Legal, regulation and compliance
Licences, regulation, terms, data protection, sanctions and marketing claims: the legal questions to settle before selling challenges.
Is it legal to start a prop firm?
In most countries, selling trading evaluations on simulated accounts is not prohibited as such, and many prop firms operate openly. Legality depends on where you are based, where your customers are, how you describe the product and whether any part of it counts as a regulated financial service.
Do I need a financial licence to run a prop firm?
Many challenge-based prop firms operate without a financial services licence because they sell evaluations on simulated accounts and do not hold client money or execute trades. Whether that holds for you depends on your jurisdiction, your customers' countries and your exact model, so get legal advice.
Are challenge-based prop firms regulated?
Generally, challenge-based prop firms are not regulated as brokers or investment firms in most jurisdictions, because they sell evaluations on simulated accounts. Ordinary business law still applies: consumer protection, advertising standards, data protection, tax and anti-money-laundering obligations where relevant. Regulators in several countries are looking more closely at the model.
Why do most prop firms describe themselves as education or evaluation companies?
Because that describes what they sell: an evaluation of trading skill on a simulated account, with rewards for traders who pass. The description separates them from brokers and investment firms, which hold client money and execute real trades. The label must match the actual product; wording alone does not change how a regulator sees a business.
What does simulated trading mean legally for a prop firm?
Simulated trading means orders are filled by software against market prices without being placed in a real market. Legally, it usually means the firm is not executing client trades or holding client funds for trading, which is a key difference from a broker. It also creates a duty to describe accounts and payouts honestly.
What did the CFTC case against My Forex Funds mean for prop firms?
In August 2023 the US CFTC sued Traders Global Group, the company behind My Forex Funds, and froze its assets. In May 2025 a federal judge dismissed the case with prejudice and sanctioned the CFTC for misleading the court. The dismissal did not settle whether challenge-based prop firms fall under US commodities law.
Do US regulators oversee futures prop firms?
There is no specific US licence for challenge-based futures prop firms, and most operate as evaluation businesses. The CFTC oversees commodity futures and has shown willingness to act against firms it considers fraudulent, and the futures exchanges and data vendors set their own rules on data use. Take US counsel before serving US traders.
How is the FCA approaching prop firm marketing?
In the UK the FCA controls financial promotions and has acted against unauthorised promotion of financial products, including by social media influencers. Whether a prop firm's marketing is a financial promotion depends on what is offered. UK-facing firms should avoid earnings promises and have their marketing reviewed.
What disclosures should a prop firm make to traders?
At minimum, disclose that accounts are simulated, every rule and how it is measured, how payouts are calculated and when they are paid, what disqualifies a payout, refund terms, KYC requirements, restricted countries, the company's legal name and address, and that trading results are not guaranteed.
What should a prop firm's terms and conditions include?
Terms should cover eligibility and restricted countries, what the fee buys, that accounts are simulated, all rules and prohibited strategies, payout conditions and KYC, refunds and chargebacks, the firm's right to review accounts, data use, intellectual property, limitation of liability, governing law and how disputes are handled.
Do I need a lawyer to start a prop firm?
You are not always required to use one, but it is strongly advisable. A lawyer who knows the prop industry can review your structure, terms, payout policy and marketing, and tell you which countries to avoid. The cost is usually small compared with a dispute, a frozen payment account or a regulator's enquiry.
What are the risks of operating a prop firm from an offshore jurisdiction?
Offshore companies can be cheaper to form and lightly regulated, but they can make banking and payment processing harder, reduce traders' trust, and do not remove obligations in the countries where your customers live. Some processors and banks are cautious with offshore entities.
Can a prop firm accept customers from the United States?
Some prop firms do and many do not. Since 2024, MetaQuotes restricted MetaTrader access for prop firms with US clients, and several firms stopped accepting US traders as a result. US customers also bring US consumer, data and commodities law into play. Decide with legal advice and with your platform and payment providers.
Can a prop firm accept customers from every country?
No. Most firms restrict countries under sanctions, countries where offering trading products to residents is prohibited or risky, and countries their payment providers cannot serve. The restricted list should be in your terms and enforced at checkout and KYC.
Which countries should a prop firm consider restricting?
Start with countries under comprehensive sanctions by the UN, US, UK or EU, then add countries whose regulators prohibit residents from using offshore trading platforms, countries your payment provider excludes, and countries where your platform licence does not allow service. Many firms also restrict the United States.
What sanctions screening does a prop firm need?
A prop firm should screen anyone it pays, and ideally anyone it sells to, against the main sanctions lists, including OFAC (US), OFSI (UK), the EU consolidated list and UN lists, and block sanctioned countries. Most KYC providers include sanctions screening, often with ongoing monitoring.
Do anti-money-laundering rules apply to prop firms?
Whether a prop firm is formally covered by anti-money-laundering law depends on its jurisdiction and activities, but in practice payment providers require AML-style controls: KYC before payouts, sanctions screening and monitoring for suspicious patterns. Payouts are the main money-laundering risk in the model.
What data protection rules apply to a prop firm's trader data?
Data protection law depends on where you and your traders are. If you serve people in the EU or UK, GDPR or UK GDPR applies; many other countries have similar laws. They govern how you collect, store, share and delete personal data, including identity documents from KYC.
Does a prop firm need to comply with GDPR if it accepts European traders?
Usually yes. GDPR applies to businesses outside the EU when they offer goods or services to people in the EU, under its territorial scope rule. Selling evaluations to EU residents generally brings you within it, along with the UK's equivalent for UK residents. You may also need an EU representative.
How is a prop firm's revenue taxed?
A prop firm's revenue is normally taxed as business income in the country where the company is resident, after deductible costs such as payouts, marketing and software. Sales taxes such as VAT may apply to digital services sold to consumers in some countries. Rules differ widely, so use a local accountant.
How are payouts to traders treated for tax?
For the firm, payouts are usually treated as a business expense, though the classification can vary. For traders, payouts are generally taxable income in their country of residence. Firms typically do not withhold tax for overseas traders, but rules differ, and some countries require reporting. Take local tax advice.
Should payouts be described as rewards, profit splits or performance fees?
Many firms use "reward" or "profit split" because the trader is paid a share of simulated profits under the firm's terms rather than receiving investment returns. The right wording depends on your legal structure and should match your terms and tax treatment. Avoid wording that suggests the trader's own money was invested.
Which marketing claims can get a prop firm into regulatory trouble?
Risky claims include guaranteed funding or income, unrealistic success rates, describing simulated accounts as real capital or "managing" funds, fake payout proof, undisclosed paid endorsements, and urgency tactics that mislead. Regulators and advertising authorities focus on whether a claim is true and how a typical customer would understand it.
Can a prop firm advertise "funding" when accounts are simulated?
Many firms use "funded account" as an industry term, but it can mislead if a customer believes real money is placed in the market. The safer approach is to define the term clearly: a simulated account on which the trader can earn payouts. Some regulators have focused on exactly this distinction.
What is a regulated prop firm structure, and when is it worth it?
A regulated structure means operating under a financial licence, for example as an investment firm or alongside a licensed broker, often with real execution for funded traders. It brings credibility and access to some markets, but it is expensive, slow and comes with capital, reporting and compliance duties. It suits larger or broker-affiliated firms.
How do I keep a prop firm compliant as regulation changes?
Assign someone to monitor regulators and industry news in your main markets, review terms and marketing at least twice a year, keep your restricted-country list current, document your rules and payout decisions, and keep a lawyer on call. Choose vendors that can adapt without long contracts.
Does a prop firm need a privacy policy and a refund policy?
Yes. A privacy policy is legally required in most countries where you collect personal data, and payment providers require both a privacy policy and a refund policy before approving a merchant. Clear policies also reduce chargebacks and support disputes.
What should a prop firm's risk disclosure say?
A risk disclosure should explain that trading involves significant risk, that most traders do not pass evaluations, that accounts are simulated, that past or demonstrated results do not guarantee future results, and that the evaluation fee may be lost. It should be easy to find, not buried.