I would like to set up a prediction market website. I understand that gambling is illegal in the US, but if users play with fake money that they buy off the website, will it be legal? The Users will receive prizes for how much they win and bet. So is this legal? And do I need to do something with the government to set up the website.
Whether the players receive money, goods (gifts), or anything which can be converted to money and if they are buying online money with real money, you have created a gambling site. You can consult a local attorney as to gambling, but if your site can be reached outside of CA, then the issue is gambling, state by state, and as to the Feds. If the users are not paying and only receive "bragging rights" for winning, then I can see no gambling involved.
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You should have this business model reviewed by an online gaming lawyer. Some states will treat virtual currency that has any value whatsoever, as sufficient 'consideration' to support a finding of gambling. The laws of each state are potentially applicable, unless you geo-block users from specific states, to avoid application of those states' laws. Also, if the 'predictions' involve a sufficient element of skill, that may take the business model out of the realm of gambling. Currently, the federal government does not issue licenses for this sort of business. Nevada has issued initial approval for licensure of some online gaming companies, but your goal will probably be to avoid any business model that requires licensure.
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While not exactly on point, the Bus info below may be helpful to get you started:
Business and Professions Code
Bus & P C § 19890.5. In addition to the requirements of Section 19852, in order to be eligible to receive a gambling license to own a gambling enterprise, a limited liability company shall comply with all of the following requirements:
(a) Be registered to do business in California.
(b) Maintain an office in the gambling establishment.
(c) Comply with all of the requirements of the laws of this state pertaining to a limited liability company.
(d) Maintain an ongoing ledger in an office of the limited liability company in California that shall meet both of the following conditions:
(1) At all times reflect the ownership, membership, and management interests.
(2) Be available for inspection by the department at all reasonable times without notice.
(e) Supply the following supplemental forms and information in accordance with Section 19865 with the initial application, and thereafter upon request to the department, which shall include, but not be limited to, all of the following:
(1) The organization, financial structure, and nature of the business to be operated, including the names, personal and criminal history, and fingerprints of all members and managers, and the name, address, and interest of each owner, member, and manager.
(2) The rights, privileges, and relative priorities of members as to the return of contributions to capital, and the right to receive income, accept losses, and incur liabilities.
(3) The terms on which membership interests are to be offered.
(4) The terms and conditions on all outstanding loans, mortgages, trust deeds, pledges, or any other indebtedness or security interest.
(5) The extent of the holding in the limited liability company of all underwriters, and their remuneration as compensation for services, in the form of salary, wages, fees, or otherwise.
(6) The remuneration to persons other than managers or members in excess of one hundred thousand dollars ($100,000) per annum.
(7) Bonus and profit-sharing arrangements.
(8) Management, consulting, and service contracts related to the operation of controlled gambling.
(9) Options existing or to be created.
(10) Financial statements for at least three fiscal years preceding the year of application, or, if the limited liability company has not been in existence for a period of three years, financial statements from the date of its formation. All financial statements shall be prepared in accordance with generally accepted accounting principles and audited by a licensee of the California Board of Accountancy in accordance with generally accepted auditing standards.
(11) Any further financial data that the department reasonably deems necessary or appropriate for the protection of the state.
(12) An annual profit-and-loss statement, an annual balance sheet, and a copy of its annual federal income tax return, within 30 calendar days after the return is filed with the Internal Revenue Service. [Added by Stats. 2009, Ch. 233, Sec. 13. Effective January 1, 2010]
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