Binary Options And Securities Regulation
Recently, the North American Securities Administrators Association (NASAA) updated and expanded its 2015 advisory warning investors about online binary option schemes. NASAA offers the following explanation of “binary options”:
A binary option is a type of all-or-nothing investment contract, similar to placing a bet. Like the flip of a coin, there are only two possible outcomes: heads you win or tails you lose. When an investor purchases a binary option contract, the investor predicts the value of an underlying asset (currency, stock, etc.) at a predetermined time or date in the future – similar to placing a bet. If the investor correctly predicts the asset price at the end of the contract, which can be just a matter of minutes, the investor receives the payout agreed upon in the contract. If the investor is incorrect, there is no payout and the investor loses the amount invested.
NASAA is an association of state and provincial securities regulators and one might expect that binary options are therefore securities. However, NASAA’s advisory implies, but does not directly assert, that binary options are “securities”.
In doing some quick, and by no means comprehensive checking, I found that the SEC has taken the position in at least one administrative proceeding that binary options are securities as defined in Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the Securities Exchange Act of 1934. Those statutes define “security” to include, among other things, “any put, call, straddle, option, or privilege on any security certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof”.
The definition of “security” in California Corporations Code Section 25019 includes the same language. The Corporate Securities Law may not be the only enforcement hook in California. Depending upon how the binary option agreement is structured, it is possible that it would constitute a contract constituting bucketing under California’s Bucket Shop Law, Cal. Corp. Code § 29000 et seq. It is also possible that binary options may violate criminal bookmaking and wagering statutes such as California Penal Code § 337a.