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Regulated gaming companies, suppliers and investors are receiving conflicting advice to embrace opportunities in sweepstakes gaming, but also wake up to the regulatory risks of participating in the fast-growing sector.

From top gaming executives to capital investors to payment processors, discussion of the sweepstakes gaming industry dominated last week's Global Gaming Expo (G2E) in Las Vegas, with many weighing in on the segment's sustainability, if not its right to even exist at all.

Michelle Cohen, a member of the Ifrah Law firm in Washington D.C., argued that sweepstakes-based products that replicate online casinos and sportsbooks build on the social casino concept that has already existed legally for many years.

“They're very popular…and the sweepstakes are involved as a way to promote the social games and really to gamify them as an additional layer of entertainment and enjoyment,” she said during a particularly contentious G2E panel on sweepstakes.

“The sweepstakes itself is not something new or novel that someone's come up with,” Cohen said, “it's just adapting it to the social games, which have also been around and are a legitimate service that are being promoted.”

Matt Kaufman, managing director of digital and interactive gaming for consultancy Eilers & Krejcik Gaming, also pushed back against criticism of sweepstakes, arguing that many social casino operators also use a sweepstakes element to promote their underlying product, which is the sale of playing currency.

“I find it a difficult line to draw where it's okay to do it if you occasionally run a sweepstakes product… in order to promote the sale of gold coins as a product, and then they want to draw the line right there where, if you then do it more frequently, it starts to become problematic,” he said. “It just feels like an arbitrary distinction.”

The Michigan Gaming Control Board (MGCB) has been one of the most aggressive U.S. regulators to date in trying to curtail sweepstakes gaming, including sending a cease-and-desist letter to sweepstakes market leader VGW that resulted in the operator of Chumba Casino and Luckyland Slots withdrawing from the state.

John Lessnau, manager of criminal investigations for the MGCB, pushed back against the argument that sweepstakes are merely a promotional tool for the underlying product of the games themselves.

“I think we can get bogged down in the weeds on sweepstakes games,” Lessnau said, citing the famous McDonald’s Monopoly sweepstakes promotion as an example.

“Monopoly is a lottery designed to bring business in to sell burgers, fries and shakes,” he said. “If McDonalds doesn’t operate a Monopoly game, McDonalds doesn’t go out of business.”

“Sweepstakes are gambling, and when they’re run all the time, 24/7, you’re talking about an expansion of gambling,” Lessnau later added. “Gambling is profitable, and that’s why there’s a big push for sweepstakes, because it sounds like it’s a legitimate type of means to promote a product.”

Edward King, co-founding partner of the venture capital firm Acies Investments that has invested in the sweepstakes space, also defended the model.

“When people talk about grey markets, what does grey really mean?” King asked G2E delegates.

“Grey can mean, in the case of many economies such as Asia, an absence of regulation, or grey can mean in the case of what we would say on the sweepstakes side, regulation that maybe hasn't kept up with pace of technology, but it is very much written into the statutes about the absolute applicability and ability to operate that model.”

“The U.S. has a ton of history of grey market-type products or innovative products that don't have any kind of legit framework today, and taking those products through an evolution where either they get banned outright or they get licensed and regulated,” added Matt Davey, a prominent former gaming executive and founder of Tekkorp Capital.

“The question for us is… how early in that cycle do you want to put capital to work?” Davey said. “Clearly, there's product-market fit, but does this fit within a regulated environment? Or is it a pre-regulated environment and you can see regulation coming down the pipe?”

Criticism of the sweepstakes segment also came from a wide variety of stakeholders within the regulated gaming market.

Those critics included Las Vegas casino-owner Derek Stevens, who also owns sports-betting operator Circa Sports, which is live in five states.

“It's pretty clear they found the loophole,” Stevens said, calling out sweepstakes sports operators Fliff and Novig as part of his remarks during a keynote appearance at G2E.

Stevens described the two companies as “sportsbooks that are working through a loophole of sweepstakes law”.

"I want to hand it to the sweepstakes groups that they that they found a loophole, but it's not realistic that this is sustainable,” he added. “There's no governing bodies here.”

“So I think there's got to be some more knowledge about that. I don't think attorneys general and state legislators have a full comprehension how big this is, because with the sweepstakes, we're talking billions of dollars here, it's just exploded.”

Peter Jackson, CEO of FanDuel-owner Flutter, added that he believed sweepstakes operators should “cross the Rubicon” into the regulated gaming market when asked if his company had any interest in expanding into the sweepstakes space itself.

“We operate in lots of different markets but we are only focused on operating in areas which are regulated,” Jackson said.

Pressure On Payment Processors

Howard Glaser, global head of government affairs for Light & Wonder, has emerged as one of the staunchest critics of the sweepstakes gaming model.

“The gaming regulators who are responsible for determining whether a product or an operation in their state is gambling or not, are very uniform in saying, if you pay money for a chance to win money, that is gambling,” he said.

During their panel, Glaser and Cohen had a back-and-forth about what level of controls were in place for sweepstakes operators, with Glaser arguing that payment processors and other vendors should be wary of working with them.

“You hope that the response is that vendors and funders who have been rushing into the space, because they think there's no risk, begin to say maybe there is some risk,” he said.

Cohen pushed back against Glaser’s argument that sweepstakes operators have little to no anti-money laundering controls or know-your customer procedures in place.

“Payment processors are under very strict controls under federal laws, and they don't just turn on sweepstakes operators because they're getting business,” Cohen said. “They have to go through many hoops to check their boxes off.”

“Some of the boxes, we think are actually more rigorous than iGaming, what these companies go through,” she added.

“So I think it’s actually fake news to say that there are more money-laundering issues and it’s completely unsupervised and unregulated, because anyone who’s actually gone through it will say it takes months for [sweepstakes operators] to actually get onboarded by the payment processors, and they all have responsible gaming controls, and certainly they look to implement those and make them active.”

The involvement of payment processors in sweepstakes was amplified near the end of last week's G2E convention when Worldpay was added as a co-defendant in a class-action lawsuit in Florida against VGW seeking loss recovery on behalf of the platform's players.

Other loss-recovery or class-action lawsuits have been filed against sweepstakes companies in a growing number of states, including Kentucky, Georgia, Tennessee, Massachusetts, Mississippi, Alabama and California.

Glaser argued that he believed more state regulators would follow the lead of Michigan, Delaware and Connecticut in ordering the likes of VGW to stop offering games in the state.

“I believe as sure as we are sitting here, we will see more of that happening, so if you are a payment processor, if you are a funder, I do think you have to look at the risk,” he said.

“If you are riding out your investment on the theory that, 'oh, I'm told this is not gambling because it fits into the sweepstakes law, whatever that is, and I'm going to protect my investment and my license based on that', please examine the basis.”

Kaufman drew a parallel to the rise of daily fantasy sports in 2015 and pointed out that many in the regulated gaming industry made similar arguments about the legality of the genre.

“And today, when you look at the sports-betting market online or the online casino market, who's winning? DraftKings and FanDuel,” he said.

“They squandered this opportunity, because when this new thing came up, this new legal activity rose and started to grow dramatically, they missed the boat.

“I don’t want the regulated space to miss this opportunity and squander it the way I feel they did with DFS. It feels ridiculous to me that when you look at the online casino market today that it’s not traditional casino brands at the top.”