In re Sand Hill Exchange.
In re Sand Hill Exchange involved two Silicon Valley entrepreneurs, Gerrit Hall and Elaine Ou, who operated a website called Sand Hill Exchange (“Sand Hill”). The SEC said that the two wanted to create a business that would involve valuing private startup companies, especially companies operating in Silicon Valley, and initially experimented with several business models, including a variation of a “fantasy sports” league, a valuation contest, a valuation game, and so forth. The SEC alleged that, starting around February 2015, Sand Hill started offering its new products that allowed users to fund their Sand Hill accounts with either dollars or bitcoins and then buy and sell contracts that referenced a private company, such as Uber, Pinterest, Snapchat, and Coinbase. According to the SEC, Sand Hill touted the business model as an opportunity to “profit off an early stage startup” and represented that it was a “market for smart contracts on the future valuation of startups.” Specifically, the SEC said, Sand Hill described to users that contract buyers would receive one dollar for every $1 billion that the company was valued at the liquidity event (e.g., IPO, merger, or dissolution), if that company experienced such event.
The SEC alleged that Sand Hill sought out people to fund accounts but did not ask users about their financial holdings or seek to limit Sand Hill to users with any specific amount of assets; in fact, they wrote on the website, “We accept everybody regardless of accreditations status.” The SEC also alleged that Hall and Ou exaggerated Sand Hill’s accomplishments in an attempt to improve people’s views of them and the company (e.g., “backed by notable Silicon Valley investors, providing sufficient capital to guarantee deposits”), none of which the agency believes were true. Moreover, according to the SEC, Sand Hill never had legal teams to govern the contract, all of the contracts entered on the website were between the user and Sand Hill, and Sand Hill had no outside investors, auditors, or insurance. Additionally, the SEC alleges that the reports of volume on the website did not reflect actual transactions; instead, Hall and Ou manually set inflated volume amounts to make it appear that there was a liquid market for Sand Hill’s contracts.
The SEC maintained that the Sand Hill contracts were security-based swaps because their payouts were linked to the valuation of private companies at a liquidity event, namely a merger, IPO, or dissolution, and, as such, the value of the contracts were based on the value of stock issued by those private companies and/or based on the occurrence of an event that directly affects the financial statements, financial condition, or financial obligations of the private companies. Moreover, the SEC said, Hall and Ou made no effort to limit transactions to people with any specific amount of assets and they advertised that anyone could trade—even people who did not meet the lower standard of being an accredited investor. Because it is unlawful for any person to effect a transaction in a security-based swap with or for a person that is not an eligible contract participant without a registration statement, the SEC claimed that Sand Hill, Hall, and Ou violated Section 5(e) of the Securities Act and Section 6(l) of the Exchange Act. In the cease-and-desist order, the court ordered Sand Hill to stop committing the violations and to pay a civil money penalty in the amount of $20,000. Sand Hill has also undertaken to maintain on the front page of its website a notice that Sand Hill no longer offers “smart contracts” or any transactions based on actual money and that it has refunded all money provided by users and any user who has not received a full refund should email Sand Hill.
This post was a part of a multi-part series on fantasy stock trading and security-based swaps. You can find the other post by searching our blogs at www.mcbrideattorneys.com. If you have any questions about the content of this blog or other securities law issues not discussed here, please contact us.
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About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
 See generally Order Instituting Cease-and-Desist Proceedings, In re Sand Hill Exch., Administrative Proceeding File No. 3-16598 (June 17, 2015).
 Id. at 4.
 Id. at 5.
 Id. at 6.
 Id. at 7.
 Id. at 9.
 Id. at 10.
 Id. See also Sand Hill Exchange, Compliance Notice, http://sandhill.exchange/ (last visited Sept. 29, 2015).