On June 17, 2015, the Securities and Exchange Commission (“SEC”) issued an investor alert to warn investors about fantasy stock trading and other similar websites. For a full text of the alert, click here.
Although most people think that terms like “swap,” “security-based swap,” and “derivative” include only complicated financial instruments used by sophisticated financial institutions, the SEC explains that these terms are defined broadly and include any agreement, contract, or transaction whose value is based upon – or “derivative” of – the value or performance of some other financial product, event, or characteristic. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which we discussed briefly in our blog series on aiding and abetting securities law violations (available here), sought to prohibit the unregistered sale of security-based swaps to persons who are not eligible contract participants, i.e., certain types of entities and individuals allowed to engage in financial transactions not open to retail customers, such as financial institutions, investment companies, and very wealthy individuals. This requirement was intended to ensure that persons who are not eligible contract participants receive financial and other significant information and that the trading activity is appropriately surveilled.
In the alert, the SEC warned of fantasy stock trading and other similar websites that claim to offer investors the chance to make money on publicly traded or privately held companies without actually buying stock in those companies. The SEC said that some of these transactions could fall under the “security-based swap” category, implicating both the federal securities and commodities laws—even when the sites presents the transaction as a “fantasy” trading game or competition. For example, the SEC said, a website that charges a small amount of entry fee to join an online fantasy stock trading competition in which participants could buy or sell a virtual portfolio of securities and win a prize is one that may be offering security-based swaps. The alert also generally warns investors of websites involving unlawful internet gambling or use of bitcoins or some other virtual currency as payments or prizes, as they may be violating gambling as well as securities laws.
This post is a part of a multi-part series on fantasy stock trading and security-based swaps. In our next post, we will look at In re Sand Hill Exchange, a recent SEC enforcement action involving a website that claimed to offer anyone an opportunity to realize profits based on the performance of private companies.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
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: 407-517-0064; [email protected], or <a ” ” target=”_blank” href=”http://www.rshawnmcbridelaw.com”>www.mcbrideattorneys.com.
 SEC, Investor Alert: Beware of Fantasy Stock Trading Websites Offering Real Returns (June 17, 2015), http://www.sec.gov/oiea/investor-alerts-bulletins/ia_fantasytrading.html. See also 7 U.S.C. § 78c(a)(68); 7 U.S.C. § 1a(47).
 See 15 U.S.C. §§ 78f(l), 77e(e).
 See 7 U.S.C. § 1a(18).
 See generally Order Instituting Cease-and-Desist Proceedings, In re Sand Hill Exchange, Administrative Proceeding File No. 3-16598, at 2 (June 17, 2015).
 SEC, Investor Alert: Beware of Fantasy Stock Trading Websites Offering Real Returns (June 17, 2015).