States Consider Regulating Daily Fantasy Sports Venues FanDuel, DraftKings

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Elaine S. Povich

If you’ve been around a TV in the past three months, you’re almost guaranteed to see ads from daily fantastic sports websites like DraftKings and FanDuel on the “easy” to make money. Now the states are trying to figure out how to regulate and possibly increase the revenues of the booming industry.

New York and Nevada have banned the sites, calling gambling illegal – decisions the sites are contesting. But many other states are working on legislation for upcoming sessions that would subject games to surveillance or licensing. Pennsylvania and California are leading the way. But other states, such as Colorado, Delaware, Georgia, and Illinois, are also interested.

$ 175 million buyout of Frisch completed

Daily sites, an internet outgrowth of the 1980s rotisserie sports leagues, have emerged in recent years and have taken off this year amid massive advertising campaigns. Gamers will spend more than $ 3 billion this year on entry fees, said Chris Grove of Eilers Research, a market research company in the gaming industry. Of that, sites will retain about 10%; the remainder will be paid in the form of winnings.

“The slight increase in state scrutiny of the matter coincided with the start of the football season when the commercials became uninterrupted,” said Jonathan Griffin, gaming specialist for the National Conference of State Legislatures. “I expect this [coming] year we are going to see a significant number of states that are going to try to regulate it, which is directly related to the fact that they have become so well known in the last few months.

Daily sports sites work much like fantasy sports games in general: a player chooses a fantastic team of athletes from real sports teams (they don’t have to play for the same team in real life). Each athlete has a salary number attached to them, and the cost of an entire team must be below a certain salary cap. This prevents a daily player from choosing a team consisting only of stars.

Fantastic players score points if their selected athletes do well scoring touchdowns or racking up yards in football, hitting hits in baseball or making hoops in basketball. The difference between everyday fantasy sports and old school fantasy play in a group of friends is in the payoffs that can happen every day. Another big difference: As the sites point out in their advertisements, players can earn hundreds of thousands of dollars every day.

$ 175 million buyout of Frisch completed

For States, the fundamental question is whether the daily contests are games of chance, that is to say “games of chance”, or not games of chance, that is to say “games of chance” or not. skill games ”. Fantasy companies argue that games are about skill – that players need to know a lot about a sport and how athletes compete if they are to win. Nevada and New York argue that daily fantasy contests are games of chance – that luck plays a big part in who wins. For example, they say, it’s bad luck when the star quarterback breaks his ribs and is out for the game, diminishing his value to the everyday fantasy sports player.

In October, the Nevada Gaming Control Board issued a decision calling on all daily fantasy sports websites to “cease and desist” from their activities in the state. But the board’s long-term intention, according to many analysts, is to bring fantasy games under state regulation and require participants to go to casinos to play.

“Nevada, deep down, would like to have it and regulate it. It’s another profit center, ”said Alan Silver, a professor at Ohio University who has worked for and is widely consulted by the gaming industry.

“Fantastic sports appeal to the younger ones,” he said, noting that millennials are less likely than previous generations to go to casinos to play traditional table games, which are the bread and butter of the world. Nevada game. “If that were put into play and if it were regulated by Nevada, that would be another way to get millennials into casinos.”

Legalities

In New York, DraftKings and FanDuel went to court in November, after Democratic Attorney General Eric Schneiderman decided to shut them down. In a state Supreme Court hearing, lawyers for both companies argued that their activities were not gambling and were permitted under a 2006 federal law that had exempted fantasy sports from the ban on dealing with online financial betting. But attorneys for Schneiderman’s office argued that the games were based on luck – not skill – and were prohibited as games of chance. A decision is expected this month.

DraftKings operates out of Boston, where Democratic Attorney General Maura Healey has decided to regulate the industry, not ban it. The regulations proposed in Massachusetts are intended to protect consumers. They ban anyone under the age of 21 from gambling, require age verification and ban betting on college sports, which are a fraction of daily activities, according to Eilers Research. The proposed rules would officially come into effect on January 22, but Healey called on the industry to start abiding by them now, and the industry has been mostly receptive.

As the legal controversy over fantasy internet games escalated, FanDuel CEO Nigel Eccles called for “strong, common sense and enforceable consumer protection requirements” from states, to include requirements. age, protection of personal information, individual player accounts and third-party audits.

The NBA has a small stake in the daily fantasy site FanDuel.

The company, however, said the daily fantasy sites did not want to be lumped together with casinos by regulators. “We… welcome the opportunity to work with attorneys general of all states, as well as other legislators, to implement fair regulations that benefit both consumers and innovators in sports technology,” said a spokesperson.

DraftKings did not respond to repeated requests for comment. Previously, he called the New York attorney general’s decision “hasty” and said he would be prepared to work with states and other “relevant authorities to ensure our industry operates transparently and fairly for all. consumers ”.

Billions of dollars are at stake in the courts and courthouses for the sites and their top investors. Fox Sports and NBC Sports, the MLB and the NHL, Time Warner and the Kraft Group, owner of the New England Patriots, have invested in FanDuel and DraftKings. Forbes reported that FanDuel raised around $ 361 million from media companies, while DraftKings raised $ 375 million in total.

Imminent legislation

In Pennsylvania, lawmakers have begun to study how to regulate and tax fantasy sports venues. The House Gaming Oversight Committee held a hearing in November and Republican Representative George Dunbar is preparing a bill.

“The industry needs regulation,” Dunbar said in an interview. “The problem is who regulates them. In my opinion, this is gaming and it should fall under our gaming control board.

But, he said, he is considering an “internet gaming law” that would allow casinos already in the state to have websites at those locations that could run internet poker and other games. . “It could force the fantastic daily sports on the Internet to browse our casino sites,” he said.

He said the legislation, still being drafted, would include a one-time casino fee of $ 1 million to be paid by sites and a fee of $ 5 million paid by casinos to include the games as part of their. operations. The profit margin that a casino makes on the sites would be subject to state taxes. Pennsylvania has one of the highest casino tax rates in the country at 55%.

For this type of bill to become law, the state would first have to fully legalize internet gambling, he said.

In California, the Assembly Committee on Government Organization has scheduled a hearing this month, to which representatives of the major daily fantasy sites, consumer groups and other interested parties have been invited. Committee chairman Adam Gray, a Democrat, has a bill that would license and regulate sites through the California Gambling Control Commission.

Gray said the emergence of everyday fantasy sports this fall is hard to miss. “For a sports fan like myself, I haven’t missed the barrage of ads. It seemed clear to me that we were quickly going to get to a place where regulatory oversight was needed. “

He said there seems to be both an element of skill in the games, as well as an element of luck. California law has a “predominant goal test,” which determines that an activity is a game if more than 50% of the outcome is derived from luck.

In New York, the state has what’s called the “material element test,” which determines that the activity is an activity of chance, as long as chance plays a “material role” in the outcome.

Different standards can influence each state’s rules for daily fantasy sports.

Gray said his bill would include an element of revenue, likely licensing fees, to help pay for the costs of administering the regulations.

Daniel Wallach is a sports and games lawyer at Becker & Poliakoff in Florida, where he said lawmakers are considering regulations Wallach called “friendly” to the everyday fantasy industry.

He said many lawmakers in Florida and other states believe the sites should be legal, but not accessible to minors, and the public should be protected from insider games.

Insider trading was raised this fall when allegations surfaced that employees at the site were placing bets using secret information. A DraftKings employee won $ 350,000 at FanDuel in one week. Employees of both sites are now prohibited from playing on either site.

Protecting the public from scams and insider trading is factored into the Massachusetts Attorney General’s regulations, and other states are considering similar rules.

Wallach, who does not represent great sites, predicted that in a year there will be “more legislative clarity, but it will be a mishmash.”

“It will be legal, but how it is regulated will vary from state to state,” he said.

Stateline is a non-partisan, non-profit news service of the Pew Charitable Trusts that provides daily reports and analysis on trends in state policy.


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