The Securities Exchange Commission (“SEC”) recently fined New York-based Forcerank LLC (“Forcerank”) $50,000 in connection with charges that Forcerank’s fantasy stock market mobile app illegally offers complex derivative products to investors.

How did the fantasy stock market app allegedly violate federal securities law?

The app, described by some as the stock market version of FanDuel or DraftKings, permitted players to predict the order in which 10 stocks would perform relative to each other over the course of the upcoming week. Players would pay a contest entry fee, accrue points based on the accuracy of their predictions and receive cash prizes at the end of the competition. Forcerank would keep 10% of the entry fees. The SEC alleged that the contests violate federal securities laws, including the Dodd-Frank Act, by offering players security-based swaps. The SEC’s charges were premised on the reasoning that the players entered into contracts with Forcerank, which provided for payment to the players that was dependent on an event associated with a potential financial or commercial consequence and based upon the value of individual securities. The SEC noted that the contests violated dual mandates concerning derivative swaps, namely that no registration statements had been filed for the contests and that none of the contests were offered through national securities exchanges. The SEC effectively shut down the fantasy stock market app before any investors could potentially be harmed, though Forcerank maintained that the contests were skill-based competitions and denied any wrongdoing.

Protecting Your Fantasy Venture

Fantasy sports leagues benefit from special legal protections, including both the carve-out exemption contained in the federal Unlawful Internet Gambling Enforcement Act and increasing numbers of state laws. However, as we have previously blogged, this protection likely does not extend beyond sports-based contests. The SEC’s aggressive takedown of Forcerank’s fantasy stock market application demonstrates the risks inherent in relying on the theory that skill-based competitions are entirely exempt from prohibitions. Even if a stock market-based contest is arguably a game of skill, federal securities laws may still make it illegal. Accordingly, it is critical to work closely with knowledgeable counsel to ensure that fantasy-based contests involving cash prizes are compliant with applicable law.