News & Events

What You Need to Know About Online Sports Betting

Over the past few years the sports betting industry has completely transformed due to the ability to wager in multiple states and, in some of those states, wager online. Historically, Nevada was the only state to have legal sports books regulated by the Nevada Gaming Control Board and the Nevada Gaming Commission. Only a handful of other states had minor sports lotteries and sports betting frameworks. This was due to the Professional and Amateur Sports Protection Act of 1992 (PASPA), which had grandfathered existing sports betting offerings and prohibited new states from adding such offerings. PASPA was overturned by the U.S. Supreme Court in 2018, which paved the way for this new expansion of sports betting that includes legal online sports betting. Since then, states have raced to place their bets on the business of sports betting.

This growth has been astounding and happened very quickly.  In this process, many legal questions arise from how to establish an online sportsbook and obtaining the requisite licenses to partnerships with local sports teams, marketing firms and suppliers. Experienced legal counsel can help gaming companies identify the relevant issues and avoid potential pitfalls.

Online Sports Betting Market Regulations

Nearly every state that allows online sports betting has a brick and mortar requirement to allow an online offering in that state. Online offerings are known as skins.  The one exception so far is Tennessee[1], which passed a sports betting law creating the sole online-only model in the United States. This effectively means there are a limited number of licenses and/or skins available to become a legal online sports betting operation, and in all states except Tennessee, this starts with a legal licensed brick and mortar casino.  Some states allow one online skin per brick and mortar license, other states allow two or more. In addition, due to the Federal Wire Act each state’s online operations are required to be confined to and geofenced so the activity only takes place within the boundaries of each specific state.

The first step starts with a legal brick and mortar casino property, which must have a license to operate at the physical location. In Colorado, for example, this is called a retail license and casinos there are regulated by the Colorado Division of Gaming and the Colorado Limited Gaming Control Commission. Once a casino has a retail license, it must then acquire a master license to allow it to offer sports betting. Once a master license is received, the casino has the option to set up a retail or online sportsbook, or both. The casino can operate these on their own or enter into a contract with a third party to operate the retail and/or online sportsbooks

Many U.S. casinos companies lack the online experience necessary for efficient online sports betting. This is where online operators most often come into play, as casinos can also contract with another entity to manage its online sports betting. This designation in Colorado is called an internet sports betting operator, which also requires a license of the same level of investigatory scrutiny as a retail license. A party that would operate the retail only would be a sports betting operator in Colorado.

Online Betting Considerations

For online sports betting entities, the primary hurdles are licensing and contracting. There are other legal considerations to be aware of once those steps are completed, though. State gaming regulators need a full understanding of the parties involved with the full online product. As such, platform providers and other vendors that a licensed internet sports betting company would contract with also need to be licensed.

In Colorado, to continue a specific state example, they designate two levels of vendor licensing: vendor major or vendor minor. A vendor major license is required for a company that provides a sports betting platform or shares in percentage sports betting revenue. The licensing standard is the same vigor as that for a retail license. A vendor minor license is required for other vendors (geolocation, data server landlords, marketing partners) and this process is more akin to a registration. The point is that the regulators need to have jurisdiction over every aspect of a licensed online sportsbook.

Online gaming operators also need to be cognizant of where and how they take wagers. The Federal Wire Act prohibits the placing of wagers across state lines. This means entities must align their operations accordingly, placing a data server in each state where they operate to handle wagers exclusively for operations in that state. Wagers can only be made when a patron is present in the state in question, and such wagers need to be processed by the data server located within the same state—the state in which the entity holds a license to operate. This effectively means duplication of resources for multi-state sports betting operators (multiple data servers in multiple states), but unless the Federal Wire Act is amended there is no alternative.

Marketing and promotions also present legal considerations. Once a company begins online sports betting, some seek sponsorship agreements with professional sports teams. A contract with a team to be its official sports betting partner can be a good way for online gambling companies to attract patrons. There also have been marketing agreements with restaurant chains and other companies that would help an online operator develop a clientele.

Aside from the legal considerations surrounding a sponsorship agreement, companies must also adhere to state regulations surrounding specific bets related to local teams. For instance, some states do not allow residents to place bets on college teams within that state. In other cases, ownership of casinos and sports teams can impact betting. If a person owns a casino and also has an ownership stake in a sports team, oftentimes the associated casino’s sportsbook cannot take wagers on that team. This could be due to a regulation or it may be due to a company policy at the casino level. The first step to understanding the varied, often complicated regulations is to contact either the local state gaming regulatory agency or competent legal counsel in the jurisdiction in question.

With the recent growth of sports betting, many U.S. casinos have looked to already-established online gambling companies for partnerships to set up their online sportsbook and take wagers. The United Kingdom and many countries in the European Union have allowed online betting for many years, and these operators have experience in this space that many U.S. companies do not yet have. As such, many of these operators are entering the U.S. market for the first time.

While the U.K. and E.U. have anti-money laundering requirements and protocols, the U.S. has more cumbersome anti-money laundering practices based on the U.S. experience with casinos. It would behoove these international companies to involve U.S. legal counsel to support compliance in a format that FinCEN would be familiar and comfortable with. If there is some issue that raises a concern with FinCEN, it would be better if they saw that the operator has a U.S. formatted anti-money laundering policy, procedure and protocol.

Partnering for Success

With the legalization of sports gambling a flood of internet sports betting operations emerged, as well as a rapidly changing landscape. States, casinos and operators are trying to grab their piece of the wager while maintaining regulatory compliance. It’s important for operators to adhere to proper licensing requirements and establish mutually beneficial partnerships, get involved with their local gaming counsel early on, develop strong anti-money laundering practices, and understand not only state but federal regulating bodies as well (such as FinCEN). While the sports betting industry may feel a bit like the Wild West, a strong legal partner can help you navigate complex regulations and assist with best practices.

[1] On Monday, March 29, 2020, the Wyoming Legislature passed HB133, legalizing online sports wagering in the state. At the time of publication, the Governor had not yet signed the bill.