Virginia has become the first state to specifically authorize fantasy sports operations within its laws, through the establishment of the Fantasy Contests Act. Fantasy sports companies may now operate within Virginia and without a concern as to their legal status as long as they register with the state and pay a licensing fee.
While certain smart consumer protections are built into the Fantasy Contests Act in the form of regulations, the new law has elements that could stifle entrepreneurship and innovation in the fantasy sports industry. Two such concerns relate to a steep application fee and an expansive reach to cover not only daily fantasy sports, but also season long sites.
The hefty new licensing fee will be a huge burden for smaller operators.
The Fantasy Contests Act requires any fantasy sports operator wishing to conduct business in Virginia to pay a $50,000 application fee. Additional annual fees will be set at a later date.
The fantasy sports industry mostly consists of young startups like SportsLock that are still trying to earn market share and revenues to survive. Paying a $50,000 fee to compete in a single state could be too high of a barrier of entry for one of the smaller entities in the space. Furthermore, if other states adopt similar laws, then it could preclude an entire industry from developing.
Operators outside of FanDuel, DraftKings and Yahoo will struggle with the cost of competing in Virginia.
There is no justification for the $50,000 application fee.
The clause nestled into the very back of the passed and signed legislation almost reads like a penalty to keep competition away from behemoths like FanDuel and DraftKings. However, it likely found itself in the bill as part of a misunderstanding about the fantasy sports industry at large.
Regulations concerning the fantasy sports industry will need to be enforced. Thus, a budget for enforcement is easily justified. However, the idea that an enforcement division would need hundreds of thousands if not millions of dollars is ludicrous.
Legislators may have wrongfully believed that only 2-3 operators would even pay a fee. In that case, a $50,000 fee per applicant may make sense. Yet, hundreds of fantasy sports operators exist. They may now have the door closed on them in Virginia based on this excessive fee, which should be reduced effective immediately.
Virginia did not need to group season long fantasy with daily fantasy.
The position of many state Attorneys General thus far, including those in New York, Texas and Illinois, has been that daily fantasy sports (i.e. FanDuel and DraftKings) is completely separate and apart from season long fantasy sports games, which typically span across almost the entire professional sports league's season of play.
However, the Fantasy Contests Act makes no such distinction. It also regulates season long fantasy sports operators, which bring in nowhere in the realm of what daily fantasy sports companies earn from entry fees. There is a sense among season long fantasy sports operators that there was no need to group them into the bill, as the legality of their operations has not been questioned by a state Attorney General in recent past.
A couple of quick and easy fixes may be made.
First of all, Virginia should clarify that the Fantasy Contests Act is limited to the regulation of daily fantasy sports sites. That is not to say that regulation of season long operators is completely unnecessary. However, any such regulation should come by way of separate legislation that focuses on the nuances of that class of operators.
Secondly, the application fee should either be dramatically reduced or Virginia should look to other states for better forms of raising capital. For instance, New Jersey is looking at the idea of imposing a 9.25% tax on the gross revenue of daily fantasy sports operators to help fund enforcement of proposed regulations. That would at least allow the operators to enter the market and see if they can survive instead of forcing them out by way of an extremely burdensome application fee.