SEC Issues Investor Alert Warning That Fantasy Stock Trading Websites May Violate Securities Laws
At the end of June, the SEC Office of Investor Education and Advocacy issued an Investor Alert and reminded us all that the net of federal securities laws is far-reaching. The Investor Alert warns investors that fantasy stock trading and similar websites violate federal securities laws and, in particular, the “security-based swap” regulations enacted by the Dodd-Frank Act.
The SEC Investor Alert warns against websites that claim to offer a chance to make money from publicly traded or privately held companies without actually buying stock. Generally the sites are set up as a “fantasy” trading game or competition and involve a small entry fee with the chance to win a larger payment if you win the fantasy competition. The SEC has taken the position that these fantasy stock trading programs could potentially involve security-based swaps and implicate both the federal securities and commodities laws. The SEC has and is continuing to investigate the matter. The investigation has progressed enough that
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Sometimes it’s good to go back to basics. In my blogs I often refer to the registration and exemption requirements in the Securities Act of 1933, as amended (“Securities Act”). Section 5 of the Securities Act makes it unlawful to offer or sell any security unless a registration statement is in effect as to that security or there is an available exemption from registration. Similarly, I often refer to the broker-dealer registration requirements. To be a “broker” or “dealer,” a person must be engaged in the business of effecting transactions in securities.
In today’s small cap world corporate finance transactions often take the form of a convertible note and/or options and warrants, the conversion of which relies on Section 3(a)(9) of the Securities Act. Section 3(a)(9) is an exemption available for the exchange of one security for another (such as a convertible note for common stock). Likewise, Rule 144(d)(3)(i) allows the tacking of
