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Legal Developments

Daily Fantasy Sports Are Legal in Indiana

Indiana became the second state after Virginia to formally legalize and regulate daily fantasy sports on Thursday. Governor Mike Pence signed the bill into law yesterday, which makes Indiana the second state this month to pass legislation concerning daily fantasy sports.

This news serves somewhat as a consolation prize after the major daily fantasy sites had to leave New York state as a part of an agreement with that state’s Attorney General. While FanDuel, DraftKings and the other major sites make do without New York, they can at least breathe a little easier in Indiana.

The Indy Star obtained a statement from DraftKings director of public affairs, Griffin Finan:

“Today, Indiana became yet another state to put in place a thoughtful and appropriate regulatory framework to protect the rights of fantasy players. We thank Governor Pence for his leadership and advocacy and are hopeful that other states across the country will follow Indiana’s lead.”

Senate Bill 339 requires fantasy sports operators, who are defined as persons who are “engaged in the business of professionally conducting paid fantasy sports games for cash prizes for members of the public,” to register with the Paid Fantasy Sports Division and pay a licensing fee of at least $50,000. SB 339 allows the division to increase the fee to as much as $75,000 if necessary to cover the “direct and indirect costs of the operation of the division.”

The bill calls upon the UIGEA-compliant definition of daily fantasy sports contests in its own definition of what constitutes a legal contest:

  • The value of all prizes and awards are made known to participants in advance of the contest
  • All winning outcomes reflect the relative knowledge and skill of the game participants and are determined predominantly by accumulated statistical results of the performance of individuals, including athletes in the case of sporting events
  • No winning outcome is based on the score, point spread or performance of any single team or combination of teams, or solely on any single performance of an individual athlete or player in any single event

The bill also establishes the Fantasy Sports Division within the Indiana Gaming Commission to oversee the licensing and operation of fantasy sports. The division is given the powers and duties necessary to investigate applicants, investigate alleged violations of the law, revoke and suspend or renew licenses and to take any “reasonable or appropriate action to enforce” the law.

Regulations Imposed on Operators

SB 339 looks similar to measures we have seen proposed in other states. The bill, which will go into effect on July 1st, requires operators to verify that all participants are at least 18 years old and prevent employees and relatives of employees from participating in any contest in which the cash prize exceeds $5.

The bill also requires operators to implement procedures to ensure that:

  • Athletes, game officials and other participants in actual sporting events are prohibited from participating in any contest in which the winning outcome is determined by that event
  • The number of paid fantasy sports games a single participant may enter is made known up front and enforced by the operator
  • Operators keep player funds segregated from the operational funds of the operator
  • A cash reserve equal to the total value of deposited player funds is maintained in the form of cash, cash equivalents, an irrevocable letter of credit, a bond or a combination of these sources
  • Operators are audited annually by a CPA
  • No fantasy contests based on high school, college or amateur sporting events are held

Interestingly, the bill also includes a provision that requires operators to withhold the payment of some winnings to customers who are delinquent in child support payments.

Advertising Restrictions

SB 339 also includes restrictions on advertising in mediums that are aimed exclusively at juveniles. Furthermore, operators are not allowed to advertise or run promotional activities at elementary schools, high schools or sporting venues used exclusively by elementary and high schools.

A Different Point of View

As promising as it is to see one more state join the regulatory bandwagon, Seth Young from the Legal Sports Report recently published an interesting article with a different take on regulation. It basically serves as an open letter to the industry and explains that while it is good to see progress in establishing daily fantasy sports as a legitimate industry, Seth Young sees an even better way forward regarding regulation.

One important point that I took from the article regards how barriers to entry impact the industry. Current regulatory measures impose high licensing fees for operators, which do make it more difficult for smaller operators (i.e. anyone outside of FanDuel, DraftKings and maybe Yahoo). Barriers to entry can serve a purpose by keeping small, unscrupulous and fly-by-night operators from entering the market, but they also keep small, legitimate companies from gaining a foothold.

What Young proposes instead is lower licensing costs but imposing greater technical and logistical barriers as a part of the licensing process. For example, rather than simply having operators pony up $50,000 for a license, states could instead require operators to pass technical audits by recognized regulatory regimes. These audits would ensure any would-be operators are able to adequately verify identity, age and location, to provide adequate security measures, properly manage who has access to which information and so on.

Young also advocates for putting more of the burden on operators to contract with financial institutions for managing player funds. Financial institutions could perform their own due diligence on any prospective fantasy sports client and decide for themselves if they feel comfortable entering a business agreement with operators.

Under such a regime, operators would bear the burden of these costs while the state would rely on the recommendations of accredited banks and technical auditors. This would presumably relieve the state of much of the burden and place that burden in the hands of more experienced third parties.

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