Alex!
@imaznation · PM, Microsoft
Okay, so I'll buy into the argument that this isn't really considered gambling because it's skill-based. But what about the legalities of this from both a SEC and an IRS perspective? Technically, aren't you creating a class of derivatives based on stock? What about the actual money that is paid out by the company--would this be considered taxable income, or would this be considered capital gains? On the Forcerank side of things, what's the incorporation status of the company that's making the monetary payouts?
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Leigh Drogen
@ldrogen · Founder and CEO at Estimize
@imaznation Hey Alex. While the DFS issue is dumb, this is the better question and where we think we've innovated. We've spoken with all of the relevant financial regulatory authorities over the past 6 months and what is clear is that Forcerank isn't a swap or a derivative. We're so certain of this that we've filed a patent on it so that clones don't pop up. The contest doesn't give you exposure to any asset or basket of assets due to the format of the contest. We give you 10 stocks, or forex pairs, or commodities, etc. to rank in order of how you believe they'll perform over a 1 week period. Then, you're scored independently based on how accurate your Forcerank is compared to how the market actually behaved. Then, your score is compared to the scores of the competitors in your competition that week (let's say 21 other people). Then and only then if you have a higher score than half your competitors do you win part of the prize pool (in a 50/50 contest, tiered contests are different where the person in 1st place takes about 30% of the total prize pool). Because of this, you're about 4 steps removed from having any actual exposure to any asset or basket of assets, it really is a test of skill and can not be used to hedge other exposure in any way. The other thing is that we don't allow you to "sell out" of your contest at any point, once you're in, you're in. So your expected winnings (if we can put a probability on them) can not be sold as a derivative either as binary options exchanges allow (this is what InTrade got in trouble for, the COMEX Gold contract up there was a swap and they were not regulated by the CFTC).
We're 100% certain we've done our homework here with our council, but it definitely is an innovation for the industry which we'd like to see people not duplicate ;)
And yes, it's taxable income, we collect 1099s if they go over $600 in winnings.
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Alex!
@imaznation · PM, Microsoft
@ldrogen Cool, definitely eases my concerns. It'll be awesome to have this bit on the website, possibly even as part of the onboarding flow. Given the other comments here, it seems like building trust is going to be the #1 mover of your sign-up acquisition metrics.
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Leigh Drogen
@ldrogen · Founder and CEO at Estimize
@imaznation great idea, definitely agree. The DFS companies really screwed things up for everyone else by doing some immoral stuff (bum hunting, insider trading, etc.). And there have been no shortage of unregulated swaps/futures markets that have been shut down for good reason (anyone remember SandHill Exchange?). The only thing I fear with that screen in the onboarding flow is that if you say there's nothing to worry about people start to question whether there's something to worry about. Wonder what % of people even consider that off the bat. The funny thing is that there's no risk to the player in any case. I think the bigger thing has been people not wanting their deposits stolen (Mt. Gox style). We obviously sequester player assets in a separate bank account we don't touch.
Interesting issues for this industry after the idiocy of our predecessors.
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Alex!
@imaznation · PM, Microsoft
@ldrogen Sounds like the perfect candidate for doing a quick-and-dirty A/B test on.
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