The Securities and Exchange Commission (“SEC”) recently settled two lawsuits against sports betting funds which the agency accused of violating the Securities Act. The settlement culminates a nearly two-year investigation, and the first known prosecution of a sports betting fund since Nevada legalized such pooled wagering.
What were the nature of the SEC’s allegations against the sports betting funds?
Organized pursuant to a 2015 Nevada statute, sports betting funds were introduced for the purpose of allowing entities to pool resources, including resources from individuals located in jurisdictions outside of Nevada, for the purpose of placing sports wagers in the State. Though ostensibly in compliance with the Nevada gambling statute, according to the SEC, the entities, nevertheless, allegedly ran afoul of federal securities law by not filing a registration statement or obtaining an exemption. Readers will recall our blog at the time the Nevada law was enacted cautioning that such sports betting funds were likely to draw the attention of federal authorities. Each of the SEC’s complaints make clear that the agency views such sports betting funds much in the same way that it does mutual funds. For example, in the subject lawsuits, the SEC alleged that the funds collected performance fees from returns generated from the sports wagers and then proportionately distributed the remainder to the contributing individuals pro rata, based upon the amount of their respective contributions. Consequently, the SEC determined that the sports betting funds were, in effect, offering securities to the contributors requiring registration as investment contracts pursuant to the Securities Act.
What does the Future Hold for Sports Gambling?
We expect that innovative legal sports gambling products, such as the statutorily-created betting funds in Nevada, will continue to come to market in the coming months, particularly so long as Congress does not enact restrictions that would prohibit such offerings. Until such time, the SEC’s pursuit of sports betting funds in Nevada is an apt reminder to those operating in this space that compliance with federal law implicated by sports gambling activity, such as the Wire Act, must be strictly adhered to even in states where such activity would otherwise be legal. As always, it is critical that those interested in entering this space work closely with knowledgeable gaming lawyers to review all aspects of their prospective licensing applications and associated offerings.