The college football bowl season is upon us, NFL teams are jockeying for playoff seeding, and with the college basketball season underway fans of that game are looking longingly towards March for how their brackets may look for the 2020 tournament. Thus, sports and the gambling associated with it are all around us. In recent years, this gambling has risen from the shadows and is now openly discussed throughout society. So this industry has evolved and continues to evolve, since the times when gamblers needed to travel to Las Vegas or Atlantic City to legally gamble. Over the years, state laws have expanded such that today numerous states allow gambling in some form. Further accelerating this expansion, in the spring of 2018, the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act.

With this background in mind, last month the SEC stepped into this arena. In an opposition brief filed in a Nevada federal court, the SEC took the position that the solicitation of funds for an alleged $29 million sports betting scheme constituted “investment contracts” under the federal securities laws. While this positon may at first seem a bit surprising due to the connection to gambling, the SEC’s position relied on long-standing precedent and a legal argument routinely made by the SEC. Specifically, the SEC argued that the investment contracts issued are securities that fall under the SEC’s purview, as they involve the investment of money into a common enterprise, with an expectation of profits derived from a third party’s actions. The SEC further argued that the existence of other regulatory regimes that might govern sports betting does not preclude the SEC from stepping in, saying for example that the SEC covers bank securities, even though the banks themselves are regulated by the Office of the Comptroller of the Currency.

For the underlying case, the SEC filed its action in early September against the defendants alleging a $29 million sports betting investment scheme impacting over 600 investors from more than 40 states. The SEC further alleged that investor money was used to enrich themselves, their brokers, and other investors in the style of a Ponzi scheme, taking millions for “personal and business expenses” that included food and travel, according to the SEC.

In terms of a takeaway, while the alleged underlying facts may appear extreme, with the proliferation of gambling and sports wagering in particular, the concept of raising and pooling money in this area to attempt to profitably gamble is no longer that far-fetched at all. Individuals and firms planning to engage in efforts like this will need to be mindful of how they structure such vehicles in light of the potential of the SEC considering their efforts to involve an investment contract that requires registration under the federal securities laws. Depending on the structuring, the odds may weigh in the SEC’s favor.

The SEC’s opposition brief is available for download.

The SEC’s litigation release announcing the filing is available on the SEC website.