March 26, 2016

Best Bet Is Expanded Economic Freedom

Christopher Koopman

Senior Affiliated Scholar

Jim Pagels

Research Assistant
Summary

Virginia's new Fantasy Contests Act dictates how fantasy sports companies (including DraftKings, FanDuel, or future upstarts who may develop a better business model) can offer games and pay out prizes, requires them to hire a third party to screen customers, and mandates annual audits.

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Earlier this month, Gov. Terry McAuliffe signed the Fantasy Contests Act into law. Virginia is the first state to pass comprehensive regulations on the fantasy sports industry, making it a trendsetter in its approach to this fast-growing, popular, and sometimes controversial industry.

It also highlights Virginia’s troubling entrepreneurship problem.

Calling these new regulations rigorous would be an understatement. Specifically, the Fantasy Contests Act dictates how fantasy sports companies (including DraftKings, FanDuel, or future upstarts who may develop a better business model) can offer games and pay out prizes, requires them to hire a third party to screen customers, and mandates annual audits. Perhaps most burdensome is the $50,000 fee required to register with the Department of Agriculture and Consumer Sciences.

Beyond Virginia, this issue is far from settled, and these regulations could serve as a template for the 30 other states considering similar fantasy sports legislation. Yet doing so would simply extend bad policy beyond the commonwealth’s borders — and Virginia’s approach to fantasy sports is not unique to this industry. In fact, in many respects, the commonwealth can be an example of how not to approach other new, innovative industries.

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Take, for example, Virginia’s recent regulations on ridesharing companies like Uber and Lyft. In July 2015, the state began licensing them as “transportation network companies.” Similar to its fantasy sports regulations, the state now requires an initial fee of $100,000 and an additional $60,000 each year to renew the license.

If every state were to adopt Virginia’s approach, a single ridesharing start-up could be faced with $5 million worth of costs to simply offer their app across the country and another $3 million each year after that.

Or look at how difficult it is to start a craft brewery in Virginia today. An individual seeking to start a brewery can be denied a license for such subjective reasons as being “physically unable to carry out the business of brewing,” lacking “good moral character,” or failing “to demonstrate financial responsibility.”

If that wasn’t enough, the state could merely decide that there are already enough brewers operating in the region, and one more is simply unnecessary. When taking into account the federal, state, and local regulations combined, it is as difficult to start a brewery in Virginia as it is to start a small business in China or Venezuela.

However, we rarely hear the full story when these laws are passed. Oftentimes, the large, established firms — DraftKings, FanDuel, Uber, Lyft, and others — celebrate these laws as wins for the industry. They certainly have good reason to do so: The once-in-question legality of their business was cleared up. Perhaps equally importantly for them, however, is that Virginia also created huge roadblocks for any smaller firms who may rise up to compete with them.

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Why even try to launch a startup in Virginia? Even without these artificial barriers to entry, it is already an incredibly daunting task to come up with business plans, raise funds, test the market, find employees, and generate interest — all with zero initial revenue.

Square one is a rough place for any entrepreneur. Virginia start-ups are already playing from behind against their established competition, and now they need tens of thousands of dollars just to buy the privilege to try.

For DraftKings or Uber, licensing fees of $50,000 or $100,000 amount to a rounding error. But for the college student working out of her dorm room, or the guys launching a new company from their garage, it’s a death sentence before they even have chance to breathe.

Virginia lawmakers are right to worry about protecting consumers, and it is certainly important to keep the focus on how to best achieve this. But, as our colleague Adam Thierer has said, “Planning for every worst case means the best case never comes about.” Policymakers should focus on fixing real problems in concrete ways instead of creating barriers for the next generation of entrepreneurs and innovators in Virginia.

Life will go on. Entrepreneurs will seek greener pastures. Policymakers in other jurisdictions should look elsewhere for examples of how to get it right. But consumers in Virginia will be left with fewer options, higher prices, and ultimately less innovative markets as those in less burdensome states. And all of this could be avoided if common sense became more common in the commonwealth.