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Thinking of Starting Your Own DFS Company?

Thinking of Starting Your Own DFS Company?

July 3, 2023

Thinking of Starting Your Own DFS Company?

By: Sara Dalsheim

The expansion of daily fantasy sports (“DFS”) is on the rise in the United States. As the country prepares for the 2023-24 NFL season, it is around this time we see new products come to the market. Unlike sports betting, launching a DFS product has less regulatory barriers. Although, there are a few key states with regulatory compliance requirements that new contest operators should keep in mind.

First, it is important to be sure that your DFS contests meet the Unlawful Internet Gaming Enforcement Act’s (“UIGEA”) carve out conditions. UIGEA generally prohibits persons from engaging in the business of unlawful internet gaming. The general prohibition under UIGEA hinges on whether the state in which the act occurs prohibits the act because it is considered illegal gambling under the state’s law or another federal law. Although, UIGEA expressly exempts fantasy sports games or contests so long as no fantasy team is based on the current membership of an actual sports team, and: (1) all prizes and awards are established and made known to the participants in advance, and, their value is not determine by the number of participants or the amount of fees paid by participants; (2) all winning outcomes reflect the relative knowledge and skill of the participants and must be determined predominantly by accumulated statistics in multiple real-world sporting or other events; and (3) no winning outcome may be based on: (i) the score, point-spread or performance of any single real-world team or any combination of such teams; or (ii) solely on the single performance of an individual athlete in any single real-world event.[1]

Nearly all states that have implemented laws and regulations legalizing fantasy sports, have a definition for fantasy sports that mirrors UIGEA. Since UIGEA defers to state law for the legality of the acts, it is vital that DFS operator’s contests meet the above criteria.

A new DFS product should also consider the legal and regulatory requirements to operate in a state. Some states require DFS operators to obtain an operator’s license or registration prior to offering their product in the state. Licensing and application fees can range from a few hundred dollars to as much as $85,000. Some states with licensing requirements will also require detailed personal disclosures and the submission of fingerprints from owners, executives, officers, and directors. The states with licensing requirements are Alabama, Arizona, Colorado, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maine, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Tennessee Vermont, and Virginia.[2]

Three states, Arkansas, Maryland, and Massachusetts do not require a license but require operators to remit applicable taxes on gross revenues.[3] Further, Maryland and Massachusetts require a notification to the state gaming authorities of the intent to offer fantasy contests in the state.[4] Maryland specifically requires proof that the operator is authorized to do business in the state. Although Maryland law also requires operators to register, the Maryland Lottery and Gaming Control Commission needs to develop a registration process and promulgate regulations to implement changes. For now, so long as Maryland operators notify the Commission of their intent to conduct fantasy competitions, provide proof that they are qualified to do business in the state, and timely remit the operator tax they are following the state’s requirements.[5]

DFS operations are permitted without licensing or registration in the District of Columbia, Kansas, and West Virginia. These three states have specifically excluded fantasy sports from their definitions of sports wagering and/or gambling.[6]

In the remaining states, the legality of DFS depends on whether the contest would be considered a “game of skill” under each state’s relevant legal authority. Generally, a game or contest is considered gambling if it has three elements: prize, chance, and consideration. Therefore, the permissibility of DFS in non-regulated states depends on whether the state would consider DFS a game of chance or a game of skill. There are 20 states that follow the predominant factor test for determining games of chance vs. games of skill: Alaska, California, Florida, Georgia, Illinois, Kentucky, Minnesota, Nebraska, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, Wisconsin, and Wyoming.[7] DFS contests are generally characterized as games of skill so long as a select number of users win significantly more than would be likely if the outcome was determined by chance. Therefore, assuming that skill is the dominant factor for determining a winner, DFS is permitted without gaming related licenses or registration in these 20 states.

There are four states where it is ill advised to offer DFS. In Hawaii, even games of skill are prohibited gambling.[8] As a result, without further legal authority regarding fantasy sports and gambling, DFS is not permissible. Idaho’s gambling statute only requires wagering activities to be partially based on chance to be considered prohibited gambling.[9] Therefore, DFS products are generally not acceptable under the law. In Montana, the law expressly prohibits paid internet fantasy sports;[10] and, in Washington all forms of internet gambling, even games of skill, are prohibited.[11] For these reasons, DFS is not permitted.

Given the above laws and regulatory requirements for DFS, perhaps the best initial launch strategy for a new DFS game is to begin in the 20 above listed states non-regulated states and the three states that have specifically excluded fantasy sports from their gambling and/or sports wagering definitions. A DFS operator may consider having Arkansas, Maryland, and Massachusetts be a part of their initial launch as well, since the registration and tax requirements are less onerous. After a product has launched and shown success in those states, the operator could consider which of the regulated states they wish to enter. The licensing process varies in each state, and it is important for an operator to consider all licensing requirements and factors before making the decision to enter a market.

Finally, any operator launching or offering a product in the market should continuously monitor laws and regulations in all states they are live (or wish to be live) in. As the number of states with legalized sports wagering increases so does the level of scrutiny that gaming regulators have on DFS products.

 

 

[1] 31 U.S.C. § 4362(1)(E)(ix).

[2] Ala. Code § 8-19F et seq.; Ariz. Rev. Stat. at § 5-1202; Colo. Rev. Stat. §§ 44-30-1605, 1606; Conn. Agencies Regs. § 12-865-22; Del. Code Ann. tit. 29, § 4860; Ind. Code Ann. § 4-33-24-15; Iowa Code Ann. § 99E et seq.; La. Rev. Stat. § 27:306; Me. Stat. tit. 8 § 1103; Mich. Comp. Laws § 432.503; Miss. Code Ann. § 97-33-307; Mo. Rev. Stat. § 313.935; NV Gam. Reg. 14.040; N.H. Rev. Stat. § 287-H:2; N.J. Rev. Stat. § 5:20-2; N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 1402; Ohio Rev. Code § 3774.02; 4 Pa. C.S.A. § 311, 321–328; Tn. Code § 47-18-1603(b); 9 V.S.A. Chap. 116, §§ 4186, 4187, 4189; Va. Code Ann. § 59.1-557.

[3] Ark. Code § 23-116-104.

[4] 940 Code Mass. Regs. 34.14.

[5] See Ancillary Responsibilities – Fantasy Competitions, Md. Lottery and Gaming (last visited June 29, 2023), https://www.mdgaming.com/ancillary-responsibilities/fantasy-competitions/.

[6] D.C. Act 22-594(c)(17); K.S.A. 21-6403(a)(9), (d); W. Va. Code §29-22D-3(23)(G).

[7] Morrow v. State, 511 P.2d 127, 129 (1973); Hotel Employees & Restaurant Employees Int’l Union v. Davis, 88 Cal.Rptr.2d 56, 981 P.2d 990 (Cal. 1999); Faircloth v. Cent. Fla. Fair, Inc., 202 So.2d 608, 609 (4th Dist. 1967); Ultra Telecom, Inc. v. State, 288 Ga. 65, 70 (2010); Ill. Att’y Gen. Op. 15-006; Commonwealth v. Bowman, 102 S.W.2d 382, 384 (Ct. App. Ky. 1936); City of St. Paul v. Stovall, 30 N.W.2d 638, 643-44 (Sup. Ct. Minn. 1948); Am. Amusements Co. v. Nebraska Dep’t of Revenue, 282 Neb. 908, 807 N.W.2d 492 (2011); Territory v. Davenport, 124 P. 795, 797 (1912); Joker Club, L.L.C. v. Hardin, 183 N.C. App. 92, 97, 643 S.E.2d 626, 629 (2007); N.D. Att’y Gen. Op. 85-7 (1985); Delano v. State, 82 Okla. Crim. 28, 267 (Crim. Ct. App. Okla. Apr. 24, 1946); State v. Coats, 158 Or. 122, 138, 74 P.2d 1102, 1108 (1938); In re Advisory Op. to Gov., 856 A.2d 320, 328 (2004); Tim Waller, Daily Fantasy Sports Betting Still Legal in South Carolina, WYFF4.com, Nov. 17, 2015, http://www.wyff4.com/article/daily-fantasy-sports-betting-still-legal-in-south-carolina/7018422; Bart Pfankuch, State Lawyer Says SD Unable to Regulate Fantasy Sports, Rapid City J., Nov. 19, 2015, http://rapidcityjournal.com/news/local/state-lawyer-says-sd-unable-to-regulate-fantasy-sports/article_c2aae2af-a7ba-5c33-9878-7a614c5643fb.html; Tex. A.G. Opinion No. GA-0926, May 7, 2012; D’Orio v. Startup Candy Co., 71 Utah 410, 266 P. 1037, 1038 (1928); State v. Dahlk, 330 N.W.2d 611, 617 (Wis. 1983); Frat. Ord. of Eagles Sheridan Aerie No. 186, Inc. v. State ex rel. Forwood, 126 P.3d 847, ¶¶ 43-44 (2006).

[8] State v. Prevo, 44 Haw. 686, 675 (Sup. Ct. Haw. 1961).

[9] Idaho Code § 18-3801.

[10] M.C.A. § 23-5-802.

[11] Wash. Rev. Code Ann. § 9.46.240.

Sara Dalsheim

Sara Dalsheim

Sara Dalsheim’s life-long passion for sports and the law fuels her commitment to assisting all players in the sports betting industry, whether in navigating the ever-evolving regulatory and licensing issues inherent in this burgeoning industry or negotiating operations and sponsorship agreements. Sara advises clients throughout the sports betting and gaming ecosystem on how to structure business partnerships that minimize liability and maximize revenues.

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