In October, the SEC charged a Switzerland-based securities dealer for offering and selling unregistered security-based swaps to U.S. investors using bitcoins and for failing to transact its swaps on a registered national exchange, according to an SEC order instituting cease and desist proceedings (the “Order”). A copy of the Order can be found here.
Without admitting or denying the SEC’s findings, the dealer consented to the Order and agreed to cease-and-desist operations. In addition, the dealer agreed to pay disgorgement of $31,687 in commissions, overnight holding fees, and its share of trading profits from its U.S. investors, as well as a civil penalty of $100,000. The dealer also undertook remedial efforts to pay back U.S. investors their trading losses.
According to the Order, from late 2014 through 2019, the dealer targeted U.S.-based retail investors and offered and sold them, through its website, various investments in exchange for payments in bitcoin. Although described with different terminology (such as bitcoin Asset Linked Notes, i.e., “bALNs”), the investments were essentially security-based swaps that track the real-time price of a variety of U.S.-listed securities.
The U.S. resident investors who purchased the security-based swaps at issue did not qualify as “eligible contract participants” with $5 million or $10 million invested on a discretionary basis. As a result, according to the Order, the dealer’s conduct violated the securities laws when the swaps were not subject to an effective registration statement and were not traded on a national securities exchange.
In a parallel action, the CFTC entered into a similar settlement with the dealer arising from similar conduct.
This case illustrates that the use of new technology such as bitcoins and new terminology (such as bALNs) does not exempt investment-product dealers from having to comply with the U.S. federal securities laws.
