As some companies in the so-called “predictions market” have begun to offer event futures contracts on sporting events, including the most recent Super Bowl, many observers are questioning whether these offerings are really just another type of online sports betting—albeit without the usual licensing requirements and regulatory constraints that otherwise apply to that industry. While traditional online sports betting has been available to only those customers who are physically present in states that have legalized the activity and have licensed the operators, these new futures contracts are offered nationwide and are not licensed or regulated by the states. This activity likely implicates federal gambling laws and has drawn the attention of at least one state gaming regulator.
This client alert briefly explains what an event contract is, how they have been regulated and what future issues may be implicated by the recent expansion of such contracts into sporting events.
Background
Event contracts are a type of derivative contract that allows participants to speculate on the outcome of a specified event. Event contract prices are based upon the current probability that an event will occur and the contract specifies the values to be paid on the contract. Event contracts expire on a specified date and can be purchased or sold at any time before that date. For example, a farmer may purchase an event contract predicting that a storm will impact the area to hedge the investment. If the storm does not hit, the farmer will collect on his normal crop revenue. If the storm does hit, the farmer can offset the loss of crop revenue with the earnings from the event contract. These types of products have existed for some time and are regulated under the federal Commodity Exchange Act (“CEA”). By special rule, the CEA authorizes the Commodities Futures Trading Commission (“CFTC”) to review, and prohibit, certain types of events contracts that it determines are contrary to the public interest. The types of events contracts that fall into this category include those involving specific activities, including “activity that is unlawful under any Federal or State law” and “gaming.”
Prior to the 2024 presidential election, several companies in this space sought approval from the CFTC to offer elections-based contracts, that is, contracts involving the prediction of the outcome of elections. The CFTC rejected the idea, deciding in a 3-2 vote that political event contracts involve both gaming and unlawful activity and are, therefore, prohibited. One affected company, Kalshi, then filed a lawsuit against the CFTC arguing that only event contracts that involve “games” constitute “gaming” and since political events do not involve a game, or unlawful activity, they could not be prohibited. The district court agreed with Kalshi and the CFTC has appealed. The D.C. Circuit Court of Appeals heard argument on Feb. 17, 2025, and a decision is forthcoming.
Interestingly, in its argument to the appellate court, Kalshi sought to support its position by distinguishing political events from games and, in fact, acknowledging that event contracts related to the Kentucky Derby, the Super Bowl and the Masters golf tournament would all be considered games and, therefore, could be subject to CFTC review, but that political event contracts could not be. Nevertheless, just days after taking this position in court, Kalshi announced it would offer sports-based event contracts including on the NFL playoffs. Other companies did the same, although at least one pulled back after the CFTC formally requested that it do so.
Although the ongoing Kalshi-CFTC case is about elections-based contracts, not ones involving sporting events, the case’s outcome (including any dicta relating to the sports examples) could be relevant to the future status of sports-based events contracts. However, even a favorable ruling from the court will not necessarily clear the way for Kalshi or similar companies to offer sports-based event contracts. This is because of the potential application of two federal laws, the Wire Act and the Illegal Gambling Business Act, both of which could apply to event contracts concerning sports.
The Wire Act
The Wire Act (18 U.S.C. Section 1084(a)), signed into law in 1961, prohibits the use of wire communications facilities to place, facilitate or transfer money earned from bets internationally or between U.S. states. The Wire Act contains limited safe harbors that exempt transmissions of information for use in news reporting of sporting events or contests, and information assisting in the placing of bets or wagers (but not bets or wagers themselves) from a jurisdiction where such betting is legal to another jurisdiction where such betting is also legal. The Wire Act states:
Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.
Clearly, the use of interstate facilities (including the internet) to offer bets or wagers on sporting events is prohibited. It is also clear that the internet is used by events contracts trading platforms. The relevant question then is whether the purchase of a contract involving the outcome of a sporting event is a bet or wager.
While the Wire Act itself does not define “bet” or “wager,” another federal gambling statute does. The Unlawful Internet Gambling Enforcement Act (“UIGEA”), while explicitly not applicable to activities regulated by the CEA, nevertheless offers a definition of “bet or wager” that may be useful in this context. UIGEA defines “bet or wager” as:
The staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.
This definition is consistent with the plain meaning of the term “wager” which, according to The Merriam Webster Dictionary, means “something (such as a sum of money) risked on an uncertain event.” Black’s Law Dictionary Fifth Edition defines wager as “a contract by which two or more parties agree that a certain sum of money or other thing shall be paid or delivered to one of them ... on the happening of an uncertain event or upon the ascertainment of a fact in dispute ... .” Therefore, if events contracts can be said to involve the staking of something of value where a certain sum of money shall be paid or delivered to one of them upon the outcome of a sporting event, it seems likely that such conduct is betting or wagering. And if the wires (the internet) are used to facilitate such activity, the Wire Act would seem to be implicated.
The Illegal Gambling Business Act
The Illegal Gambling Business (“IGBA”)(18 U.S.C. 1955) effectively transforms a violation of state gambling law into a violation of federal law if two additional conditions are met. This law, which was included in the 1970 Organized Crime Control Act (which also included the Racketeer Influenced and Corrupt Organizations (“RICO”) Act), identifies an illegal gambling business as any business that meets the following criteria:
- The business violates the laws of the state or political subdivision where it’s located;
- The business involves at leastfive people who finance, own, or conduct the business; and
- The business operates for at least 30 consecutive days and generates gross revenue of at least $2,000 on any of those days.
Simply put, even if the Wire Act does not cover sports gambling via online event contracts trading platforms, IGBA might. If online prediction markets’ sports offerings violate the laws of any state—especially states with expansive gambling regulatory regimes—those state violations may also be a violation of federal law under IGBA.
State Regulatory Scrutiny
At least one state—Nevada, one of the leading jurisdictions for gaming regulation—has already taken action to address event-based contracts on both sporting events and elections. In a March 4 cease and desist order, the Nevada Gaming Control Board (“NGCB”) notified Kalshi that offering such products is unlawful under state law, unless approved as licensed gaming by the Nevada Gaming Commission. The NGCB order details several Nevada laws and regulations that Kalshi’s offerings violate and advises the company that such conduct could result in criminal charges. With respect to event-based contracts concerning the outcome of elections, the order affirms that even licensed sports betting operations in Nevada are prohibited from accepting wagers on such activity and advises Kalshi that its actions are in direct violation of the state’s public policy. The order instructs the company to cease all such activity within Nevada by 5 p.m. on March 14, 2025.
Future Implications
If event contracts predicting the outcome of events like the Super Bowl or the Kentucky Derby or Masters do relate to “gaming,” as suggested by Kalshi itself in the CFTC litigation, it would stand to reason that trading event contracts on the outcome of sporting events is no different than betting or wagering on such outcomes. If that is true, and Nevada regulators clearly believe that it is, then both the Wire Act and IGBA may well be implicated. This could lead to federal scrutiny beyond what the CFTC may or may not do going forward, potentially leading to DOJ review, focused on what looks like interstate sports betting that is both unlicensed and unregulated by the states. In other words, precisely the type of activity the Wire Act and IGBA were intended to prohibit.
This document is intended to provide you with general information regarding federal and state policies impacting sports prediction markets. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.