Robinhood Challenges State Lines on Sports Futures Regulation

Robinhood Derivatives, the derivatives division of the Robinhood trading platform, has filed lawsuits against the gaming regulators and attorneys general of Nevada and New Jersey. The legal action follows the states’ attempts to restrict Robinhood’s offering of sports-related event contracts, which the company claims are federally regulated financial instruments. Robinhood Derivatives asserts that its contracts, which are traded on the KalshiEX platform, fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) and are therefore preempted from state-level regulation. In its complaints filed in the U.S. District Courts for the Districts of Nevada and New Jersey, Robinhood seeks to enjoin the states from enforcing their gaming or gambling laws against its event contracts. The company emphasized that allowing selective state regulation could fragment federal oversight and undermine the uniform regulatory framework Congress intended for commodity futures and swaps trading.

The event contracts, which allow users to trade on the outcomes of future events such as sports games and election results, were recently expanded to include pro and college football markets. Robinhood has launched these contracts within the Robinhood app, with initial offerings covering the first two weeks of the pro and college football seasons. Customers can trade these contracts in real time and adjust or exit positions throughout a game. The company argues that unlike traditional sports betting—where bookmakers set lines—event contracts operate on a financial market model, with prices set by buyers and sellers interacting on a marketplace. This distinction, Robinhood claims, is critical to its legal position.

Robinhood’s legal challenges are part of a broader regulatory debate over the boundaries between financial derivatives and sports betting. Earlier this year, Kalshi, the prediction market platform that facilitates Robinhood’s event contracts, faced similar pushback from state regulators in New Jersey and Nevada. Federal courts in both states granted preliminary relief to Kalshi, ruling that its contracts were likely not subject to state-level gambling laws. Robinhood argues that the same reasoning should apply to its contracts, given their operation under the CFTC’s regulatory umbrella. However, a recent court decision in Maryland has complicated this argument, with a judge noting the similarities between Kalshi’s offerings and traditional sports betting.

The company has also encountered enforcement actions from other states, including California, where three Native American tribes have sued Kalshi and its partners, including Robinhood, over the legality of their sports prediction markets. Robinhood maintains that its event contracts are not sports betting products and are offered in compliance with federal law. It further emphasized that customers must apply and be approved for a Robinhood Derivatives account to trade these contracts, and additional trading prohibitions apply. Robinhood has previously suspended the rollout of sports-related markets in New Jersey following regulatory pressure, only to resume them after securing legal clarity.

Robinhood’s lawsuits are being represented by Cravath, Swaine & Moore LLP, with local counsel in Nevada and New Jersey. The company filed the suits on the same day it launched its pro and college football prediction markets. Robinhood claims that if state regulators are permitted to take enforcement action against its contracts while allowing Kalshi to operate, it would face significant harm in the emerging market for sports event trading. The outcome of these lawsuits could have wide-reaching implications for the regulatory landscape surrounding prediction markets and the future of financial innovation in the U.S.

Source: [1] Robinhood Sues New Jersey, Nevada Over Event Contracts (https://cointelegraph.com/news/robinhood-sues-new-jersey-nevada-over-sports-contract-threats) [2] Robinhood to Roll Out Football Prediction Markets (https://frontofficesports.com/robinhood-to-roll-out-football-prediction-markets) [3] Robinhood Sues Nevada, New Jersey Over Sports Wager (https://news.bloomberglaw.com/securities-law/robinhood-sues-nevada-new-jersey-over-sports-wagering-crackdown)