Prediction Market Marketing Draws CFTC Scrutiny
For most of the past two years, the regulatory contest over prediction markets has centered on the product itself. Are event contracts legitimate derivatives or unlicensed sports wagering? Does the Commodity Futures Trading Commission hold exclusive jurisdiction, or do the states retain a role? Those questions remain the subject of active litigation across the country. In recent weeks, the inquiry has shifted. Federal regulators have begun to examine not what these platforms offer, but how they promote it.
The Polymarket Inquiry
The catalyst was a Wall Street Journal investigation into Polymarket's promotional videos. According to that reporting, the platform engaged dozens of social media creators to publish videos depicting winning trades. The Journal reviewed more than 1,100 videos and found that roughly 70 percent featured simulated transactions rather than actual market activity, staged on replica versions of the platform. The videos displayed approximately $1.9 million in wagers that were never placed, including close to $900,000 in fabricated gains. The creators were reportedly compensated on a monthly basis and instructed not to disclose the arrangement. Collectively, the videos drew well over 100 million views.
The response was swift. Senators John Curtis and Adam Schiff wrote to CFTC Chairman Michael Selig, asking whether the agency was investigating, whether the conduct was lawful, and whether the Commission possesses adequate resources to oversee how these platforms advertise. Bloomberg subsequently reported that the Commission has an active and comparatively broad inquiry underway, one extending beyond the marketing conduct into other aspects of the business. If confirmed, it would be the first significant CFTC investigation of an event contract platform under a Chairman who has otherwise been among the sector's more consistent defenders.
A Question of Fraud, Not Gambling
The significance of the inquiry extends well beyond Polymarket. The exposure at issue does not arise under gambling law. It arises under the antifraud provisions of the Commodity Exchange Act. Presenting a simulated transaction as a genuine winning trade is, in substance, a deceptive solicitation, and the Commission requires no new rulemaking to reach it. Those who advise commodity pool operators and commodity trading advisors will recognize how seriously the CFTC treats performance advertising. Commission Regulation 4.41 prohibits fraudulent marketing outright and requires that any hypothetical or simulated result be accompanied by a prescribed disclaimer making clear that no actual funds were at risk. A prediction market exchange is not a commodity pool, but the governing principle is the same, and regulators reason by analogy. Portraying a demonstration as a live winning position is precisely the conduct that principle exists to prevent.
The NFA Standard and Its Limits
It is worth considering how demanding the applicable rules already are for the regulated participants in this industry. National Futures Association Compliance Rule 2-29 governs communications with the public by futures commission merchants, introducing brokers, commodity pool operators, and commodity trading advisors, and it is anything but permissive. It prohibits communications that are fraudulent, deceptive, or high-pressure, as well as any representation that trading is suitable for all persons. Promotional material must be reviewed and approved by a supervisor before dissemination. Audio and video advertisements that reference past or prospective profits must be submitted to the NFA for review at least ten days before first use. Hypothetical or simulated results must carry the prescribed disclaimer together with a statement of the assumptions on which they rest. Testimonials must be representative and must disclose any compensation paid. Records of promotional material must be retained for years. And a member remains responsible for promotional material produced on its behalf by third parties, which disposes of any suggestion that an outside contractor bears the fault.
The difficulty, and much of the explanation for why this conduct has persisted, lies in the scope of that regime. Rule 2-29 binds NFA members. A prediction market that operates as a CFTC-registered exchange is not an NFA member, and the individuals producing these promotional videos are not registered in any capacity. The most exacting promotional standard in the derivatives markets, the one a commodity trading advisor must satisfy before it may advertise a track record, does not readily attach to the most visible marketing in the sector. The result is not a loophole by design. It reflects a regulatory framework constructed for intermediaries and now outpaced by platforms that reach retail investors directly through social media.
A Divided Regulatory Landscape
The question of who supervises this conduct has, until now, lacked a clear answer. The NFA is the primary front-line regulator for the intermediaries within its jurisdiction, and it would not permit a member to conduct the campaign at issue. The platforms, however, answer to the CFTC directly, and the Commission's enforcement attention to marketing, as distinct from product approval and questions of jurisdiction, is a recent development. The Polymarket inquiry represents its first meaningful application, although the agency has already begun extending its broader enforcement apparatus into the prediction market space, as its first insider trading case arising from Polymarket makes clear. The Federal Trade Commission retains authority over undisclosed paid endorsements, which require clear disclosure of a material connection between a promoter and the product being promoted. State regulators, for their part, continue to treat these products as gambling and to police them accordingly. Oversight is thus divided among several authorities, none of which has clearly owned influencer-driven promotion of event contracts. That division may not have driven the sector's growth, which has other and more powerful causes, but it left the promotional tactics unconstrained while the growth was underway.
That division of authority should not be mistaken for an absence of exposure, least of all for the promoters themselves. Compensating an individual to solicit customers has long been the type of activity that triggers registration obligations in this industry, and characterizing it as content does not alter its nature. The Securities and Exchange Commission has already pursued public figures who promoted digital-asset products without disclosing that they were compensated, and the same legal theory is available to the CFTC and the FTC in this context. The point is not that the influencer model is impermissible, but that it cannot be conducted outside the standards that govern every other form of derivatives marketing.
The Stakes for the Industry
The conduct also imposes a strategic cost on the industry as a whole, separate from the legal exposure of any individual platform. Operators have devoted years to the argument that event contracts are legitimate instruments for hedging and price discovery rather than a form of gambling. Marketing that presents these products as a low-risk path to quick profits, directed at the audience least able to absorb the resulting losses, undermines that argument and strengthens the position of the states and members of Congress who would prefer that these markets be regulated as gambling. Each staged winning video becomes evidence available to the opposing side.
Marketing has historically been the least disciplined function within many prediction market businesses. It has been rapid, improvised, and oriented toward growth rather than compliance, an approach that was understandable while the sector was still establishing its right to operate. That period is drawing to a close. The regulatory posture toward these markets is maturing, and promotional conduct that would not survive scrutiny at a registered firm is unlikely to remain unexamined at an exchange that reaches the public directly.
De Silva Law Offices advises exchanges, intermediaries, and market participants on the regulatory treatment of event contracts and on the standards governing their marketing and promotion. We welcome the opportunity to discuss how these developments may bear on a particular business. This article is part of the firm's ongoing event contracts series.
De Silva Law Offices, LLC is a financial regulatory and litigation law firm founded in 2002 and located in Chicago at 110 North Wacker Drive. The firm advises exchanges, commodity pool operators, commodity trading advisors, introducing brokers, futures commission merchants, registered investment advisers, proprietary trading firms, hedge funds, and fintech and prediction market platforms on CFTC and NFA compliance, SEC regulation, derivatives and futures markets, digital asset and event contract regulation, and fund formation. On the litigation side, the firm represents clients in CFTC, NFA, SEC, and CME enforcement and disciplinary proceedings, FINRA and AAA arbitrations, and federal regulatory investigations. Inquiries may be directed to tamara@desilvalawoffices.com or 312-500-8424.