SEC Charges App Developer for Unregistered Security-Based Swap Transactions

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SEC Charges App Developer for Unregistered Security-Based Swap Transactions

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Originally published on iComply Investor Services; authored by Kayvan B. Sadeghi of Schiff Hardin LLP.

Kayvan B. Sadeghi

What happened​?

On July 13, 2020, the SEC and CFTC each filed settled enforcement actions against Abra and its related company, Plutus Technologies Philippines Corporation.

Abra is a cryptocurrency app developer that offered synthetic exposure to dozens of fiat currencies, digital currencies, and blue-chip stocks and ETFs. They were penalized for structuring and effecting swaps without complying with U.S. securities and commodities laws.

Abra unsuccessfully sought to avoid U.S. laws by excluding U.S. purchasers and moving certain operations out of the U.S. The SEC announcement emphasizes that one “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.”

What types of stakeholders will be impacted by this?

This announcement should serve as a caution to anyone seeking to structure their business conduct or offerings to stay outside the reach of U.S. securities and commodities laws.

Why does this matter?

U.S. regulators view the reach of U.S. laws far more broadly than businesses might expect. This action also demonstrates the clear intent of the SEC and CFTC to work together where their jurisdictions may overlap, including in the blockchain space.

Does this change create new risks for industry stakeholders? If so, what should they be looking out for?

This action highlights and increases the regulatory risks for anyone who has sought to stay outside the reach of U.S. laws by excluding U.S. purchasers. The SEC and CFTC likely will now view the market as on notice that the efforts taken by Abra were insufficient.

Does this change create new opportunities for industry stakeholders? If so, what might they be?

Any company that has concerns about compliance with U.S. securities and commodities laws should consider this announcement an opportunity to evaluate with counsel whether to approach the SEC and/or CFTC proactively.

How does this impact compliance teams, and what can they do to stay ahead of the regulatory requirements?

Compliance teams must remain vigilant with KYC and AML requirements, but they must also realize that a well-intentioned and implemented plan to exclude U.S. purchasers is only part of the puzzle, not a complete solution.

What can management teams or boards of directors do to stay ahead of these changes?

Management teams and boards can evaluate with outside counsel both their existing compliance programs and whether to proactively engage regulators through channels such as LabCFTC and SEC’s FinHub.

What can service providers do to help their clients stay ahead of these changes?

Service providers will do well to stay in their lane, understand what risks they can help control, and also where their best efforts alone may fall short of reaching their client’s end goal.