Tag: real money gaming

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gambling law gaming law Uncategorized

Are Skill-Based Real-Money Games Legal in the United States?

The skill-based real-money game sector continues to grow in 2024, and yes, skill games are generally legal under the laws of most states. Risking money on games of skill has always been popular – from Mesopotamia, to Ancient Egypt and the Roman Empire, to your local pool hall. Now, with the ubiquity of the smartphone and internet access, skill-based real-money gaming is a widely available form of entertainment. The setup is familiar – pay an entry fee for a chance to compete for a prize. Top score takes the prize. There is also no shortage to game variety, although skill-based solitaire, bingo, and a blackjack-solitaire hybrid called 21 Blitz account for the vast majority of players.

Designing, distributing, and marketing real-money skill gaming apps continues to be a lucrative business model. But what are the legal and regulatory hurdles to distributing and marketing your product in the United States? There are many nuances, and given that each of the 50 states has its own set of laws related to gaming and gambling, hiring experienced counsel is a must.

IMPORTANT – Real-money games of skill are still illegal in some U.S. states, even though they are not games of chance (such as traditional gambling like blackjack, roulette, or slots). A lot depends on the particulars of your app or game, but it is a mistake to assume that all skill games are automatically legal.

There are three main obstacles to distributing a real-money skill game in the U.S.:

  • Second, the app must comply with state and federal law. Geolocation technology can be used to meet specific location requirements or restrictions. Additionally, Apple requires that any real-money gaming app comply with local laws where the app is offered, have the required licenses (or the aforementioned legal opinion), and be geographically restricted to those locations. Also, offering an app in a jurisdiction where it is illegal risks attention of local authorities or private litigation, which can result in fines, penalties, and closure of your particular game.
  • Third, as skill-based real-money gaming is unlicensed and unregulated, it is important to have robust terms and conditions and a privacy policy in place. These terms function as a contract between the gaming company and its customers, offering important rules and regulations, as well as disclaimers and liability limitations. Further, dispute resolution provisions like an arbitration clause and a class action waiver are important, but must be carefully tailored to be enforceable.

Real-money games of skill vs. gambling

You may have heard that real-money games of skill – like darts, pool, puzzles – are not prohibited or regulated in the United States because they are not “gambling.” The reasoning goes that if the outcome depends on skill rather than chance, then it is not regulated under state gambling laws. This is false. Each of the 50 states have their own statutory definitions, laws, and regulations applicable to gambling. The states also differ on how much skill is required to exclude a particular game from the “gambling” category. Most states rely on the “predominance” test, where skill must predominate over the chance element. Other states use the “material element” test, where a game is considered gambling if chance is a “material” element in the outcome. A few states use the “any chance” test – where if there is any chance element present, the game is considered “gambling” and may not be offered without a license.

There is also a distinction between fantasy sports-type games and pure contest games on both the state and federal levels.

Payment Processors and Due Diligence

Payment processors – companies responsible for money-in and money-out of your app – also have their own set of due diligence requirement. Most reputable providers will require the legal opinion, copies of the terms and privacy policy, and even may require an internal anti-money laundering (“AML”) policy. Under federal law, financial institutions and certain high-risk businesses (such as casinos) must have AML policies in place. However, experienced counsel can also help with craft a policy that balances the payment processor’s standards with practical considerations and costs facing any starting-stage business.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

This article was originally published in 2020, but has since been updated to reflect current legal and regulatory developments in the skill-based gaming area.

© 2020 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law internet law Uncategorized

Are Play-to-Earn Video Games Legal in the United States?

Are play-to-earn games legal? The answer depends on the specifics of the game. For many gaming developers, play-to-earn is a lucrative business model in 2023 and beyond. These games let players compete against other players (PvP) or against the the game itself (PvE) to earn rewards that have real-world value. For example, players may pay real money to buy in-game currency to purchase virtual gear or real estate, but players also have the option to redeem the in-game currency for real-world money. Players can trade resources or earn the in-game currency through gathering, completing tasks or quests, or other gameplay. However, any company looking at play-to-earn should retain an experienced gaming attorney to consult on their game. It may be an attractive business model, but any real-money gaming implicates multiple legal areas, including taxes, securities law, and both state and federal-level anti-gambling prohibitions.

Earning real-world cash for virtual goods or gameplay is not a new concept. In fact, the first generation of massively-multiplayer online roleplaying games (MMOs or MMORPGs) like Ultima Online, Runescape, and Everquest had robust real-money economies for in-game items. Resource “farming” – where one would gather virtual resources and then transfer them to another player for a real-world money payment – became even more popular with World of Warcraft and the next generation of the MMOs like EVE Online. However, the developers did not officially sanction these in-game economies. Anti-RMT (real-money trading) provisions are prevalent in most end-user license agreements. Real money components in video games may be too close to gambling, which is obviously problematic. Developers are generally reluctant to assume additional liability and risk associated with any real-money economic component.

Play-to-Earn is Hot, But Rife With Legal Pitfalls.

However, it is the end of 2022, and making money playing video games is a real and viable career choice. Esports and video game tournaments are mainstream events, with their own ESPN page, multi-million dollar teams, and celebrity-status professionals. Many colleges offer esports scholarships. Casual video game tournaments (Call of Duty, FIFA, Gran Tursimo) are also a thing. For the more casual gamer, there are also real-money skill-based games (timed solitaire, bingo, etc.) available on the web or from the App Store. Daily Fantasy Sports giants like DraftKings and FanDuel also offer skilled players an opportunity to win real money by drafting the best fantasy sports teams.

There are also a number of NFT-based collectible card games, horse racing simulators (like Zed.Run), and countless other permutations of games where players are able to own in-game assets that they can sell and trade like their real-world counterparts. This sector of the gaming economy continues to grow, as the relatively low cost of cryptocurrency makes entry a lot more accessible. Many players also see the current “bear” market as a prime opportunity to enter some of these projects at low cost and potentially see significant growth in their in-game assets as the economy rebounds.

Modern play-to-earn games are simply another variation of the real-money gaming business model. Developers in this space fully embrace the concept of a virtual economy and the ability to earn real-world compensation for game play. The most prominent example is Axie Infinity (a Pokemon-type trading, collecting, and battling game), which has integrated blockchain technology (crypto and NFTs). Investors around the world, including Mark Cuban, quickly embraced the play-to-earn gaming model. Even in the times of the “crypto winter,” Axie is still worth many millions of dollars.

Advertising and Onboarding May Require a Legal Opinion.

Any real-money gaming business (including play-to-earn) needs experienced gaming counsel to guide them through various compliance issues. Advertising a real-money game on social media and getting through Apple’s approval process on the App Store requires a legal opinion that the game is truly skill-based and not illegal gambling. Is your game structured so that they are providing a service to you in exchange for compensation? Depending on the nature of your game, you may have unintended labor law obligations and even tax filing (W-2 or 1099) obligations to the IRS and state tax authorities.

Make Sure Your Game is Not Selling Securities.

Another potential pitfall is with the Securities and Exchange Commission (“SEC”). When designing your game and reward system, you must make sure that you are not inadvertently marketing a security and violating federal law. Securities are not just traditional stocks and bonds. An “investment contract” is also a regulated security and broadly includes any scheme where individuals pay money with the expectation that their money will be invested and they will earn a return. In the cryptocurrency world, initial coin offerings (“ICOs”) face heavy SEC scrutiny, especially after several high-profile cryptocurrencies turned out to be pyramid schemes.

The “investment contract” analysis is highly specialized and requires a thorough legal opinion. Each game is different, the laws are quickly changing in this area, and regulatory agencies are especially sensitive to crypto-related businesses in light of the numerous 2022 failings, bankruptcies, and rug pulls – with FTX being only the most recent example.

Beware Tax and Other Regulations If Your Game Uses Cryptocurrency or Other Blockchain Tech.

Speaking of crypto, if you are utilizing cryptocurrencies, tokens, NFTs, or other blockchain technologies as part of your game, there are more legal issues in play. Tax reporting and tracking are essential because the IRS considers cryptocurrencies to be property subject to capital gains tax. Does the game involve any crypto staking? If so, is your company now considered a bank subject to the FDIC’s jurisdiction? Are you involved in the business of money transmission and required to be licensed in each state where you do business?

Despite the slow regulatory change in this area and continued lack of centralized regulation, this area remains in the public eye and something of continued interest to regulators.

The bottom line is whatever your game and whether you are a veteran or just starting out, an experienced gaming attorney is a necessary asset to your business team.

Contact Artaev at Law PLLC to set up your initial consultation. We are Michigan’s gaming law firm and we specialize in the unique concerns that you may encounter as a game developer.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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esports gaming law internet law Uncategorized

Do Play-To-Earn Games Sell Unregistered Securities?

Play-to-earn game developers that sell in-game currency tokens or NFTs to their players may be inadvertently selling unregistered securities. Offering unregistered securities is illegal and the Securities and Exchange Commission (“SEC”) may prosecute developers and obtain injunctions, civil penalties, and orders to refund all investor funds (disgorgement). Further, the investors themselves can sue developers (including as a class action) for securities laws violations, all of which can be financially devastating. Securities laws are a major factor to consider, but there are other applicable laws and regulations that determine whether a play-to-earn game is legal. Accordingly, it is absolutely critical to consult with an attorney specializing in play-to-earn and obtain a legal opinion regarding legal compliance before offering and selling any fungible or non-fungible tokens.

What do securities laws have to do with gaming?

Securities are traditionally associated with stocks and bonds traded on various exchanges. However, “securities” is actually a much broader term and includes virtually anything that a company sells to raise funds, whether to the general public or to a select group of high net worth individuals in a private placement. In the play-to-earn context, either the in-game currency token or the game asset NFT can be considered securities. Crypto/blockchain/NFT regulation is still at the early stages, but the SEC has taken an active enforcement role in pursuing fraud and illegal token offerings in the digital assets market.

Not all tokens or digital assets are securities. The uses a four-prong analysis called the Howey test to determine whether an offering is a security. More precisely, courts apply the Howey test and examine whether something is an “investment contract,” which is a type of security. The United States Supreme Court created the test in SEC v. WJ Howey, 328 U.S. 293 (1946), when it determined that a company selling shares in an orange grove farming operation was actually selling unregistered securities. If a token does not qualify as a security under the Howey test, it is generally considered a “utility token” and may be sold without the constraints of securities laws (but may still be subject to other regulations).

How do securities laws apply to gaming tokens or NFTs?

An “investment contract” has four elements: (1) an investment of money; (2) in a common enterprise; (3) with the expectation of profit; (4) derived from the efforts of others. With digital assets, the SEC generally assumes the first two prongs are met. Most, if not all, play-to-earn tokens involve an investment of money (either fiat currency or cryptocurrency with value) in a common enterprise (i.e. the game project). Thus, whether an offering is an exempt “utility token” or an unregistered security depends on whether the purchasers are led to expect profit derived from the efforts of others. In other words, does the purchased token function as a passive investment that pays dividends?

Of course, this is a very fact-specific inquiry. The SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”) has a rather complex set of guidelines and guideposts for the analysis, called the “Framework for Investment Contract Analysis of Digital Assets.” The SEC also relies on the DAO Report, which was a 2017 investigation of the Swiss-based DAO Project that explains the SEC’s application of Howey to digital assets.

In general, the determining factor is how the tokens are used. Do players actively use the NFTs they acquire to play the game and earn rewards? For example, an owner must manually enter the racehorse NFTs in Zed.Run (a hugely popular play-to-earn horse racing game) into various races, deciding on the best course type and distance suited to that particular “racehorse.” If the NFTs “wins,” the owner wins a prize, just like in real-life horse racing. Axie Infinity is another example of where players must actively manage their NFTs and “battle” them before earning rewards. Active in-game management likely negates both the third and forth prongs of Howey, as players purchase the tokens for in-game use and any rewards are not from the efforts of others – they come directly from the efforts of the player/owner. The same logic applies to in-game currencies that can be used to acquire in-game assets, pay entry fees, upgrade NFTs, and for other purposes. Simply put, while the in-game currency may certainly fluctuate in value on the secondary market, it is not a passive investment vehicle. It is an active “utility” component of a play-to-earn game.

Do staking and lending features affect the securities analysis under Howey?

As play-to-earn games become more sophisticated, so does the analysis. Many games now offer “staking” – which rewards players with in-game currency for parking their tokens or removing them from circulation for a set period of time. Additionally, NFT renting and lending are becoming more common, where owners let third parties to borrow their NFTs, actively use them within a game, and in return, receive a share of any winnings. The staking and lending mechanisms effectively enable passive income for token owners. Passive income is a hallmark of a security under the Howey test.

Play-to-earn games are a rapidly growing sector of the overall crypto and NFT market. It is critical for developers to ensure legal compliance, not only to protect themselves and their companies from crippling lawsuits, but to also make their product attractive to potential investors. In 2022, a comprehensive legal analysis of the play-to-earn project is a must-have for any pitch deck. Note that even if the token or NFT is not a security under federal law, state level “Blue Sky laws” may apply. Additionally, a token or NFT may be regulated as a commodity or under money transmission laws. In other words, the securities analysis is only part of a full legal evaluation.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2022 Artaev at Law PLLC. All rights reserved.

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esports gambling law gaming law internet law

The Three Types of Skill-Based Real-Money Games: Room for Innovation, Not Stagnation.

The skill-based real-money gaming market remains a popular and innovative business environment. The draw for players is that they can play games and win real money, but also improve their chances of winning through skill. Unlike gambling or casino-style games, skill-based gaming is not mathematically skewed in favor of “the house.” There are many types of games to choose from – card-based solitaire-like games, bingo, bubble puzzlers, trivia, and even sophisticated physics-based racing games. Best of all, unlike casino gambling and sports betting, skill-based real-money games are legal and available in the majority of U.S. states and internationally as well.

For developers, the upside is obvious. Monetization of gaming has always been profitable and a lucrative business – hence the tightly-regulated casino and sportsbetting markets. Designing a mobile game instantly gives the developer access to customers across the world through a well-established distribution network (i.e. the Apple App Store). When done right, real-money skill games are not required to be licensed or otherwise regulated in a majority of the states. This makes the real-money skill game market very accessible to most developers, including smaller studios with limited budgets and without the lobbying firepower that would otherwise be required to enter the money gaming market.

These factors combine into a highly-competitive market. This makes it difficult to design a profitable game without innovation. For example, the Skillz.com platform (publicly traded as SKLZ on the NYSE) boasts over 30 million players and over 30,000 developers. However, according to Skillz’s August 2021 prospectus filed with the SEC, only three games accounted for 74% of all revenue in 2021. These so-called “big three” are Tether’s “Solitaire Cube” and “21 Blitz,” and Big Run’s “Blackout Bingo.” Predictably, there are number of copycat games that are very similar to these “big three” in design and gameplay. To be successful, developers must innovate. As part of their development and marketing efforts, all companies in this space need to understand the three main types of skill games, each with its own set of regulatory nuances:

Pure-Skill Games

The first category of games is the “pure skill” variety that are similar to the popular Solitaire Cube, 21 Blitz, and Blackout Bingo that account for such a large share of the market. These games pit players in head-to-head contests, multiplayer battles, or tournaments the outcome of which depends solely on the skill of the player. For example, in Solitaire Cube, players are given the same deck and are scored on how well and fast they play Klondike Solitaire using these cards. Players pay an entry fee, with the winner receiving a cash prize.

These “pure skill” games do not involve any other factors than the players’ own skill in determining the outcome. There are limitless possibilities in this genre – anything from knife-throwing games, to cup flipping or “beer pong” style contests, to trivia games fall into this category. Some particularly innovative developers have even developed sophisticated physics-based games (similar to Angry Birds) that take serious dexterity, planning, and logic to master.

Pure-skill games are legal under U.S. federal law, as well as in the majority of U.S. states. Because skill games involve the opportunity to win real money, the Apple App store and various social media advertising platforms require special approval and an application that must be accompanied by a legal opinion from qualified gaming counsel. Payment processors also require special approval, a physical presence in the United States, and have their own set of standards and rules that must be met before your gaming account is approved.

Fantasy Sports or Market Games

The second category of skill games are those that are similar to the daily fantasy sports (“DFS”) contests offered by DraftKings and FanDuel. Generally, participants pay an entry fee and then are given a virtual currency budget to spend on a lineup of sports players to be on their fantasy team. The fantasy team then scores points based on real-world performance and the participants that accumulate the most points can win a cash prize.

Traditional sports and leagues like the NBA, NFL, MLB, and NHL are not the only options. There is at least one fantasy esports platform that lets players put together a lineup of their favorite gaming stars. There are also fantasy stock market games that let players pick a portfolio of real-world shares and win prizes based on how well their portfolio does against other players.

The key distinction between these fantasy games and pure-skill games is that the outcome of a fantasy game is not determined solely by a player’s skill. While it certainly takes knowledge and research to put together the best team, points are awarded based on real-world performance that is outside of the participants’ control. In fantasy sports, a particular player might have a bad game, get injured, or fall victim to bad officiating or adverse weather conditions. In fantasy stocks, a particular stock might enjoy a sudden price spike due to a merger announcement or a new product. Or, a stock might quickly lose value due to an SEC investigation or other unpredictable real world factors. In 2020, the IRS issued two separate memoranda analyzing and addressing this distinction, concluding that DFS involves “wagering” within the meaning of the Internal Revenue Code. At a minimum, the IRS’s position matters from a tax perspective: does your skill-based game involve “wagers” subject to excise tax?

DFS and similar fantasy games are more regulated than “pure-skill” games. DraftKings and FanDuel currently offer their DFS products in 43 states and are a good regulatory bellwether. In some states, DFS is offered as an unregulated skill-game product that falls outside of the state’s definition of “gambling.” In other states, legislatures have passed laws that expressly exclude DFS from “gambling,” but do not otherwise regulate or license DFS. In contrast, states like Michigan have enacted comprehensive licensing regulations for DFS. There are also states that outright ban any sort of real-money wagering. And, there are states that have issued DFS-adverse legal opinions and are embroiled in litigation to decide whether DFS constitutes illegal “gambling.” In other words, the regulatory landscape for DFS-type games is complicated and requires guidance from an experienced gaming attorney.

Arcade-Style Skill Games

The third category does not involve mobile phones, computers, or the internet at all. Rather, these games look like arcade cabinets or even like slot machines, and are found in certain bars, restaurants, and other public establishments. Originally, these games were purposefully designed to look and feel like slot machines, but introduced additional player choice or input features so that they would involve skill and purportedly fall outside of the definition of “gambling” in most states. Authorities in some states have cracked down on these types of machines (sometime called “nudge machines” or “skill slots”), concluding that the claimed skill element was a sham or otherwise insufficient to render the machine a true game of skill.

Despite the ongoing pandemic and the ubiquity of gaming options on mobile devices and the internet, these cabinet-type skill games are still thriving. One particularly popular game called “Dragon’s Ascent” has attracted the attention of regulators in the D.C. area and has sparked debate over whether the game (which pays out cash prizes) is an illegal gambling device. Players score points by shooting magic balls at dragons to capture them, using the joystick and buttons to direct and time their shots. The two-player version looks like a traditional arcade cabinet. The eight-player version adds an impressive-looking table that doubles as a screen. Both versions include drink holders, and the game’s promotional material specifically targets bars as a way for them to “offer something new.”

Although the barriers and start-up costs to enter into this specific market are significantly higher than the mobile game field, the presence of arcade-style skill games demonstrates the level of innovation and variety in the industry. Bars and restaurants that survive the pandemic may very well be interested in real-money skill games as one way to bring customers back to their in-person establishments. It is also possible that bars and restaurants will partner with more skill game developers to introduce mobile or more individualized real-money games to their establishments. After all, having a pint and betting $5 on a game of pool or darts is one of the most traditional and familiar ways to bet on a game of skill. Technology may advance, but people’s desire to compete, wager, and win real money remains the same.

Have more questions? Do you need a legal opinion or help getting your game through the regulatory process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
business law esports gambling law gaming law internet law

A Guide to Getting Your Skill-Based Real-Money Game Approved in the United States.

Skill-based real-money gaming has been a popular form of entertainment across the world for hundreds of years. From Roman legionnaires wagering on an early version of backgammon to $5 eight-ball games at your local pool hall, skill games have always attracted players looking for a chance to win real money. With smart phones in every pocket, skill-based gaming has entered a new era where anyone with an internet connection can play various money skill games through their phone or computer and stake anywhere from $0.25 to hundreds of dollars on the outcome.

Gaming is a rapidly growing industry and the skill-based real-money market is no exception. Indeed, there is already at least one publicly-traded California-based company (Skillz.com; SKLZ) investing substantial resources in the real-money skill-based U.S. market. However, any sort of real-money gaming business implicates federal and state-level regulation. While a government license is not necessary in most states, your game must still pass private sector review. Apple’s App Store is indispensable in the current market; advertising through social media like Facebook is another must. Banking and payment processing is likewise an integral part of your ability to run a business.

I have advised a number of companies, both international and U.S. based, on the legality of their skill-based real-money games. Through Artaev at Law, I have prepared detailed memorandums and analysis for a number of companies, as well as provided consultation to investors seeking more information about the real-money skill-games market. As a game developer, here is what you need to know:

1. Get Your Game to the Players.

If you were to get into the full-scale casino gambling market, you would have to comply with stringent state-level regulatory requirements, pay substantial application and licensing fees, and otherwise deal with an intricate governmental regulatory framework. Further, in the few states where casinos are even legal, there is only a limited number of licenses that a state will issue. In other words, it is impossible. But real-money skill gaming operates outside the gambling regulatory framework, which means you don’t have to go through a government licensing or regulatory approval process to offer your product (in most states).

Instead, real-money skill game providers find themselves faced with so-called private company gatekeepers. The popularity of real-money skill gaming is in large part due to the ubiquity of the smartphone. Apple’s App Store is the only practical way to get real-money skill games onto iPhones (no, people will not “unlock” their iPhones to sideload your real-money skill game, especially when the App Store already has a robust selection of these games that are easy to download and use). Google’s Play store does not currently allow real-money skill games, so there developers must either provide sideloading options or use a Progressive Web Application (PWA).

The bottom line is that developers must pass Apple’s “gatekeeping” to even get their app on the market. That means complying with the App Store Review Guidelines. Section 5.3.4 is particularly important:

5.3.4 Apps that offer real money gaming (e.g. sports betting, poker, casino games, horse racing) or lotteries must have necessary licensing and permissions in the locations where the app is used, must be geo-restricted to those locations, and must be free on the App Store.

Apple considers real-money skill games to fall into this category, even though skill games do not depend on chance like the “sports betting, poker, casino games, horse racing” examples. This guideline can be distilled into three requirements: (1) The app must be legal where you are offering it; (2) The app must be geo-restricted to only those locations where it is legal; and (3) the app must be free.

The first requirement is the most important and the most confusing for app developers. How do you demonstrate that your app has “necessary licensing and permissions” if the states where you are offering your real-money skill games do not regulate such games? This is a situation where a legal opinion or memorandum from an experienced gaming attorney is helpful. In general, such a legal opinion will describe your game, explain how the game fits within existing federal regulations, and then present a state-by-state analysis (supported by applicable statutory and case law citations) to show that the skill game does not violate those states’ anti-gambling prohibitions or any other law.

The second requirement of geo-restriction is self-explanatory. Your app can only offer real-money gaming if the user verifies their location in a state where such gaming is legal. You can still offer practice or play-money games without geo-restriction (or if the user does not want to or cannot verify their location).

The third requirement is that the app must be free. Section 5.3.3 of the review guidelines further clarifies that “in-app purchase” cannot be used to purchase credit or currency for use in the real-money gaming app. That means that you will need to set up some sort of external mechanism for deposits, link the user’s existing account and balance to the app, and ensure compliance with the external payment processors’ requirements.

Once submitted, the review process can take between several weeks to more than a month. A lot depends on whether your app is similar to other apps already approved or whether it is something completely new. Other factors, like the reviewer or the law firm reviewing the legal analysis may also impact the timeline.

2. Advertise Your Game.

Advertising is critical to your app’s success and online advertising platforms have special rules for real-money games. Social media companies like Facebook and Twitter require prior approval and permission before running your gaming ad. The process is similar for both platforms and generally involves filling out a questionnaire, selecting the geographic areas you are targeting, providing a link to your app’s website, and submitting a legal opinion that your app comports with the law where it will be advertised. Google and YouTube (owned by Google) do not currently allow real-money skill game advertising.

This process may be a bit more lengthy than getting approval from the App Store. Depending on the nature of your product, your location, and the platform, the process may take several months. The social media platform may also come back with additional specific legal questions for your counsel to answer. The level of follow up and scrutiny is hard to predict because the social media companies farm out the review to outside law firms, which have their own standards and review processes.

3. Set Up Your Payment Processor and Bank.

Once your game is live and advertised, it’s time to start making money. There are a lot payment processors out there (PayPal, Square, etc.) and each has their own set of rules and guidelines for business accounts. The federal Unlawful Internet Gambling Enforcement Act applies to payment processors, so they must be especially careful not to facilitate illegal gambling activities. Credit card companies present another potential obstacle, as credit card companies often lump skill-based gaming with gambling into the 7995 merchant code.

For example, after states started rolling out regulated sport-betting options, Visa issued guidance that made its payment services available for “all transactions that are consistent with local, federal, and international laws.” Visa introduced new 7800-series merchant codes for legal gambling, but none of those codes apply to real-money skill gaming transactions. Practically, this means that skill-gaming transactions may still fall under the blanket 7995 code and Visa may not authorize the transaction. Nor does Visa issue an MVV (merchant verification value) for 7995 merchants, meaning that skill-based real money gaming companies are limited as to their direct-pay options.

This essentially requires skill-game companies to explore options through payment providers like PayPal. Provided you are based in the United States and can link a bank account, the process should be straightforward. If you are based in another country however, there is a whole another set of hurdles to overcome.

There’s More.

Getting your game approved, advertised, banked is only the first step. You will also need robust terms and conditions that govern your relationship with your users, which is especially critical when dealing with real-money gaming and facing potential payout disputes. A privacy policy is also a must, especially if you are offering your game internationally. Then there is the issue of taxation and whether you should be paying excise tax on skill-based game wagers. Real-money skill-based gaming is a hot market, but requires experienced legal counsel to get through these various issues.

Have more questions? Do you need help getting your app through the review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
business law esports gambling law gaming law intellectual property internet law

The Facts About Real-Money Skill Gaming: Dispelling 5 Common Internet Myths.

Artaev at Law advises companies looking to launch new technologies and tap into the skill-based real-money game market in the United States. In keeping up with the latest legal and regulatory trends, we do a lot of research, and we have seen a lot of misleading and downright false information on the internet. Do not be deceived and get the facts backed up by legal analysis – Artaev at Law is the trusted, experienced, and accurate source to answer your questions and dispel the most common myths about real-money skill gaming.

1. MYTH: Online gambling games are the same as “real-money games of skill.”

FACT: No. Words matter. “Gambling” is term of art used in state laws across the United States to define heavily-regulated casino-type activities, usually with reference to an element of “chance.” Federal laws like the Unlawful Internet Gambling Enforcement Act (“UIGEA”) also regulate and prohibit banking institutions from facilitating unlawful gambling. But paying an entry fee to a cash-prize tournament or wagering on yourself in a head-to-head contest is not the same thing as “gambling.” These real-money games of skill rely on the relative skill of the players to determine the outcome and do not involve any element of chance, so they cannot be considered “gambling,” which has a specific definition under the law. I have even seen other law firm websites make this mistake and misuse the term “gambling” to refer to anything that involves the wagering of real money. There are also a lot of questionable websites that attempt to equate online casinos to video games or pure-skill games in an attempt to confuse and generate clicks and get people to transfer money to off-shore operations. Do not be deceived – and contact a knowledgeable lawyer if you have questions.

2. MYTH: States only regulate “games of chance” and if the real-money game does not involve “chance,” the game is automatically legal everywhere.

FACT: No. There are 50 states in the United States and each one of them has their own laws that regulate gambling. Each state has its own definition of “gambling” and what exactly is and is not allowed depends on the nature of the game offered, as well as specific regulations. Some states specifically allow participants to wager real money on “bona fide contests of skill.” Others prohibit wagering any real money on any game, even if chance is not involved. Note that wagering on the play of others, even if they are involved in a contest of skill, is prohibited as gambling. After all, that is how sportsbooks work – wagering on the competition of others. This is a constantly evolving regulatory area – the major real-money gaming websites themselves disagree where to offer real-money gaming – some offer cash games in 45 states, others in 41, others in 35, etc. Whether your particular game is legal (and where) is a case-by-case analysis that requires an up-to-date legal opinion.

3. MYTH: Real-money games of skill are those shifty-looking slot machines that you see at truck stops or those internet cafes that offer sweepstake games.

FACT: No. Those slot machine looking things are in fact slot machines (with some extra features added to attempt to claim that they involve “skill”) and internet cafes try to disguise game of chance gambling as sweepstakes. Law enforcement in many states have used existing gambling laws to shut down these establishments. Real-money games of skill are in fact played predominantly on mobile devices or computers at home. They are nothing like slot machines or sweepstakes and allow players to compete head-to-head for real cash prizes. There are card based games (like Solitaire that awards points based on speed to completion), bubble shooter games, Tetris clones, knife throwing games, and many others. The head-to-head (or tournament) contests are more akin to entering a pool tournament for a chance to win a cash prize, rather than any sort of randomized game of chance.

4. MYTH: Skill games or are just a different type of gambling video game that Las Vegas using to try to appeal to Millennials who are not interested in the traditional casino games.

FACT: No. Skill-based real-money gaming is not something that involves or depends on land-based casinos. While the regulatory bodies in states like Nevada and New Jersey did adopt regulations to encourage a new type of slot machine that involves an element of skill, there is no indication that these types of machines enjoy any sort of popularity. Like many other forms of entertainment in 2021, skill-based real-money games are based online. Advanced internet and mobile phone technology and accessibility is making these games an especially lucrative business.

5. MYTH: There are no legal implications for organizing or running a real-money video game tournament (FIFA, Tekken, Magic: The Gathering, etc.) because the outcome depends on the skill of the players.

FACT: No. There are two distinct problems with this assumption. One, is that legality depends on the nature of the game being played. Is there an element of chance? This could be determined by not only the nature of the game, but how the match-making or team selection function works. If chance is present, how much, and does it predominate over the skill element? That will determine whether the particular game passes the state-level “gambling” test. Two, there are intellectual property issues. The game studios own copyright and trademark rights in their games and do not endorse third party websites that enable real-money wagering on their games. Studios like Epic Games have publicly announced their view that these websites are misappropriating their intellectual property, and legal action is likely forthcoming.

Skill-based real-money gaming is an exciting and emerging form of entertainment worldwide. But there is a lot of misinformation online. The regulatory landscape is always changing, and Artaev at Law are the experts on the facts, trends, and the law about real-money skill-based (or pure-skill) gaming.


Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
business law gambling law gaming law internet law

Is Playing Video Games for Real Money Legal? It May Depend on the Game.

Skill-based real-money gaming is a growing industry worldwide. Previously, I wrote about the legality of playing casual games like Solitaire and bingo derivatives for real money. But what about console or PC games like FIFA ‘21, NHL ‘21, Madden ‘21, NBA2K21, and PGA2K21? Shooters like Call of Duty, CS:GO, and Fortnite? Strategy card games like Magic the Gathering? Can those be played for real money as well?

We are not talking the official in-game cash cups or periodic tournament that a few games offer. Rather, head-to-head real money competition that makes any game a chance to win (or lose) cash. There is no shortage of websites and apps offering players this very service. The chance to wager real money on head-to-head video game contests or play in cash-prize leagues and tournaments is certainly attractive. But whenever there is any sort of betting or wagering, legal issues may come up. As a player, you want to make sure you are not breaking the law by wagering $5 on a Sunday Madden round robin. As an entrepreneur and app developer, you need to know what you can and cannot offer to your audience or how to plan for and resolve potential legal issues.

There are two distinct problems areas in the real-money gaming sector. First, is playing video games for real money considered illegal gambling?

Each of the 50 U.S. states has its own set of laws that define “gambling” and that definition determines whether real money playing video games for real money. Do not assume that a platform or app is legal just because it is not traditional, casino-style “gambling.”

You may have heard that if a game’s outcome depends on skill rather than chance, then it is not “gambling” and therefore allowed. This is false. Each of the 50 states have their own regulatory scheme for gambling and gaming, and while some states only regulate games where chance is the dominant factor (in other words, casino-style gambling), not all have the same laws. Certain states define gambling independent of whether chance or skill determines the outcome. They simply make it illegal to wager money in exchange for the possibility of winning money. Other states expressly regulate “games of skill,” either independently or as part of recent internet gambling legislation.

Note that even if a state allows participants to wager real money on a game of skill for a chance to win cash prizes, wagering on the gameplay of others is prohibited. Wagering on the play of others is akin to a sportsbook, which are tightly regulated as gambling across the board.

The gambling vs. game of skill analysis also depends on the particular game at issue. Some games are pure skill with no element of chance – such a game that pits two identical soccer squads against each other. Others have some element of chance, but the skill predominates over the outcome. For example, Fortnite has an element of chance (even presuming you are matched with players of equal skill) because the loot is randomized and the bus approaches the map from different directions, giving an element of luck at least at the start. Then there are games like Magic: The Gathering and Hearthstone or any other game that features cards and a random shuffle mechanism. While better players will certainly win over time, the randomness of the shuffle does affect the outcome. Thus, the specific nature of the game played also determines the legality of the wager on a state-by-state basis. Note that official in-game tournaments always have a “void where prohibited” disclaimer and generally do not require a real-money entry fee to participate to avoid legal issues.

The second problem is intellectual property rights – specifically the game copyrights and trademarks owned by studios like EA and Epic.

Game studios generally do not endorse any websites or apps that allow real-money wagering on their games. In fact, such wagering providers may face copyright or trademark infringement lawsuits from the game developer for misusing their intellectual property.

Many third-party wagering sites use the logos or cover art from the games that they support, but not many have the license or permission to do so. From a trademark perspective, the game studios could have a brand confusion claim, as players may assume that the game makers themselves endorse these wagering sites. The fine print (that nobody reads) disclaiming any endorsement is unlikely to prevent a trademark infringement action. Game developers spend millions of dollars on cultivating their image and will not hesitate to file a lawsuit to protect the integrity of their brand.

The game studios also own the copyright to their games, which means they get to control how their products are used, distributed, and portrayed. At least one studio, Epic Games, has publicly stated that any website or app that facilitates wagering on any of its games (including Fortnite) is violating Epic’s IP rights. Video game publishers – especially those that market to the under-18 crowd – do not want to be associated with anything that could be viewed as gambling (even if it is not gambling under the law). It is likely that there are lawsuits coming to protect the games’ “family-friendly” image and reassure parents that video games are a safe and wholesome hobby. It is also unlikely that any game studio – at least any major game studio – will enter into a licensing deal with a wagering website to specifically support real-money wagering on gameplay.

Plus, some studios themselves offer cash and prize competitions. For example, Fortnite hosts its own real money prize events. Call of Duty has league play. Magic: The Gathering periodically does an Arena tournament that awards a cash prize to the top players. “Official” competitions let the studios control their own IP and not have to share revenue and player base with any third parties. Further, most official competitions do not require a real-money buy-in to participate, making them more “family-friendly.”

There is no doubt that real-money skill gaming is a big draw worldwide, especially with the ubiquity of smartphones and fast cellular connections. Potential legal issues are there as well, and the wrong approach will attract the attention of local law enforcement and civil intellectual property lawyers. To add to the uncertainty, the United States is a dual-sovereign system, with regulations both on the federal level (that mainly affect the banking aspect of wagering) and the state level (that are constantly changing). Tread carefully and hire a lawyer.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
gambling law gaming law

Fun Facts About the History of the World’s Oldest Hobby: Gambling.

For a change of pace, here is some short and fun reading about everyone’s favorite hobby – gambling. Whenever I do a gambling-related legal project or research, it amazes me how much time and effort has been spent by lawmakers across the United States regulating and restricting gambling in all its forms. And, it is equally amazing how much time and effort has been spent by people to evade those restrictions by designing every sort of workaround imaginable. The battle continues in the age of the Internet and evolves with each technological advance, with mobile gaming being the latest front.

The history of gaming and gambling is fascinating. For as long as people have been playing games, they have bet money on them. According to “The History of Backgammon” by Oswald Jacoby, the world’s original dice game (with dice carved from actual bones) was played as early as 3000 B.C. in southern Mesopotamia (modern day Iraq). Backgammon boards were found in King Tut’s tomb that date back to 1500 B.C., and evidence exists that Ancient Egyptians played for money and even designed an elaborate mechanical dice box to protect against cheaters. Real-money gaming was huge in the Roman Empire, both among royalty and ordinary Romans. Nero (among his other excesses) is said to have played a version of backgammon for an equivalent of $15,000 per point and Emperor Commodius turned the imperial palace into a grandiose casino. Wall paintings in Pompeii depict scenes of ordinary Romans playing in inns, arguing over a backgammon board, and being promptly thrown out by the innkeeper. Suddenly naming one of Las Vegas’s most popular casinos “Caesar’s Palace” makes sense.

Backgammon and gambling in general were so historically popular and addictive, that during the Third Crusade in 1190, Richard the First and his allies issued a joint proclamation that prohibited playing any game for money for any person “beneath the degree of a knight.” Knights and clergymen were permitted to gamble, but were restricted to losing no more than 20 shillings per day, with strict penalties for exceeding the limit, including being flogged naked through the army for 3 days. Sports betting dates back at least to Ancient Greece, where betting on the original Olympics was widespread.

Today, there are so many iterations, versions, and types games that people wager on, it is no wonder that each of the 50 United States has an extensive statutory scheme addressing gambling. Courts all over the U.S. have thousands of pages of options dating back more than a hundred years dedicated to analyzing various devices to determine whether they are prohibited “gambling devices.” Did you know that pinball machines were originally restricted as gambling devices and there remain detailed regulations in each state as to the maximum number of free games that a pinball machine can award? But that’s a topic for another day.

Despite heavy regulation, gambling and betting remain extremely popular across the world. The modern global casino industry is estimated to be worth in excess of $100 billion, with steady and continued growth expected. The sports betting market, which is tracked separately, is valued at approximately $85 billion worldwide. According to analysis by Morgan Stanley, the U.S. sports betting market is projected to grow from $833 million in 2019 to $7 to $8 billion by 2025. Although COVID-19 dropped casino and gambling related revenues by over 10% in the United States in 2020, the market is still expected to recover and grow robustly in the foreseeable future. Indeed, latest data indicates better-than-expected revenues in the gaming industry in 2020, as many people are turning to gaming (both video games and gambling) as entertainment, social interaction, and an escape from the stresses of daily life. Stay tuned.

Dan Artaev is an experienced attorney who has advised domestic and international clients regarding gambling regulations, legislation, and provided other gambling- and gaming-related representation. Contact Dan by email at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

© 2020 Artaev at Law PLLC. All rights reserved.

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