Over the past five years, nearly all consumer fintech and gaming platforms have been shaped by a specific type of growth mechanism. Enroll, recommend a friend, get a little bonus, then SMS your friend the sign-up link. The Cash App succeeded. It was done by Robinhood. The same straightforward loop was used by DraftKings, FanDuel, Coinbase, and Venmo to build audiences. Because users are paid in credits or bonuses rather than salaries, the structure functions as a distributed sales force. Additionally, the loop has encountered a class of state laws that were mostly ignored when they were drafted with ever-increasing frequency. The most recent instance is Washington’s lawsuit against Kalshi, and it probably won’t be the last.
Kalshi’s “Refer-a-Friend” program is the target of the complaint, which was filed in federal court in Washington and may be followed via ClassAction.org. The complaint contends that Kalshi has effectively transformed its user base into agents by providing financial incentives and sign-up bonuses to users who text promotional links to non-customers, so spreading commercial communications to individuals who have not given their consent.
The plaintiffs contend that this is against both the more general Washington Consumer Protection Act and the Washington Commercial Electronic Mail Act (CEMA), which regulates unsolicited commercial messaging. The legal theory is simple. Whether the corporation can legitimately assert that its users were acting freely when they sent the texts or whether the financial incentive structure renders them, in legal words, instruments of Kalshi’s own marketing is the factual matter that will ultimately need to be litigated in detail.
In several respects, the Washington CEMA is an underappreciated law. It provides Washington people with a private right of action against senders of unapproved commercial electronic messages and predates many of the government frameworks that regulate contemporary digital marketing. These instances become class actions instead of regulatory problems because of the final detail, the private right of action. With appropriate legal representation, a single recipient who did not request a Kalshi referral SMS can lead a class of thousands of recipients in identical circumstances who received the same template message. The statutory damages, which are determined by the number of violations, can quickly put offenders in a difficult financial situation.
Speaking with fintech compliance professionals gives me the impression that the industry as a whole has been a little sluggish when it comes to the legal framework surrounding referral marketing. Until recently, the prevailing belief was that the platform was not accountable for the content of the SMS as long as it originated from the user’s own phone or messaging app. Over the past few years, that presumption has not always stood up in court. With increasing success, plaintiffs’ lawyers have contended that the platform is a sender by proxy due to the design of referral programs. The legal question of who “sent” the message becomes hazy when the platform creates the template, provides the link, offers the cash incentive, and monitors the conversion.
Due to the contentious nature of its product category, Kalshi is in a particularly vulnerable situation. In a different case, Washington Attorney General Nick Brown claims that Kalshi’s prediction market circumvents the state’s current prohibitions on internet betting by operating as an illicit gambling platform. That situation has complex dimensions of its own. The Commodity Futures Trading Commission regulates Kalshi at the federal level as a designated contract market for event contracts, but the issue of whether state gambling laws still apply to its products has not yet been resolved in court. Similar concerns have been voiced by several states. A distinct, more focused legal pressure point that is independent of the resolution of the more general gambling issue is added by the class action lawsuit over the texting program.
This situation is intriguing because of the mix. In some respects, Kalshi’s legal challenge is simpler in the texting case. The discovery process concentrates on relatively concrete questions, such as how the referral system was created, what incentive structures were in place, and whether the company’s terms of service sufficiently required users to obtain consent before texting referrals. CEMA cases typically follow predictable patterns. The courts must negotiate the far more contentious issue of where state gaming enforcement begins and federal commodity control ends. A settlement and changes to the policy would result from a loss in the texting lawsuit. Kalshi’s capacity to operate in Washington might be severely impacted by a loss in the gaming case, which would also set a precedent for other states thinking about taking similar action.
A settlement that modifies the referral program’s structure and offers impacted Washington citizens modest individual recovery could conclude the class action rather swiftly. Cases involving CEMA typically settle. The majority of businesses do not wish to litigate the underlying issues regarding whether their referral systems render them sender-by-proxy, and the statutory damages framework is well-understood. It’s also likely that the case will be vigorously defended, especially if Kalshi’s legal team believes that giving up ground in any one state would make their position in other states weaker. After all, the business is battling on several fronts at once.
Watching this unfold gives me the impression that the consumer-fintech viral growth playbook may be nearing the end of its unproven stage. For many years, platforms have created referral schemes that barely adhere to consumer protection and state telemarketing regulations. The fact that plaintiffs’ lawyers were concentrating on other matters helped the platforms that were not sued. The platforms that were sued, frequently in secret, tightened their referral structures and paid settlements. The Kalshi case may, depending on how it resolves, become a more visible marker — one that other prediction markets, sportsbooks, and consumer fintech apps will study closely when they design their next promotional campaigns.
