Educational Investment Game is Security-Based Swap
The Dodd-Frank provisions on securities-based swaps were added to the Securities Act to protect investors when investing in those instruments. The securities typically have to be registered with the Commission to ensure that persons who are not eligible participants in those markets are properly protected by receiving adequate information. At the same time, the Commission has a legitimate interest in investor education and programs which teach potential investors about investing. These two points present a question regarding when, if at all, an interest in an investment game must be registered with the Commission. Tradent Capital recently discovered the answer. In the Matter of Tradent Capital Markets Ltd, d/b/a Tradenet, Adm. Proc. File No. 90261 (October 23, 2020).
Respondent is a private company based in Israel. The firm has two independent contractors that swerve as representatives in the United States. Many of its customers are also U.S. citizens and/or based here.
Since January 2016 Tradent has operated a website – Tradenet.com – that offers educational programs to customers that can teach them to trade U.S. and other securities. Buyers can purchase a Day Trading Educational Package designed to teach them the basics. The contract the purchaser executes described the purchase and sale of securities, options and contracts for differences. Tradent did not purchase any securities however.
The firm also offered other packages to potential investors. By paying an additional fee, set at different levels for different packages, more services could be obtained. Specifically, four packages priced at different levels gave the customer the opportunity to fund an account from which they could obtain a 70% interest in the net profits of the funded trading account or no more than a specified amount of the losses which were limited by a mechanism which halted trading after a certain dollar level.
Over a three-year period, beginning in November 2017, over 5,000 customers in the U.S. purchased and operated Tradent accounts. Those customers received about $1.7 million in payouts. Those funds were transferred to U.S. accounts. The transactions were tracked through a software system licensed by a U.S. based company affiliated with Tradent. No registration was in effect.
The Order alleges that the contracts offered and sold by Tradent were security-based swaps. Those instruments are defined as any agreement or transaction that is a swap under the CEA and is based on either an index that is a narrow-based security index, a single security or loan or the occurrence, nonoccurrence or extent of an occurrence of an event relating to a single issuer of a security.
Tradenet offered to sell security-based swaps to U.S. customers when no registration statement was in effect. The persons to whom the contracts were sold were not eligible contract participants, that is one of the categories of entities and or individual designated in the statue and, in certain cases, persons who meet specified monetary limits. While there is value in the development of investing and trading games which do not require registration with the Commission, where the investors are provided a percentage of trading profits based on their securities selection, registration may be required as here. The Order alleges violations of Securities Act Sections 5(e) and 6(1).
In resolving the matter, Respondent took certain remedial actions and cooperated with the staff. The company consented to the entry of a cease and desist order based on the sections cited in the Order. The firm also agreed to pay a penalty of $130,000 which will be transferred to the U.S. Treasury.