fractionalized or whole life settlements are not “securities” under the federal securities laws and, therefore, are not subject to the SEC’s jurisdiction. The life settlement (so long as not a variable annuity) begins as a life insurance contract, which is not a security, and there is no basis to believe that such contract morphs into a security simply because the contract may be sold into a secondary market.
The Staff Report appears to have accepted the general view and to have assumed that whole life settlements are not “securities.” The Staff report refers to two key federal court decisions that have reached different conclusions as to whether fractional interests in life settlements are securities. The federal courts would not have reached different conclusions as to fractional interests, if a whole life settlement contract had been deemed to be a security. Nevertheless, the units or membership interests in the Portfolio are securities and the offer and sale of the Portfolio’s securities will be subject to the federal securities laws and applicable state securities or “Blue Sky” laws.
The offering and sale of membership units or interests in the Portfolio constitutes an offering of securities. Portfolios may be conducted as a Private Placement offering without any general solicitation or advertising, exempt from securities registration under the Securities Act of 1933, as amended (the “Securities Act’) in conformity with Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506(b) of Regulation D thereunder. Accordingly, there will be significant restrictions imposed on the transfer or resale of such securities and there will be no trading market. While Rule 506(b) of Regulation D permits sales to non-accredited investors subject to heightened disclosure and investor sophistication requirements, Usually, portfolios will only accept subscriptions from accredited investors.
Being consistent with the federal securities laws, the life settlements are not securities under the Texas Securities Act. For the reasons noted above under the federal securities laws, the shares or membership interests in the Portfolio are securities and the offering and sale thereof are subject to applicable blue sky regulation in the jurisdictions from which offers may originate and to which offers and sales may be made.
Currently there is no requirement for a Sponsor or the Manager to be registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser. However, requirements may vary from state to state.