The Securities and Exchange Commission charged Abra, a California-based company behind a cryptocurrency-investing app and a related firm in the Philippines on Monday for offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange.
Though the companies did not admit or deny the findings in the SEC order, they agreed to pay a combined penalty of $150,000 and comply with a cease-and-desist order from future violations. The SEC announced the settlement in a parallel action with the Commodity Futures Trading Commission, which also settled with Abra and the Philippines-based Plutus Tech.
Abra was founded in 2014 and runs an app that allows investors to benefit from “synthetic exposure” to the price movements of stock and exchange traded fund shares, according to the SEC order. This purportedly allowed investors to carry out financial transactions using blockchain in order to benefit without having to purchase the actual securities.
Starting in early February 2019, Abra offered contracts to U.S. and international investors, according to the SEC. The company claimed that the app would not collect personal information (including information that would be needed to perform a “know-your-customer” inquiry) on accounts funded via bitcoin or other digital assets, according to the order.
After the SEC inquired about their practices, Abra discontinued offering these contracts, but the business restarted in May through November 2019, with an emphasis on attracting investors from outside the U.S., the SEC said. While the company moved some of its operations outside of the country, the SEC found that Abra continued to design and market some of the swaps out of its California location, according to the order.
However unconventional the transactions, the swaps qualified as security-based swaps, according to the SEC. The commission argued that Abra violated federal law by offering and selling the swaps to investors that were not “eligible contract participants” and that lacked a registration statement, and also erred because the swaps were not done on a proper national securities exchange, according to the order. Businesses like Abra are not able to ignore the registration requirements that help investors evaluate transactions, said Daniel Michael, the chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
“Further, 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,” he said.
When asked for comment, an Abra spokesperson cited this tweet from Abra CEO Bill Barhydt:
According to the order, Abra’s non-U.S. clients would enter into contracts with Plutus Tech, which is partially owned by Abra and dependent on that company for funding and business operations. The SEC claimed that foreign investors contracted with Plutus Tech but Abra employees designed and marketed the contracts, found clients, and hedged those contracts by causing stock and ETF purchases in the United States.
Additionally, though Abra targeted foreign investors, the SEC said it appeared there were seven contracts between Plutus Tech and five individuals within the United States.