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According to documents obtained by Legal Sports Report, the audit was sent on Monday by the SEC’s Atlanta Regional Office and received by funds starting Tuesday.
When reached on Tuesday night, the SEC offered a two-word correspondence that declined comment on the investigation.
The audit is believed to target each of the entity funds currently operating, appearing to indicate governmental interest in an entire emergent industry as opposed to a particular fund or funds.
In 2015 Nevada enacted a law, SB 443, that allowed for entity wagering funds to operate inside the state. In the spring of 2016, the first of these funds launched.
These funds are managed by professional sports bettors in the style of a mutual fund, sourcing investment from people throughout the US and even other countries. Fund managers then wager the money from the fund across the outcome of sports matches with the aim of consistent, long-term growth.
It is unclear if CG or the Bank of Nevada, the sole financial institution offering services to the entities, are being audited as well.
CG came under scrutiny recently for numerous violations from its sports betting operations. A settlement between CG and the Nevada Gaming Control Board led to the payment of a $1.5 million fine and the ouster of its CEO in July. It then agreed in October to pay a $22.5 million fine as a result of involvement in a money laundering and illegal gambling operation.
Representatives from CG and the Bank of Nevada did not immediately respond to requests for comment.
The subpoena gives fund operators two weeks to send the SEC copies or complete files of information across the following eight categories:
Several funds have communicated to LSR both prior to and after Tuesday’s subpoenas how seriously they take the protection of their investors’ identities and resultant personal information.
They have no intention of betraying investor trust by disclosing investor information, and covet a personalized relationship with the people they refer to as their customers.
But now, these funds appear to be compelled to do just that — reveal the names, addresses, amounts invested, income levels, net worth, investment experience and risk tolerance of investors.
Funds, as well as other actors in the entity ecosystem, are likely to have correspondences detailing at least some of this information. Both CG and the Bank of Nevada are believed to have thoroughly vetted both fund managers and investors prior to funds’ formation.
Several funds expressed irritation at the fact that the SEC, a body whose regulation they believe their fund to be exempt from, and who they believe to be lawfully unregistered with, is nonetheless compelling they release private information.
Businesses and financial institutions are audited all the time. It’s slightly less common, however, for entire industries to be subpoenaed at once, especially when there is no specific sense of wrongdoing.
The SEC could be trying to learn more about an emergent industry that mimics the financial markets without subjecting itself to typical financial regulations.
Nevada entities are not registered with the SEC and are not believed to meet the threshold that requires such registration.
The Investment Act excepts from the definition of investment company any issuer whose securities are owned by not more than one hundred persons.
Even if an entity fund were registered as a securities company, the Securities and Exchange Act suspends the filing obligations of companies with fewer than 300 shareholders, or fewer than 500 shareholders and less than $10 million in total assets for three fiscal years.
Estimates put the total amount of investment dollars in the entity wagering industry around $2 million, and the total number of investors in the low hundreds.
At this stage, it’s not clear what the SEC is after, or if it’s after anything at all.
The subpoenas include no accusations of wrongdoing and with such a short commercial history and such few actors, there’s not the widest body of evidence for the SEC to draw on.
The SEC’s emphasis on advertisements and marketing materials could indicate a concern that investors in entity funds were somehow misled by funds themselves.
Several funds told LSR Tuesday that they felt confident of their scrupulousness and their attention to detail in setting up their entities, some of which underwent over a year of manager vetting, investor vetting and regulatory compliance before making taking their first wagers.
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