A mobile phone app that offers “fantasy stock” contests is facing a $50,000 penalty on charges of illegally offering security-based swaps.
The Forcerank app was described by Fortune as “the stock market version of fantasy sports sites FanDuel and DraftKings” when it was launched in March. According to start-up Estimize, the app allows players to rank a group of 10 stocks or exchange traded funds based on expected performance over the upcoming week.
Using the app, players get to win points for each instrument based on the accuracy of their prediction, and the players with the most aggregate points receive cash prizes at the end of the competition. Forcerank, in turn, keeps 10 percent of the entry fees and obtains “a data set about market expectations,” which it hopes to sell to hedge funds and other investors.
The U.S. Securities and Exchange Commission, however, found that the games violated provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, whose goal is to limit the sale of security-based swaps to the highest level of regulation as well as ensure that information about a swap offering is fully transparent to retail investors.
“The Dodd-Frank Act sought to bring security-based swaps activity out of the shadows, including when it involves retail investors,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, in a statement.
Forcerank’s website described the contest as a “skill-based contest,” which the SEC rejected in an administrative order, noting that “no registration statements were in effect for the Forcerank contests” and that “none of the contests were effected on a national securities exchange.”
The app had run 240 paid contests by early June, with about 337 players paying a total of $16,885 in aggregate entry fees and receiving about $15,196 in prizes, according to Forcerank.
Forcerank cancelled the contests after meeting with SEC staff and has also agreed to pay $50,000 to settle the charges.
Forcerank isn’t the first app to take a punt on stock market watching. In April, start-up Foundermark launched the Vestly app, which allows players to choose their own portfolio, buy virtual stocks and then rack up points based on the stocks’ performance. The top 100 portfolios at the end of each month will split $10,000 based on where they ranked.