On June 17th, the Securities and Exchange Commission (“SEC”) announced an enforcement action against a company for illegally offering “complex derivatives products to retail investors”. According to the related SEC enforcement order, the respondents operated a website that allowed its users to buy or sell contracts that were valued by reference (or “linked”) to the value of interests in designated private companies. The SEC analogized the website to a fantasy league for private companies. The SEC based its enforcement order on the grounds that:
1) Such contracts constituted a “security-based swap,” as such term is defined by Section 3(a)(68) of the Securities Exchange Act of 1934 (the “Exchange Act”); and
2) The Exchange Act makes it unlawful for a person to either: a) offer a security-based swap to any person who is not an eligible contract participant, as defined by Section 1a(18) of the Commodity Exchange Act (the “CEA”), without an effective registration statement; or b) effect a transaction in a security-based swap with or for a person that is not an eligible contract participant, unless such transaction is effected on a national securities exchange.
The enforcement order is noteworthy for a couple of reasons:
1) It involves a security-based swap, the statutory definition of which incorporates the term “swap” from section 1a(47) of the Commodity Exchange Act; and
2) It highlights the attention that the SEC and, more generally, Federal regulators (including the Commodity Futures Trading Commission) intend to give to “retail oriented” products that have characteristics of a derivative.
Indeed, in the press release, the SEC specifically stated that, “The Complex Financial Instruments Unit will continue its scrutiny of the retail market for conduct that may violate the Dodd-Frank Act’s swaps provisions, including online competitions creatively monetizing what actually constitute security-based swaps transactions.”
The press release and the enforcement order are available here.
Good day. Good reading. DR2