Games can be fun, but the SEC Enforcement Division was not amused by a fantasy stock trading game offered by Forcerank LLC. Forcerank offered a mobile phone game in which players paid a small entry fee to participate, and won points and cash prizes for predicting the order in which 10 securities would perform relative to each other. Forcerank kept 10 percent of the entry fees and paid out the rest as prizes.
The SEC rejected the company’s claim that the game was a contest of skill, concluding that each game entry was a security-based swap because payments were dependent upon the occurrence, or the extent of the occurrence, of an event or contingency and were based on the value of single securities. The Commission noted that "[t]he term 'based on' does not require an exclusive relationship between the payment and the movement of a security."
The games ran afoul of the Securities Act because Forcerank did not restrict the offering to “eligible contract participants,” including institutional investors and individuals with at least $5 million in qualifying investments, and did not file a registration statement for the offerings. The company also failed to sell the gaming contracts through a national securities exchange.
Without admitting or denying the Commission's findings, Forcerank agreed to the entry of a cease and desist order and to pay a $50,000 penalty. The company also shut down the stock picking game.
This enforcement action appears to reflect the “broken window” approach to policing the markets expressed by Chair Mary Jo White in an October 2013 speech, in which she said “even the smallest infractions have victims, and that the smallest infractions are very often just the first step toward bigger ones down the road.” In this case, Forcerank received only $16,885 in entry fees, and paid out all but $1,689 to game participants as prizes. The Commission noted, however, that as of June 2016, the company planned to increase the number and size of the games it offered.
The SEC is obviously concerned about these stock trading games. In June 2015, the Commission issued an Investor Alert to warn investors that fantasy stock trading and other similar websites may violate federal securities laws designed to protect investors from abuses in the swaps market.
The SEC staff is reviewing new and evolving versions of these games, including paid and unpaid models, to determine if these offerings to retail investors violate the federal securities laws, including the swaps provisions of the Dodd-Frank Act. Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, stated that “the Dodd-Frank Act sought to bring security-based swaps activity out of the shadows, including when it involves retail investors.” He added that "we will continue to vigilantly scrutinize the market for improper offerings of complex security-based swaps that ignore the required safeguards to protect retail investors.”
In the Matter of Forcerank LLC , SEC Release No. 33-10232 (Oct. 13, 2016).
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