The Securities and Exchange Commission (SEC) charged the California cryptocurrency investment app Abra and a related Philippines-based firm today with “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, the Abra app enables customers to bet on price movements of domestic and international equity securities. Utilizing the app, users can “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 SEC’s order found that the company told its customers that their contracts would go down in price, mirroring the securities of their interest. It also found that the “contracts were security-based swaps subject to U.S. securities laws.”
According to the SEC’s Monday press release, Abra allegedly began offering the contracts in February 2019 to foreign and domestic investors, but it did not verify if its users were “eligible contract participants” as defined by securities law. Abra briefly ceased offering the contracts that month after communicating with SEC representatives but resumed in May 2019, offering them only to domestic customers.
Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, explained that companies must adhere to the SEC’s registration requirements. “Businesses cannot ignore the registration requirements designed to provide investors with the information necessary to evaluate securities transactions…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.”
Abra and Plutus Technology agreed to cease and desist their conduct and to pay a combined penalty of $150,000. The Commodities Futures Trading Commission (CFTC) today announced a settlement with the two parties for similar reasons.