When you say sweepstakes, in the UK we might think of sports like football or horseracing. Can you explain just what you mean by sweepstakes in the casino context?
In the US, for something to be considered gambling, it needs to meet three requirements –prize, chance, and consideration. Prize means winning something of value, consideration means paying to participate and chance meaning that chance determines the outcome and not skill, or other factors.
Normally, free-to-play social casinos don’t deliver any prizes and therefore they’re not considered gambling. However, sweepstakes casinos operate a little differently. As a way of promoting the sale of virtual coins, a sweepstakes casino will award purchasers with free sweepstakes entries which are offered in the form of sweepstakes coins. These coins can be played on casino-style games which act as sweepstakes and any winning may be redeemed as cash prizes.
What we’re seeing, and I cannot disclose exact numbers, but I’m seeing new entrants to this market that are definitely growing fast, even doubling on a monthly basis, and reaching profitability quite fast
So, if you’re a sports betting operator in Europe targeting the US, and you’re thinking ‘this could be a good addition for us,’ how would you go about attaining a licence for a sweepstakes casino?
This model is not required to be licensed, which is part of the appeal, because like I said it’s not defined as gambling. As such, it doesn’t fall under the jurisdiction of the different regulators in different states. When we do that, we obviously need to obtain a legal opinion, and the legal opinion will analyse the legality of this.
So, the legal opinion works as a statement from one of the company’s officers. We’ll present the model to the lawyers, and they’ll respond that, based on their analysis, this does not conflict with any of the gambling or other laws in different states. So, you go to a state-by-state analysis with all of the different aspects of the business model. When it comes to casinos the legal analysis is fairly straightforward. For the different peer-to-peer games. There’s a bit more of a conversation that needs to be had, but we’ve seen it happen with both bingo and poker.
As for sports betting…here I believe in taking a more conservative approach in order not to conflict with the Wire Act and other federal and state laws, specially with sports betting being regulated in the majority of US states. These laws talk specifically about sporting events and, therefore, if you offer anything that has to do with sporting events, you may be associated with that category and may be in conflict with some of these laws. And this is an area that you need to be more cautious about because there we are not only getting legal exposure on a state level but possibly also on a federal level. So, sweepstakes are ideal for casino sites in the US – but not for sports.
What’s the best advice you can give for somebody looking to get into the sweepstake casino model?
I’ll paraphrase advice that a lawyer gave me a while back: You need to make sure this is legally defensible. Understand what the legal boundaries of the sweepstakes model are and ensure not to cross into the definition of gambling. Secondly, if you are a company that may be in a position of acquiring licences in the US, you may face a regulator that will say, “What is this sweepstakes thing? I don’t understand it. We’re not gonna give you a licence because of that.” So, this is where it may become a little more risky.
However, many content providers that hold licences in US states did their own analysis and realised that they are not exposed. They can do both. They can provide the content, both sweeps and casinos, while still maintaining their licence activities.
In the US, we even have this one major studio called High 5 Games. They’ve really converted their free-to-play social casino into a sweepstake model and they’re running with it quite aggressively. So, it just tells you that there are major tier-one licensed providers that capitalise on this model. We may not see licensed brick-and-mortar operators entering the space, but we can certainly see online organisations that make it a part of their strategy.
You mentioned that you don’t need a licence for a sweepstake, and that that’s part of the appeal. But could it get to a stage where in two-three years, if the industry booms, a regulator says ‘hey, these guys are making a lot of money off sweepstakes. We need to start licencing this.’ What happens then?
Definitely, yeah. In my opinion, this is probably an inevitable outcome, and we’ve seen it before with daily fantasy sports. Although, it’s slightly legally different because the argument was that fantasy leagues were carved out of the UIGEA and that they exploited that to turn it into a model that is very close to gambling.
But that legal argument didn’t really hold up once it became big, and once they pushed the envelope a little bit, all of a sudden, the lawmakers started to look into it. That can certainly happen here, too, and this has to do with the maturity of sweepstakes operators and how they conduct themselves.
How fast is the sweepstakes industry growing?
Sweepstake casinos have been steadily growing over the past decade, but they were kept under the radar to the point that most people in the gambling industry weren’t even aware of them. And then it changed around the Covid-19 pandemic when there was a huge explosion of interaction. At that time, the marketplace had maybe 50 operators. Since then, we’ve seen an influx of around 50 new operators now, and they keep growing. So that will definitely bring attention and discussion of responsible gaming issues to the forefront.
Sweepstakes are ideal for casino sites in the US – but not for sports
So, if there were going to be any issues with sweepstakes casinos, would this be enforced by state governments?
I will say that, in my opinion, and this is what I’ve been hearing, it is less likely to be addressed on a federal level. I don’t expect something like that to happen. If anything, it’s going to come on a state-by-state basis. And that’s a process that takes time.
It can also be challenged through payment providers and the credit card companies. They are usually on board as long as you come with a proper legal opinion and you meet their requirements when it comes to adequate responsible gaming policies and tools, complying with AML laws, and ensuring that your KYC procedures are effective in detecting and limiting underage and other ineligible players. So, if you go with all of these best practices and you pretty much self-regulate, they’re fine, and they’re happy to take part in this growth.
But if we see that more rogue actors are getting into this and the industry becomes more of a Wild West, then that can turn things. So, this is where this industry needs to self-regulate and be responsible as much as possible. And I understand, like anything else, there’s quite a lot of money to be made but it has to be done responsibly. I think it will, which would prolong that window of opportunity. Will it be five years or 10 years? That’s a bit hard to say.
I don’t know if numbers might be difficult to project, because you’re talking about the whole industry. But how big are we talking here?
So, we have to keep in mind that this industry, as opposed to the gambling industry where we may be looking at turnover or gross gaming revenue, here it’s a bit different because we’re talking about overall purchases. That’s gross revenue: essentially the coin packages sold to players.. And then let’s say the net revenue will be the purchases minus the player’s prize redemption. This is going to be your net. And from there, you start deducting the rest.
Let’s look at Chumba Casino, they also operate other sites, both for poker and casino. I believe the projections show they are going to be exceeding $4bn in annual sales. Sure, that’s not pure profit, but that shows you tremendous volume and growth. So, this is definitely a multi-billion-dollar industry now, and the expectation is that it’s going to continue to grow.
What we’re seeing, and I cannot disclose exact numbers, but I’m seeing new entrants to this market that are definitely growing fast, even doubling on a monthly basis, and reaching profitability quite fast.
Sweepstake casinos have been steadily growing, but they were kept under the radar to the point that most people in the gambling industry weren’t even aware of them. And then it changed around the Covid-19 pandemic, when there was a huge explosion of interaction
