Recently I’ve been seeing the company Draft Kings adverting all over the place. Draft Kings is a fantasy sports website which lets users bet real money on fantasy teams. A recent television ad features young and exuberant Draft King users winning one million dollars. The ad was complete with a larger than life check trumpeting the user’s spoils. I can also report that Draft kings has made its presence known at Yankee Stadium with huge signs for all fans to see. But how could Internet gambling on fantasy sports be legal when general sports betting is illegal in most states?

Apparently, the Draft Kings business model is legal. In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act that establishes fantasy sports as a “game of skill” and not a “game of chance.” The distinction seems thin: in fantasy sports, users create their own teams based on real-life athletes. The outcome of the game is determined by how each player performs. In regular sports gambling, on the other hand, bets are made on the outcome of overall games. This is enough to make Draft Kings a “game of skill” rather than a “game of chance.”

The rising popularity of fantasy sports gambling has not gone unnoticed. Recently, Disney decided to bet on Draft Kings with an investment totaling $250 million. With that, it was reported that Draft Kings was valued near $900 million. Interestingly, Draft Kings “agreed to spend more than $500 million on advertising with ESPN, Disney’s 24-hour sports network” in return, which certainly explains one thing: why I’ve been seeing so much of the company.

As an afterthought, I’m considering whether or not paying money into Draft Kings could be seen as a security within the Federal Securities Law. Their promotional material does suggest large returns are within reach. However, the familiar Howey test is probably not met: the “solely through the efforts of others prong” is likely not satisfied.

 

Joshua Sureck

 

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