When Estimize launched Forcerank in March 2016, they created a mobile game app that incentivized the participants who would be providing rankings for their contests. From the start, the goal for Estimize was to create a valuable database for hedge funds and other institutional traders that would allow them to build and/or enhance quantitative strategies — the mobile phone game that some have described as “fantasy sports for stocks,” was simply a means to that end.
But on Oct. 13, the Securities and Exchange Commission (SEC) announced a settlement with Forcerank where Forcerank agreed to pay a $50,000 fine and shut the game down because the SEC described it as an unregistered security-based swap offering not sold through a national securities exchange. Forcerank consented to the SEC’s order that claimed Forcerank violated provisions of the Dodd-Frank Act without admitting or denying the findings that it violated certain securities laws.
Perhaps the SEC was taken aback by how some in the financial media portrayed Forcerank. Here is a lead from a story in the Street.com: “Estimize, the crowdsourced financial estimates platform, is excited to announce the launch its latest initiative, Forcerank. This skill-based contest is for stock market fans who want to compete for cash and glory. Competitors use their knowledge of the market to rank the performance of 10 stocks, with the goal of winning the money and respect of their peers each week.”
By the time the settlement was announced, Estimize had continued with its plan of offering Forcerank data to institutional investors, just without the payouts, which came from a pool of money the participants contributed to.
Estimize CEO Leigh Drogen launched the game that rewarded correct analysis, believing that they were on solid regulatory footing — not being a sell side analyst but rather a crowdsourcing tool — and despite reaching out to the regulatory community while developing their Forcerank methodology, the SEC determined that the game constituted an unregistered Swaps market.
“Prior to the launch of Forcerank last fall, we had half a dozen conversations with the SEC regarding the structure of the Forcerank application,” Drogen says. “Post launch, we had further conversations with the SEC, which after several months resulted in them determining at that point the Forcerank contests as constructed represented an unregulated swap based on the newly written Dodd-Frank law. We immediately complied by removing contests where participants could double their entry fee if they scored more points than half of their competitors. Despite the discontinuation of contests with prizes, the Forcerank user base continues to grow and thrive with more contests and entries each week.”
Advisory firm Integrity Research Associates described the SEC’s application of the Dodd-Frank law as bizarre. “The pertinent provisions of Dodd-Frank, which the SEC applied to this case, were designed to regulate billion dollar derivatives which threatened to bring down the financial system in the wake of the Lehman bankruptcy. It is hard to see how a $100 Forcerank stock contest threatened the integrity of the U.S. financial system,” noted Integrity Research.
“Various academic studies have proven that our government was not able to solve the severe bias on the part of sell side analysts with Reg FD,” Drogen says. “We’ve seen incredible results within this data set, highly correlated to the market outcomes.”
So Forcerank 2.0 is carrying on with its defined purpose and Drogen says that participants continue to provide their opinions on markets without the promise of small cash awards.