📵Anti-Gambling Laws

Gambling is primarily regulated on a state level and each state has its own definition of “gam bling.” Federal laws, specifically the Federal Wire Act of 1961, 18 USC 1084 (the “Wire Act”); International Travel Act of 1961, 18 USC 1952 (the “Travel Act”); the Illegal Gambling Busi ness Act, 18 USC 1955 (the “IGBA”); and the Unlawful Internet Gambling Enforcement Act of 2006, 31 USC 5363 (the “UIGEA”), all reference state anti-gambling violations. In other words, federal law does not independently criminalize gambling.

Although each state has its own definition of “gambling,” in general three elements are required: (1) payment of consideration; (2) for an opportunity to win a prize; (3) determined by chance. 38 Am. Jur. 2d Gambling 2; see also Sniezek v. Colorado Dept. of Revenue, 113 P.3d 1280 (Colo. App. 2005); Veterans of Foreign Wars Post 6477 v. Missouri Gaming Com'n, 260 S.W.3d 388 (Mo. Ct. App. W.D. 2008).

Most video games (including the Game) are games of skill that do not have the “chance” element even when they are being played in a tournament setting with an entry fee and real-money prize.

Federal law

This memorandum provides an analysis of federal law, including the Federal Wire Act of 1961, 18 USC 1084 (the “Wire Act”); International Travel Act of 1961, 18 USC 1952 (the “Travel Act”); the Illegal Gambling Business Act, 18 USC 1955 (the “IGBA”); and the Unlawful Inter net Gambling Enforcement Act of 2006, 31 USC 5363 (the “UIGEA”).

In general, federal law does not prohibit, license, or otherwise regulate real-money games of skill or video game tournaments for real money stakes. Federal law targets “gambling,” which re quires an outcome determined on the basis of chance. Chance is not a material or predominant factor in the outcome of the Game.

1. Unlawful Internet Gambling Enforcement Act of 2006, 31 USC 5363 (the “UIGEA”)

By its very name, the UIGEA applies only to "unlawful internet gambling." The Game is not un lawful because real-money skill play is offered only in the states where this Firm determined the game complies with all legal requirements. Further, the Game is not gambling and does not in volve gambling because the outcome does not materially or predominantly depend on chance. Like many other skill games, the dominoes knowledge and strategy, speed, and logical decision making of the players are the material and dominant factors that determine whether they win a prize. Additionally, the player is only paying an entry fee in consideration for their own partici pation in the game. There is no ability to wager or bet on the play of others, nor is there any op portunity to observe the play of other persons.

Notwithstanding this common-sense analysis, the text of the UIGEA itself supports the conclu sion that it neither prohibits or otherwise regulates real-money skill games like the Game. Gener ally, the UIGEA prohibits a “person engaged in the business of betting or wagering” from know ingly accepting financial transactions “in connection with the participation of another person in unlawful Internet gambling.” 31 USC 5363. Under the UIGEA, to “bet or wager” means “staking or risking by any person of something of value upon the outcome of a contest of others, a sport ing event, or a game subject to chance...” 31 USC 5362(1)(A) (emphasis added). The Game does not involve betting or wagering because (1) there is no stake on a contest of others - the players only pay an entry fee to participate in a game themselves; (2) the Game is not a sporting event; and (3) the game is not subject to chance and is materially and predominantly determined by skill. As explained earlier, chance plays no role in the outcome. Therefore, there is no “bet or wager” and the UIGEA does not apply.

However, even if the Game involved a “bet or wager,” the Game does not meet the second part of the prohibition in § 5363 because it does not involve the “participation of another person in unlawful Internet gambling.” The term “unlawful Internet gambling” means “to place, receive, or otherwise knowingly transmit a bet or wager...where such bet or wager is unlawful under any ap plicable Federal or State law in the State...in which the bet or wager is initiated, received, or oth

erwise made.” 31 USC 5362(10)(A). As explained in more detail below, real-money games of skill are not unlawful in a majority of states. Further, no Federal law prohibits real-money games of skill.

The Firm was unable to find any case law or any other authority that supports the application of the UIGEA to real-money skill games like the Game.

2. Federal Wire Act of 1961, 18 USC § 1084 (the “Wire Act”)

The Wire Act prohibits the use of a "wire communication facility" (which now includes the In ternet) to transmit "bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest" 18 USC 1084(a). The Wire Act does not define "bets or wagers." In 2011, the Department of Justice issued an opinion concluding that the Wire Act's prohibition applied only to "sports gambling" and did not apply to state lotteries. See Whether Proposals by Illinois and New York to Use the Internet and Out-of-State Transaction Processors to Sell Lot tery Tickets to In-State Adults Violate the Wire Act, 35 Op. O.L.C. __ (2011) (“2011 Opinion”). The 2011 Opinion did not address the meaning of "betting or wagering." In 2018, the Depart ment of Justice revisited the interpretation of the Wire Act and reversed course, concluding that the Wire Act is not limited to sports gambling and applies to "non-sports related betting or wa gering." Reconsidering Whether the Wire Act Applies to Non-Sports Gambling, slip op. at *11– *14, *23, 2018 WL 7080165, (Nov. 2, 2018) ("2018 Opinion"). The 2018 opinion did not ad dress the meaning of "betting or wagering." Notwithstanding the 2018 opinion, states continue to offer intra-state online lotteries and have expanded online casino-style gambling. Recently, the 1st Circuit Court of Appeals affirmed the New Hampshire District Court's determination that de spite the 2018 Opinion, the 2011 Opinion is correct and the Wire Act only applies to sports gam bling. New Hampshire Lottery Comm'n v. Rosen, No. 19-1835, 2021 WL 191771, at *1 (1st Cir. Jan. 20, 2021).

The Firm was unable to find any case law or any other authority that supports the application of the Wire Act to real-money skill games like the Game.

3. International Travel Act of 1961, 18 USC 1952 (the “Travel Act”)

The Travel Act is part of the federal anti-racketeering laws. It broadly criminalizes traveling, us ing interstate mail, or any facility in interstate or foreign commerce to carry on any "unlawful ac tivity." 18 USC 1952(a). The term "unlawful activity" includes any "business enterprise involv ing gambling." 18 USC 1952(b). The term "gambling" is not defined in the Travel Act.

The Firm was unable to find any case law or any other authority that supports the application of the Travel Act to real-money skill games like the Game.

4. The Illegal Gambling Business Act, 18 USC 1955 (the “IGBA”)

Like the Travel Act, the IGBA is a part of the federal anti-racketeering laws. The IGBA specifi cally prohibits conducting, financing, or owning an "illegal gambling business." 18 USC 1955(a). The term "illegal gambling business" is defined as a "gambling business" that is "a vio lation of the law of a State...in which it is conducted." 18 USC 1955(b)(1)(i). The term "gam bling includes but is not limited to pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein." 18 USC 1955(b)(4).

A real-money game of skill where participants pay an entry fee for a chance to win a prize (the Game) does not fit the definition of "gambling" in the IGBA. Although the list is not exclusive, the outcomes of the activities listed in the definition are all decided predominantly or materially

by chance or involve betting on the result of sporting events. Further, even if the Game was "gambling" under the federal definition in the IGBA, the states where the Developer offers real money play do not prohibit those games. Where there is no "violation of the law of a State...in which it is conducted," there is no "illegal gambling business," and no violation of the IGBA.

The Firm was unable to find any case law or any other authority that supports the application of the IGBA to real-money skill games like the Game.

Additionally, the Firm concludes that no other federal laws regulate or prohibit real-money skill games like the Game in states where such games are not prohibited by law.

State law

Gambling is primarily regulated on a state level and each state has its own definition of “gam bling.” In general three elements are required: (1) payment of consideration; (2) for an oppor tunity to win a prize; (3) determined by chance. 38 Am. Jur. 2d Gambling 2; see also Sniezek v. Colorado Dept. of Revenue, 113 P.3d 1280 (Colo. App. 2005); Veterans of Foreign Wars Post 6477 v. Missouri Gaming Com'n, 260 S.W.3d 388 (Mo. Ct. App. W.D. 2008).

At its foundation, the Game is a video game with real-world rewards in the form of Domicoins and NFTs. These assets are valuable on an in-game level, because they allow players to partici pate in the gaming and other aspects of the Game, as well as to upgrade Avatar NFTs via through cosmetic items to augment the NFT. As explained above, the outcome of the game is not pre dominantly or materially determined by chance – in fact, it is impossible to win a game of domi nos based on chance or random luck.

Paying money for in-game or gamified assets is not a new concepts. Baseball cards and trading card games have been litigated in the past, with courts coming to the conclusion that the presence of primary non-speculative utility in these products controls. No court has concluded that pur chasing trading cards or baseball cards constitute gambling. Nor has any court concluded that player

Trading cards (and collectible card games) have been challenged as “gambling” since at least the 1980s. More recently, video game “loot boxes” have also been challenged as “gambling.” To date however, there is no binding precedent that has rendered trading cards or loot boxes illegal.

A widely-cited case, Chaset v. Fleer/Skybox Int’l, 300 F.3rd 1083 (9th Cir. 2002), involved con solidated lawsuits where plaintiffs purchased trading card packs (including baseball cards and Pokemon trading card game packs). The packs were advertised as having a chance to include “insert” cards, which are more rare, and therefore more valuable on the secondary trading card market. The trading card packs at issue plainly disclosed the odds of receiving a rare card (such as 30:1). The 9th Circuit adopted the reasoning of several prior California district court decisions and held there was no injury to the disappointed purchasers. Id. at 1087. The Court of Appeals stated: “Purchasers of trading cards do not suffer an injury…when they do not receive an insert card. At the time the plaintiffs purchased the package of cards, which is the time the value of the package should be determined, they received value -- eight or ten cards, one of which might be an insert card -- for what they paid as a purchase price. Their disappointment upon not finding an insert card in the package is not an injury to property.” Id.

The Court of Appeals in Chaset relied on a similar decision from the 5th Circuit Court of Ap peals in Price v. Pinnacle Brands Inc. 138 F.3d 602, 607 (5th Cir. 1998) (“plaintiffs do not allege that they received something different than precisely what they bargained for: six to twenty cards in a pack with a chance that one of those cards may be of Ken Griffey, Jr. Injury to mere expec tancy interests or to an "intangible property interest" is not sufficient to confer RICO standing.)

Video game loot boxes have also been challenged as gambling. In a recent decision rejecting this argument, the United States Court for the Northern District of California stated that it is impossi ble to separate the loot box mechanic from the game itself. “Here, any items obtained from loot boxes can only be used within the games themselves.” Mai v. Supercell Oy, No. 5:20-cv-05573- EJD, 2021 U.S. Dist. LEXIS 178949, at *11 (N.D. Cal. Sep. 20, 2021). However, where the chance mechanic is entirely separate and severable from the base game, the chance mechanic can be considered illegal gambling. See Bell Gardens Bicycle Club v. Dep't of Justice, 36 Cal. App. 4th 717, 744 (1995) (“Nothing in California law permits the Card Clubs to append an illegal lot tery onto a legal game and yet be allowed to operate the illegal lottery.”)

The Firm was unable to find any case law or other authority that holds that (1) the presence of chance in a trading card pack or game is considered gambling; or (2) a loot box mechanic where a player can pay real money for a chance to obtain a valuable virtual item is considered gam bling. Several European jurisdictions have enacted legislation to ban loot boxes (Belgium and the Netherlands for example). Japan has also banned loot boxes, classifying them as “gambling,” which is illegal in Japan. In the United States, there have been certain legislative and regulatory efforts (on a state and federal level) to address loot boxes and micro-transactions, but as of the date of this memorandum, there is no enacted regulation or law to that effect.

A key element of the trading card game decisions is that the cards have utility outside of the sec ondary market. With baseball cards, the customers have the chance to own cards with the image of their favorite players or work towards a complete set. With trading card games like Magic: The Gathering and Pokemon, the players use the cards they obtain to build decks, play a game with specific rules against other players, to compete in tournaments, and otherwise engage in “utility” activities that are separate from the cards’ value on the secondary collectibles market. Similarly, with loot box decisions (i.e. Mai) the Court emphasized that the player paying money for a loot box does receive items that are usable only in game.

With the Game, the secondary market does dictate the “real world value” of the in-game assets. However, ample utility exists outside of the secondary market. With the Game, the utility of the Domicoins is for in-game use, to: (1) pay domino game entry fees; (2) pay the prize to the win

ner; (3) pay a fee to the game center NFT owner games played at the center; (4) purchase cos metic items (such as skins) from the marketplace; (5) upgrade the game center NFTs; (6) and pay and receive scholarship fees.

All of these uses are in-game uses that enable game participation, progression, and enjoyment. Like the loot boxes in Mai, the in-game tokens and items have ample utility independent and separate from the secondary market.

Accordingly, the Firm concludes that the Game has sufficient independent utility where users are not paying “consideration” primarily for the chance to win a prize. Thus, it is unlikely that the Game violates any state or federal-level anti-gambling laws.