Fantasy Sports Legislation Overview and Background

As you may be aware, the fantasy football landscape has changed drastically over the past few years with the introduction of “Daily Fantasy Sports” (aka DFS) by companies such as DraftKings and FanDuel. The last year in particular has been especially drastic because of proposed legislation that various states have introduced in 2016, or plan to introduce in 2017. Because of these regulatory developments, we had to make changes in the MFL10s Terms of Service such that residents of certain states can no longer participate in MFL10s, at least for the time being. To be clear, this is not a development that we are happy about, and our long term goal is to be able to offer participation in MFL10s to all individuals, but as you’ll see below, our hands are tied for residents of some states for the short term.

List of States with Regulations

Background

When we launched the first MFL10s leagues way back in 2012, there wasn’t really any type of legislation in place to regulate fantasy sports, other than the Unlawful Internet Gambling Enforcement Act of 2006, (the UIGEA), which most companies viewed as a broadly based piece of legislation that allowed fantasy sports based cash games and contests to operate legally from a federal level. When the language in the UIGEA was written, there was no such thing as Daily Fantasy Sports at the time, so the concept of entering multiple games or contests on a daily basis, and getting paid prize money on the same day or the next day was never even contemplated. The only fantasy sports that existed back then were Traditional Season Long games, where drafts took place in the preseason, and then prizes were paid many months later.

Daily versus Season Long

All of that changed with the introduction of DFS. Suddenly, participants could pay an entry fee in the morning and get paid prizes the same night. In addition, users could enter dozens or even hundreds of games at once, so a lot more activity could take place in a very short period of time compared to traditional season long fantasy games. As a result of this new development, the industry landscape shifted somewhat, with more of an emphasis on daily results compared to season long results. This resulted in some “high volume” players (sometimes referred to as “whales” or “sharks”) gaining an advantage over the “average” player (sometimes referred to as “minnows”) by leveraging their volume of entries to produce better results. All of this led to the current environment, where it has been reported that 1.3% of the players in DFS games are making 91% of the profits.

The Scandal (Insider Information)

In the fall of 2015, everything changed overnight when an employee of one of the DFS sites (DraftKings) inadvertently posted lineup information about that day’s contests before it was supposed to be revealed to the general public. Later that day, that same employee won a $350,000 prize in a game hosted by a rival DFS site (FanDuel). Was this a case of insider information being used to an advantage? The employee could have been using the information about players and lineups that he had access to before anybody else in order to gain an unfair advantage and win similar contests on other sites. Even if that wasn’t the case, it did not look good to anybody looking in at the situation from the outside. You can read all the gory details about that “scandal” here if you are interested in the full story.  The article concludes with this statement: Now, government agencies and lawmakers in various states are reviewing whether daily fantasy sports contests constitute illegal gambling or not.

Regulation

The above scandal led to the immediate investigation of DFS specifically, and fantasy sports in general, by the New York Attorney General as well as various other officials. To make a long story short, it started a chain reaction of investigations, as well as legal opinions from various State Attorneys General and legislators.  Unfortunately, this legal review was not limited to DFS contests and games. Over the past year, it has been expanded to include traditional season long contests and games as well.  And that’s how we ended up in our current situation with having to limit participation in certain states.  The end result is what we are facing today — a much more regulated industry, with a wide range of laws and opinions that vary widely among different states.

Consumer Protection or Licensing Fees?

Another unfortunate development is the way that certain states are approaching the issue of regulation.  Some states are focusing on consumer protection, while others are focusing on the licensing fees and taxation aspects of regulation, presumably with the goal of generating significant revenue for their states that can then be used for providing various governmental services.  Alas, some of the states have gone completely overboard on their licensing requirements.  For example, Indiana and Virginia have imposed a $50,000 licensing fee for any fantasy sports company that wants to operate in their state and offer games or contest leagues.  They have visions of dozens or even hundreds of companies becoming licensed in their state, which would raise millions of dollars for them.  The reality of the situation, though, is that only a few companies (FanDuel, DaftKings, and perhaps Yahoo and one or two others) will actually be able to afford the steep licensing fees, so when all is said and done, these states will only generate between $100,000 and $250,000. At the same time, their new legislation will have the very chilling side effect of driving all of the other fantasy sports companies away, so that residents of their state can no longer participate in the fantasy football games they love and have played for years, such as MFL10s leagues.  We just don’t generate enough revenue, let alone profit, in those states to be able to justify the prohibitively high licensing costs.  Some states are currently proposing fees as high as $500,000 in order to become licensed — yes that’s half a million, which doesn’t make any sense!

Burdensome Compliance Requirements

The negative impact doesn’t stop with the licensing fees.  Many states are also imposing very burdensome regulations such as expensive annual compliance audits, or expensive technology such as geo-location and age identification, as well as financial hurdles like requiring security bonds in the same amount as entry fees, meaning that companies would have to maintain a reserve fund with double the amount of entry fees collected. Rules like this might make sense for DFS companies, but they don’t make any sense for season long companies like MFL. Other proposals include limiting entry fees on a monthly basis and identifying high volume daily players and allowing low-volume players to avoid having to play against the grinders (again, these types of things may apply to DFS companies, but they don’t make any sense for season long companies).  The bottom line is that some states have put too many barriers in place for companies like MFL to be able to do business there, and until those laws are repealed or updated, we will have to exclude residents of those states from participating in our MFL10s leagues.  But there is still hope for some states, and we will be applying for licenses wherever financially possible.

More to Come

We will follow-up throughout the month of March with details about each state and information about how you can help the situation by Contacting your Representatives to let them know that you want to keep playing MFL10s and similar fantasy games in your state. Stay tuned for more information. [Update: check out our State Summary page]

Resources

In the meantime, be sure to check our Legislation Resources page for some information that you can study if you want to become more aware of the issues.  In particular, we encourage you to help at a grassroots level by donating funds to the SBFSTA, which they will use for lobbying efforts to keep fantasy sports legal and accessible in every state.

Fantasy Sports Legislation Main Page