Questions from a college student with an investment company idea

[james545454]

Hi there,

I am a college student kicking around ideas for a year long intensive entrepreneurship class I am taking in which we have to start a fake business. I have a basic business idea provide below and I am wondering how difficult something like this would be to start in the eyes of the law.

So let's pretend that someone started a company that offered insurance for investors when their stock declines. For financial traders, the idea is very similar to a put.

• Example: Someone owns 1000 shares of a stock valued at $100 per share ($100,000 worth of stock). Let’s say they want to buy insurance against the stock going down over the next year with our made up company. Let’s say they pay $15,000 to insure that they will not take any loses below a $90 stock price for the next year. If the stock ends up at $110 a year later, they lose the $15,000. If the stock goes down to $50 a year later, the made up company would deposit $40,000 into their account. Hopefully that example gives you the basic idea of how the company would function.

My question is if someone were to start this business, what type of business regulations would it have to follow?

• Would it be an insurance company?
o At its most basic level, it seems this company is just offering insurance on an uncontrollable event occurring.
• Would it be a stock brokerage/exchange?
o The underlying assets behind the insurance would be stocks, which obviously trade on an exchange. However, the insurance this company would offer would not be traded between parties and the price of the insurance would not be dictated by an exchange. Since the company would use internal measures to price the insurance and not an exchange of buyer and sellers, it seems the company would not be a brokerage or exchange.
• Could the company operate legally under the "Unlawful Internet Gambling Enforcement Act of 2006"? –
o On the one hand, these “trades” between the consumer and the company could be viewed as a skillful trade similar to those in legal fantasy football company’s such as fanduel and draftking.
o Could the insurance buying/trading just be considered legal, skillful gambling un this law?
• Would the company be illegal?
o Or Is it pretty much impossible to start a company that deals with stock prices without trading the actual stock?


Thanks so much for any help you can provide!

 

[FlyingRon]

I am a college student kicking around ideas for a year long intensive entrepreneurship class I am taking in which we have to start a fake business. I have a basic business idea provide below and I am wondering how difficult something like this would be to start in the eyes of the law.

I'm sure your teacher had a different idea in mind for research than "ask people on the internet to do my work for me."

So let's pretend that someone started a company that offered insurance for investors when their stock declines. For financial traders, the idea is very similar to a put.

It's nothing like a put. A put triggers a sale at a predefined price. Yours pays investors a payout even if they don't sell as you have worded it.

• Would it be an insurance company?

I would suspect that this is an involved decision. It's either going to be considered insurance or that it's some sort of derivative financial instrument. Either way it's likely to be highly regulated.

• Could the company operate legally under the "Unlawful Internet Gambling Enforcement Act of 2006"? –

Doubtful. Even derivatives based on other financial instruments that are highly speculative are not considered "gambling" (no matter how much of a gamble they would appear to be).

o On the one hand, these “trades” between the consumer and the company could be viewed as a skillful trade similar to those in legal fantasy football company’s such as fanduel and draftking.

SKILLFULLNESS isn't what make fanduel and draftking legal. Fantasy sports leagues bought off congress to specifically make those forms of gambling legal.

 

[james545454]

Thanks for the response - not sure why there seemed to be a bit of hostility in the response. I have researched things a bit(The Unlawful Internet Gambling Enforcement Act of 2006, laws concerning brokers, derivatives, etc) and I was hoping some law professionals could give me a bit of advice on how a company like this would even be structured. I am not a law student and the formation of a possibly highly regulated entity, for which no regulations have been created for yet begins to get very confusing and I am fairly confused as to what to research or look into next.

Basically what I am asking is - Is there a grey area with stuff like this? Would I need to work with a lawyer and essentially make decisions as to whether the company would function as an insurance company or a brokerage, etc. Or is there not a grey area with this stuff and you have to find the correct answer within the regulations and otherwise the company will be screwed.

Obviously I am very, very new to the world of financial regulations and the implications they have on forming a financial derivative company. Thats why I am looking for some basic guidance on this. Also - I am just asking this question for the fun off it, my professor would probably think I am crazy at this point for trying to analyze things this deeply. But I am just trying to have fun with it and learn. So thanks once again for anyone who can help with the process!

 

[quincy]

Thanks for the response - not sure why there seemed to be a bit of hostility in the response. I have researched things a bit(The Unlawful Internet Gambling Enforcement Act of 2006, laws concerning brokers, derivatives, etc) and I was hoping some law professionals could give me a bit of advice on how a company like this would even be structured. I am not a law student and the formation of a possibly highly regulated entity, for which no regulations have been created for yet begins to get very confusing and I am fairly confused as to what to research or look into next.

Basically what I am asking is - Is there a grey area with stuff like this? Would I need to work with a lawyer and essentially make decisions as to whether the company would function as an insurance company or a brokerage, etc. Or is there not a grey area with this stuff and you have to find the correct answer within the regulations and otherwise the company will be screwed.

Obviously I am very, very new to the world of financial regulations and the implications they have on forming a financial derivative company. Thats why I am looking for some basic guidance on this. Also - I am just asking this question for the fun off it, my professor would probably think I am crazy at this point for trying to analyze things this deeply. But I am just trying to have fun with it and learn. So thanks once again for anyone who can help with the process!

The volunteers on this forum generally do not assist students with work they are doing for their classes. The teachers/professors expect the students to do the work on their own instead of relying on professionals to do the work for them. FlyingRon assisted you more than most of the volunteers on this site would.

I will answer one of your latest questions, though: There are always "grey areas" in law.

It is generally advised that anyone who is starting a new business, especially when that person does not understand the basics of starting it, should sit down with a professional, possibly a legal professional, possibly a business professional. The Small Business Administration can be a good place to start.

For your purposes, perhaps you can ask your professor for direction.

 

[james545454]

OK well thank you for the help and for informing me of the policy. I will look to the help of a professional or possibly my professor moving forward.

 

[quincy]

OK well thank you for the help and for informing me of the policy. I will look to the help of a professional or possibly my professor moving forward.

It's an unwritten forum policy but most of the forum members adhere to it.

That said, you could check your thread later to see if any rogue (or bored) forum member has decided to assist you anyway - but I think speaking with your professor could be a good start. Here is a link to the Small Business Administration (I would provide state resources, but you did not mention your state): https://www.sba.gov/

Good luck.