A company settled SEC charges that it offered complex derivatives products to retail investors illegally, through mobile phone games described as "fantasy sports for stocks."
The SEC determined that the company violated Dodd-Frank Act requirements by failing to (i) file a registration statement concerning what constituted a security-based swap offering, and (ii) sell the contracts through a national securities exchange. The SEC explained that the company ran mobile phone games that challenged players to predict the order in which ten securities would perform relative to each other, and awarded points and cash prizes to players based on the accuracy of their predictions. The SEC emphasized that the company kept ten percent of the entry fees, and "obtained a data set about market expectations that it hoped to sell to hedge funds and other investors." The SEC asserted that the company's "agreements with players were security-based swaps because they provided 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, Unit Chief of the SEC Enforcement Division Complex Financial Instruments, stated that this recent action is a harbinger of things to come:
The company agreed to pay a $50,000 penalty.
Commentary
Perhaps these sports games are a bad thing, and perhaps they should be prohibited, but the notion that they are illegal because they are swaps shows how absurd Dodd-Frank's definition of "security-based swap" really is. The breadth of the definition, however, is less of a problem on the securities side (because it only picks up contracts relating to securities) than it is on that of the Commodity Exchange Act, where, in theory, the definition includes a contract relating to any event of potential financial, economic, or commercial consequence (other than one related solely to securities). See What Is a Swap? Maybe (Almost) Everything? You Got a Problem with That?
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