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The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to warn investors that fraudsters may conduct investment schemes through purported online binary options trading platforms.  While some binary options are listed on registered exchanges or traded on a designated contract market that are subject to oversight by U.S. regulators such as the SEC or the Commodity Futures Trading Commission, respectively, this is only a portion of the binary options market.  Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements.  For a comprehensive overview of binary options, including information about investing in binary options that are subject to U.S. regulatory oversight, read our Investor Alert: Binary Options and Fraud.

What is a Binary Option?

A binary option is a type of options contract in which the payout will depend entirely on the outcome of a yes/no (binary) proposition.  When the binary option expires, the option holder will receive either a pre-determined amount of cash or nothing at all.  Given the all-or-nothing payout structure, binary options are sometimes referred to as “all-or-nothing options” or “fixed-return options.” 

Typically, a representative of a binary options website will ask a customer to deposit money into an account where the customer can purchase binary options contracts.  A customer may be asked to, for example, pay $50 for a binary option contract that promises a 50% return if the stock price of XYZ company is above $5 per share when the binary option expires. 

Be Wary of Sales Pitches

Representatives of binary options websites may use fictitious names and tout fake credentials, qualifications, and experience.  They may misrepresent where they are calling from (for example, pretending that they are in the U.S.).  Supposedly “unbiased” sources reviewing or ranking binary options websites may have been paid to promote or criticize particular websites.  Fraudsters may “warn” you that the binary options website you are using is a scam in order to gain your trust and get you to deposit even more money in another website that they also run. 

If you are considering investing money with a binary options website, look out for these red flags:

Violations of the Federal Securities Laws Involving Binary Options

In addition to perpetrating fraudulent investment schemes, the operators of binary options websites may be violating the federal securities laws through other illegal conduct, including:

Furthermore, if any of the products offered by binary options trading websites are security-based swaps, additional requirements will apply.

SEC Enforcement Actions Involving Binary Options.  The SEC’s Division of Enforcement has brought charges against companies for failure to register the securities and failure to register with the SEC as a broker before offering and selling binary options to U.S. investors, as required.  In SEC v. Banc de Binary, the binary options seller allegedly solicited U.S. investors through methods including YouTube videos, spam emails, and advertising on the Internet, and also communicated with U.S. investors by phone, email, and instant messenger.  In In the Matter of EZTD Inc., another binary options seller allegedly misrepresented the risk of investing in binary options sold on its trading platforms, including by stating on its websites that investing in the binary options that it offered and sold is profitable when, in fact, less than 3% of its customers in the U.S. earned a profit trading binary options sold by the respondent.  

If you purchase binary options from a firm that is not registered with or subject to the oversight of the SEC, you may not have the full benefit of the safeguards of the federal securities laws that have been put in place to protect investors.  Some safeguards and remedies are available only to purchasers of securities in registered offerings.  In addition, individual investors may not be able to pursue, on their own, some remedies that are available for unregistered offerings.

Before investing, check out the background, including registration or license status, of any firm or financial professional you are considering dealing with through the SEC’s Investment Adviser Public Disclosure (IAPD) database, available on Investor.gov, and the National Futures Association Background Affiliation Status Information Center’s BASIC Search.  If you cannot verify that they are registered, don’t trade with them, don’t give them any money, and don’t share your personal information with them.

Additional Information

Beware of Off-Exchange Binary Options Trades

Binary Options: These All-Or-Nothing Options Are All-Too-Often Fraudulent

Canadian Securities Administrators Investor Alert: Unregistered binary option platforms target Canadians

Report possible securities fraud to the SEC.  Ask a question or report a problem concerning your investments, your investment account or a financial professional.

Visit Investor.gov, the SEC’s website for individual investors.

Receive Investor Alerts and Bulletins from the Office of Investor Education and Advocacy (OIEA) by email or RSS feed.  Follow OIEA on Twitter @SEC_Investor_Ed.  Like OIEA on Facebook at facebook.com/secinvestoreducation.

The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.