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Regulatory Crackdowns Are Reshaping Sports Wagering.

Regulatory uncertainty in emerging gaming markets has proven itself to be a double-edged sword. On one hand, unregulated gaming products that do not squarely fall into the definitions of “gambling” or regulated fantasy sports offer greater accessibility, innovative entertainment, and lower fees to their customers. Such products include skill-based games, play-to-earn video games, peer-to-peer social wagering, and pick’em-style fantasy sports (most prominently championed by Underdog Sports and PrizePicks). On the other hand, pick’em fantasy sports has recently been under fire, as a number of states have either outright banned pick’em fantasy sports or are currently investigating them.

Pick’em As a Popular Alternative to Traditional Fantasy

Pick’em style fantasy sports found success in appealing to the younger, more casual player. Instead of assembling a roster, managing a virtual salary cap, and engaging in time-consuming balancing of performance vs. cost, the pick’em format simply awards points based on correct predictions of a better outcome. For example, the pick’em format will ask participants to pick an over/under point total between two outcomes or which player will score more points. This simpler and more straightforward format has enjoyed rapid success due to its accessibility and entertainment factor. However, state regulators have also cracked down on the format due to its functional resemblance to proposition-style sports bets.

Regulators Have Cracked Down on Pick’em in Late 2023 and Early 2024

As of the date of this article, Arizona, Arkansas, Florida, Kansas, Maine, Michigan, Mississippi, New York, North Carolina, Virginia, and Wyoming have taken the position that pick’em fantasy sports offerings are illegal under state law. Wyoming (which legalized online sports betting in 2021) targeted leading pick’em operators PrizePicks and Underdog in July 2023 with cease-and-desist letters. High-profile regulatory actions followed in Florida, New York, and Michigan. Florida takes the position that fantasy sports have not been and are not allowed in the state. Michigan and New York have amended their daily fantasy sports administrative rules to prohibit “any contests that have the effect of mimicking betting on sports or that involve ‘prop bets’ or the effect of mimicking proposition selection.”

Other states joined the effort. California is currently in the process of investigating and opining on the legality of DFS in the state. Kansas became the latest state to issue cease-and-desist letters to at least six fantasy sports operators. Notably, despite having a well-articulated and public position on the legality of its offering, Underdog voluntarily left Kansas in September of 2023. PrizePicks continues to operate in Kansas.

After Florida targeted the three market leaders – Underdog, PrizePicks, and Betr – with cease-and-desist letters in September 2023, it appeared that the companies were eager to fight for and defend the legality of their offerings. This no longer seems to be the case and at least one operator (PrizePicks) just settled the New York State Gaming Commission’s allegations of illegal fantasy sports operations by agreeing to pay a fine of nearly $15 million and ceasing operations in New York.

While the settlement is limited to PrizePicks, its a potential blow to all the other pick’em operators, whose legal position has been that their products either operate within the boundaries of permissible fantasy sports or are not otherwise regulated by state law. As a side note, New York is unique in that the settlement with PrizePicks acknowledges the general legality of fantasy sports in New York pursuant to license. PrizePicks’ “wrongdoing” was ostensibly operating fantasy sports without a license (not that their pick’em product was per se illegal).

Novel Game Markets Remain Uncertain and Subject to Rapid Adverse Regulator Actions

In any case, the cascade of regulatory actions (and the speed with which investigations turned into cease-and-desist letters and subpoenas) highlights the uncertainty related to novel gaming products. For instance, PrizePicks operated in New York since 2019 under a “good-faith belief” (and presumably in reliance upon legal advice) that it did not need to obtain any sort of fantasy sports or other license from the state. PrizePicks likely relied on the common-sense conclusion that its offering was a game of skill and therefore unregulated under New York law. Yet PrizePicks had to essentially pay back all the revenue it made in New York and agree to exit the state.

Out of all the real-money gaming offerings in the market, skill-based real-money gaming still appears to be most accepted model. Skill-based real-money gaming involves players paying an entry fee and competing for a prize, with the outcome determined by the relative skill of the players as opposed to chance. Peer-to-peer social wagering leverages the skill-based aspect of predicting sports outcomes, but involves direct bettor-to-bettor competition as opposed to bets against the house.

While legally untested, the peer-to-peer model also appears to be more palatable to regulators, as Underdog Fantasy revised its player vs. house pick’em model to function as a peer-to-peer skill contest in Alabama, Mississippi, Tennessee, and Wyoming in response to collaboration with regulators in those states. Play-to-earn is a concept most associated with Web3.0 and video games where in-game assets have tangible out-of-game value. Interest in play-to-earn is surging, as the crypto markets recover and Bitcoin exceeds the $50,000 barrier.

As more states legalize gambling and especially sports betting, regulators are taking a closer look at potential competitors. Licensed heavyweights like DraftKings and FanDuel (and their lobbyists) are allegedly involved in bringing regulators’ attention to potential competitors, especially if those competitors are operating at higher margins due to lower regulatory costs.

A Detailed Legal Opinion is More Important Than Ever

The current regulatory environment in the United States highlights the importance of hiring experienced and knowledgable counsel as part of your team. What was permissible or at least tolerated by regulators a year ago may not be acceptable now. Further, more states are taking a position against unlicensed sports betting or fantasy products, even if those offerings are firmly grounded in sound legal arguments. Careful consideration, a legal opinion, and a detailed analysis are more important than ever to a successful launch, especially as payment processors, vendors, investors, and other third parties are going to be engaged in a lot more legal scrutiny.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming law – email or call us to set up your initial consultation.

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.

The Surging Demand for Novelty Prop Betting in the United States: Is This an Opportunity for the Peer-to-Peer Model?

Super Bowl LVIII is generating an unprecedented interest in “novelty wagers” unrelated to the game, but related to Taylor Swift’s expected appearance.

But Super Bowl LVIII is not only notable for the matchup between the San Francisco 49ers and the Kansas City Chiefs. This year, there is unprecedented crossover interest due to pop star Taylor Swift’s much-publicized romantic involvement with Chiefs’ tight end Travis Kelce. Ms. Swift’s appearances at the Chiefs’ games throughout the regular season have generated a profound interest in the NFL from a younger female demographic that does not normally consume professional football (but does consume Ms. Swift’s music). In the betting world, this demographic convergence has also created an unprecedented interest in placing non-traditional “novelty bets” on Ms. Swift that are completely unrelated to the actual football game.

Unfortunately, if you want to bet on the outfit that Ms. Swift will wear, the color of her lipstick, or whether she will cry if the Chiefs lose, your options are limited. Due to state licensing rules, traditional physical sports books only allow action directly related to the football game. Online sports books that are available in a handful of states like New Jersey and Michigan likewise do not offer “novelty bets” on either Ms. Swift or anything else not directly related to the game (like the length of the national anthem).

Offshore betting options may be risky (or even illegal) for U.S. customers.

So are there options for customers interested in placing a $5 bet on over/under of how many times Ms. Swift will be shown on TV? The New York Times article cites to foreign websites Betonline.ag (an online gambling website based and licensed in Panama) and Betus.com (based in Costa Rica and licensed in Curacao) as examples of websites willing to take Taylor Swift-related wagers. However, their legality is uncertain at best. It is unclear how (or if) they comply with U.S. law and whether there are limitations or costs associated with payments going to and coming from abroad. As just one potential obstacle, the federal Unlawful Internet Gambling Enforcement Act of 2006 prohibits businesses from accepting payments in connection with unlawful internet gambling. Additionally, the federal Wire Act separately prohibits persons engaged in the business of betting or wagering from using a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest.

The emerging peer-to-peer model may offer a solution to limited U.S.-based “novelty bet” options.

One alternative emerging model to the traditional sports book is peer-to-peer social betting or P2P. The P2P model is related to European-style exchange betting and essentially eliminates the centralized sports book in favor of direct, player-to-player wagers. Instead of betting against the house and paying an integrated “vig” or “juice,” players propose or accept various bets from other users in the marketplace. Bets on P2P applications are fully customizable and allow players to use their relative skills (like sports knowledge, data analysis, and mathematics) to compete.

The customization aspect would technically allow for Taylor Swift-esqe novelty wagers that could not be offered by a traditional sports book. Certain topics are generally off-limits as a matter of either state or federal law – betting on elections, the stock market, and price of commodities is either expressly prohibited or already regulated by financial authorities. But entertainment prop bets are just one example of exciting possibilities with customizable peer-to-peer gaming. Another emerging trend is betting on actual skill contests in real-time – whether skateboarding or golf. P2P is no different than engaging with your friends, coworkers, or peers and making wagers in real life, except that the use of the internet (or apps) expands the potential social pool, helps keep track and organize multiple wagers, and ensures prompt wager settlement.

P2P is innovation that offers some of the same availability and skill-based advantages as DFS did when it first came out as a sports book alternative.

Peer-to-peer is a relative newcomer to the wagering markets dominated by licensed sports books and fantasy sports giants like DraftKings and FanDuel. Consequentially, much like fantasy sports around 2015 and 2016, the legality of P2P is being debated. When Daily Fantasy Sports (“DFS”) boomed and became a prevalent skill-based alternative to traditional sports betting, DFS offered many of the same advantages that peer-to-peer operators offer today – wider availability and skill-based gameplay for starters.

Accordingly, peer-to-peer or P2P wagering is an innovative, novel model that relies on the skill-based gaming argument, the social aspect, and the decentralized marketplace approach that removes the operators from the “business of betting or wagering.” Certainly peer-to-peer innovation can offer advantages to customers who are looking for a creative approach to a saturated traditional betting market, lower fees, and more gameplay options. And more “fun.” Betting on Taylor Swift at the Super Bowl without having to engage with an offshore website is just one of the exciting opportunities that might merit a look at a peer-to-peer operator in the United States.

Disclaimer: This article 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. The field of peer-to-peer betting and non-sports event wagering is novel and complex. Artaev at Law PLLC and its lawyers do not and cannot endorse the legality of any particular model, as each factual circumstance is unique and the application of the law remains unsettled in this emerging area.