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The Ethicality of Regulatory Entrepreneurship:

An Analysis of the Legal Questionability of Silicon Valley Startups in the
Sharing Economy and Daily Fantasy Sports Industry

By

MICHAEL J. ARVONIO

A thesis submitted to the faculty of Iona College

In partial fulfillment for the Honors Program curriculum

Thesis Advisor: Matthew Carey

Finance Department

Hagan School of Business

Faculty of the Accounting and Finance Departments

February 2017
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TABLE OF CONTENTS

I. Introduction 3
II. The Construct of Regulatory Entrepreneurship 5
A. Definition 5
B. The Business Plan of a Regulatory Entrepreneurship Startup 7
III. The Sharing Economy 9
A. Uber 9
i. Creation of Product 10
ii. Raising of Venture Capital 12
iii. Legal Pre-Mature Go-to-Market Strategy 13
iv. Rallying of User Base and Lobbying for Favorable Regulatory Laws 14
v. Legal Battles and Ultimate Legislation Approval 16
B. Airbnb 18
i. Creation of Product 20
ii. Raising of Venture Capital 21
iii. Legal Pre-Mature Go-to-Market Strategy 22
iv. Rallying of User Base and Lobbying for Favorable Regulatory Laws 23
v. Legal Battles and Ultimate Legislation Approval 24
C. Conclusion on the Legal Ethicality of Regulatory Entrepreneurship in the Sharing
Economy 25
IV. The Daily Fantasy Sports Industry 28
A. Definition of Online Gambling 29
B. Legal Carve-Out for Season Long Fantasy Sports Leagues 30
C. Comparison of Traditional Fantasy Leagues to Public Equity Markets 31
i. Parallels Between Traditional Fantasy Sports Leagues and Public Equity
Markets 32
ii. The Requirement of Skill through Data Analysis in Fantasy Football and
Equity Investing 33
D. Differentiating Characteristics Between Daily Fantasy Sports and Traditional
Fantasy Sports Leagues 39
E. Legal Case Study of New York States Legalization of Daily Fantasy Sports 41
F. Conclusion on the Overall Legality of the Daily Fantasy Sports Industry and the
Legal Ethicality of DFS Startups DraftKings and FanDuel 43
V. Conclusion 44
VI. References 46
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I. Introduction

In the technological age of the twenty-first century, modern society has witnessed one of

the most rapid periods of advancement in technology available for consumption on the mass

market in the history of the world. With the construct of the Internet available for developers to

share their creations, new technologies, services and entire industries can become available to

consumers overnight simply by visiting a website or downloading an application. While this has

had many positive impacts on society and results in consumers having access to new services to

assist them in their everyday lives, it is also not without its challenges from a regulators standpoint

who are tasked with ensuring consumer protection and fairness in the economic marketplace.

With the rapid rise of innovation and the globalization of the World, regulators within

positions of governmental power are scrambling to keep up and minimize the lag time between

the introduction of a new technology or service and the enactment of regulations to keep these

companies operating within the law and in the best interests of both consumer protection and

economic fairness. Due to the inherent retroactive nature of regulatory response to the introduction

of a new technology, it is inevitable that there will be a window of time in which innovative

startups will be operating outside the realm of regulatory scrutiny. This thus creates a period of

limbo for these companies to operate within in which the legality of its product and entire business

model is in question.

Jordan M. Barry, Professor of Law at the University of San Diego, and Elizabeth Pollman,

Associate Professor of Law at the Loyola Law School in Los Angeles, have coined the phrase,

regulatory entrepreneurship, to describe startups whose business plan revolve around taking

advantage of inefficiencies within the regulatory environment to initially operate within loopholes

of current regulations, outside of the confines of regulatory scrutiny. Once these companies grow
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and claim a significant stake in the marketplace, it is then the next step of their business plan to

fight a long legal battle to protect the legality of their services and gain favorable regulatory terms

to their newly created industry.

For the purposes of this paper a twofold approach will be taken to scrutinize the construct

of regulatory entrepreneurship in the modern American economy. First the theory itself will be

considered to describe what the business plan of a startup enacting the strategy entails. For this

analysis two of the most prevalent regulatory entrepreneurship startups in Silicon Valley will be

examined, that of the ride sharing service Uber and the home sharing platform Airbnb. From there

the regulatory challenges faced by the onslaught of these business models will be distinctive and

it will be observed how different jurisdictions around the United States have reacted to these new

services. At the end of this analysis the entire construct of regulatory entrepreneurship will be

considered for its overall ethicality and a determination will be made on whether or not laws should

be enacted to restrain the practice altogether by creating a framework for innovators to have their

platform be approved by regulators before they are allowed to go to market.

Secondly, a more in depth analysis will be taken to consider a new platform that has been

created in order to transform the approach taken to get around decades of regulation surrounding

online gambling practices. This analysis will revolve around the newly created daily fantasy sports

industry that is currently dominated by the two major players, DraftKings and FanDuel, two

companies which have agreed to merge in the fourth quarter of 2016. Within this analysis the

definition of online gambling will be determined along with the three conditions that must be met

in order for a practice to be considered gambling. From there the daily fantasy sports games will

be considered using the most prevalent sport in the industry, that of professional football using

players from the National Football League. Finally, a determination will be made on the overall
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legality of daily fantasy sports based on current regulations and recommendations will be made on

how legislatures can best respond to the new industry in order to ensure consumer protection and

economic fairness without overstepping the boundaries of regulatory power.

This paper will utilize relevant laws enacted prior to year-end 2016 and legal battles that

are very much ongoing as of the beginning of 2017 as source documentation for the determinations

made in deduction. Because of the ongoing nature of this subject, there is a high probability that

the legal facts will change once new information comes out from resolutions found in state and

city courts around the country. With that said however all of the conclusions and subsequent

recommendations made from here on out will be current based on the facts known as of the

publishing date of this paper.

II. The Construct of Regulatory Entrepreneurship

A. Definition

The theory of regulatory entrepreneurship was first defined by Jordan M. Barry &

Elizabeth Pollman in their research paper holding the same name.1 While they make the distinction

that almost all startups have some sort of legal issue as part of their daily operations, what is

distinctive about regulatory entrepreneurship startups is the fact that they have a legal issue at the

core of its business plan.

An analogy can be used to better explain this point by looking at a fast food company like

McDonalds. McDonalds is in the business of serving food to consumers in an atmosphere that

allows people to get in and out quickly with food sold for a relatively cheap price. While there is

no question that the fast food service industry is legal and necessary in society, McDonalds

frequently faces legal controversy regarding the healthiness of their product and the way they

market to kids when the childhood obesity rate has more than doubled in children over the past
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thirty years.2 Thus while the core business of food service is clearly legal within McDonalds

business plan, other aspects have been put into legal question such as the use of preservatives in

food and the lack of nutrition facts on menus.3

On the other hand, the same cannot be said about regulatory entrepreneurship startups.

These are companies whose product exists within a legal grey area that exists either through the

use of a loophole in previous legislation or the complete lack of mention of the product due to the

fact that the technology was previously non-existent. Thus while it is currently not illegal for the

company to operate, it is technically not legal either and thus will operate in legal questionability

until governmental regulators can address the issue and pass new legislation that addresses the

legality of the industry.

For the purposes of this paper, four regulatory entrepreneurship startups will be examined

to get a better picture about the ethicality of this practice. The first two companies are the pioneers

of the newly created sharing economy, in which individuals use their cars and homes to provide

services to other individuals, thus in theory sharing their property with others in return for a fee.

These companies, Uber and Airbnb, have been facing intense legal battles around the United States

brought against them by taxi commissions and hotels respectively who have suffered greatly by a

loss of market share due to the presence of a new alternative service on the market. The final two

companies that will be examined in the second half of this paper are the architects of the daily

fantasy sports industry which are faced with accusations of being an illegal online gambling

platform due to the risk of losing wagered money on the platforms. All four of these companies

face a unique battle to gaining legal status in major markets around the country, however ironically

they all have a very similar business plan in regards to how they plan on achieving this legal

authorization.
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B. The Business Plan of a Regulatory Entrepreneurship Startup

In order to best understand the distinctive process that a regulatory entrepreneurship startup

takes in order to start its business, one must first understand the constructs of the business plan

necessary in order to be successful in essentially going head to head against the government. This

distinctive business plan has five parts and each one contains a unique requirement of a regulatory

entrepreneurship startup in order for it to be successful in gaining ultimate legal accreditation.

The first stage of the business plan requires the entrepreneurs at the center of the new

company to come up with the idea for this new product and then ultimately create it so that it can

be offered to consumers as a service. Regulatory entrepreneurship startups tend to be only

technology based companies due to the fact that in order for current legislation to not address the

product, it must be a new innovation that was not present previously when the legislation was

originally drafted. Therefore, the product tends to be technologically based in software which

empowers consumers to take advantage of a new disruptive service that is legally questionable

based on past regulations on the larger industry in which this new service is having a negative

impact on.

The second stage of the business plan requires the company to go out and seek outside

venture capital funding to raise the capital needed to further improve the product, hire new talent

in the development and legal personnel departments, aggressively market to consumers and

ultimately keep the business running while it is fighting a long and intense legal battle. This stage

tends to occur simultaneously to the first stage and also runs throughout the rest of the companys

existence until its eventual initial public offering once the startup has matured.

Once the company has the product to be successful in the marketplace and the capital to

keep its doors open, the next stage of the business plan will be enacted which is their legal
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premature go-to-market strategy. While the company knows that their product is within a legal

grey area of current legislation and is ultimately operating outside of the law, they will introduce

their product to the market anyway and attempt to grow by educating consumers and gaining loyal

customers before the government steps in and attempts to halt operations. A large part of this stage

in the business plan is investing heavily in marketing and gaining users as quickly as possible

regardless of the cost to acquire them.

The fourth step of the business plan is where the inherent nature of politics comes into play

and is why the success of the go-to-market strategy is crucial to the future of the company. Once

a large user base of the product is acquired and the service becomes a staple in the industry it is a

part of, it will be very difficult for a government to outlaw it completely without backlash from

their constituents. Since these politicians hope to be elected again in the future, keeping their voting

record in line with the greater consensus of their constituents is essential and thus if the people

want this service available to them there is a greater likelihood that the legislators representing

them will vote to approve it. Secondly, since many of the issues in question with regulatory

entrepreneurship startups are dealt with in the state and local jurisdictions in each individual

market, lobbying of these lower-level officials is easier, however much more expensive and time

consuming due to the vast increase in number of state and local officials compared to those on the

federal level.

The fifth and final stage of the business plan, in regards to legal approval for regulatory

entrepreneurship startups, is that of fighting the individual legal battles and ultimately witnessing

legislative judgement. This is the longest process of the five stages of the business plan and the

culmination of everything in which the first four stages prepared the company to withstand. Unlike

other startups whose business is engrained within the law, regulatory entrepreneurship startups are
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attempting to change the law in order to run their business and in order to do this they must

withstand a rough legal battle and spend millions of dollars in legal fees to gain ultimate approval.

Thus if all four of the previous four steps of their business plan were executed efficiently and the

company prepared itself adequately for the legal battle ahead within the final stage, the startup can

be successful in forcefully changing the law and achieving official legal authorization to operate

within a particular jurisdiction.

III. The Sharing Economy

A. Uber

Uber is the worlds highest valued venture-backed private company with a valuation of

$68.0 billion set in June 2016 and has raised a total of $12.9 billion from equity funding. 4 The idea

for the company was created in Paris in 2008 when founders Travis Kalanick and Garrett Camp

were facing difficulty hailing a cab. Traditionally individuals in need of a cab service would have

to rely on chance by hailing a physical cab on the street of major cities in hope of stumbling upon

a driver who just happened to be driving by and currently had an empty vehicle. The only

alternative to this would be calling into the taxi services hotline to request a cab, waiting on hold

and then ultimately waiting for a cab to be re-routed to their location to pick the customer up.

Travis and Garrett, two seasoned entrepreneurs, realized the inefficiencies present in the

process of hailing a taxi and decided that there was a need in the marketplace to develop an app

which allowed consumers to request a ride with a press of a button on their smartphone and have

a cab waiting for them outside their door hassle-free in a matter of minutes. Armed with this idea,

both men went back to their hometown of San Francisco and developed the platform which not

only gave consumers the power to request a ride through the app but also added other conveniences

such as estimated fares and arrival times, a map view of all cars available in your area and the
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ability to pay automatically through a credit card at the conclusion of your ride. After initially

launching in San Francisco, the company quickly expanded globally and brought the service to

more than 270 cities within five years. The business model is simple, Uber keeps twenty-five

percent of all fares for use of the platform and the rest goes to the drivers who provide their own

cars, gas, cell phones and other equipment needed to operate their routes.

Ubers business model has been incredibly successful and their success has translated into

a record valuation and exceptional brand awareness. With all of the good that the service does to

ensure easy access to rides in an efficient manner, it can be sometimes easy to overlook the fact

that Uber is essentially commercialized hitchhiking, a practice which is illegal in many of the fifty

states. Also, by creating a system in which drivers use their own personal vehicles to operate their

routes, Uber drivers get around laws that require drivers to obtain a medallion from their citys

taxi and limo commission to give them the legal right to operate a taxi. The presence of this new

transportation service has resulted in the plummeting of value of these medallions and essentially

an infinite number of taxis on the streets of the countrys major cities. Because of the legal

questionability surrounding ride-sharing services, Uber has been amongst many legal scandals

regarding the legality of their platform and has been fought tirelessly by medallion owners who

have been devastated by the new competition that Uber brings to their business.

In order to better understand the business plan of a regulatory entrepreneurship company

like Uber we will now break up Ubers business by the five stages set forth in the previous section

of this paper. Additionally, we will address many complex legal issues that arise from the facts

present in Ubers business model that will have an impact on the ethicality of its business.

i. Creation of Product
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It is important to distinguish that Uber is a software platform in which the company

effectively licenses its application to individual entrepreneurs who use the app to find

customers in need of rides. The company itself does not own the cars, gas or cellular

devices needed to operate the vehicles and thus the majority of the fares goes to the

driver who must make the upfront capital investment to operate their route. Thus when

initially creating the product Uber had to focus on developing a stable, easy-to-use

mobile application that could be used on all devices and was user friendly. The software

package built by the Uber team also included the backend operations of the business

that operate the application itself, process all credit card transactions, provide

accounting and tax records and deliver customer support solutions for drivers and riders

experiencing trouble with the app. Once the software was developed and reliably

operating, the platform was complete and ready to operate on a small scale, thus their

initial test run in San Francisco.

The main challenge that Ubers product faced once the application and backend

software was developed, was signing up and on-boarding drivers to operate the taxi

routes that was at the core of their business model. This required extensive proof of

concept to prove to drivers that they could make a living on their platform and the

demand would be there to support the initial investment needed to purchase a vehicle

and operate it as a cab on a daily basis. One of the biggest hurdles the company faced in

proving to drivers that their platform was a viable alternative to established taxi services

was providing insurance coverage that would protect them from potential liability in the

event of an accident or injury to a passenger in their own personal vehicle. Thus Uber

provides drivers a $1 million insurance policy for passengers during a trip and up to
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$100,000 of coverage when they are online but in between trips. 5 With the initial proof

of concept while operating in San Francisco and the insurance coverage demanded by

drivers to limit their liability, Uber had created a platform as a product to sustain a multi-

billion dollar business and create a twenty-first century alternative to taxis which

disrupted a decades old taxi cab industry.

ii. Raising of Venture Capital

In order to build the application and backend software necessary to achieve the

stability needed to operate a multi-billion-dollar platform in which thousands of

transactions are going back and force simultaneously, there is a large amount of coding

expertise required to build the product. Additionally, the server space required to host

the application and operate its functionalities is immense in order to ensure that the

application runs smoothly and is not overloaded by an influx of users and transactions,

causing it to crash and ruin the reputation of the brands reliability. Finally, in order to

gain users and spread the word about the convenience offered by their new service, Uber

needed to invest in an aggressive marketing campaign to direct people to download their

application and start using it to find rides. The one common underlying requirement of

hiring new talent, obtaining server space to run their platform and functioning their

marketing campaign to drive revenues, is the huge amount of capital required to operate

these campaigns necessary to the companys success.

In order to acquire the capital necessary to pay for these investments Uber was then

forced to enter into the second phase of its business plan which was to raise outside

venture capital. In total Uber has currently raised $12.9 billion through nine rounds of

funding to use to pay for these three capital investments. As the company matured and
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gained a stronger foothold in the marketplace, they then used the excess funds to invest

in research and development, acquisitions and new product offerings such as Uber Eats

in addition to these three original investments. The original $200,000 seed investment

was made by the founders themselves, Garret Camp and Travis Kalanick in August of

2009. However, as additional capital was necessary future rounds were raised with

established venture capital firms investing such as First Round Capital, Benchmark,

Menlo Ventures and Goldman Sachs following suit. Armed with billions of dollars of

venture capital investment, Uber not only received the capital they needed to be

successful in the marketplace but also the credibility to back up their product and cement

itself as a leader in the newly created ride-sharing industry.

iii. Legal Pre-Mature Go-to-Market Strategy

Once Uber had the product to sustain a large demand on its platform and the capital

necessary to operate in a manner that would set itself up for success, it was then time

to instill the third stage of its business plan which was the legal pre-mature go-to-

market strategy. While the product and the company itself was ready to go-to-market,

the legislation surrounding the business in the larger environment in which it was

operating was not. This is where the first distinguishable characteristic of the regulatory

entrepreneurship nature of Uber is seen.

Ubers executives ignored the fact that their platform was not necessarily explicitly

legal in the current legislation enacted into law and utilized the time period that they

had available to them between initial product launch and official regulatory scrutiny to

capture market share and cement their brand image so that the public would receive a

taste of what it was like to have their service available to them and immediately be
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hooked. They utilized a zig-zag strategy of multi-sided platform development 6 to

slowly build a reputation to attract drivers and riders to join their platform. Initially

subsidizing rides to its first users in its test run in San Francisco, Uber slowly began to

build a name for itself and gained a reputation of reliability and convenience that began

to spread through a subsequently implemented aggressive advertising campaign. As the

platform gained more notoriety and they expanded to more cities around the country,

Uber started to do away with many of their initial subsidizations however they still

offered an initial complimentary ride to new users up to $10 to incentivize new business

which they hope will come back for more. Through this go-to-market strategy Uber has

strengthened its position in the marketplace and has become a transportation giant in

order to set itself up in an advantageous position to face the legal battles that will

undoubtedly come ahead.

iv. Rallying of User Base and Lobbying for Favorable Regulatory Laws

As previously mentioned a regulatory entrepreneurship startup begins their business

with the knowledge that what they are building is questionable within the current

constructs of the law. Thus it is obvious that at some point there will be legal opposition

to their business and it will become a long legal battle to fight for its legality. Uber at

this point has built its product, raised sufficient capital and has instilled a successful

go-to-market strategy that has resulted in revenues, a loyal customer base and a positive

brand image in society. All three of these advantages will come in handy once the

inevitable legal opposition is faced and the medallion owners start filing lawsuits

against the company.

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In September of 2015, Uber won a lawsuit in New York City filed against them by

medallion owners in the city arguing that only yellow or green cabs can pick up riders

under the law.7 Queens Judge Allan Weiss however ruled in favor of Uber and said,

In this day and age, even with public utilities, investors must always be wary of new

forms of competition arising from technological developments. This explanation is

perfectly valid and is making the point that the value of a medallion investment is

subject to future innovations in technology that could bring new forms of competition

into the marketplace. While medallions did limit the supply of yellow and green taxis

that could be present in the city at any one time, that does not mean it also protects

against competition from ride-sharing vehicles that were not around when the initial

taxi medallions were distributed.

Ultimately however, there is still an argument that medallion owners were

unrightfully misled when initially making their investment in thinking that there would

always be a limit to how many cabs could be in the city. Thus the power of Uber

changing the mindsets of New Yorkers to rely on the presence of their services is of

immeasurable importance. Taxi & Limousine Commission Chief Meera Joshi summed

the impact that consumer expectations had on the decision when he said, This decision

is a victory for the riding public and leaves no question as to the appropriateness of our

regulatory approach to app-dispatched services, passengers will remain free to continue

to enjoy the many transportation options available to them, whether new, more

traditional, or both. Thus while for the greater public the presence of ride sharing

services are advantageous, the government is in a way contradicting itself by allowing

ride-sharing taxis without medallions to operate when it is illegal for traditional taxis
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to do the same exact thing themselves. Ultimately, Uber would not have been able to

be successful in this lawsuit if they had not made their services available to the public

and created the expectation that their service would be available, an expectation that is

now too engrained within society to outlaw without backlash from its constituents.

v. Legal Battles and Ultimate Legislation Approval

All of the preparation taken in the early stages of the company to prepare itself for

the inevitable legal battle that is on the horizon is ultimately put to the test in the final

stage of the regulatory entrepreneurship business model. In order to continue operating

and cross the bridge into legal recognition, Uber must fight in court and lobby officials

to pass the most favorable legislation possible for its operations.

One of the most controversial debates surrounding Uber and its legality is whether

or not their drivers should be classified as employees or contractors for legal purposes.

This is a huge distinction in terms of the impact it has on Ubers personnel costs and

the benefits it would have to offer to drivers as a result. Currently for federal and state

tax purposes, Uber drivers are considered self-employed contractors and are thus not

subject to regulations for employees such as minimum wage laws and mandatory health

insurance.8 This classification is advantageous for both Uber and most drivers, however it can

also have a negative impact on some drivers and the government as a result of unethical tax

evasion. Since Uber is able to avoid the requirement of providing health insurance for drivers

and has no liability to provide at least the minimum wage in times of low demand, Uber saves

a ton of money in personnel costs and only pays drivers when there is a matching fare that was

earned. Drivers are also primarily happy because they are able to keep a larger percentage of

earned fares and can deduct certain business expenses such as the cost of their vehicle against

ordinary income. This would then allow an Uber driver to deduct the full cost of their vehicle
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as a business expense when in reality they may also be using the same car for personal use and

thus illegally taking a deduction that is virtually impossible for the IRS to prove.

Since it is essential for the ongoing success of the company to maintain this legal status,

Uber is spending millions of dollars in legal operations to fight against class action lawsuits

and lobby government officials to pass laws in agreement with them. In the United Kingdom

however, courts found in October 2016 that drivers are not self-employed and thus should be

paid the national living wage.9 This would entitle drivers to holiday pay, pensions and

benefits, all extra costs that would have a huge burden to Ubers bottom line. While the

company is still currently operating in the United Kingdom, they are fighting the decision in

appeals court with the intention to prove that drivers are indeed contractors and it is not

unethical to exclude them from normal employee protection laws.

Back in the States however Uber faces a legal blueprint where the decisions on

whether or not their operations are legal are in the hands of individual cities which can

pass regulations from a local standpoint. This is an especially capital intensive process

since the company must employ a big enough legal team to cover the entire country

and fight lawsuits in multiple cities around the nation. One of the most prevalent

standoffs that Uber has had with a local government is their decision to halt operations

in the heart of Texas within its capital city of Austin. In late 2015 the Austin City

Council passed a new regulation which required drivers of ridesharing applications to

pass a fingerprint-based background check.10 Although Uber, in partnership with its

biggest competitor Lyft, spent a combined $8.1 million to publically campaign when

the issue was put up to a public vote, the regulation was ultimately approved by the

people. In response to the defeat both Uber and Lyft decided to voluntarily halt all

operations in the city, setting a precedent for other governments around the nation that
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if harsh regulations are set hindering their business, they will leave altogether and

citizens will no longer be able to access the convenience of their service within its

limits.

The legal questionability of Ubers core business is the reason why the main focus

of its initial business plan is to adequately prepare for the legal challenges that will

come ahead. Whether they are successful in every legal battle they are a part of is

doubtable, however the main goal is simply to gain legal approval and favorable

regulatory treatment in as many jurisdictions as possible to achieve maximum market

share and profitability for the long term. This overall objective can only be made

possible by forcefully changing the law through the penetrative regulatory

entrepreneurship strategies outlined in the initial business plan.

B. Airbnb

To provide a secondary example of a regulatory entrepreneurship startup in addition to

Uber which has instilled this framework of a business model to achieve initial success, we

will next briefly address the home sharing platform Airbnb. The idea for the company was

initially thought of in 2007 when founders Joe Gebbia and Brian Chesky were having trouble

affording the rent on their San Francisco apartment and wanted to rent out their loft area in

order to help subsidize their cost of living.11 This idea is very similar to the traditional

construct of bed and breakfasts which are privately operated lodging establishments which

provide housing accommodations for short periods of time and in many cases free breakfast.

The problem with bed and breakfasts in the past however was that there was no convenient

way for potential consumers to find them and instead of investing time and effort into

searching for bed and breakfasts in the area people would revert to staying at brand name
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hotels instead. Thus because of the lack of brand recognition of individual B&Bs and the

lack of convenience in booking procedures, it was difficult to operate a successful bed and

breakfast and compete with established hotel chains.

Noticing the vast inefficiencies present in the home rental business, Joe and Brian set out

to create an online platform in which home owners and renters could be easily matched up

with individuals looking for a place to stay in the short term and provide a mutual economic

benefit to each other. This platform which they later coined Airbnb allowed for renters to

easily list their property online with a description of what it offered and pictures to provide

potential renters an idea of the quality of stay they would have if they booked that listing.

For renters the platform provides a plethora of new alternatives to traditional hotels when

looking for a place to stay on trips to new cities and reviews from past renters to provide

assurance that they will be staying in a clean and safe environment if they decided to book

the property.

Airbnb has been widely successful since its official launch in 2008 and has achieved an

overall valuation of roughly $30 billion, just over half of the valuation of the four biggest

hotel companies combined.12 Thus the platform has created essentially an entire new industry

of home sharing which has disrupted the traditional hotel market and stolen a large portion

of the market share of short term lodging previously captured by hotels. While the core

business of home sharing is in theory perfectly legal, that statement is made with the

disclaimer that the renter has the legal right to do so and is not violating any laws either

regulatory or contractually. Many cities in the United States have tourism taxes that should

be applied to stays at Airbnbs and regulations regarding the legality of short term stays in

their jurisdiction. Also renters on Airbnbs platform who do not legally own the property
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have to comply with subletting rules that are written in to their initial rental contract in order

to be operating legally. Thus due to the legal complexity of Airbnbs core business it is

operating within a legal grey area that must be explicitly hashed out through new legislation

that deals with the home sharing industry directly. Therefore, Airbnb can be viewed as a

regulatory entrepreneurship startup and thus subject to the requirements of the initial business

plan previously defined in this paper.

i. Creation of Product

Airbnbs product is very similar in nature to that of Uber because of the fact they are

both software platforms which match consumers to sellers. In the case of Airbnb, the

consumer are guests who are in need of short term lodging while the sellers are property

owners who are looking to make additional income from renting out their homes. Thus

Airbnb does not physically own any of the properties themselves and simply takes a

facilitation fee for use of the platform to rent out properties to consumers.

Where Airbnbs product development differentiates itself from that of Uber lies

within the fact that a large source of its bookings come from its online website instead

of its mobile app. Although mobile commerce has surged in recent years and is now

30% of all U.S. e-commerce as of 201513, one of the industries that the majority of

transactions still occur over the traditional desktop browser is that of travel. Thus

Airbnb at its outset not only needed to create a mobile application for its platform but

a website that also allowed for a seamless consumer experience when booking or listing

a property. Consequently, it had a two-fold development challenge to build a platform

that operates without a glitch over its website and mobile application and
 Arvonio 21

communicates all information back to its backend software to facilitate reliable

bookings and efficient communication between guests and renters.

The next challenge Airbnb faced once they had developed the technology behind

their platform, was to acquire customers and prove to renters that it was safe and

reliable to list their properties to strangers. A renter is taking on a load of liability when

renting their property to others and thus Airbnb offers a Host Protection Insurance

program which provides up to $1 million of primary liability coverage in the event of

injury or property damage during a guests stay.14 Thus armed with the technology

necessary to run the platform and the insurance needed to provide coverage against the

liability individuals are taking when they rent out their homes, the first stage of

Airbnbs business plan was complete.

ii. Raising of Venture Capital

Just like any other technology startup in Silicon Valley, Airbnb was in need of capital

to hire talent to develop the product, rent out server space to host their platform and

spend on an aggressive marketing campaign to spread brand awareness and drive in

revenues. Founders Joe Gebbia and Brian Chesky, funded the initial development of

the site by selling special edition breakfast cereals branded after the two presidential

candidates at the time, Barack Obama and John McCain. 15 They sold eight hundred

boxes of cereal in two months at $40 apiece, thus raising $30,000 for the company,

allowing it to grow and attract its initial seed investor, Y Combinator in January 2009.

After the initial seed round Airbnb has attracted nine additional rounds of funding

from over thirty-nine investors for a total of $2.95 billion in venture capital funding.

This capital has given the company the ammunition necessary to build its product and
 Arvonio 22

spread into new markets, which ultimately achieves the long-term operational goals of

gaining market share and spreading brand awareness. The execution of these objectives

have helped Airbnb achieve a $30 billion valuation as of its latest funding round,

making it the second most valuable tech startup in the United States to Uber. 16

iii. Legal Pre-Mature Go-to-Market Strategy

Airbnbs legal issues revolve within the fact that each individual city it operates

within have uniquely complicated zoning and regulatory codes which affect the legality

of a listing on its platform. In addition to this, many jurisdictions have tourism or

occupancy taxes that must be applied to a stay and paid by the renter to the local

government at the conclusion of the rental. The Airbnb product does not currently have

a sufficient technology built into its platform to notify renters what the applicable laws

are in their jurisdiction and ensure that each and every listing going up on the site is in

compliance with local laws and is thus not illegal.

Instead of holding back the release of the platform until this technology can be built

in and local laws can be clearly understood, Airbnb decided to put in place its go-to-

market strategy without it, thus opening up the door to illegal listings on the site. Instead

of enforcing the laws themselves, the company puts this responsibility into the hands

of the hosts who are encouraged to review local laws to ensure that their listing is in

compliance with the law. If a host is either unaware of a certain law or willfully choose

to disregard it and list anyways, there is no way for Airbnbs platform to ensure that

the law is being upheld and thus it essentially facilitates an illegal transaction.

Therefore, due to its legal pre-mature go-to-market strategy, the company is currently
 Arvonio 23

operating within the legal grey area of whether or not the majority of their listings are

legal and thus it has been faced with an onslaught of legal controversy and disdain.

iv. Rallying of User Base and Lobbying for Favorable Regulatory Laws

One of the many advantages to bringing the platform to market pre-maturely in

regards to its legality, is that it allows for Airbnb to build a loyal consumer base and

gain brand recognition in the market prior to opposition being faced from governmental

regulators. Thus the company is given a window of time to display to consumers the

advantages of their services so that once it experiences regulatory pushback in regards

to its legality, the company can mobilize their consumer base to use them to help lobby

officials to pass favorable regulations to the business.

This strategy is currently being utilized in the companys largest US market, that of

New York City, where the company is currently trying to lobby Governor Andrew

Cuomo into not signing a law that would fine users as much as $7,500 for listings of

unoccupied apartments.17 This new law is stemming from the current law in New York

State which prohibits rental of an unoccupied apartment in buildings with three or more

units for less than thirty days. While Airbnb admits that many of its users are operating

listings that violate the current law, they are arguing that their platform cannot be held

liable for such violations since it merely only facilitates the transaction and is not

involved in its specifics. Former Philadelphia Mayor Michael Nutter who is the

chairman of an Airbnb advisory council attempted to mobilize the platforms renters

into supporting the lobbying efforts by saying, You, the Airbnb community, are the

face of a movement. Thus as clearly shown by this quote, the company is trying to

utilize the consensus of its user base to strong arm legislators into making favorable
 Arvonio 24

regulations of its platform, a process which is a pivotal part to gaining legal recognition

in the regulatory entrepreneurship business strategy.

v. Legal Battles and Ultimate Legislation Approval

Just as in the case of Uber, all of the previous stages of Airbnbs business plan were

done in preparation for the last and final hurdle to legislative approval, fighting the

actual legal battles themselves. In order to continue operations and gain legal

recognition, the legal team within Airbnbs corporate headquarters must be ready for a

long fight to prove to legislatures that their business is legal and is worthy of being

written into law with regulations that are reasonable and favorable to their business

goals.

One jurisdiction where the company has been successful in lobbying for a law to

officially legalize the service is in Philadelphia, Pennsylvania where prior to the Papal

visit in September of 2015 the city council passed a law legalizing rentals through

online marketplaces.18 In order to achieve this, the new law changed zoning codes

specifically to allow Airbnbs in residential areas and subjected all rentals to an 8.5%

hotel tax to be paid to the city for each listing booked. Similar laws have been passed

in San Francisco and Portland, Oregon.

The company has not been as successful however overseas in Europe where many

cities are plagued with increasing rents and housing shortages. Germanys capital city

of Berlin passed a law in May of 2016 which effectively banned Airbnb rentals of full

apartments or homes within the city limits.19 This law imposes a fine of up to 100,000

($115,000) for those who break the law and rent out their entire apartment for less than

30 days on the site. Other cities in Europe such as Paris, which is also the platforms
 Arvonio 25

most popular vacation destination, have instilled tourist taxes on Airbnb listings that

must be collected directly upon initial booking through the platforms direct billing

technology. Policies levying new taxes on home rentals have helped raise revenue for

city governments, exemplified by the fact that Paris was paid nearly 1.2 million in

tourist taxes for the fourth quarter of 201520.

The complexity and uniqueness of housing laws in different jurisdictions around the

world is at the center of the legal questionability of Airbnbs core business. The

company has chosen to take a lackluster approach towards the due diligence they

partake upon to ensure all listings are following the laws and regulations of their

particular domain, and thus are facilitating many illegal bookings through its platform.

Additionally, many renters are renting properties they do not personally own and are

subject to subletting laws within the rental agreement they have with the actual

landlord. This situation arises an additional legal issue with the service in regards to

contractual law and whether or not the renter has a contractual right to make the listing

in the first place. Thus Airbnb has an uphill battle to gain legal recognition in the

majority of jurisdictions in which it operates and must closely monitor its business

strategy to ensure long-term success in its regulatory entrepreneurship objectives.

C. Conclusion on the Legal Ethicality of Regulatory Entrepreneurship in the Sharing

Economy

The theory of regulatory entrepreneurship creates a situation in which a startup is

originated under legal controversy, due to the lawful grey area that its product initially

operates within. In the technological age of the 21st century, innovation has become so

widespread that new technologies are being created faster and faster, at a pace which
 Arvonio 26

legislators regulating these industries are simply incapable of keeping up on. Thus these new

companies are able to take advantage of the time lag between product release and legislative

action to instill a market penetrating business strategy to build its business and gain

significant market share during this time of legal uncertainty.

The obvious question that arises when considering this business strategy is whether or

not it is ethical for individuals to take advantage of inefficiencies in our legal system to incur

personal gain and then use the capital achieved during this period to strong-arm legislators

to pass favorable legislation. Using the sharing economy as an example, two of Americas

most highly valued private companies in Airbnb and Uber, have exhibited a successful

implementation of the strategy to set themselves up for long term success. However, both

companies will always operate under a stigma of legal and ethical controversy due to the

questionability of the lawfulness of their business at its outset.

It is important when considering whether or not the regulatory entrepreneurship business

model is ethical to remember that one of the great assets a country can have economically is

to encourage innovation and create an environment where innovators are rewarded for their

labors. This is why intellectual property such as patents, trademarks and copyrights are

essential to a modern economy, since if innovators rights werent protected there would be

no economic advantage for founders to bring new products and services to the marketplace.

Government is also notoriously slow at responding to changes in the economic landscape of

the country and thus it is not solely a companys fault that they created a new industry which

is not explicitly regulated by previous legislation.

Therefore, a balance must be found between encouragement of innovation and ensuring

consumer protection and market fairness on the macroeconomic level of addressing this
 Arvonio 27

issue. I would contend that it is unethical to take advantage of current legal inefficiencies in

order to force a new industry into the marketplace in order to acquire the capital and brand

awareness to fund aggressive efforts to legalize the industry later on down the line. Thus in

many ways I do believe that the business strategy previously outlined in this paper, utilized

by the sharing economy, was unethical and resulted in both Uber and Airbnb receiving an

unfair period of time where they escaped all regulatory scrutiny. However, at the same time

I also believe that the sharing economy itself is a benefit to the economy as a whole due to

the fact that it is a valuable service, if regulated correctly to ensure that all laws are being

followed and the integrity of the marketplace is maintained.

Ultimately, while the current regulatory entrepreneurship business model is at its core

unethical, the main reason in why it has to be implemented this way originates in the fact

that there is no official way to get regulatory approval of a new industry prior to its go-to-

market strategy. New services such as the sharing economy are overwhelmingly beneficial

to society as long as they are regulated correctly and thus their creation should not be

inhibited solely because the regulation does not yet exist at its outset. Hence I believe the

problem lies within the fact that there is no construct within our current legal structure to

proactively disclose to regulators the new technology that is being developed, to give them

a head start to create regulatory guidelines that must be followed in order for the product to

be innovated legally. This new process would involve filing with the federal government

plans for the new service, which under current law is outside the realm of regulatory scrutiny.

The company would then be given a six to twelve-month window in which it can develop

the product and raise capital but cannot go to market until it receives final regulatory

guidelines to follow in its infancy. These guidelines will ensure that the company operates
 Arvonio 28

within the law during its infancy and will provide state and local governments a template on

how to ultimately treat these new services when drafting local regulations and laws.

This plan, while not perfect, in my opinion creates a more level playing field between

innovators trying to provide a new service and regulators who are trying to ensure market

integrity and consumer protection. The swiftness of new innovations being introduced to the

marketplace will only increase in the future and thus is why I think it is important that

government creates a way to quickly respond to new technologies in order to obtain the

balance necessary to foster a more advanced but also fair American economy.

IV. The Daily Fantasy Sports Industry

For the second half of this paper an entire different regulatory entrepreneurship industry will

be considered, that of online daily fantasy sports. What makes daily fantasy sports unique from

the first construct of regulatory entrepreneurship we looked at in this paper, is the fact that online

gambling has historically been illegal in the United States. Airbnb and Uber face legal controversy

not because the legality of the hospitality or car service industries were ever in question, but

because they facilitate these services online in a matter that circumvents regulations that traditional

hotels and taxi services must follow. Daily fantasy sports on the other hand can be described as an

alternative means of online gambling which is an industry that at its inception has been outlawed

through past regulation and precedent.

Therefore, for the regulatory entrepreneurship startups DraftKings and FanDuel, the question

regarding their legal questionability more lies within whether or not their services should be

considered online gambling or not. While both startups exhibited the same framework of a business

strategy that was previously defined in this paper, it would be redundant to go through the same

analysis that we did with Airbnb and Uber all over again. Thus it is more beneficial to consider
 Arvonio 29

whether or not the industry of daily fantasy sports is considered online gambling through current

law and precedent and then use this determination to conclude the ethicality of DraftKings and

FanDuels overall regulatory entrepreneurship business strategy.

A. Definition of Online Gambling

In order to determine whether or not daily fantasy sports should be classified as illegal

online gambling it is first necessary to define what gambling is itself. Based off of the

definition from The Law Dictionary gambling is, Betting or wagering which results in either

a gain or total loss of wager, the money or asset put up. The definition goes on to

differentiate gambling from other sources of financial wagering such as investing or

insurance by saying, Risk taking or speculation takes on substantial short-term risk to

potentially get high gain. Investing uses property or assets to potentially increase in worth,

securing long-term capital gains. Insurance can prevent financial loss but has no way to

gain.21 Consequently there are a few main differences between gambling from other sources

of financial wagering. First off when an individual gambles their initial capital investment,

or wager, is subject to total loss or total gain and thus there is no middle ground for partial

loss or partial gain. Secondly, the outcome of the transaction is determined by the occurrence

or nonoccurrence of a predisclosed event, an outcome that must be determined by chance.

Finally, if the event does in fact occur, the wager will be returned in full with a predisclosed

multiple being earned with it, however if it fails to occur the wager will be deemed worthless

and the gamble will be lost.

Ultimately there are three elements of gambling that must clearly be met in order for a

practice to be legally classified as it. These three elements are: consideration, chance and

prize. Consideration is the wager initially put up to initiate the gambling transaction, chance
 Arvonio 30

is what influences the ultimate outcome of the event in question and prize are the winnings

that will be paid out to the bettor if the outcome lands in their favor.

The legal definition of unlawful Internet gambling therefore is, To place, receive, or

otherwise knowingly transmit a bet or wager by any means which involves the use, at least

in part, of the Internet where such bet or wager is unlawful under any applicable Federal or

State law in the State or Tribal lands in which the bet or wager is initiated, received, or

otherwise made.22 Therefore in order for a platform to be participating in illegal online

gambling activities their platform must be facilitating gambling activities that contain the

elements of consideration, chance and prize and are accepting monetary wagers over the

Internet.

B. Legal Carve-Out for Season Long Fantasy Sports Leagues

Solely considering the language provided above for the criteria of online gambling it

would seem trivial to conclude that fantasy sports leagues are illegal gambling operations

facilitated over the Internet. The federal government however recognized the economic

benefits that traditional season long fantasy sports leagues have had on increasing sports

viewership and that they provide a source of comradery between groups of friends who play

in leagues together. Due to these positive characteristics Congress included an explicit carve-

out for fantasy sports leagues when defining illegal online gambling in the Unlawful Internet

Gambling Enforcement Act of 2006 (UIGEA)23.

This carve out legalized fantasy leagues that met three specific criteria. First, the value

of the ultimate prize must not be determined by the number of participants or the amount of

fees paid; and should be established in advance. Second, winning outcomes should reflect

the relative knowledge and skill of the participants and be scored by accumulating statistical
 Arvonio 31

results of the performance of individual athletes in multiple real-world sporting events.

Lastly, the fantasy games result should not be based on the individualized performance of

any real-world teams or individual athletes.24

These three criterion ensure two critical aspects of legalized fantasy sports that classify

it as a game of skill instead of a game of chance. First off, individualized fantasy rosters must

be diversified through the combination of individual players from around the league to make

up any single roster. Second, the performance of individual athletes, which make up the

scoring of any fantasy game, should be based off accurate statistical data that can be analyzed

based off historical data observed in the past. Diversification of players and the use of

statistical data over an entire season, both in theory ensure that success can be achieved

through the accumulation of skill and not solely chance alone.

C. Comparison of Traditional Fantasy Leagues to Public Equity Markets

When first defining what the legal definition of gambling was, an important distinction

was made in terms of what differentiates legal financial wagering activities such as investing

and insurance from illegal gambling operations. Illegal gambling and legal investing all have

one thing in common which is the initial outset of capital required to take on a significant

risk of capital loss. However, investing in corporate equity and purchasing insurance

products are legally protected since return on investments do not lie within chance alone and

require some sort of skill or expertise.

Thus in order to make the argument that season long fantasy sports are more similar to

legal investing than that of illegal gambling, it must be proven that skill is involved in order

to be successful and that there are parallels between public equity markets and traditional

season long fantasy sports leagues.

 Arvonio 32

i. Parallels Between Traditional Fantasy Sports Leagues and Public Equity Markets

Traditional fantasy sports leagues mirror closely a public equity market such as the

New York Stock Exchange due to the fact that investors, in this case team managers, own

assets in the form of player rights which hold value over the course of the entire season.

When investing in publically traded stocks an investor will go to his or her brokerage firm

and place an order for a certain number of shares at a specified price. If and when a seller

is matched through the brokerage, the order will be executed and the shares will be

deposited in the investors account in return for the purchase amount. In season long

fantasy sports leagues there is a commissioner who acts as the broker in order to fill the

entire league and collect the entrance fee from these owners which ultimately gives them

the right to draft a team in the league. Once the league draft occurs, owners will have the

opportunity to build their team by drafting individual players and building their rosters

with the best possible talent to ensure success over the entire season.

Moving forward past the initial drafting of teams, each and every player owned by a

team manager has an intrinsic value that fluctuates based off of their on the field

performance on a week to week basis. Players that were not picked initially can be signed

throughout the season through free agency and trades can occur between two league

managers who decide a particular transaction would be mutually beneficial for the needs

of each team. This is very similar to the stock market where each and every stock owned

by an investor will carry with it a value that will fluctuate based on the supply and demand

observed in the marketplace. Over time an investor can choose to sell a position, buy more

shares from an issuer they already own or further diversify their portfolio by purchasing

shares in a new company. Thus in both stock investing and fantasy team management, an
 Arvonio 33

investor must maintain their asset holdings on an ongoing basis and update their positions

continuously in order to be ultimately successful and gain the highest return on investment

possible.

ii. The Requirement of Skill through Data Analysis in Fantasy Football and Equity Investing

In order to make informed investment decisions when investing in the stock market,

an investor must be able to understand the market trends that are expected to be observed

in the future and be able to value a company based on the metrics shown on its financial

statements. First year analysts at investment banks are paid a lot of money straight out of

college to value certain stocks through pre-built models and determine which stock

opportunities should be attractive to investors.

This objective is achieved by implementing one or both of the two most common

security evaluation methods, technical and fundamental analysis. Technical analysis is

the process of evaluating a security by studying statistics generated by market activity in

the past such as price and volume. Technical analysts dont care about the stocks

intrinsic value but instead use stock charts to identify patterns and trends observed in the

past that may suggest what the stock will do in the future. Fundamental analysis on the

other hand attempts to measure the intrinsic value of a stock by using its financial

statements to value the overall companys net worth. 25 Ratios such as price-to-book,

price-to-earnings, and dividend yield are all utilized to better understand whether or not

a stock is currently under or overpriced on the market compared to its actual book value.

In order to better explain what the process of technical and fundamental analysis

looks like within the stock market, the publically traded e-commerce giant Amazon will

be considered. When considering Amazon from a strict technical analysis standpoint it is

 Arvonio 34

necessary to utilize stock charts which can be easily found on financial websites such as

Google Finance. The below stock chart of Amazon shows that it went public in May of

Source: Google Finance

1997 at what is now equivalent to $1.73 after stock splits (The actual IPO price was $18).

Since then the stock has risen 48,210.40% and its current price after market close on

January 27, 2017 is $835.77 per share. Purely utilizing technical analysis back in the

early days of the stock would draw the conclusion of skepticism since the stock enjoyed

a large boost from its IPO to early 2000 when it plummeted as a result of the Internet

bubble crash. The stock price never was able to reach its pre-crash highs again until after

the end of the housing market collapse in early 2009 when it went on a run that it has

never looked back from. Therefore, purely using technical analysis to decide on whether

or not to buy Amazon stock could have been an unsuccessful strategy back in 2009

because it was almost impossible to foresee the steep upswing the stock was about to go

upon through its past price trends.

Using fundamental analysis during this time period might not have been the most

successful strategy either. As of year-end 2008 Amazon had a price to earnings ratio of

34.4, over three times that of the S&P 500 average of 10.9. Their price to book ratio

wasnt much better, almost five times greater than the S&P 500 average of 1.7 at 8.2. 26

Utilizing both of these ratios would have told the typical fundamental analyst that

Amazon was significantly overpriced compared to what its true book value was on paper.
 Arvonio 35

Amazon has also never paid a dividend so a fundamental analyst cannot use the dividend

yield metric to help accurately value the stock.

What did accurately forecast the future success of Amazon as a company however

was the non-financial statistics surrounding its business. E-commerce in 2009 was one

of the newest and most innovative industries that was disrupting the way traditional brick

and mortar retailers were doing business. Amazons user base was also increasing rapidly

and although the company was not currently making a profit that was because they were

heavily investing in infrastructure and software that would help grow their business and

gain more market share as the company matured into the future. An investor that realized

the long term value the e-commerce industry had and chose to invest in the industry

leader in Amazon would have enjoyed enormous profits due to their understanding of the

larger trends of the market as a whole.

With all of that said, what we were ultimately trying to prove by detailing out how

an investor would go about valuing a stock such as Amazon was that an immense amount

of skill would be required in order to be successful. While an investor could have

randomly chosen to buy Amazon in 2009 without doing any sort of analysis, the success

of the stock did not ultimately occur because of chance but instead because there was real

value in the business behind the company in which the stock equity represented. In order

to prove that fantasy sports requires the same source of skill in order to be successful, it

must then be proven that the same sort of statistical analysis can be done on players to

determine which are of greatest value.

Thus in order to prove that statistical analysis is beneficial for being successful in a

fantasy sports league we will look at three players from the National Football League
 Arvonio 36

who have been well regarded as one of the best players at their respective positions over

the past four seasons. These players are quarterback Aaron Rodgers from the Green Bay

Packers, running back LeSean McCoy from the Buffalo Bills and wide receiver Antonio

Brown also from the Pittsburgh Steelers. Using an excel spreadsheet created for the

purposes of this paper all of the fantasy stats of players over the past four seasons were

compiled into one excel databank. Using this database, I was able to extrapolate the

relevant statistical data for each of the past four seasons and create a graphical

representation of each players fantasy performance compared to their peers around the

NFL. Below are the results of this analysis:

Aaron Rodgers vs. All NFL Quarterbacks

Passing Yards Per Season for NFL QBs Passing Touchdowns Per Season for
5000 NFL QBs
AR
50
4000 3Q
2Q 40 AR
3000 AVG 30
3Q
20 2Q, AVG
2000
1Q 10 1Q
1000 0
2013 2014 2015 2016 2013 2014 2015 2016

Aaron Rodgers League Average 3rd Quartile Aaron Rodgers League Average 3rd Quartile
2nd Quartile 1st Quartile 2nd Quartile 1st Quartile

Total QBR Rating Per Season for NFL QBs

80 AR
70 3Q
2Q, AVG
60
1Q
50
40
30
2013 2014 2015 2016

Aaron Rodgers League Average 3rd Quartile

2nd Quartile 1st Quartile
 Arvonio 37

LeSean McCoy vs. All NFL Running Backs

Rushing Yards Per Season for NFL RBs Rushing Touchdowns Per Season for
1650
NFL RBs
1450 14
LM
1250 LM
12
10
1050
3Q 8
850 3Q
6
650 AVG AVG
4 2Q
450 2Q
2
1Q 1Q
250 0
2013 2014 2015 2016 2013 2014 2015 2016

LeSean McCoy League Average 3rd Quartile LeSean McCoy League Average 3rd Quartile
2nd Quartile 1st Quartile 2nd Quartile 1st Quartile

Antonio Brown vs. All NFL Wide Receivers

Receiving Yards Per Season for NFL Receiving Touchdowns Per Season for
WRs NFL WRs
2050 14
1850 12 AB
1650
10
1450
1250 AB 8
1050 3Q 6 3Q
850 AVG
AVG 4
650 2Q
2Q
450 2 1Q
1Q
250 0
2013 2014 2015 2016 2013 2014 2015 2016

Antonio Brown League Average 3rd Quartile Antonio Brown League Average 3rd Quartile
2nd Quartile 1st Quartile 2nd Quartile 1st Quartile

Since all three players have been at or above average in terms of yards and touchdowns,

the two most valuable stats in fantasy, for the past four seasons it is easy to conclude that

they have had great value to those owners that have drafted them. Solely using technical

analysis to make decisions on future production I would make the assertion that all three

players will continue to be valuable picks for future seasons and that it would be worth a
 Arvonio 38

high round draft pick to acquire them. In terms of which player has the highest value I

would conclude that Antonio Brown is worth the most because he has consistently been

well above the 3rd quartile of receivers in the league in terms of receiving yards and

receiving touchdowns. Also if the league utilizes the point-per-reception (PPR) rule those

managers who own Antonio will get one point for each reception he has in addition to

what he would normally earn.

For the purposes of fantasy football however I would recommend using a combination

of technical analysis and fundamental analysis to rank players based off of future value

for fantasy production. Unlike stocks, athletes are human beings who are effected by

limiting factors such as age, health and fatigue. A player might have played at the top of

his game for a while and thus would look like a solid pick based off of solely technical

analysis, but his age may result in reduced production for the future. Also a rookie or

second year player who may not have the statistical data behind them to prove future

success may be a valuable pick because of their skill and ability that hasnt been exhibited

yet on the field.

Moving past the initial player draft, skill is further required in fantasy football to

maintain a team over the seventeen-week season and ensure that the best possible roster

is being put forth each and every week to achieve success. A team manager must sign free

agents that have unexpectedly played well over the first few weeks of the season,

substitute players to and from the bench who may be on a bye week or are injured and

make trades with other teams to stay competitive over the long haul. All of these

transactions require the skill of the team manager to achieve success and is similar to a
 Arvonio 39

real NFL general manager who has to maintain his teams roster to remain competitive in

actual competition.

Ultimately for these reasons and many more traditional season long fantasy sports

leagues have been deemed a game of skill by Congress and is why they created a

specialized carve out for it in the UIGEA legislation. Daily fantasy sports startups such as

DraftKings and FanDuel have used this carve out as legal evidence that their platforms

are facilitating a legal fantasy sports operation, an assumption that has been widely

criticized and brought to court to contest the legality of its operations.

D. Differentiating Characteristics Between Daily Fantasy Sports and Traditional

Fantasy Sports Leagues

In order for there to be even an argument that daily fantasy sports can be considered

online gambling there must be distinct differences which distinguish daily fantasy sports

from season long fantasy sports. These differences must then be proven to be significant

enough that they completely diminish every source of skill present in the traditional fantasy

structure that result in the ultimate outcome of DFS games originating in chance alone.

The most obvious difference between daily fantasy sports and traditional season long

leagues is the construct of time. Most daily fantasy football games occur over the course of

a weekend or a single day and thus require less skill since managers dont carry a roster over

an entire season. The idea of free agency, trading or bench management is non-existent in

daily fantasy sports and owners simply have to build a roster for that single time period with

no regard for what other teams are doing in which they are competing with. Teams are built

on DraftKings and FanDuel utilizing a virtual cap structure. The platform assigns eligible

athletes a monetary salary based on their relative value and how many points they are

projected to score; it is then the individual managers job to build the best roster possible
 Arvonio 40

utilizing the $50,000 in cap space that they have available to them. If a player that they choose

on one weeks roster gets hurt or underperforms, the manager simply does not choose them

the next week thus making there no source of long term risk when selecting individual

rosters.

This lack of long term risk creates the next major difference between daily fantasy sports

and traditional leagues, since the wager put up as collateral to play in one weeks game does

not carry over to the next. If a manager is unsuccessful in building a roster that scores enough

points to be in the money, they lose all of the entry fee they put up to play originally and

must contribute additional money in the future to continue playing. This environment of a

quick turnaround between initial wager and potential loss can create a source of betting

addiction in which an individual puts more and more of their money into the system to keep

on playing and ultimately loses a lot extra than what they originally budgeted for. In a

traditional fantasy sports league that lasts an entire season, although the initial buy in may be

greater, there is no additional capital required to continue playing and no chance for a

manager to lose more than what they originally bargained for.

The final difference that is relevant to this discussion is the fact that daily fantasy sports

games are played against thousands of strangers while traditional fantasy leagues are

composed of only a handful of friends. It was previously stated that one of the positives of

traditional fantasy leagues that Congress initially wanted to protect in the UIGEA was the

camaraderie created between friends when they played fantasy sports together. It is hard to

make the argument that there is any camaraderie present between individuals competing for

the ultimate daily fantasy sports prize, thus making the only advantage of playing daily

fantasy sports games the final monetary prize. Many individuals who play fantasy sports with
 Arvonio 41

their friends may do it solely for the sense of inclusion and enjoyment that they get out of

friendly competition with friends through a sports medium that they all enjoy. This non-

monetary benefit that individuals receive from playing fantasy sports can sometimes

outweigh the benefit of overall winning, thus making the monetary prize at the end not as

much of of the leagues ultimate goal. In daily fantasy sports however an individual player

has no idea who he or she is competing against and thus the only way they can benefit from

playing is ultimately winning and increasing the value of the initial wager they put at stake.

E. Legal Case Study of New York States Legalization of Daily Fantasy Sports

The legality of the daily fantasy sports industry has been a hot topic in arguably the

nations most important state when it comes to legal precedent on business regulation, that

of New York. Back in 2015 New York State Attorney General, Eric Schneiderman ordered

DraftKings and FanDuel to seize operations in New York under the grounds that it was

operating an illegal online gambling operation according to state law.27 This decision was

aggressively appealed by both companies for the greater part of a year until finally in June

of 2016 the state Assembly and Senate passed the bill legalizing daily fantasy sports in the

state. Governor Andrew Cuomo signed the bill, officially enacting it into law on August 3,

2016 which legalized the industry and provided specific regulations for it to operate under

for the future. This legislation requires daily fantasy sport sites operating within the states

jurisdiction to be licensed and be taxed at fifteen percent from gross revenue and another half

a percentage point in licensing fees capped at $50,000. These taxes would be earmarked

towards education to fund the states public school system in a similar manner that state

lottery revenues are earmarked for education initiatives.28

 Arvonio 42

The passing of this legislation into law was a huge win for daily fantasy sports sites such

as DraftKings and FanDuel however it is not the end to the debate on whether or not their

services should be classified as illegal gambling or not. Shortly after Governor Cuomo signed

the bill legalizing daily fantasy sports in New York State an anti-gambling group called Stop

Predatory Gambling filed suit saying that the law violated the states constitution. This case

was quickly dismissed however by Eric Schneiderman himself who argued that New York

can define gambling how it wants and that since the State Constitution never explicitly

defines what gambling means, the legislature has the authority to interpret the term how they

see fit. In his ruling Schneiderman said, The State Constitution expressly delegates to the

Legislature the authority to enact appropriate laws to effectuate the constitutional prohibition

against gambling a term the Constitution itself leaves undefined. Consistent with that

authority, the Legislature has enacted L. 2016 Ch~ 237 (Ch. 237), which resolved the legal

status of specific internet games known as interactive fantasy sports and declared that such

contests properly fall outside the definition of gambling in New York as defined in the Penal

Law.29

Ultimately New York States decision to legalize daily fantasy sports operations within

its jurisdiction will go a long way in setting precedent for other states to follow suit and

legalize it nationwide. It was a huge win for DraftKings and FanDuels regulatory

entrepreneurship strategies however since it took so long to get legal approval in one of its

biggest markets, the fight left both companies in an economic struggle to restore the market

share they once had before it began. Consequently, this is one of the major reasons why both

companies are merging in order to align and better situate themselves to be mutually

successful in the long run.

 Arvonio 43

F. Conclusion on the Overall Legality of the Daily Fantasy Sports Industry and the Legal

Ethicality of DFS Startups DraftKings and FanDuel

When considering the big picture surrounding the daily fantasy sports as an illegal

gambling activity debate it is clear to see why many people consider the practice gambling.

It is nave however to contend that the outcome of daily fantasy sports relies on chance alone

and that there is no sense of skill required to be successful. In my opinion daily fantasy sports

is more similar to day trading then it is to gambling and is why I believe that it should be

legalized and regulated so that consumers have access to the service in a safe and fair manner.

Back when the comparison was made between traditional season long fantasy leagues

and public equity investing, one of the characteristics of both practices that we used to prove

they both required skill was the passage of time. This assumption neglected however the

practice of day trading in which an investor buys a stock and intends to hold it for a short

period of time (hours, days or weeks) before selling it off in hopes of a quick profit. This

practice is perfectly legal, however it is riskier and requires less skill than long term investing

since many short term movements in stock prices occur as a result of market anomalies

instead of changes in true stock value.

While many would consider this practice gambling because it is hard to predict what the

market is going to do in the short term, it is within every investors right to choose how and

when they want to manipulate their stock portfolio. In my opinion this mentality should be

used when monitoring fantasy sports involvement. If Congress has already recognized the

legal credibility of traditional long term fantasy sports leagues, I think that it should be within

a consumers rights to participate in riskier short term versions of a similar fantasy concept.

These leagues can be regulated more closely and taxed at a higher rate than season long
 Arvonio 44

leagues, similar to the construct of long term and short term capital gains tax rules, but I

believe that it is outside the power of the government to outlaw the industry all together. It

has been made clear that skill is involved in Daily Fantasy Sports, even if its at a lesser level

than long term leagues, thus I would ultimately classify the industry as a risky bet on an

individuals fantasy sports knowledge rather than a gambling activity that is left entirely up

to chance alone.

V. Conclusion

Regulatory entrepreneurship is a construct that has been around ever since the Industrial

Revolution and the rise of technology has brought about the shift into modern society. The creation

of the Internet however has allowed for this construct to take off rapidly in recent years, since new

products and services can be introduced globally through the single click of a mouse. While

innovation is essential to society and the global economy will only continue to advance if new

disruptive technologies are developed to increase competition in established industries, the debate

still lies in whether or not it is ethical to take advantage of the newness of a technology to

circumvent existing regulation and legal statutes that do not necessarily apply to this new product.

Over the course of this paper four twenty-first century privately held startups were

considered to better understand what the business model of a regulatory entrepreneurship company

looks like. These companies Uber, Airbnb, DraftKings and FanDuel all utilized their previously

non-existent industry to circumvent regulatory scrutiny for a period of time while they grew their

brand and acquired customers. All four of these companies then weaponized their user base to

lobby lawmakers to pass favorable legislation so that they could continue using the platforms that

they felt made their lives more convenient or entertaining as a result.

 Arvonio 45

While this business model is entirely legal and in no way against the law for utilizing an

inefficiency in the law to generate personal gain, it does have many legitimate ethical concerns in

regards to being anti-competitive and potentially exploiting consumers. Thus I believe that the law

needs to be changed to require companies hoping to innovate within an industry that is previously

not mentioned in legislation to disclose their business plan in advance so that regulation could be

written quicker to protect against corruption in this new industry. Also in order to ensure that

innovative entrepreneurship is not discouraged as a result of long approval periods between the

disclosure of a business plan and its ultimate regulatory response, a new innovation protection

federal agency should be created to create temporary guidelines for new companies to follow and

help advise them while permanent legislation is being written and voted upon in local governments

around the country.

The advancement of technology is the defining characteristic that will embody this time

period in history and is something that is going to only grow quicker over the next decade.

Investing in a government agency to regulate the advancement of technology in an efficient and

time sensitive manner is essential to ensure fairness in the marketplace and protect consumers in

the present instead of after the fact. Additionally, the presence of a federal precedent in which

individual state and local legislatures can use to draft permanent legislation can help expedite the

process of ultimate legalization while also creating a standard in which is used to normalize

regulations throughout the country.

Regulatory entrepreneurship is not unethical; it is purely utilizing the advantages present

in the law to achieve ultimate personal gain. It is ultimately up to the government to fix the

inefficiencies present in the legal system so that regulatory entrepreneurship can be changed into

pure entrepreneurship, a construct that can only positively propel society into the future.
 Arvonio 46

VI. References
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12. Farber, Rafi. "$30 Billion Airbnb Valuation Challenges New Bear Market Thesis

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23. Edelman, Marc. "Is Your Fantasy Football League Legal?" Forbes. Forbes Magazine, 31

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Additional Citations

Feeney, Patrick. "Turning Fantasy into Regulatory Reality: A Comparative Approach to

Daily Fantasy Sports Through Contracts.". Columbia Journal of Law and the Arts, 11

Apr. 2016. Web. 29 Jan. 2017.

"Amazon.com, Inc." Google Finance. Alphabet Inc., n.d. Web. 29 Jan. 2017.

"NFL Player Statistics." ESPN. ESPN Internet Ventures, n.d. Web. 29 Jan. 2017.

"Are Daily Fantasy Sports Gambling?" U.S. News & World Report. U.S. News & World

Report, 6 Oct. 2015. Web. 29 Jan. 2017.