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SEC Charges App Developer for Unregistered Security-Based Swap Transactions

07/13/2020 | 10:10am EDT

Washington, D.C.--(Newsfile Corp. - July 13, 2020) - The Securities and Exchange Commission today charged California-based Abra and a related firm in the Philippines for offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange.

According to the SEC’s order, Abra developed and owns an app that enabled users to bet on price movements of U.S.-listed equity securities.  Using the app, individuals were able to enter into contracts that provide synthetic exposure to price movements of stocks and exchange-traded fund (ETF) shares trading in the U.S. through blockchain-based financial transactions with Abra or with related company Plutus Technologies Philippines Corp.  The order finds that Abra told users they could choose securities whose performance they wanted to mirror, and the value of their contract would go up or down the same amount as the price of the underlying security.  The order further finds that these contracts were security-based swaps subject to U.S. securities laws. 

As described in the order, in February 2019 Abra started offering the contracts to investors in the U.S. and abroad.  The order finds that Abra marketed its app to retail investors, yet Abra took no steps to determine whether users who downloaded the app were “eligible contract participants” as defined by the securities laws.  According to the order, Abra stopped offering contracts in February 2019, after conversations with SEC staff, but resumed the business in May 2019, this time attempting to limit the offers and sales to non-U.S. people.  Although Abra moved certain operations outside the U.S., the order finds that its employees in California designed and marketed the swap contracts, and screened and approved users who would be allowed to buy the contracts.  The order further finds that Abra’s U.S.-based employees effected thousands of stock and ETF purchases in the U.S. to hedge the contracts. 

“Businesses cannot ignore the registration requirements designed to provide investors with the information necessary to evaluate securities transactions,” said Daniel Michael, Chief of the SEC Enforcement Division's Complex Financial Instruments Unit. “Further, businesses that structure and effect security-based swaps may not evade the federal securities laws merely by transacting primarily with non-U.S. retail investors and setting up a foreign entity to act as a counterparty, while conducting crucial parts of their business in the United States.” 

The SEC’s order finds that Abra and Plutus Technologies violated federal securities law provisions concerning unregistered offers and sales of security-based swaps and requiring that certain swap transactions occur on a registered national exchange.  Without admitting or denying the findings in the order, Abra and Plutus Tech agreed to a cease-and-desist order and to pay a combined penalty of $150,000.  In a parallel action, the Commodity Futures Trading Commission announced a settlement with Abra and Plutus Technologies arising from similar conduct.

The SEC’s investigation was conducted by Michael Baker and Deborah Tarasevich of the SEC’s Cyber Unit and Brent Mitchell and Reid Muoio of the SEC’s Complex Financial Instruments Unit and supervised by Mr. Michael and Kristina Littman, Chief of the Cyber Unit. The SEC appreciates the assistance of the CFTC.


© Newsfilecorp 2020
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