BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:   January 21, 2016


                        ASSEMBLY COMMITTEE ON APPROPRIATIONS


                                 Jimmy Gomez, Chair





          AB  
          1437 (Gray) - As Amended January 12, 2016


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          Urgency:  No  State Mandated Local Program:  NoReimbursable:  No


          SUMMARY:


          This bill establishes the Internet Fantasy Sports Game Consumer  








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          Protection Act (Act) and requires DOJ to license and regulate  
          internet fantasy sports.  Specifically, this bill:  


          1)Defines "Internet fantasy sports game" as a game of any  
            duration conducted on the Internet in which a registered  
            player does all of the following: 


             a)   Competes against other players or a target score as the  
               owner or manager of an imaginary or simulated team of in an  
               imaginary or simulated game.


             b)   Uses the statistics accumulated by athletes in  
               real-world sporting events to determine the scores of the  
               imaginary or simulated game.





             c)   Plays for a predetermined prize; and 


             d)   Pays a charge to the licensed operator providing the  
               game in order to participate.


          1)Requires a person or entity to receive a license from DOJ  
            prior to offering an Internet fantasy sports game for play in  
            California.


          2)Requires DOJ to issue a license if the applicant meets  
            specified eligibility and suitability criteria.  Allows DOJ to  
            establish regulations to implement the licensing criteria and  
            process.









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          3)Requires the licensed operator to identify itself on its  
            website and to comply with specified requirements for Internet  
            fantasy sports gaming.  Establishes content requirements for  
            websites including notification and links to DOJ's Responsible  
            Gambling Internet Web page.


          4)Requires the licensed operator to hold funds in the account of  
            a registered player, as defined, in trust.  Requires the  
            licensed operator to prevent unauthorized withdrawals,  
            comingling of funds and prohibits the licensed operator from  
            issuing credits to registered players.


          5)Requires the licensed operator to implement data security  
            standards and ensure players are at least 21 years old and  
            physically located in California.  Prohibits a registered  
            player from having more than one account on each website.   
            Authorizes DOJ to assess civil penalties and establishes a  
            graduated civil penalty structure ranging from $1,000 to  
            $10,000 based on prior violations.


          6)Requires a DOJ to develop and provide an online self-exclusion  
            process to licensed operators by regulation as specified.   
            Prohibits licensed operators from advertising to persons under  
            21 years of age or who have self-excluded.


          7)Prohibits licensed operators, officers, contractors, and  
            employees from participating in Internet Fantasy Sports and  
            disclosing proprietary or nonpublic information as specified.


          8) Requires licensed operators to facilitate the collection of  
            income tax from registered players and requires state agencies  
            to treat proprietary information, including the social  
            security numbers of registered players, as confidential.








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          9)Requires each licensed operator to pay a regulatory fee to be  
            determined by DOJ.  Requires fees to be deposited in the  
            Fantasy Sports Fund, established by the bill, and continuously  
            appropriates funds to DOJ in amounts necessary to perform its  
            duties.


          10)Imposes a one-time tax on licensed operators in an amount yet  
            to be specified to be deposited in the General Fund.  Upon  
            depletion of the one-time tax, DOJ is required to notify  
            licensed operators to commence quarterly tax payments in an  
            amount equal to a yet to be determined percentage of gross  
            income.


          11)Preempts local governments from regulating, taxing, or  
            contracting with respect to anything governed by the Act, but  
            allows investigation and prosecution of violations of the Act.  
              Exempts the Act from fines and punishment associated with  
            pool selling, bookmarking and other forms of illegal gambling.


          12)Makes various legislative findings and declarations.


          FISCAL EFFECT:


          1)Unknown ongoing potential increased GF revenue resulting from  
            the unspecified tax and potential penalty fines. 


          2)Unknown increased administrative and enforcement costs to DOJ  
            likely offset by the regulatory licensing fee (special fund).

          3)Unknown potential increases in income tax collection from  
            registered players (GF).








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          COMMENTS:   


          1)Purpose.  According to the author, Californians participate in  
            Daily Fantasy Sports (DFS) games on a daily basis on  
            unregulated Internet Websites.  Despite a lack of regulation,  
            participation in DFS still remains very popular.   This bill  
            establishes a framework to license and regulate to ensure  
            consumers are playing on websites with comprehensive consumer  
            protections.


          2)Background.  A fantasy sport is generally a type of online  
            game in which players assemble imaginary or virtual teams of  
            real athletes from amateur or professional sports and compete  
            based on the statistical performance of the individual  
            athletes in actual games.  DFS games are played over  
            short-term periods rather than over the entire season as with  
            traditional fantasy sports.  


            DFS websites have been operating for years but have recently  
            increased in popularity following a major advertising campaign  
            launched by FanDuel and DraftKings prior to the 2015 National  
            Football League (NFL) season.  DFS games are typically played  
            as contests subject to an entry fee that funds the advertised  
            prize pool and the operator's cut, also called a raking fee.   
            A raking fee is the amount of commission the operator takes  
            off each entry fee, typically about 10%.  DFS raking fee  
            percentages vary, but are usually higher for low entry fee  
            games.  Some sites offer no raking games to entice players  
            with bigger awards.


            Many companies have invested hundreds of millions of dollars  
            in DFS websites, including professional sports teams/leagues,  








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            media conglomerates and venture capitalists.  According to the  
            Wallstreet Journal, FanDuel and DraftKings control 95% of the  
            North American market and are each valued at over $1 billion  
            but have not made a profit due to heavy advertising spending  
            to attract customers.  In 2014, FanDuel generated $57 million  
            in revenue and awarded $564 million in prizes while DraftKings  
            generated $30 million in revenue and awarded $300 million in  
            prizes.


          3)Unlawful Internet Gambling Enforcement Act (UIGEA) and DFS  
            beginnings.  In 2006, in response to the rampant and corrupt  
            online poker industry, Congress passed UIGEA to ban internet  
            gambling.  The federal law includes an exclusion for fantasy  
            sports if the games meet specified skill-based criteria and  
            were not otherwise prohibited by state or federal law.   The  
            DFS industry emerged as the online poker industry ceased most  
            operations in the states.  The United States Attorney General  
            effectively shut down internet poker on April 15, 2011, a day  
            gamblers refer to as "Black Friday."


            In September 2015, an employee at DraftKings inadvertently  
            published information that may have given him an advantage  
            over his competitors. That same day, he won $350,000 on  
            FanDuel.  This led to greater scrutiny of the unregulated  
            industry and unproven allegations of insider trading.  In  
            response, DraftKings and FanDuel both adopted  policies to ban  
            play by company employees and owners. 


          4)Regulatory and Legislative Efforts.  In response to the  
            DraftKings information leak, many states are taking action  
            regarding the industry. Regulatory agencies in several states,  
            specifically Nevada, New York and Illinois, have determined  
            DFS to be illegal gambling and are attempting to shut down the  
            activity through cease and desist orders in their respective  
            states.  Other states, such as Massachusetts have instead  
            regulated DFS and approximately 16 states are proposing  








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            legislation to legalize or regulate DFS.


            To date, California's Attorney General has not opined on DFS  
            nor taken any enforcement actions.  This analysis does not  
            address the legality of DFS under federal nor state law nor  
            attempts to determine if the Legislature has the  
            Constitutional authority to regulate DFS by statute.


            On January 19, 2016, Texas' Attorney General issued an  
            advisory opinion that DFS is prohibited gambling in the state  
            and suggested a court would find the practice illegal.


          5)FantasyUp Folds.  On January 14, 2016, DFS operator FantasyUp  
            ceased operations and legally dissolved its business.    
            According to the Legal Sports Report, the company informed its  
            users by email that it would not be processing any withdrawals  
            due to lack of capital.  It is unknown how much or how many  
            players are owed money.   In its email, the company stated  
            that numerous legal issues facing the industry have increased  
            the cost of doing business and decreased the ability to  
            attract investors.  Others suggest the company became  
            insolvent due its efforts to attract players with no raking  
            fees and 300% bonuses on deposits.


            Players began having problems getting their withdrawals  
            processed in a timely fashion last summer with payments  
            sometimes taking weeks or months.   While players struggled to  
            get their money, the site continued advertising and taking  
            deposits.


          6)Discussions Continue.  The author indicates he is continuing  
            to work on bill provisions to address the fact that DFS is  
            already operating in California and this bill does not contain  
            a grandfathering clause or temporary DFS license while DOJ is  








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            developing regulations.  Additionally, the fees and taxes are  
            in unspecified amounts that need to be determined before the  
            bill is enacted. 


            Further, this bill requires state agencies to protect players'  
            confidential information, but does not place that same  
            requirement on licensed operators or prohibit the sale of  
            customer information to others.  The author is working with  
            consumer protection groups to further refine these provisions.


            Others have raised concerns regarding whether DOJ is the  
            appropriate regulatory agency and discussions with  
            stakeholders and other interested parties continue.  


          7)Remaining Concerns.  The Committee is not recommending  
            amendments at this time, but has identified several issues  
            that may require clarification.  The author may wish to  
            consider revisions including but not limited to:


             a)   Tightening up definitions to prevent loopholes,  
               particularly in the definition of "Authorized Internet  
               Website."


             b)   Defining "commercially reasonable effort" as it applies  
               to determining player eligibility.


             c)   Streamlining the civil penalties and considering  
               additional penalties for other violations of the Act.


             d)   Clarifying all funds in the Fantasy Sports Fund are  
               continuously appropriated.









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          Analysis Prepared by:Jennifer Galehouse / APPR. / (916)  
          319-2081