The Conundrum Of US Sweepstakes Sportsbooks And Casinos

One New Jersey sportsbook is pivoting from regulation to a sweeps model, pointing to friction in the industry

Why would you operate a state-regulated sportsbook when you could just run a sweepstakes sportsbook?

That’s increasingly a question worth pondering in the United States.

At least one operator answered by changing from one to the other. Prophet Exchange ended operations as a regulated sportsbook in New Jersey in May. Now comes official word it’s reopening — in more than 40 states — as a sweepstakes sports betting exchange, including in NJ.

That sounds like a no-brainer, right? Why wouldn’t you trade paying taxes on sports betting revenue, licensing fees, and a regulatory scheme in one or multiple states to operate in more than 40 of them with much less oversight and taxation?

The top-level answer is that sweeps face risk moving forward. The sweepstakes sportsbook (and casino) model stands on at least decent legal footing under sweepstakes laws in the United States. But like daily fantasy sports, that could change for the sweeps category if there’s more scrutiny.

But let’s back up and get up to speed on sweeps first.

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How are sweepstakes sportsbooks legal?

I’ll quickly give you the outline of these operations’ legal arguments. (As always, I am not a lawyer.)

I have always found the best way to wrap your head around it is using an example most people are probably familiar with: the McDonald’s Monopoly game. (We’ll set aside the fraud around that in the past and just focus on the sweeps dynamic.)

The game was pretty simple. Customers would buy McDonald’s hamburgers, fries, etc., and when they did so, they received Monopoly game pieces that could lead to winning prizes. As a sweepstakes, you didn’t actually have to buy anything to play; you could send a self-addressed stamped envelope to McDonald’s and they would send you back game pieces.

The rationale is the same behind a sweeps sportsbook or casino. You can make a purchase to get virtual currency that can be turned into cash prizes, but all of these operators allow you to claim some of that virtual currency without making a purchase. You’re also never technically betting real money on a sweeps site, only a form of currency that you can later convert into cash.

Also, remember the Professional And Amateur Sports Protection Act that the US Supreme Court deemed unconstitutional in 2018? That law made it illegal to operate “a lottery, sweepstakes, or other betting, gambling, or wagering scheme” around sporting events. As we all know, PASPA is ancient history, so that’s no longer a concern.

All of this adds up to a pretty good argument (if you’re glass half full) that these are sweepstakes and not running afoul of any laws. At the end of the day, it’s also obviously gambling. The question moving forward is whether everyone is cool with this happening on an unregulated (at least by states) basis.

So are sweepstakes big business?

Yes, definitely. While sweepstakes sportsbooks are coming into their own, casinos are very big business in the US and have been around longer. The category is led by VGW, which operates Chumba Casino, Luckyland Slots and Global Poker. Annual revenue for the company appears to be on track to eclipse $5 billion.

It’s not just VGW; by at least one count there are 50 sweepstakes casino brands operating in much of the US.

It’s interesting to note that VGW was to my knowledge the first mover in sweeps sprotsbooks with its Fendoff brand, which was shuttered. Right now the sports sweeps segment is dominated by Fliff, with other competitors launching in recent months and years. That includes new entrant Rebet and the aforementioned Prophet.

Is the sweeps category sustainable?

The opportunity here remains quite large, even if you’re not an early mover. We’re going to see more exchanges like Prophet in short order, I am sure.

The problem is not the potential upside, it’s the negative outcomes in the distribution. Will all this be allowed to continue as the status quo? The move of an exchange from the regulated New Jersey market to sweeps will raise eyebrows if nothing else.

For a long time, the market was VGW quietly growing and printing money. It’s only in the past year or so that the sweeps category has gotten any real attention, both from the media and a regulator with the action against sweeps in Michigan.

If I were a regulated online casino or sportsbook in the US, I wouldn’t be excited about all of these operators going unchecked in upwards of 40 states, and seeing more of them opening up shop. The regulated operators pay a lot of money to states and put themselves under strict rules for the privilege of doing business. There is an expectation from the operators that states should be protecting that investment.

But will state regulators want to act? Could they even act without changes in the law? These are open questions as we sit here.

There is some movement and discussion between regulators and the regulated industry happening in the background on sweeps. We saw some of this manifest in the fantasy pick’em/parlay industry as the regulated market (mostly FanDuel and DraftKings) cried foul. It’s not hard to think we’ll see a more coordinated campaign again.

It will be fascinating to see what’s next because the category is going to get bigger — both in revenue and number of operators — if the traffic light stays green.

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