As a multi-state hailstorm of regulatory bad news and class action fury engulfs daily fantasy sports companies, are there cautions other enterprises in the sharing economy can take from the tale? Sure.
First, the tale so far:
DraftKings raises $300 million. Its investors now include Google, FOX, Time Warner and Major League Baseball.
FanDuel raises $275 million. Its investors now include Time Warner, NBC, Google and Comcast.
During the first week of the NFL season, DraftKings and FanDuel spend more than $27 million on about 8000 television ads.
The New York Attorney General orders FanDuel and DraftKings to cease operations in New York because their activities constitute illegal gambling under state law.
One week later, the New York Attorney General files a lawsuit seeking an injunction to prohibit FanDuel and DraftKings from operating in New York. New York is reportedly the DFS industry’s largest market.
The Massachusetts Attorney General proposes regulations for DFS companies operating in Massachusetts.
The Illinois Attorney General announces that DFS constitutes gambling under Illinois law.
Jay Caspian Kang argues in a New York Times Magazine piece that the betting economy created by FanDuel and DraftKings is "highly unstable and corrupt."
The New York Attorney General files an amended complaint that seeks an order requiring FanDuel and DraftKings to give back the hundreds of millions of dollars they have made in the state and pay a stiff penalty for running what he argues are illegal gambling operations.
As for the cautions that other sharing economy enterprises can take from this tale:
More than one potential regulator may have jurisdiction over the enterprise’s activities, and the viewpoints of those potential regulators will not necessarily be identical.
If consumers can exploit the enterprise to the detriment of other consumers, chances increase for significant regulation, and possibly prohibition.
Investors and the Board are wise to consider in advance the worst-case regulatory scenario, as well as what basis, if any, on which the enterprise can continue under those circumstances.
To unprepared investors and directors, regulation will appear to arrive with the flip of a switch.
Consideration of the worst-case scenario should be realistic. E.g., notwithstanding the provisions of the UIGEA, one would think that Google, Time Warner, NBC, DraftKings, FanDuel et al. knew when they embarked on this endeavor--given that DFS is at least a cousin of gambling and was prohibited in five states--that multiple battles over significant regulation and perhaps prohibition could arise.
Copyright 2016 by William Devine. All rights reserved worldwide.
Return to WilliamDevineEsquire.