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Private Prediction Markets and the Law

3 Journal of Prediction Markets (2009)

22 Pages Posted: 18 May 2008 Last revised: 21 Nov 2014

Tom W. Bell

Chapman University, The Dale E. Fowler School of Law

Date Written: 2009

Abstract

This paper analyses the legality of private prediction markets under U.S. law, describing both the legal risks they raise and how to manage those risks. As the label "private" suggests, such markets offer trading not to the public but rather only to members of a particular firm. The use of private prediction markets has grown in recent years because they can efficiently collect and quantify information that firms find useful in making management decisions. Along with that considerable benefit, however, comes a particularly worrisome cost: the risk that running a private prediction market might violate U.S. state or federal laws. The ends and means of private prediction markets differ materially from those of futures, securities, or gambling markets. Laws written for those latter three institutions nonetheless threaten to limit or even outlaw private prediction markets, as the paper details. The paper also details, however, how certain legal strategies can protect private prediction markets from violating U.S. laws or suffering crushing regulatory burdens. The paper concludes with a legal forecast, describing the likely form of potential CFTC regulations and a strategy designed to ensure the success of private prediction markets under U.S. law.

Keywords: prediction market, private prediction market, idea futures, gambling, commodity futures, CFTC, securities

JEL Classification: K23, L5, M1

Suggested Citation

Bell, Tom W., Private Prediction Markets and the Law (2009). 3 Journal of Prediction Markets (2009). Available at SSRN: https://ssrn.com/abstract=1134563

Tom W. Bell (Contact Author)

Chapman University, The Dale E. Fowler School of Law ( email )

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Orange, CA 92866-1099
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714-628-2576 (Fax)

HOME PAGE: http://www.tomwbell.com

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