Colorado Enacts Bonding Requirement for Fantasy Sports Operators

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On June 10, 2016, Colorado governor John Hickenlooper signed House Bill 16-1404, a bill to regulate fantasy contests and fantasy contest operators in the state.

The bill and its provisions will become effective on July 1, 2017 after which being a fantasy contest operator in Colorado without a license or registration will become illegal. With more than 800,000 Coloradans playing fantasy sports on a daily basis, the introduction of a separate Colorado fantasy sports law has been necessary for a while.

After having been carefully vetted in the preceding months, the bill was well-received in the industry as it includes both numerous provisions for consumer protection, yet does not stifle business and innovation. As such, the bill reflects the business-friendly climate of the state, which currently ranks #5, according to Forbes's list of Best States for Business.

Implementing the Bill

One of the first consequences of the newly adopted Bill has been the creation of the Office of Fantasy Contest Operator Registration and Licensure. The Office is part of the Division of Professions and Occupations, itself part of the Colorado Department of Regulatory Agencies.

Once the Colorado fantasy sports law comes into effect in July 2017, the Office's main functions will be related to registering small fantasy sports operators (those with less than 7,500 participants) and licensing larger ones (those with more than 7,500 participants). The office will further address complaints brought against operators as well as decide on and enforce disciplinary actions for those who violate fantasy contest operator regulations. In addition to those actions, the Director of the Division will also be authorized to "adopt rules, set fees, and approve applications for registration and licensure as a Fantasy Contest Operator, among other powers and duties," in accordance with the Bill.

In preparation for the implementation of the provisions of the Bill, the Office has already scheduled a number of meetings and milestones to be met. September 13 saw a stakeholder meeting take place, during which draft rules were discussed. A follow-up rule-making and policy-making hearing is expected to take place next, sometime in October, so that rules can be finalized by the end of December 2016.

But to return to the Bill. What exactly are its provisions and what will they require of fantasy sports operators in the state after July 2017?

The Colorado Fantasy Sports Bill's Provisions

House Bill 16-1404 sets out by defining the various parties involved in the fantasy sports business as well as what a fantasy contest is. According to the definition a fantasy contest is an event in which participants know the value of all prizes offered in advance and winning outcomes:

      Reflect the relative knowledge and skill of the participants;

      Are determined predominantly by accumulated statistical results of the performance of athletes in fully completed sporting events; and

      Are not based on randomized or historical events or on the score, point spread, or any performance of any single actual sports team or combination of such teams or solely on any single performance of an individual athlete in any single actual sporting event. (12-15.5-102(4))

University, college, high-school and other similar events are not permitted to be part of a fantasy contest.

Licensing and Registration

After July 2017, small operators will be required to become registered at the Office, while fantasy contest operators will need to become licensed. The difference between being a small and a regular operator is that small operators are not subject to the Bill's requirements in 12-15.5-106(2), namely having an annual independent audit conducted by a third party and reporting its results to the Director.

In order to get licensed or registered, applicants will need to submit the relevant applications, along with:

      Full information concerning the applicant such as names, address and contact information

      Full information concerning all partners (if applicable), their names, addresses and any additional information requested by the Director

      A set of fingerprints to be used by the Colorado Bureau of Investigation to perform a criminal background check

The latter requirement is necessary because applicants who have previously been convicted of a felony or have entered a plea of 'nolo contendere' (accepting a conviction but not pleading or admitting guilt) may not be .

Licensed or registered operators are forbidden from using devices that qualify as or replicate limited gaming, as defined in the Colorado Constitution. Operators are further forbidden from using video or mechanical reels as well as any symbols or depictions of slot machines, poker and the like.

According to 12-15.5-107, operators are also required to maintain daily records of their operations for at least three years, detailing all financial transactions. In the case of an audit, licensed operators will be asked to provide these records to be inspected.

How the Bill Protects Consumers

The Bill features a number of procedures that are intended to protect consumers and to prevent fraudulent actions on the part of operators. For example, the Bill requires operators to implement procedures that would not allow their employees or relatives to participate in any of the games. They are also required to ensure that players who participate in the games that the fantasy contest is based on are not allowed to enter the contest either.

To level the playing field and provide transparency to players, the Bill also requires operators to make sure that:

      No confidential information concerning the games is being shared

      Players can restrict themselves from entering such a contest if they have been requested to do so

      The number of entries that participants can submit to an event are disclosed

      Experienced players and beginners are distinguished and experienced players can be identified as such by everyone

      No scripts can be used that would provide an unfair advantage to one player over others

      All rules that govern the contests are disclosed

      Fantasy contest player funds are separated from operational funds

      A cash reserve, a letter of credit or a surety bond in the amounts of the deposits in the accounts of players are in place to protect these funds

The latter requirement - to obtain a surety bond or have a cash reserve - is in line with similar requirements in other states who have developed rules and regulations for fantasy sports. So what does the surety bond guarantee and how does it protect consumers?


Why the Surety Bond Requirement?

12-15.5-109 of the Bill delineates the Grounds for discipline. Among these are, of course, the possibility of having one's license or registration revoked as a result of violating the Colorado fantasy sports law.

A further measure in that direction is the requirement for fantasy contest operators to obtain a surety bond. Such a measure is always put in place, in order to guarantee that in the case of a violation which negatively affects players or the public, there will be a possibility for some form of legal recourse and compensation.

Fantasy contest operator surety bonds are a type of agreement between the bond principal (the fantasy contest operator), the bond obligees (consumers and the Office) and the surety bond company that issues the bond. The bond is put in place to protect consumers against dishonest or fraudulent actions on the side of the operator and guarantee that they will receive compensation for any damages or losses that result from such behavior. In this way, surety bonds are similar to a line of credit, which the surety extends to the operator. Should the surety have to pay compensation as a result of a claim against the bond, the operator will be required to repay the surety - hence the credit analogy.

The bond amount is the maximum amount of coverage that the bond must provide in the case of a claim. The exact maximum and minimum surety bond amounts for operators in Colorado are not specified in the Bill and will probably be clarified in the upcoming rule-making meeting.


How Does This Concern Daily Fantasy Sports Operators?

The Bill sets out a very particular list of conditions and requirements to protect consumers and ensure that fantasy sports are conducted fairly. The bonding requirement is there to underscore those protections.

While obtaining a surety bond is not particularly costly or complicated in most cases, the requirement itself places a greater legal responsibility on operators than there has been so far, given that an operator’s actions may trigger a surety bond claim. Bond claims can be costly, may seriously hurt the reputation of a business or even lead to the revocation of their license.

In the face of such a possibility, operators will need to pay more attention and conduct business more carefully and conscientiously. In doing so, they should strive to create a relationship to their surety that includes regular communication, and particularly so in moments when something may be wrong.

That sets the foundation for finding ways to resolve instances when a claim may be on the horizon. Apart from that, the operator may find that they will benefit from the relationship to the surety because sureties will often suggest ways in which a business may improve itself so as to be in better compliance with laws and regulations.

Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping business owners get bonded and start their business.

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