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This month, the Securities Exchange Commission (SEC) fined Forcerank, makers of a fantasy stock market trading game, $50K in connection with their game. The fine was specifically for failing to file a registration statement and also for failing to sell their contracts through the national securities exchange. While Forcerank's game was offered as a game, the SEC explained that the offering of a financial reward and entry fee for games where players are essentially playing the stock market invokes various federal laws put in place to protect investors.
Forcerank's mobile phone games asked players to predict the performance of ten different securities. Forcerank kept 10 percent of all entry fees. Players were rewarded with points and some even won cash. Forcerank was also hoping to collect data about market expectations that could be sold to other investment firms.
What Is a Security-Based Swap
A security-based swap is a complex way to trade on the stock market that doesn't actually involve trading stocks. Instead, a type of interest is traded. Typically, retail investors (individual investors) do not engage in this type of trading, as it has been traditionally the domain of investment firms. Forcerank's game targeted individual investors.
The SEC's press release explained that: "Forcerank's agreements with players were security-based swaps because they provided for a payment that was dependent on an event associated with a potential financial, economic, or commercial consequence and based on the value of individual securities." In exchange for agreeing to the $50k fine, Forcerank escaped liability without admitting to any wrong doing.
Are Fantasy Sports-Style Games for Stocks Legal?
Last year, the SEC issued a warning to retail investors that websites offering pay-to-play fantasy stock trading, or fantasy investment, games that provide real rewards may violate federal securities and investment laws. In particular, the SEC was alerting consumers and investors about how these games could potential run afoul of the laws that govern 'security-based swaps.'
It would seem, based on the SEC's guidance, that if a stock trading game is free to play and offers no rewards then the game will most likely be legal. However, the SEC warns that even if an alternate currency, such as bitcoin, is used, this can still violate federal laws. Additionally, there are state gambling laws that can be violated in pay-to-play stock market trading games.