This article discusses fantasy stocks apps, their potential to gamify investor education, and the regulatory concerns expressed by Indian and foreign regulators.
In our wealth-tech series, we analyze different wealth-tech products and their legal status. You can read all the posts here.
Investing in the stock-market may be daunting for new entrants. But a few start-ups are trying to solve for this by offering fantasy stocks apps as investor education tools. These platforms create a simulated stock-market, which is like a practice net for investors. The users can pick different virtual stocks to create their portfolios. The prices of virtual stocks and subsequent gains or losses are based on actual securities market data. The participants who build the most profitable virtual stock portfolio during a pre-determined period win. Fantasy stocks contests can be paid or free. In paid contests, the participants pay an entry fee to join the contest – which forms the prize pool. And the winners receive prize money from this pool. In free contests, the participants don’t pay any entry fee and the winners only get bragging rights (and not prize money).
The gamification of investments – which involves elements like goal-setting, competition and rewards – can be a powerful educational and habit-forming tool. Remember spending hours playing Snake on a Nokia feature phone? Watching the snake get bigger and setting new records (which beat our friends and family) kept us hooked to this simple game. Gamification can simplify investments, increase motivation and ensure consistency in learning. It can also teach practical skills like emotional regulation. As Warren Buffet said, “the stock market is a device to transfer money from the patient to the impatient.” Controlling panic and greed and being patient is critical to be a successful investor. As millions of Indians enter the stock-market for the first time, fantasy stocks can teach them these skills in a low-risk environment.
Like fantasy sports, fantasy stocks must comply with anti-gambling laws if they involve real-money. But unlike fantasy sports, paid fantasy stocks games may also raise concerns under securities laws. Let’s understand why.
The Securities Exchange Board of India (SEBI) – India’s securities regulator – has expressed concerns about competitions based on the securities market. It hasn’t banned these competitions yet. But through press releases and consultation papers, SEBI has warned investors that these competitions could put them at risk. For example, game operators may misuse an investor’s trading data or fail to disclose their own conflicts of interest. SEBI has also prohibited stock-brokers from being associated with these competitions. Because Indian stock-brokers, in the past, have launched competitions like the Indian Trading League in which participants buy and sell real stocks (and not virtual stocks) through them. And those with the highest returns during a particular period win rewards. SEBI’s concern is that these competitions could induce investors to make risky trades to earn rewards. Of course, some of these risks are mitigated if rewards are offered based on virtual stock portfolios created in a simulated environment. Because in this scenario, an investor is not risking substantial money by buying or selling real stocks to win rewards.
But the legality of these games is still mired in uncertainty. Because these simulated stock-market investments run the risk of being considered unlawful derivatives under securities law. You see, any contract which derives its value from a real-world security is a derivative (which can be executed and traded in India only as per SEBI regulations). The virtual stock portfolios (in fantasy stocks games) are created and priced on the basis of real-world securities. So, a regulator may hold that the contract between fantasy stocks platforms and their users derives its value from the prices of real-world securities. And it’s an unlawful derivative not executed in accordance with SEBI regulations.
Some foreign regulators have already held that fantasy stock trading is akin to derivatives trading. In 2015, the US Securities and Exchange Commission (SEC) cautioned investors against participating in fantasy stocks contests which offer real-returns. In SEC’s view, participating in these contests could be a type of illegal derivative trading. In 2016, the SEC also fined a gaming company for offering fantasy stocks contests. The SEC held that since the game’s scoring system was based on comparing the change in the price of a single security against that of other securities, it was an illegal derivative. Similarly, the Australian Securities and Investment Commission (ASIC) has warned game operators that fantasy stocks could be a form of illegal derivative trading under Australian securities laws.
The stance adopted by foreign regulators like SEC and ASIC has raised doubts about the legal status of fantasy stocks. And regulatory clarity on this issue may take time to emerge. In the meantime, fantasy stocks platforms can take a leaf out of the gaming industry’s book to promote responsible gaming. This includes introducing contest limits, spending limits, self-imposed time-outs etc. for these games. And emphasizing on the educational benefits of fantasy stocks. These features may also encourage SEBI to grant fantasy stocks its blessing because it would promote investor education with minimal risks.
(This post has been authored by the fintech team at Ikigai Law.)
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