Is The SEC Entering Fight Over Prediction Market Oversight?

As prediction marketplaces have swelled in popularity and scope, individuals are now offered the opportunity to "trade on anything," according to Kalshi's slogan. Individuals can wager on topics and issues of nearly endless variety, from sporting events and elections to the Rotten Tomatoes score of new movie releases.

As prediction market popularity has grown, U.S.-based regulators have grappled with regulatory battle lines: Which agency regulates which contracts, which sets of rules should govern prediction marketplace compliance and oversight, and where are the corresponding lines for enforcement activity?

In recent months, the news cycle on prediction markets enforcement has been dominated by high-profile prosecutions by the U.S. Department of Justice, targeting individuals who misused confidential information to profit on prediction market trades, with parallel enforcement actions by the U.S. Commodity Futures Trading Commission. On June 10, the CFTC proposed a rulemaking concerning event contracts.

Until last week, the U.S. Securities and Exchange Commission had remianed largely silent. Although SEC Chairman Paul Atkins flagged prediction markets as a "huge issue" before the Senate Banking Committee in February, the agency had lagged behind the CFTC and DOJ in investor guidance, rulemaking and enforcement activity in this space.

Some of this is for good reason: Many event contracts on prediction marketplaces have no jurisdictional hook for the SEC to be involved. But with its June 18 joint notice of request for comment with the CFTC on the applicability of certain statutory provisions to certain products "including event-based products," that trend may be changing. The joint request specifically notes that "market participants are raising questions about whether certain event contracts are swaps."

The timing of the joint request is critical, as a review of event contracts on popular prediction marketplaces reveals that several contracts could qualify as security-based swaps, which are subject to the SEC's oversight under current definitions.

If the SEC does not make any changes to current rules, tangible regulatory risks exist, particularly when viewed against prior SEC enforcement activity in this space - largely during the first Trump administration. However, the joint request signals an openness from the SEC to provide carveouts that may open the pathway for fewer regulatory risks.

Regulatory Backdrop

Generally speaking, an event contract is a financial agreement offered on a prediction marketplace tied to the outcome of a particular event. Event contracts offer binary payoff terms, whereby a correct prediction entitles the winner to receive a fixed amount, while the loser receives nothing. Contract pricing typically reflects demand, with events perceived as likely to occur priced higher, thereby offering a lower return upon payout.

Among the many aspects of regulatory reform following the 2008 financial crisis, the Dodd-Frank Act created a regulatory framework for financial derivatives. Although the term "event contract" is not currently defined by statute or regulation, these agreements are typically viewed as falling under the broad definition of "swaps" under the Commodity Exchange Act.

For example, in the CFTC's own April 23 complaint concerning transactions involving the capture and arrest of former Venezuelan President Nicolás Maduro and his wife, the CFTC specifically alleged that event contracts of this type qualify as swaps because "they are settled based on the occurrence or nonoccurrence of a specified future event with potential financial, economic, or commercial consequences.

Under Dodd-Frank, swaps generally must be sold on designated contract markets and are generally subject to the CFTC's oversight. However, Dodd-Frank carved out a specific type of swap - the security-based swap - and reserved jurisdiction over these instruments for the SEC.

A security-based swap is an agreement or contract that (1) satisfies the definition of a swap as defined under the CEA; and (2) in relevant part for event contracts, is based on "the occurrence, nonoccurrence, or extent of the occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition, or financial obligations of the issuer."

In July 2012, the SEC and CFTC issued final joint rules complying with Dodd-Frank rulemaking obligations. Although the joint rules include significant details on the broader swap landscape, there is limited information on the event prong of the security-based swap definition. In fact, the most substantive language on this prong of the definition is that the SEC and CFTC noted that "[t]his provision applies generally to event-triggered swap contracts."

Since 2012, the SEC has issued several rules concerning the swap industry, including rules covering security-based swap dealers, various recordkeeping obligations and the adoption of Exchange Act Rule 9j-1, designed to prevent fraud, manipulation and deception in connection with the purchase or sale of any security-based swap. The joint request signals that another set of rules may soon follow.

SEC Enforcement History for Security-Based Swaps

The SEC's lack of enforcement activity in the prediction market space does not mean the agency has not been active historically in matters involving security-based swaps, including several actions during the first Trump administration.

The SEC's first enforcement action in this space was in 2015 against Silicon Valley-based Sand Hill Exchange and its two principals for offering and selling security-based swap contracts to retail investors outside the regulatory framework of a national securities exchange and without required registration statements.

Around this time, the SEC also issued an investor alert warning of so-called "fantasy stock trading" websites, noting these sites offer individuals "the chance to make money from publicly traded or privately held companies without actually buying stock in those companies" and, in doing so, may violate federal securities laws.

The following year, the SEC fined Forcerank LLC, a New York-based company, after the company's website offered cash prizes to users in certain contexts for predicting stock performance. The SEC determined these arrangements were security-based swaps because payment was "dependent on an event associated with a potential financial, economic, or commercial consequence and based on the value of individual securities."

During the first Trump administration, in 2018 and 2019, the agency filed two joint enforcement actions with the CFTC against 1pool Ltd. a/k/a 1Broker and XBT Corp. Sarl d/b/a First Global Credit for offering and selling security-based swaps to individuals not permitted to transact in security-based swaps and for transacting in security- based swaps outside of a national securities exchange.

Both of these matters highlight a critical and often overlooked aspect of the security-based swap regulatory framework: limitations on the types of investors who can trade in these instruments.

Subject to narrow exceptions, the sale of security-based swaps is restricted only to eligible contract participants, or ECPs. ECPs fall into different categories and may have certain monetary thresholds depending on the entity or individual involved. Individual investor ECPs, for example, require a minimum of $5 million - and potentially up to $10 million - invested to qualify as an ECP.

More recently, the SEC's high-profile fraud enforcement action against Archegos and its principals in 2022 was based on allegedly fraudulent activity involving total return swaps, a type of swap that can be a security-based swap when based on a single security or loan. Additionally, last August, the SEC charged MUFG Securities EMEA PLC, a registered security-based swap dealer based in the U.K., for failing to comply with capital recordkeeping, financial reporting, compliance, internal supervision and risk management requirements.

Based on recent historical precedent, the security-based swap space is not one that has been ignored by the SEC. And during the first Trump administration, multiple regulatory actions were filed without corresponding fraudulent activity.

Public Company-Related Event Contracts

Although the jurisdictional lines may be clear, the products now available through prediction marketplaces may not fit neatly into existing definitions. The CFTC noted in its March 12 proposed rule that

[a]lthough the event contracts listed on CFTC-registered [designated contract markets] ... are swaps or futures contracts subject to the jurisdiction of the CFTC, other event contracts referencing events associated with potential financial, economic or commercial consequences may be security-based swaps or other instruments subject to the jurisdiction of the SEC.

One example of definition-straddling event contracts is swaps related to public company issuer performance. Certain event contracts track specific performance indicators such as profit margin, production and sales growth. Markets then set different target thresholds across these metrics.

For example, the prediction market Kalshi offers event contracts tied to Sweetgreen Inc.'s profit margin in the second quarter, Tesla Inc.'s second-quarter production and McDonald's Corp.'s second-quarter global sales growth, among others.

Other markets are tied to public company security performance more directly. For example, the prediction market Polymarket offers event contracts tied to Tesla's and Airbnb Inc.'s share price performance in a given week.

As noted above, where a swap is based on a single security or an event relating to a single issuer of a security that "directly affects the financial statements, financial condition, or financial obligations of the issuer," that swap falls within the definition of a security-based swap subject to SEC jurisdiction. Swaps related to public company performance metrics may be a step removed from the security itself, but these swaps are arguably based on events that directly affect the "financial statements, financial condition, or financial obligations."

Beyond possessing characteristics that resemble security-based swaps, certain prominent event marketplaces do not include ECP-related thresholds for individual U.S.- based investors, meaning U.S.- based investors are free to transact in the instruments described above, provided they comply with other applicable terms and conditions.

Importantly, certain event marketplaces have included limitations in their terms of service that expressly prohibit any person residing in, located in, incorporated in or having their principal place of business in the U.S. from transacting on the platform. They also bar individuals from using a virtual private network to try to skirt the company's geographic restrictions.

Precluding U.S.- based investors would significantly curtail U.S. regulatory risk. However, recent studies suggest that even sophisticated event platforms that have VPN restrictions on individual activity in the U.S. are still seeing significant trading activity coming from the U.S., contrary to their terms of service.

How Will SEC Respond to Joint Notice Comments?

The above must be viewed under the umbrella of the well-documented downturn in SEC enforcement activity under Atkins.

Although administrations typically see an uptick in enforcement activity following the first year of transition, myriad factors suggest muted enforcement in the near term. Additionally, under Atkins, the agency has been reluctant to pursue actions against emerging companies that could be perceived as stifling growth and innovation.

Each of these factors suggests the agency will continue to operate with a light touch in this space.

The joint request appears to be the first step, as it includes specific requests for comment on central issues that affect the analysis above. Specifically, the SEC and CFTC seek public comment on the event prong of the security-based swap definition, namely, "is additional clarity necessary regarding when an event 'directly affects' the financial statements, financial condition, or financial obligations of an issuer? Should the Commissions further address the circumstances when a swap does or does not satisfy the [security-based swap] Event Contract Prong?"

The SEC's next steps in response to the comments will hopefully bring further clarity and potentially reduce regulatory risk for marketplaces and participants.

However, unless and until such actions take place, the current state of the law and the agency's prior enforcement history under the first Trump administration suggest that regulatory risks in this space remain. If event marketplaces are making these types of contracts available to U.S.- based investors on a large scale, it seems unlikely that the SEC would let such actions occur without any investigation into the magnitude and scope of this activity.

Moreover, under Atkins, the SEC has been aggressive in pursuing trading-related misconduct. Even though Rule 9j-1 was implemented during the prior administration, it provides broader avenues for the SEC from an enforcement perspective than the standard anti-fraud charges under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

For example, Rule 9j-1 allows the SEC to pursue negligence-based actions compared to the scienter threshold under Rule 10(b). Additionally, Rule 9j-1 permits the SEC to pursue remedies for attempted misconduct involving transactions in security-based swaps. This provision provides the SEC a tool to police market manipulation and deceptive trading on event marketplaces when security-based swaps are involved.

With the ball in the SEC's court to provide further clarity on event contracts that could be security-based swaps, market participants and event marketplaces will need to wait for guidance from the agency. But as the joint request shows, the agency is keenly aware that some of these contracts may be subject to its jurisdiction under current law.

Republished with permission. This article "Is The SEC Entering Fight Over Prediction Market Oversight?," was published by Law360 on June 25, 2026. (login required)