DFS Legislative Development Summary: Clarification of Legal Status Opens Doors for Daily Contests, but Regulations Set Roadblocks for Smaller Operators
May 28, 2016 | By Caroline R. Fabacher
With opinions from attorney generals and legislative developments arriving daily, staying on top of the shifting legal environments of every state can be a chore for any fantasy sports operator. But when you’re trying to get your fantasy sports startup off the ground, keeping track of so much movement in so many places can be downright overwhelming. At Vela Wood, we sift through the noise and boil it down to the essentials, so you can get the information you need and spend your time growing your business.
Here are the most important recent developments in Virginia, Indiana, Tennessee, Mississippi, Colorado, and Missouri:
Instant Replay: DFS all-stars are cleared to play in Virginia, but the high costs of registration have rookies sidelined.
Game Recap: In March, Virginia passed and signed the “Fantasy Contests Act,”, which provides for the registration and regulation of DFS operators. The Act includes several measures aimed at consumer protection, largely in response to last year’s industry scandal involving allegations of improper use of information by insiders at DraftKings. Additionally, the state will require DFS operators to pay a one-time $50,000 registration fee. The high registration fee has drawn strong criticism, with many arguing that the exorbitant fee will push smaller operators and startups in the industry out of the state, thereby reducing industry competition to the ultimate detriment of consumers. Advocates for four DFS operators have called for the fee be replaced with “a flat tax for all fantasy providers (daily or full-season) based on a share of collected revenues,” as well as a “small business exemption” which would allow operators with fewer than 2,000 Virginia customers to forgo the licensing fee. However, as the law currently stands, many smaller DFS operators have backed out of Virginia for the foreseeable future.
Instant Replay: DFS all-stars are cleared to play in Indiana, but the high costs of registration and other compliance requirements have rookies sidelined.
Game Recap: Indiana joined Virginia in March, when Gov. Mike Pence signed S-339. The Indiana law imposes many of the same requirements as the Virginia law, including a one-time $50,000 registration fee. Additionally, the act allows the state gaming board to raise the fee as high as $75,000, as well as require a $5,000 yearly license renewal fee. DFS operators in Indiana will also be required to bear the cost of a compliance investigation conducted every three years, as well as a yearly third-party audit of the contests. The law goes into effect on July 1.
Instant Replay: DFS all-stars are cleared to play in Tennessee, and yet-to-be-set application and licensing fees have rookies unsure of their positions.
Game Recap: Passed in April, the Tennessee law has drawn some criticisms similar to those of the Virginia and Indiana laws. Tennessee contains many of the same consumer protection measures seen in Virginia and Indiana, but goes one step further by regulating DFS advertising, requiring ads to provide “information concerning assistance available to problem gamblers.” In contrast to Virginia and Indiana, the Tennessee law was better received, as it dispenses with the hefty registration fee imposed in other states in favor of a 6% tax on the revenue derived from Tennessee residents. However, DFS operators shouldn’t exhale a sigh of relief just yet – the bill requires the state to set six different fees, including an application fee, licensing fee, license renewal fee. The law goes into effect on July 1.
Instant Replay: DFS all-stars and rookies alike are cleared to play in Mississippi, but they’ve got a 1-year contract.
Game Recap: After a negative opinion by the Attorney General in January, DFS operators largely exited the state. However, as of May 13, a new law has reopened the doors for DFS operators, at least through July 1, 2017. Mississippi’s law is among the more startup-friendly versions of recently passed state laws, requiring no licensing fee for operators of any size. However, because the law repeals itself next year on July 1, 2017, as well as provides for a “Fantasy Contest Task Force” to conduct a comprehensive review of fantasy sports contests and recommend proper oversight and regulation, this development is more of a placeholder. Although the renewed availability of Mississippi is good news for DFS operators, it is temporary; operators must watch for legislative developments next year.
Instant Replay: DFS all-stars are cleared to play in Colorado, and rookies have a chance to shine too.
Game Recap: In May, Colorado followed suit, passing its own bill. Though similar other states, Colorado is the first to specifically address smaller daily fantasy operators; it defines “small operators” as any site that has fewer than 7,500 Colorado users and exempts these companies from paying licensing fees. Although still required to register in the state, small operators are also exempt from yearly audits. Govenor Hickenlooper signed the bill into law on June 10.
Instant Replay: DFS all-stars are cleared to play in Missouri; the field has more room for rookies than Virginia or Indiana but some are still riding the bench for the foreseeable future.
Game Recap: Like other states, the law exempts DFS from gambling law and implements several consumer protection measures. Although the law lacks the hefty $50,000 registration fee seen in Virginia and Indiana, it instead requires an annual licensing fee of $10,000 or 10% of net revenue derived from the state, whichever is lesser. Additionally, the law requires an 11.5% tax on net revenue, as well as an annual audit. While the less of $10,000 or 10% of net revenue from state players is clearly a more reasonable hurdle for small operators than $50,000, its annual payment in conjunction with the tax on net revenue is seen as an insurmountable hurdle by most small operators. “We appreciate that the legislature wants to address this issue but this bill will kill us,” said small business owner and co-founder of the SBFSTA Alex Kaganovsky. Govenor Nixon signed the bill into law on June 10.
Ones to Watch
As more states move to pass DFS legislation prior to summer adjournments, more updates for small providers are sure to come. Bills have passed at least one house in Minnesota and California, and have made it out of committee hearings in New Jersey and Illinois. While the developments reflect positive shift toward legalization overall, it remains to be seen how smaller operators fair with such high barriers to entry in some states.
Posted in Fantasy Sports
Caroline is an associate at Vela Wood. She focuses her practice in the areas of entity formation, capital raises, corporate governance, and daily fantasy sports regulations. You can see Caroline’s attorney profile HERE.