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Regulation and Compliance > Federal Regulation > SEC

App Developer Agrees to Pay $150K Over Security-Based Swaps

By Jeff Berman

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App developer Abra, based in Mountain View, California, and affiliated Philippines firm Plutus Technologies agreed to pay $150,000 to settle charges that they violated securities laws by offering and selling security-based swaps to retail investors without registration and failed to transact those swaps on a registered national exchange, according to the Securities and Exchange Commission.

Abra developed and owns an app that allows users to bet on price movements of U.S.-listed equity securities, according to an SEC order filed Monday. Using the app, investors were able to enter into contracts providing synthetic exposure to price movements of stocks and exchange-traded fund shares trading in the U.S. via blockchain-based financial transactions with Abra or Plutus, the SEC says.

The firms agreed to the SEC settlement without admitting or denying the findings in the order, the regulator said.

“This case highlights the confluence of two current trends in the securities markets: offshore companies accessing US capital markets and the ease with which smartphone apps enable retail participation in those same markets,” Nick Morgan, a partner in the litigation department at law firm Paul Hastings in Los Angeles, told ThinkAdvisor in an email. “Here the SEC is signaling that it will apply federal securities laws to both of those trends even in the absence of allegations of fraudulent conduct.”

Asked for comment, Lomesh Dutta, Abra’s vice president of growth, only referred ThinkAdvisor to a tweet sent by Bill Barhydt, Abra CEO and founder, Monday afternoon that did not mention the settlement and SEC claims: “Abra’s business is doing very well with our loyal US users leading the way. We have users in 100 countries with people making $ millions in deposits via bank, stablecoin, #Bitcoin, credit card and over 50 other cryptocurrencies. Stay tuned for some awesome product announcements!”

In a parallel action also filed Monday, the Commodity Futures Trading Commission announced a settlement with Abra and Plutus arising from similar conduct.

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, according to the SEC. The SEC classified the contracts as security-based swaps subject to U.S. securities laws, it claimed.

Abra started offering the contracts to investors in the U.S. and abroad in February 2019 and the company marketed its app to retail investors, but 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 SEC.

“Abra ran a publicity campaign that promoted the offering and that Abra would not collect personal information — particularly information required to perform a know-your-customer (“KYC”) inquiry — about users who funded their accounts with Bitcoin or other digital assets,” the SEC said in the order.

Although Abra stopped offering contracts in February 2019, after conversations with SEC staff, the firm resumed the business in May 2019, this time attempting to limit the offers and sales to non-U.S. investors, according to the SEC.

“Businesses cannot ignore the registration requirements designed to provide investors with the information necessary to evaluate securities transactions,” according to 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,” he said in a statement.

Jeff Berman

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