SEC Sanctions Security-Based Swap Sellers
Disclosure and transparency are the pillars of the federal securities laws. When selling securities, the key is to disclose to those who may want to purchase interests the material facts about the investment. Stated differently, transparency regarding the material facts about the investment is critica. While these key principles seem almost self-evident, the steady stream of offering fraud cases brought by the Commission demonstrates that day after day investors are convinced to part with their money without knowing the basic facts.
A recent case brought by the Commission regarding security-based swaps emphasizes the point. In this action the seller of an app that permitted investors to essentially bet on the price movements of U.S. securities failed to furnish investors basic information about the investments, even after meeting with the staff. In the Matter of Plutus Financial, Inc., Adm. Proc. File No. 3-19873 (July 13, 2020).
Two firms are named as Respondents — Plutus Financial or Abra, a U.S. based entity, and Plutus Technologies Philippines, a Manila based firm. Abra developed an app that permits investors to enter into financial transactions with either of the Respondents serving as the counter-party. People could download the app and fund an account with dollars or Bitcoin.
By 2018 the contracts offered permitted investors to obtain synthetic exposure to the price movement of dozens of currencies. The transactions were memorialized on a Bitcoin blockchain. When engaging in a transaction, the investor executed a smart contract provided by Abra. The gains and losses were marked to the blockchain and recorded in the investor’s digital wallet. The wallet could only be unlocked at the end of the contract with the consent of Abra.
In February 2019 Respondents broadened the business. Investors could obtain synthetic exposure to numerous U.S. securities and ETFs. The structure was essentially the same as that of the initial currency transactions. It was advertised on the web in 155 countries. The advertisement contained an interview, made available on February 6, 2019, which stated that if “you sign up today  you’ll get an email the next few weeks when it’s your turn to start buying stocks and you’re off to the races” (internal citations omitted). A link was provided so that retail investors could download the app and begin investing for as little as $5.00.
Abra did not set any requirements that investors put up a specific amount of capital. There was no effort by the promoters to identify those investing or their financial resources. Indeed, Abra made no effort to determine who down-loaded the app. More than 20,000 people added their name to the waiting list.
Later in February the staff of the SEC and CFTC contacted Abra. No swaps were sold between February and May 2019. In May 2019 Abra restarted the stock/ETF business but decided not to sell to U.S. investors, only those abroad. Nevertheless, some contracts were entered into by U.S. citizens. Overall about 10,000 swaps were sold to about 2,000 persons, most of whom were outside the U.S.
The contracts Respondents offered and sold were security-based swaps. The contracts provided on an executory basis for the exchange of one or more payments based on the value of one or more securities. The contracts were based on the value of individual securities. No registration statement was in effect. The transactions did not comply with Securities Act Section 5(e). There was no effort to determine if the investors were eligible — the required information about the transaction was not made available to the investors. The transactions did not take place on an exchange as required by Exchange Act Section 6(1).
To resolve the matter each Respondent engaged in certain remedial acts. Each also consented to the entry of a cease and desist order based on the sections cited in the Order. Respondents also agreed to pay, on a joint and several basis, a penalty of $150,000 which will be transferred to the general fund of the Treasury subject to Exchange Act Section 21F(g)(3).