Company seeks injunction to block state oversight of event-prediction wagering

A New York company is seeking a court injunction to block the state attorney general from taking civil or criminal enforcement action against it for what the state considers illegal gambling.

KalshiEX, which does business under the name Kalshi, is taking Iowa Attorney General Brenna Bird to court over what it calls Iowa’s “intrusion into the federal government’s exclusive authority to regulate derivatives trading on exchanges overseen by the Commodity Futures Trading Commission.”

The company is at the center of a battle over how to regulate “prediction markets” that enable individuals to bet on a variety of real-world events, including sports, natural disasters, political contests and the war in Iran. Prediction markets have existed in the past and generated the most attention with regard to wagering on political races, but the markets have recently become more popular in sports betting.

Kalshi was an early adopter of the model, but attorneys general from 38 states, including Iowa, recently signed a friend of the court brief in a case between Kalshi and Maryland’s Lottery and Gaming Control Commission, arguing the “prediction market” model threatens “the states’ longstanding ability to protect their citizens.”

On Tuesday, the battle escalated as Arizona Attorney General Kris Mayes filed criminal charges against Kalshi, accusing it of operating an illegal gambling business in the state and violating a state law that bars wagering on elections.

“Kalshi may brand itself as a ‘prediction market,’ but what it’s actually doing is running an illegal gambling operation and taking bets on Arizona elections, both of which violate Arizona law,” Mayes said in a press release announcing the charges. “No company gets to decide for itself which laws to follow.”

In its lawsuit against the State of Iowa, Kalshi claims there is “a substantial risk that the attorney general of Iowa will bring an enforcement action” against it on behalf of the Iowa Racing & Gaming Commission, with the intent to prevent Kalshi from offering what it calls “event contracts for trading” on the federally regulated exchange.

The lawsuit seeks a judgment declaring that any state law that attempts to regulate Kalshi’s business in the contract market violates the supremacy clause of the U.S. Constitution as well as an injunction prohibiting the state from enforcing any such state law.

The state has yet to file a response to the lawsuit. A spokesman for Bird’s office said that for now, it has no comment on the matter.

The company alleges that last week, a Kalshi representative met with Bird for what he thought would be a meeting to introduce Bird to Kalshi and to the “prediction markets” on which it bases its business, and perhaps to discuss a tax bill currently under consideration in the state Legislature.

Instead, the lawsuit claims, the Kalshi representative “was greeted by a panel of attorneys, including Iowa’s solicitor general, who proceeded to ask a series of pointed questions challenging whether Kalshi’s federally regulated offerings ran afoul of Iowa state law.” The lawsuit alleges Bird characterized the meeting as being “like a deposition… Bird’s statements accordingly make clear that Kalshi is at risk of civil or even criminal enforcement in Iowa.”

The company says federal law preempts Iowa from subjecting Kalshi to state law due to it being a federally designated derivatives exchange.

Last month, the Commodity Futures Trading Commission affirmed that it has exclusive jurisdiction to regulate derivatives markets such as Kalshi, the lawsuit claims. In addition, the company alleges, “multiple courts” have agreed that the federal law preempts state law as to Kalshi’s business.

“While some courts have found that (federal law) does not prevent states from barring Kalshi’s event contracts, those decisions are mistaken and have been appealed,” the lawsuit asserts.