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daily fantasy sports

A team of reporters follows news for theScore at their offices on King St. in Toronto.Fernando Morales/The Globe and Mail

A Canadian media company is jumping into the stormy waters of daily fantasy sports despite the legal uproar that has industry leaders DraftKings and FanDuel trying to fend off government prosecutors in the United States.

TheScore Inc. says it has come up with a version that will pass legal muster in both Canada and the U.S., and launched the new application on Thursday after revamping a previous product built by an American company that theScore bought last December.

What sets theScore's version apart is that it will be free for its online users, which the company's management believes makes it legal under the Canadian and U.S. criminal codes. There will be cash prizes of $100 to $1,000 for the daily winners, albeit much more modest than the hundreds of thousands of dollars offered by the U.S.-based giants. But the potential market is huge: One trade association estimates there are nearly 57-million people playing daily fantasy sports in the U.S. and Canada in 2015.

A spokesman for the Ontario's Ministry of the Attorney General declined to offer an opinion on the legality of theScore's new app, called QuickDraft. But several lawyers who specialize in gambling laws believe it should be legal in Canada because the players will not risk any money, only their time, even though they are shooting for a cash prize. One lawyer even ventured that such an approach could also fly in the U.S. for the same reason, although he cautioned that since gambling is governed by the individual states, some jurisdictions might disagree.

The key is that in the eyes of Canadian and most U.S. laws, once someone puts their own money at risk in order to win a prize, it is considered gambling – and that makes it subject to restrictions in each jurisdiction.

Michael Lipton, a partner in the Toronto office of the Dickinson Wright law firm who is an expert in gambling laws, would not comment specifically on theScore's fantasy app because he is not familiar with it. But in general terms, he said, free fantasy games do not violate the criminal code even if cash prizes are offered.

"As soon as you have risk consideration and prize, you are into a situation where there is gambling. If you offer a free site and people play for points and whoever has the most points gets a prize or cash, that is okay," Lipton said.

"So if you and I and all our friends and brothers and sisters and cousins go on this site and play for a day or a week and it doesn't cost us anything but our time and … you win $1,000, that's okay because you haven't lost anything."

This could also work in the U.S., Lipton said, "but in considering [risk], some state courts have looked at it differently."

QuickDraft may not stay free to play forever, in Canada or south of the border. When theScore bought the predecessor app Swoopt last year, executives had planned to revamp and relaunch it with paid daily fantasy contests, which have small entry fees and are more lucrative to operate. It was a good fit with the company's main product, a mobile app that provides sports results, news and statistics.

But the company shifted to a free model because of the uncertainty in the young industry, the legality of which was thrown into doubt when New York's attorney general, Eric T. Schneiderman, demanded that DraftKings and FanDuel stop taking bets in that state. Schneiderman aregued that the games are based at least partly on chance, and not solely on skill, which would make them gambling under New York law.

"To launch a paid model into this environment, where instantly you're on your heels and you're having to respond daily to the latest news on what [U.S.] state A, B or C is doing, you're not focusing on the product," said Benjie Levy, TheScore's chief operating officer. "We certainly couldn't forecast how things have played out."

At launch, QuickDraft will offer small prizes, usually between $100 to $1,000, including some winner-take-all contests and others paid out on a sliding scale. There will be no advertising or sponsorships at first, but the company sees ads as a potential money-maker in future. In the meantime, theScore will finance the prize pools.

DraftKings and FanDuel are now waiting for a decision from New York judge Manuel J. Mendez on a preliminary injunction motion from the state to prevent both companies from operating in New York even before a final ruling is made on whether their daily fantasy contests violate state law. A decision is expected in the next few days.

Judge Mendez's ruling could have a ripple effect across the country as other states, such as Florida, are considering taking action against daily fantasy sports. But theScore thinks even a paid product will eventually be deemed legal. The company, which is based in Toronto but has staff working on its daily fantasy product in San Francisco, is in touch with trade associations about the shifting legal framework for such games, but is not actively lobbying.

"We do believe it is legal, but what we're looking for is some additional clarity here," Levy said. "Needless to say we have our own legal opinions, which have conclusions supportive of our position. Otherwise we wouldn't even be contemplating paid [daily fantasy sports]."

It is clear the investment theScore made by buying Swoopt, the dollar value of which was not disclosed, depends heavily on eventually being able to run paid contests legally, on both sides of the border.

But Levy indicated in a November conference call with investors he is hoping governments interested in getting a cut of the lucrative fantasy sports industry will soon debate how to regulate betting and prize-winning in an ecosystem driven increasingly by mobile app users. That could open the door to reaping the riches from charging fees to play daily fantasy sports.

"It's clear that regulation in some form or fashion is going to be part of daily fantasy sports," he told investors. "We're prepared for that and will respond to that how it comes to pass, whether federally or state by state."

Indeed, Massachusetts Attorney General Maura Healey has proposed a plan to regulate the sports fantasy web sites, which she says is the first in the U.S. According to The Boston Herald, Healey wants to see "age and advertising restrictions, disclosure requirements and other new rules."

For now, with no revenue from users or ads, theScore can expect to absorb tens of thousands of dollars it will pay in prize money each week while it builds an audience – which is no small expense for a company that lost $13.5-million on just $12.4-million in revenue in the fiscal year that ended Aug. 31.

But the company has a large, built-in audience it plans to tap, with 10.5-million monthly active users who already used its mobile platforms in the last quarter, 60 per cent of them in the U.S. and 20 per cent in Canada. TheScore has also amassed 500,000 monthly users of its eSports platform since launching into the online video-gaming business in March.

TheScore plans to promote its app as a place where casual users can gather – and have a reasonable prospect of winning. Levy decries "the shark-type behaviour that the other platforms cultivate" by allowing multiple entries in a single contest. That opens the door to savvy players to use computer math models to enter repeatedly with slight variations, increasing their odds of winning.

QuickDraft uses text-message verification codes, and in some cases will demand identification to collect prizes, to curb the so-called sharks. And the company expects the smaller prize pools will act as a natural deterrent.

"We're not running a millionaire-maker," Levy said.