At first glance, the homepage of FanDuel looks like an online sports casino. But the company, which paid out $50 million in winnings in 2012, is not a traditional online sports bookie. Rather, FanDuel is a fantasy sports website, offering a popular and controversial new genre of wagering contests known as “daily games,” in which players select fantasy “teams” consisting of real-life players and compete in one day “seasons.” The FanDuel homepage says that players can win “real money” – $2 million in prizes each week.

Unheard of just a few years ago, this fast-growing sector accounts for roughly one-third of the $1.6 billion spent annual on fantasy sports, according to the Fantasy Sports Trade Association. Fantasy games currently have more than 30 million players.

Considering the current uncertainties for online gaming, is the FanDuel’s homepage assurance that this is “perfectly legal” actually true? The company and others in the industry are confident that their practices fall under a exception in the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA) that classified fantasy sports as games of “skill” rather than “chance”.

While the law’s intent was to crack down on forms of internet wagering, pressure from the National Football League and other interests led to the specific exemptions for fantasy games. “We don’t think we’re on the fence, our feeling is that it’s 100 percent legal,” said Paul Charchian, President of the Fantasy Sports Trade Association. “We understand why people might think otherwise, but we think the [UIGEA’s] carve-out exempts us.”

After the law’s passage, FanDuel and several other startups, headed by key figures within the online gaming world, quickly began to test the waters of the so-called fantasy sports loophole. “The first generation games jumped right into the market perhaps without understanding, or caring, about the legal risks,” said Marc Edelman, an expert in fantasy sports law at Baruch University. Nevertheless, no criminal charges or legal challenges have occurred. As a result, similar websites began quickly proliferating after 2010, keen to profit from emerging trend.

Prior to the passage of UIGEA in 2006, the majority of fantasy games were contests that lasted a full seasonal, with outcomes determined more by skill than by chance. For example, players in a traditional fantasy football league select teams via draft or auction before the NFL season begins, and then compete over the course of the 17-week schedule. While there are elements of chance involved – weather, injuries, and statistically abnormal performances, for example, they tend to largely offset each other over the course of the season.

In season-long competitions, players managing their rosters each week is an important factor in the success of a team. For instance, if a player looks at the weather report on a Sunday morning and sees that his quarterback will be playing in the rain, something not conducive to statistical production, the player can bench that quarterback in favor of another. In the same manner, if a member of a fantasy team becomes injured – which happens regularly – the player must find a way to replace that person via free agency or trade.

By contrast, the “one day season” offered by the daily games does not allow for a large number of elements of chance to occur over the course of a full season. Critics say that placing a bet on individual players’ daily performances is hardly different from other forms of sports betting. “This is an outlet for a lot of people who want to bet on sports but don’t find themselves located in Nevada,” said Keith Whyte, Executive Director of the National Council on Problem Gambling. (In Nevada, the “Las Vegas Loophole” permits sports gambling in that state.)

Taking a nod from traditional forms of gambling marketing, daily games are pitched for players seeking relatively instant gratification, with no commitment to a multi-month season of managing a team – “fantasy for the ADD generation,” as FanDuel CEO and McKinsey consultant-cum online gambling entrepreneur Nigel Eccles has labelled it. For example, the recent launch of SideDraft, an iPhone app, allows daily fantasy players to place wagers via their mobile devices.

Until recently, the environment for daily game startups was much more challenging, especially in convincing the powers-that-be in the already-booming fantasy sports field that that such activities were legal and would not tarnish the industry’s reputation.

But after being met with this initial apprehension from the fantasy community, the daily games model has gained acceptance among mainstreamers as a viable product and business model, said Edelman, who also serves as a consultant to several fantasy sports businesses. “The founders of Draftday and FanDuel launched with a level of recklessness as to the legality of the games. However, many more recent players have come into the market, recognizing the fact that there have not been criminal charges.”

“No company has ever been prosecuted for fantasy games,” noted Charchian, who appears to have come full circle on the matter after expressing concern over the industry’s legality in an interview with the New York Times earlier this year. His company, LeagueSafe, announced in September an exclusive partnership with DraftKings, another daily games provider.

Despite this establishment backing, many observers have urged the industry to proceed with caution, saying that there are still legal and regulatory uncertainties surrounding the new generation of fantasy games, especially considering the aggressive nature in which many of them are marketing their products. For example, the Twitter profile for StarStreet shows a scantily-clad female model and says that gamers can win a trip to the Playboy Mansion.

“I think a number of these sites are basically going to push the law as far as they can until somebody cracks down on them,” said Whyte. “One of the reasons fantasy sports got that exemption was that you couldn’t spend a lot and you couldn’t win a lot. That’s not the case anymore.”

“It’s a disturbing effort by companies that are trying to condition the public that there’s this way around internet gambling,” said John Kindt, a professor at the University of Illinois and long-time critic of gambling schemes.

It’s worth noting that in a precautionary response to legal concerns, most daily fantasy game providers do not offer their products in so-called “chance” states, such as Montana or Vermont, where laws are stricter regarding games that involve elements of chance.

Also raising eyebrows is the revolving door that exists between the respective worlds of daily fantasy games and online gaming. Many key players in the daily games arena, including FanDuel’s Nigel Eccles, are direct transplants from other gaming companies.

Prior to starting FanDuel, Eccles started a series of UK-based betting exchange companies. Paul Martino of Bullpen Capital, one of FanDuel’s financiers, also has a background in internet gaming ventures. Taylor Caby, co-founder of DraftDay, was one of the first to strike it rich playing online poker and founded several poker-related startup companies, including CardRunner and Hold’em Manager.

The transitions come during a period when online gaming and sports betting are facing increasing uncertainty. In 2011, the US Department of Justice cracked down on major online poker sites, such as PokerStars and Full Tilt, which served US players. A series of court rulings struck down New Jersey’s upstart sports betting law, passed in 2012. While the U.S. Supreme Court may choose to hear the case, the likelihood of a reversal appears quite small.

These events have helped facilitate the transfer of knowledge and capital from poker and online gaming into the fantasy arena, with some comparing today’s fantasy landscape to that of poker in the early 2000s.

In 2013 alone, millions of investor dollars have poured into daily games startups. Comcast, the behemoth media conglomerate, made a splash by purchasing an $11 million stake in FanDuel – presumably an attempt to enter a marketplace heavily controlled by the “Big Three” providers: ESPN, Yahoo! and CBS.  This summer, Cantor Ventures announced a $25 million investment into the newly-launched TopLine Game Labs – which pitches itself as a fantasy sports and “social gaming” site.

BetAmerica, which had previously limited its activities to horse and greyhound wagering, recently launched a fantasy games arm, FanEx, which bills itself as the “legal alternative to betting on sports.” John Ford, BetAmerica’s CEO, has stated publicly that he believes fantasy gaming could become a $2 billion market within five years.

Given the surging interest in this fast-growing hybrid breed of fantasy games – both among investors and players – it seems inevitable that the industry will soon reach a regulatory crossroads. “As legal certainty about daily fantasy sports increases, there will be a movement in one of two directions,” said Edelman. “Either there will be far greater legal comfort about operating the games, which would lead to big players such as CBS, Yahoo! and ESPN taking substantial market share, or there will be a finding that daily fantasy sports are illegal and the marketplace will be shutdown in its entirety.”

“Aaron Stanley is a native Minnesotan and currently lives in the Washington, DC metro area. A journalist, editor and sportswriter, he follows all things politics, trade, Minnesota sports and Brazil. He holds a degree in Social Sciences from the College of St. Scholastica in Duluth, MN and is currently working on a Master’s Degree in Public Policy at George Mason University.”