Legal Gaming Business Models

June 3, 2024

1. Introduction

The American public has a fascination with gaming. Numerous online gaming business models can be found on mobile app marketplaces, websites, and social media platforms. But what gaming businesses are legal in the United States? The answers can be complicated but start with a distinction between “gaming” and “gambling”.

Gaming is a general term that covers a multitude of entertainment platforms that incorporate some type of user engagement to win a prize. Those prizes can be limited to in-game credits or items, but sometimes involve merchandise or real money. Gambling activity is a sub-set of gaming, which involves the following 3 essential elements: 1) a prize of value; 2) chance; and 3) consideration (i.e., a bet).

2. Prize

To qualify as a prize, for purposes of the gambling analysis, the winner of the game must receive something of value. Clearly, money is a “thing of value” in such instance. However, any merchandise, gift card, cryptocurrency, or cash equivalent typically qualifies as well. In general, an in-game digital prize or credit is not considered a prize. However, this is where things get tricky. In some states, an in-game prize or credit can be considered a valuable prize if it allows the player the opportunity to extend the game play or if the prize can be readily exchanged for money on a secondary market. Take, for example, an online social casino that allows users to win credits which may not be exchanged for money or any thing of value on the platform. Those credits cannot be considered a prize since they have no value in the real world. However, if the credits can be re-wagered to play another game, the laws in some states will treat the credits as a prize for purposes of gambling since they allow the users to play more games. This is known as the “right of replay.” Alternatively, in some states, the ability to easily sell a digital item on a third party marketplace can give the item sufficient value to be deemed a prize. While this is the minority view in the U.S., operators must be aware of the jurisdictions that treat such items as prizes in the gambling context.

3. Chance

In order to qualify as gambling, the gaming activity must determine the winner by means of chance. Therefore, if the winner is determined by methods such as a card flip, slot machine reels, or a random number generator, the game is one of chance. What if skill determines the outcome of the game? Skill gaming is unregulated – and therefore legal – in the majority of U.S. states. However, some states restrict skill gaming, in addition to gambling, through statutes or case law. A separate question that arises in this part of the gambling analysis is: how much skill? The outcome of many games is determined based on a mixture of chance and skill. The courts in the U.S. have developed various tests to determine whether a game is one of skill or chance. For more information on that issue, see our post here. As a result of the different tests, some skill games may be legal in one state, but considered illegal gambling in another. Careful attention must be paid to the tests used by the courts, and the statutory restrictions, when evaluating a skill gaming business model.

Another consideration that may come into play with the chance analysis is “risk of loss.” For the chance element to be present, there must be an opportunity to win a prize and a risk of losing the staked bet. This issue is best illustrated with business models that offer purchases of “mystery boxes” or trading card packets. The “player” purchases a package or box of items for an agreed amount but does not know exactly what the items will be obtained. The player could “win” an expensive pair of sneakers or a mixture of smaller items and/or digital prizes. To eliminate the risk of loss, the player must always receive items that equal the amount paid. The player may receive something more, in such a gamified shopping experience, but cannot receive less than the amount paid to participate. Using the trading card analogy; one purchases a pack of Pokémon or Baseball cards for $5.00, not knowing if the pack will contain commonly distributed cards or possibly a card of great value. Either way, there is no risk of loss if the buyer receives the number of cards purchased.

4. Consideration

The final element to evaluate when deciding if an activity constitutes gambling, is consideration. This is commonly referred to as the bet or wager – meaning the amount paid to play the game. If no consideration is paid, real world prizes can be awarded by chance without running afoul of gambling prohibitions. The element of consideration is commonly eliminated in a prize giveaway, a sweepstakes, or a raffle.

Prize giveaways are simple. A business or charitable organization decides to give away various prizes to certain users who register for the chance to win. No money changes hands for any goods, services, or donations. Giveaways may be used for various purposes to call attention to a new business, a political campaign, or a charitable cause. Some states regulate certain aspects of prize giveaways. Also, the amount of effort or personal information required to enter into the giveaway can lead to a finding of consideration if the effort is burdensome or the information is valuable.

In a sweepstakes, prizes can be awarded by chance (or skill), but entries cannot be purchased. Instead, entries may only be given away in connection with the sale of goods or services, or awarded for engaging in some alternative method of entry such as mailing a postcard or registering for a new account. Sweepstakes are commonly offered throughout the U.S. by large companies such as McDonalds and Pepsi. However, sweepstakes are regulated in various states. For example, some states require that sweepstakes promoters who offer prizes which exceed certain limits must register with the state, obtain a bond to secure prizes, and keep various records regarding prizes and winners. Other states prohibit use of casino-style games in a sweepstakes, or the award of cash prizes. Various disclosure requirements can be imposed on sweepstakes operators as well, in relation to the amount of prizes or odds of winning. The goods and services sold in connection with a sweepstakes must be legitimate, and not merely be used as a ruse or sham to avoid gambling prohibitions. More information about sweepstakes requirements can be found here.

Raffles can typically only be offered by established charitable or civil organizations. In a raffle, a qualified operator offers chances to win a prize in exchange for a donation to the organization. Generally, donations cannot be required, but suggested donations are allowed. In this way, the entry into a raffle eliminates the element of consideration, since any payment is deemed a donation to the organization, and the raffle entry is a bonus. Importantly, raffles are generally prohibited if offered by a for-profit business.

5. Conclusions

For many years, creative entrepreneurs have sought to eliminate one of the three elements of gambling discussed above, to avoid the onerous restrictions on gambling activity in the U.S. Courts are sensitive to these efforts and will punish abuse when detected. However, if any of the elements are not present, the activity is not gambling. It may be something else, such as skill gaming or sweepstakes, which are subject to their own restrictions. By understanding the essential elements of gambling, operators can be careful to avoid inadvertently straying into this highly regulated industry.

Lawrence G. Walters heads up Walters Law Group and has represented clients involved with online gaming for over 30 years. Nothing in this article is intended as legal advice. Mr. Walters can be contacted through the firm’s website, www.firstamendment.com, or on social media @WaltersLawGroup.