SEC Charges App Developers for Unregistered Security-Based Swap Transactions

Abra, a California-based trading app, and related firm Plutus Technologies Philippines Corp (“Plutus”), were charged by the Securities and Exchange Commission (SEC) on July 13, 2020. Abra and the related firm were charged for offering trades to non-registered investors and for failing to record all trades on a registered national exchange.

Abra is an app that allows users to buy contracts that mirror Exchange Traded Funds (ETF) and stocks. The value of the contract would move based on the real value of the underlying asset. The SEC found that these contracts were in fact security-based swaps, therefore Abra must comply with all U.S. Securities Laws.

In February 2019, Abra began offering contracts and advertising the app to retail investors. However, Abra took no steps to verify if users who were buying contracts were “eligible contract participants” as defined in the U.S. Securities Laws. Abra stopped offering contracts in February 2019 due to discussions with the SEC, but resumed offering contracts in May 2019, limiting the sale of contracts to non-US retail investors only. This began Abra’s attempt to move operations outside the US, but the SEC found that employees in California were still designing and approving contracts. Therefore, under the Securities Laws, Abra was not obliging with the proper regulations.

Daniel Michael, Chief of SEC Enforcement Division’s Complex Financial Instruments Unit, reinstated the importance of registering with the SEC and providing proper information to all investors. Michael further stated, “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 order stated that Abra and Plutus were in violation of securities laws surrounding unregistered offers and sales of security-based swaps and not registering all trades on a national exchange. Abra and Plutus agreed to a cease-and-desist order and paid a combined penalty of $150,000.

For the full press release, click here.

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