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Screenshot of a breaking news alert e-mail from Q2 2017
The Securities and Exchange Commission (SEC) has announced that a New York-based company has agreed to pay a $50,000 penalty for illegally offering complex derivatives products to retail investors through mobile phone games that were described as “fantasy sports for stocks.”
An SEC investigation has found that Forcerank LLC failed to file a registration statement for what constituted a security-based swap offering, and the company also failed to sell the contracts through a national securities exchange. Both are requirements under the Dodd-Frank Act to ensure information about an offering is fully transparent to retail investors and the transactions are limited to platforms subject to the highest level of regulation.
According to the SEC’s order, Forcerank ran mobile phone games where players predicted the order in which 10 securities would perform relative to each other. Players won points and some received cash prizes based on the accuracy of their predictions. Forcerank kept 10% of the entry fees and obtained a data set about market expectations that it hoped to sell to hedge funds and other investors. Forcerank’s agreements with players were security-based swaps because they provided for a payment that was dependent on an event associated with a potential financial, economic, or commercial consequence and based on the value of individual securities.
Michael Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, commented:
The Dodd-Frank Act sought to bring security-based swaps activity out of the shadows, including when it involves retail investors. We will continue to vigilantly scrutinize the market for improper offerings of complex security-based swaps that ignore the required safeguards to protect retail investors.”
The SEC has warned the public about fantasy stock trading and other similar websites in a June 2015 investor alert, noting they potentially violate federal securities laws designed to protect investors from abuses in the swaps market. SEC staff continues to evaluate whether new and evolving versions of such games, including paid and unpaid models, are being offered to retail investors in accordance with the federal securities laws, including the requirements of the Dodd-Frank Act.