Should Sports Betting Fall Under Securities Regulatory Scrutiny?


Sports betting is an activity that originated in ancient times. Back then, people wagered currency, food, or even livestock. Today, we usually wager cash or other securities. Federal government entities never regulated sports betting activities. Originally, there were no rules to govern the use of the funds that were generated from sports betting activities and, as a result, a lot of organized crime ensued. Over the last 40 years, the federal government attempted to regulate sports betting to curtail this increase in organized crime. If you think you have been subjected to securities fraud, you need a New York Securities Fraud Law Firm like Malecki Law to review your portfolio, at no cost.

These governmental attempts to regulate sports betting were often met with the question of whether these efforts overstepped the federal government’s constitutional authority. This question was constantly debated until 1992 when Congress passed the Professional and Amateur Sports Protection Act (PAPSA). This act prohibited the states from sponsoring, operating, advertising, or promoting sports betting schemes. This act also applied, not only to the state level, but to individuals as well. Although Congress put its “foot down” on the issue of regulating sports betting, many states believed that PAPSA was an unconstitutional overreach of Congress’ authority. From 1992-2018, states continued to sponsor initiatives to regulate sports betting within their own jurisdictions. New Jersey was one of the states that were on the front lines of this fight and eventually, won its battle with the federal government.

In 2011, New Jersey’s former Governor, Chris Christie, began New Jersey’s mission to legalize sports betting venues. However, it was not until 2018 when New Jersey ultimately got its wish. In the landmark case, Murphy v. National Collegiate Athletics Association, 138 S. Ct. 1461 (2018), the Supreme Court held that PAPSA was unconstitutional because it enabled Congress to dictate how the states regulated sports betting. In the majority opinion, Justice Alito concluded that the states should decide how to regulate sports betting schemes in their own jurisdictions. This limited the federal government’s authority in regulating sports betting activities. Just months after the Murphy decision, some states passed their own legislation that made it legal to place wagers on live sporting events.

Now, four years later, it is extremely easy and convenient for individuals to place these wagers through online sportsbooks, such as DraftKings, FanDuel and BetMGM. An individual who wishes to place a wager can merely download one of these online sportsbook apps, create an account with that sportsbook, deposit money into that account, and place wagers as he/she pleases. One no longer must go to a horseracing track, an off-track betting venue, or a physical casino to bet on a sporting event.

Online sports betting is a complex operation. Individuals based in Las Vegas called “odds-makers” calculate what’s called the “betting odds” for each upcoming sporting event. They use many factors including but not limited to (1) statistics, (2) historical data, (3) previous outcomes, (4) trends, (5) athlete injuries, (6) weather, or (7) simply a “gut-feeling”. The odds-makers finalize these odds and make them available to the sportsbooks. The sportsbooks then act as an exchange and list these odds on their mobile platforms. The individuals who download the sportsbook apps can view these odds on the apps and anyone aged 21 or over can place wagers based on these odds.

Now, almost five years after the Murphy decision, sports betting is in full swing. A question that may begin to arise is whether sports betting activities such as making and listing these betting odds of a sporting event or even placing a wager could fall under the Securities Exchange Act of 1934’s (the Act’s) definition of a “security”. The Act was created in 1934 in response to the Stock Market Crash of 1929. The purposes of the Act were and still are (1) to govern securities transactions on the secondary market, (2) encourage greater financial transparency, and (3) to minimize fraud and manipulation. Section 3(a)(10) of the Act lists financial instruments that the Securities Exchange Commission (SEC) classifies as securities. One of the financial instruments that Section 3(a)(10) includes in its list is an “investment contract”. For example, if these betting odds on a sporting event are classified as an “investment contract” and therefore fall under the definition of a “security” under the Act, should government agencies, such as the Securities Exchange Commission (SEC), get involved in regulating this activity after all?

Is a Wager on Certain Odds an “Investment Contract,” Thus Giving the SEC Jurisdiction Over Sports Betting Activities? 

The Act states that firms should register their securities with the SEC. Between 1934 and 1946, if an investor wanted to invest his/her money with a firm, the firm would have the investor sign an investment contract. During this time, it was unclear as to whether these investment contracts were “securities” under the Act. As a result, firms were unsure when they needed to register their investment contracts with the SEC. The Supreme Court appeared to resolve this confusion in 1946. In SEC v. W.J. Howey (1946), the Supreme Court established a four-prong test (the Howey Test) to determine whether an investment contract is a “security” under the Act. If an investment contract is a security, then the firm offering that security must register it with the SEC. The four prongs of the Howey Test are (1) the investment of money, (2) in a common enterprise, (3) with an investors’ reasonable expectation of profits, and (4) profits of the investment were derived from the efforts of others. Legal sports betting is a new area of the law, so states are continuing to grapple with how to regulate this new activity properly. Although the states can regulate sports betting on their own, it is unclear whether states should also look to the SEC for guidance on how to regulate and manage sports betting activities. The Howey decision could shed some light on whether states should consider looking to the SEC for guidance when reviewing these activities. You should consult with a New York Securities Fraud Attorney if you were sold unregistered securities. The attorneys at Malecki Law can review your securities at no cost.

     Is the wager itself an “investment of money”?

First, a wager on a sporting event is an “investment of money” because individuals deposit money into an account that they open at the sportsbook just like he/she would at a brokerage firm. To make a sports wager online, an individual opens the app to a particular sportsbook, creates an account (usually for free), and then funds the account. He/she can either use his/her debit card or make a bank transfer to move funds into the sportsbook account for the purpose of placing wagers. Likewise, at a brokerage firm, an investor holds an account at the firm that he/she can move money into that account for purposes of trading.

Next, the sportsbook holds the individual’s money and then allocates that money accordingly after an individual chooses to place a wager on a certain sporting event. The individual hopes that the team he/she picked wins and his/her “bet” increases in value. Similarly, at a brokerage firm, the firm allocates the investor’s money accordingly after the investor selects a financial instrument and hopes that the instrument increases in value. Even though sportsbooks and brokerage firms offer significantly different products, both entities still operate in a similar manner in the Howey context. Either way, an individual is putting his/her own money “on the line” when participating in both sports betting and trading.

     Is a wager a common enterprise?

Second, a wager on a sporting event is a common enterprise because the sportsbook has this money pooled together from different individuals and holds all these funds until the result of the sporting event is revealed. When someone logs into a sportsbook app, he/she can select any sports league. Then, the app loads the upcoming games under that league along with the betting lines and odds for each game. For example, if someone clicks on National Football League (NFL) games, the app will provide a list of all the NFL games for the upcoming Sunday. Each game will have the odds and other bets that someone can place on the sportsbook’s mobile platform. Anyone can view this information on the app and place a bet using his/her smartphone or any other mobile device. For example, if the New York Football Giants are playing the Dallas Cowboys, sportsbooks can have someone in New Jersey bet $100 on the Giants to beat the Cowboys. Sportsbooks can have someone in Colorado also bet $100 on the Giants to beat the Cowboys. The $100 from the New Jersey resident and the $100 from the Colorado resident are “pooled together” on the Sportsbook’s platform because both bets were on the same game. Since anyone with a mobile device can view these online sportsbooks and bet on the same games, no matter where they are in the United States, then a wager on a game could constitute a “common enterprise” under the Howey test.

     Do sports bettors reasonably expect profits? 

The third Howey prong is likely the most difficult to satisfy in the sports betting context. Sportsbooks are smart to publicly disclose that every wager involves the risk of loss. The sportsbook technically makes no promise of profits and the individual placing the wager understands that he/she may not get the desired outcome and lose money. However, there are a few ways in which one can argue that sportsbooks do lead the bettor to reasonably expect profits.

First, the individual bettor may reasonably expect profits if he/she participates in the sportsbook’s various amounts of promotions. For example, some bigger name sportsbooks advertise a “free promotion” bet. This is how a “free promotion” bet works. If an individual places a wager, usually modest in amount ($10-25 depending on the sportsbook’s policy), the sportsbook guarantees to cover the bet if the individual loses the bet. For example, if I bet $10 on the Giants to beat the Cowboys but, instead, the Cowboys beat the Giants, then in theory, I lost the bet. Even though I lost the bet, the Sportsbook will cover my $10 losing wager. Instead of giving me back the $10 cash, the Sportsbook provides a credit to my sportsbook account. In other words, the Sportsbook deposits that $10 that I “lost” back into my sportsbook account. If I bet $10 again and lose, then I officially lost the $10. One may consider this promotion as a “reasonable expectation of profits” because the sportsbook is risking $10 of its own money when it provides this credit in hopes that the bettor risks the $10 again. Some bettors could view this “free promotion” bet as their “lucky day” and they decide to place more bets in hopes of making more money.

Another argument is that whether a sports bettor reasonably expects profits depends on how the sportsbook represents these types of “free promotion bets.” In SEC v. Thomas (2019), the SEC charged two individuals and six entities with securities fraud. Here, the respondents, Thomas, and Becker, ran a sports betting scheme and represented on the investor forms that the investment would make 500% to 1200% in profits (Complaint pages 5-6). Investors read this and heavily relied on this representation when deciding whether to hand their money to Mr. Thomas and Mr. Becker. Sportsbooks must remain careful and vigilant on how they represent, not only the free promotion bets, but any promotions. Although outcomes of sporting events are truly out of both the sportsbook’s control and the sportsbook could find itself in trouble if it represents “possible profits” in a matter that was demonstrated in Thomas.

Lastly, and perhaps, the most intriguing argument is that the odds-makers lead the bettors to reasonably expect profits from merely setting the odds. The odds-makers set the odds that dictate the market. In other words, the sportsbooks display the odds that the odds-makers in Las Vegas calculated. Essentially, the sportsbooks act as exchanges while the odds-makers dictate the prices. Here is an example. Suppose the Giants are playing the Cowboys. In this hypothetical season, the Giants already have ten wins and no losses (10-0), and the Cowboys have no wins and ten losses (0-10). The odds-makers do their calculations and conclude that the Giants are favored to win the game by four points (-4.5. This means that, to win the Giants must win the game by 5 or more points OR the Cowboys must either win the game or lost by no more than 4 points). Since the bettors may conclude that the Giants have the best chance of winning based on these odds, they may expect to profit easily if they bet on the Giants. If the odds-makers concluded that the Cowboys were the favorite to win the game, bettors may not expect profits if they bet on the Cowboys because the Cowboys are 0-10 and the Giants are 10-0.

     Are these “profits” derived from the efforts of others?

The fourth prong of the Howey Test, whether the profits were derived from the efforts of others, is also up for debate. Another way that this prong is commonly understood is whether the enterprise used a third party to promote the offering. In Howey, the Court distinguished “passive investors” versus “active investors.” The Howey court concluded that the investors in the Howey scheme were passive investors because the investors lacked active control of their investment. In a sports betting context, there are a few ways in which the bettor’s profits are derived from the efforts of others.

First, it is common knowledge that anyone who places a sports bet makes a profit when the team he/she picks wins. When a team wins a game, it means that the athletes on the winning team outperformed the athletes on the losing team on a given day. An athlete’s performance is derived from that athlete’s own efforts. To perform well, an athlete must train on off-days, prepare before the game, and execute the game plan during the sporting event. The athlete puts forth a lot of effort when he/she performs the activities that are necessary to help his/her team win the game. This is clearly the strongest argument that profits from placing wagers are derived from the efforts of others. Even further, the person placing the wager is “a passive investor” because he/she does not affect the athlete’s performance in any way, shape, or form. He/she is merely a fan who roots for his/her team and has no bearing on the outcome of the game. More simply, the outcome of the game is out of the fan’s control. The person placing the wager can make a profit from athletes performing well and he/she did nothing more than place a bet on a mobile application.

Next, the odds-makers play a role in whether the bettor makes a profit. The odds for a given sporting event are another factor that determines how much profit that a bettor could potentially receive from winning a sports bet. The bettor has no impact on how these odds are calculated. The odds are calculated from the efforts of the odds-makers in Vegas. The odds-makers use their complicated statistical models. If your broker or advisor recommended you to engage in sports betting, when you expected to remain conservative, you need to consult with a Securities Fraud Lawyer in New York. Malecki Law’s lawyers are well skilled in the securities fraud space and are willing to have a free consultation with you.

Lastly, sportsbooks use third party media outlets to promote its product. For example, most people have seen commercials for these sportsbooks. These commercials offer its services and platforms to promote the placing of wagers on the sportsbook’s mobile platform(s). These commercials appear on the television networks where individuals can watch his/her desired games. For example, the New York Rangers broadcast their games on MSG Network. While a Ranger game is in a commercial break, the famous sportsbook, FanDuel, will advertise its mobile betting platform and its promotions on MSG network so that the viewers of the Ranger game can place a wager on the game through FanDuel. Here, one can argue that FanDuel is using MSG Network to advertise, and thus promote, its product. FanDuel is paying MSG a substantial amount of money to release these advertisements in hopes that it increases FanDuel’s profits. The second way in which the profits are derived from the efforts of others is through an activity called gamification. Gamification is the act of making the platform more visually appealing to attract new users. If a sportsbook had its app with nothing but numbers and betting lingo, novice gamblers will not place use the site to place wagers. These web designers must make their platforms as eye friendly as possible or else they will not get the desired business. This task is not as easy as it sounds. Software developers and computer programmers put a lot of time into making an app as user friendly and visually appealing as possible. The more time that is spent gamifying the app, the more likely the app is visually appealing and will thus, attract new consumers. In this case, gamification could lead to an increase in new wagers and thus new profits.


Even though there is no substantive legal opinion that answers the question of whether sports betting activities fit under the Howey definition of a “security,” more could come soon as sports betting continues to grow across the United States. We have only scratched the surface of how this area of the law could evolve to include the new activity of legalized sports betting. This blog illustrates how the SEC could view sports betting activities as “securities” under common law jurisprudence. I believe that the arguments supporting this view are quite strong. Even though sports betting is an activity that the states regulate, only time will tell if the SEC view these wagers as “securities” and begin to assist states in regulating sports betting. If you believe you fell victim to securities fraud, you need a New York Securities Fraud Law Firm like Malecki Law to analyze and assess your situation.


Contributions by Jonathan Owens, NYLS Securities Arbitration Seminar and Field Placement Extern

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