[toc]The daily fantasy sports site FantasyUp has closed its virtual doors, and appears to owe an undetermined amount of money to its users.
An email from FantasyUp to users said, in part: “Our sincere apologies that we cannot process withdrawals, as the Company does not have the funds needed to process the withdrawals to all customers.”
The story of FantasyUp brings up one central question: Could regulation and consumer protections have stopped this from happening? Almost certainly, the answer is yes. And, at a minimum, regulation would have provided a recourse for affected players.
The cautionary tale of FantasyUp
The daily fantasy sports operator FantasyUp has had issues for several months — that much was not a secret.
In the summer, a number of players had problems getting their withdrawals processed by FantasyUp in a timely fashion, but eventually it appeared that everyone had been made whole by August. At the time, Legal Sports Report had tried to reach FantasyUp for comment, but received no reply.
Fast forward a few months, and the same issues cropped up in the fall, with players taking to the forums at Rotogrinders.com, frustrated as they waited weeks or months to withdraw from the site.
Then, on Thursday, came the revelation that FantasyUp had closed up shop. Going to the website now brings up a blank page. The site’s Twitter account is now protected. Anecdotally, a number of players have said they are still owed money by the site.
The following email was sent to some users from FantasyUp support:
For the past few years, FantasyUp has been providing daily fantasy sports (DFS) contests with industry leading promotions. The Company essentially paid players to play on its platform with the expectation that industry would continue to expand and a financing deal would allow for us to further our growth within the industry.
Such a deal presented itself to FantasyUp months ago, before being delayed for investor personal issues. Over the following weeks, the industry saw numerous legal issues arise, increasing the cost of doing business and the decreasing the ability to raise funds.
FantasyUp no longer has the capital to fund even minimal operations. The owners and investors in FantasyUp continued to fund the business while waiting for the financing deal, but after numerous conversations with advisors, experts, and past/potential investors, the Members of the LLC have concluded that they have no choice but to shut down the business and dissolve.
As of January 14th, 2016, the Company has ceased operations and legally dissolved the business. Our sincere apologies that we cannot process withdrawals, as the Company does not have the funds needed to process the withdrawals to all customers.
It was our privilege to serve you for the past few years.
The FantasyUp Team
The lead up to FantasyUp closing down
Aside from the problems that arose in the summer, there had been some red flags surrounding the site.
First, the site announced it would be operating “rake free” for the NFL season; the promotion had been pinned on FantasyUp’s Twitter account:
— FantasyUp (@FantasyUp) August 28, 2015
“Rake free” means that the site was not taking a cut of entry fees, which is the revenue model on which the DFS industry is based. Without taking rake, there is no revenue. Usually, sites take about a 10 percent cut of all fees.
300% deposit bonus
FantasyUp had been offering a 300% bonus for first-time depositors:
— RotoGuys (@RotoGuys) December 10, 2015
Of course, like almost all DFS sites, this money was not paid all at once in a lump sum upon depositing; the “bonus” was unlocked over time, as players entered real-money contests.
The mechanics of unlocking the bonus employed by FantasyUp matches the industry standard. The 300% figure, however, is not an industry standard; generally, the highest bonus that most DFS operators offer is a 100% bonus.
At the same time that this deposit bonus was being offered, the site was also generating no rake.
Still taking deposits
The problems for players withdrawing funds started back in November, although some users also reported receiving their funds during this timeframe.
However, even as players struggled to get their money — with some never being paid — FantasyUp continued to advertise and take deposits. Users with an account at FantasyUp were still receiving emails from the site encouraging them to deposit, as recently as the end of December:
What would regulation have done?
As states across the country consider regulation of the DFS industry, this much is clear: A regulated environment might have stopped the issues players had with FantasyUp.
It’s important to note that FantasyUp is not a member of the Fantasy Sports Trade Association, while almost every other DFS operator of any size is. But the FSTA is not a regulatory or enforcement body, and it’s not clear that FSTA membership (or hypothetical revocation of FSTA membership) would have changed anything.
So what might regulation have been able to do?
- Clearly, if FantasyUp is not able to pay users who had balances on the site, it was not segregating player funds from operational funds. Such segregation of funds is the cornerstone of nearly any regulatory effort being put forward.
- FantasyUp would have had to go through some sort of third-party audit that would have uncovered problems. Most DFS bills include mandatory annual audits.
- Players would have some sort of recourse to act against FantasyUp. Currently, players are left with the possibility of contacting law enforcement about their unpaid balances, or filing a lawsuit. The success of recovering any funds seems minimal. A regulatory scheme would provide a way for players to take grievances regarding an operator to a state body.
- Regulatory schemes usually create some sort of enforcement mechanism; some bills include a civil penalty of $1,000 per violation of a state’s code as it related to DFS.
FantasyUp is not the norm in the DFS industry, and could be a one-off occurrence. However, with no regulatory body or scheme in place for the daily fantasy sports industry, it’s conceivable that this could happen again.
Passing regulation at the state level now would provide consumer protections that the users of FantasyUp did not have.