Earlier this month, members of the New York State Senate Racing, Gaming and Wagering Committee unanimously voted to advance bill S5935, which, if signed into law, would (a) forbid the operation and promotion of certain online sweepstakes games in New York and (b) impose penalties of up to $100,000 per violation. A companion bill, A6745, is pending in the New York State Assembly.
Even Money
In 2022, New York, along with many other states, legalized online and mobile sports betting. A legislative act of this kind was necessary because – subject to certain exceptions – betting and gambling are largely illegal throughout the U.S. Generally, whether an activity constitutes gambling hinges on the presence of three key elements: (1) chance, (2) consideration, and (3) prize. The removal of any one of the elements likely means the activity does not constitute gambling.
And this is how certain online "social games" (also known as "social casinos") can exist in a kind of gray area, offering what appear to be traditional casino games all the while maintaining they are not a form of illegal gambling. (See our previous blog on social casinos here.)
Because gambling requires a prize, if these "social casinos" do not offer players a prize, they are arguably only games. Instead of a prize, they offer players the opportunity to win a "continued play." This approach, however, is not without risk. In response to consumer lawsuits, courts have held that, under certain state laws, even the opportunity to win a continued play can constitute a prize, which in some states is sufficient to constitute gambling.
The New York bill takes aim at a different subset of social gaming called "sweepstakes casinos." While there are some nuances as to how this model operates, generally these types of games fit a "sweepstakes" model wherein a prize may be offered, but because there is no purchase to enter, the element of consideration is eliminated. And those that may require a purchase to enter will also offer an alternate free method of entry in order to maintain that "no purchase is necessary" to enter or win.
Sweepstakes casinos operate in an unregulated market with projected revenues of close to $8 billion this year – revenue that, if shifted into regulated gambling, could generate additional tax dollars for the state. This may be one reason that S5935 has recently gained momentum.
The Stakes Are High
As currently written, S5935 would prohibit the operation, conduct, or promotion of any "game, contest, or promotion" available on the internet or accessible on a mobile phone that employs a "dual-currency system" and "simulates casino-style gaming." Well, that's a mouthful. Let's break it down:
- A dual-currency system is defined as any system of payment that allows a player to exchange a currency for any prize, award, cash or cash equivalents, or any chance to win the same. This is intended to address the free-to-play "Gold Coins" and prize-exchangeable "Sweeps Coins" used by social gaming casinos to help eliminate the consideration element set forth in gambling laws. "Gold Coins" are a type of virtual currency provided to users for free as incentive to play the "fun-only" online games. They are proprietary to the specific online gaming casino, have no real-world value, and cannot be exchanged for prizes. However, users may also purchase additional Gold Coins via cash payments. Conversely, "Sweeps Coins," which may be obtained for free or may be earned through gameplay, are a virtual currency that have real-world value and can be exchanged for cash and prizes.
- A casino-style game refers to a type of game that mirrors real-world casino games. These include slot machines, video poker, blackjack, roulette, craps, poker, and lottery games such as draw games, instant win, keno, bingo, and sports wagering – essentially covering the gamut of offerings provided by social gaming casinos.
Not only would S5935 ban online sweepstakes games themselves, but, as written, it would ensnare anyone associated with online gaming platforms, including employees, investors, board members, financial institutions, payment processors, geolocation providers, platform providers, and media affiliates to name a few, by making it unlawful to "support" any operation, conduct, or promotion of online sweepstakes games in the state of New York.
And the proposed fines are substantial – ranging from a minimum of $10,000 to a maximum of $100,000 per violation (which could be interpreted as per consumer) – and would be in addition to the potential loss of any gaming license.
Notably, the social gaming/social casino model in which there is no cash prize would still be permitted, as the law specifically excludes "a game which does not award cash prizes or cash equivalents."
The state attorney general, gaming commission, and police would all have authority to enforce the law.
The Cards Are Stacked Against 'Em
According to drafter Sen. Joseph Addabbo, S5935 is designed to protect consumers – especially minors – from the "untaxed and unregulated" online "real money" sweepstakes casinos that have gained popularity over the past few years but continue to "evade consumer protection, responsible gaming, and anti-money laundering" requirements established for New York state.
However, due to the broad definitions and expansive language of the bill, it has the potential to inadvertently sweep into its prohibitive ambit gamified loyalty programs or other online and app-based retail promotions.
Although S5935 has not yet been scheduled for a hearing, it has already faced vocal opposition from industry stakeholder groups, including the Social and Promotional Games Association, that issued a statement calling the bill "deeply flawed" and "an affront to personal freedoms, an insult to New York voters, and a colossal waste of government resources."
Doubling Down: Actions in Other States
New York isn't the only state considering legislation to bar online gaming casinos. Currently six other states have bills pending that would place similar bans on the operation of sweepstakes-based online gambling.
- Connecticut:SB1235
- Florida:HB953
- Maryland:HB1140 and SB0860
- Mississippi:SB2510
- Nevada:SB256
- New Jersey:AB5447
With the increasing popularity and profitability of social gaming, however, it is likely that any law passed will be met with legal challenges.
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