Does Poker Staking Constitute a Securities Transaction?
Stefan Padfield | Saturday, June 30, 2012 at 08:28AM If you followed my posts on the Business Law Prof Blog and/or the Akron Law Café before I arrived here, then you know that I am a fan of poker. In fact, I have blogged more than once about my desire to cobble together a “Poker for Law Students” course. I have also blogged previously about whether poker-staking constitutes a securities transaction. I was reminded of all of this when I came across a story in today’s Wall Street Journal about how many of the professional players planning to play in tomorrow’s “One Drop” $1 million buy-in tournament (10% of each buy-in goes to the “One Drop” charity, which seeks to provide access to safe water worldwide) are selling large pieces of themselves to get into the action.
I won’t repeat what I’ve said before on this topic (that’s what the links are for), but a couple of things in the WSJ article did jump out at me that I thought warranted some additional comments. First, one of the players in the story reportedly set up an LLC (“One Drop Investments LLC”) to help organize the financing of his poker buy-in. Second, there is apparently at least one investment fund (“Arial Ventures, LLC”) dedicated to investing in poker players. Here is a description of the fund that you’ll find here:
Arial Ventures is a poker backing company – an organization that invests it’s [sic] capital and shares in earnings with some of the top poker players in the world, in some cases household names who have each earned millions of dollars of tournament prize money. The company was founded by and is run by two veteran entrepreneurs and one of the most respected professional player/coaches in poker today.
Now, I have no idea whether any of these folks are aware of their potential liability under, for example, Rule 10b-5, or whether they have looked into their potential registration obligations, but my guess is they haven’t. Given that I believe there is a strong case to be made for poker-staking qualifying as an investment contract under the securities laws, I think this might be a significant oversight.
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Reader Comments (3)
I suppose, depending on the way the profit scheme works, there might be an issue as to whether there is a common enterprise under a strict vertical commonality test (although few jurisdictions use that test), if the profit-making of the player and backers is not tied together.
And I may not be as worried about the skill question as you are. I am reminded here about the viatical settlement cases. Some courts have found there (where the death of the patient is the true determinant of payouts) that the fact that no effort is expended by the investor and some effort is expended by the promoter is enough . . . . I often ask my students whether investing in viatical settlements is like gambling. Your post gives the question new meaning--and a nice hypothetical to go with it.
For a fun crowdfunding site to wrestle with on this question, see http://www.appbackr.com/. There may be a security here, and maybe even a false advertising issue (although that's not my field, as you know).
Thanks for a provocative post.
Because I have never heard of one of these agreements leaving the player with no stake in the prize pool, I think you will always have the investor and the player "sink or swim" together sufficiently to meet strict vertical commonality. While one could certainly come up with a hypo where the player was paid a guaranteed flat fee for playing (in addition to having their buy-in covered) in exchange for 100% of any winnings, I doubt you'd ever find an actual backer so unconcerned with incentives.
I like your suggestion of comparing the viatical settlement cases to gambling. I have typically focused on the timing issue (pre- vs. post-investment), but there is clearly a skill vs. chance issue that transcends the timing as well.
Finally, thanks for the link. There are certainly some interesting hypo possibilities there in light of the fact that the backers apparently invest in (and are only paid on the sale of) specific copies of the apps, and at least some of the apps are fully developed at the time of investment.
I do think there's something to the viatical settlements analogy. Let me know if you have further thoughts on that.
As for Appbackr, it's even worse than you suggest, I think. Although the Appbackr site bills itself as selling wholesale copies of applications, that's just not true when one peels away the veneer. People are buying a future income stream. They never get actual copies of the app . . . .
Keep raising these fun issues.