Waterhouse VC: Sweepstakes: Grey Area, Green Numbers

Every month, industry investors Waterhouse VC publish an article that spotlights different aspects of the ecosystem. This month, Tom Waterhouse delves into sweepstakes.

Seven years after the legalisation of online gambling, U.S. sports betting has surged to US$13.7 billion in 2024 revenue on roughly $150 billion in handle, with 38 states plus DC already live and more likely to follow (AGA). Online casino - or iGaming - remains confined to just seven states, yet still generated US$8.4 billion last year in GGR (AGA).

The difference isn’t demand - it’s friction. Moral resistance (especially in the South), entrenched brick-and-mortar interests, and legislative inertia have slowed the spread of iGaming. In that vacuum, sweepstakes casinos have flourished, becoming America’s fastest-growing wagering vertical. Eilers & Krejcik projects the segment will generate $11 billion in 2025 - surpassing regulated iGaming in both reach and revenue. That’s a sharp rise from just $3.1 billion in GGR in 2022.

Quick Recap

When we last covered sweepstakes, the major players were scaling rapidly but largely flying under the regulatory radar. That’s no longer the case. The sums at stake are now too large to overlook, prompting investigations, cease-and-desist orders, and restrictions across a growing number of states.

VGW, the Perth-based operator behind Chumba Casino, LuckyLand Slots, and Global Poker, still leads the space. It's reportedly pulling in A$6.1 billion in annual revenue, converting nearly half a billion to net profit. Founder Laurence Escalante, now estimated to be worth A$4.5 billion, is said to be exploring a buyout of minority shareholders at a valuation near A$3.2 billion (AFR).

Competition, unsurprisingly, has intensified. More than 25 new sweepstakes brands have launched in 2025 alone, pushing the active U.S. roster above 140 sites and slicing VGW’s share from well over 90 percent to roughly one-half. The space now resembles a digital land grab - equal parts opportunity and opportunism.

Why Players Flock

Sweepstakes win on accessibility and engagement. Sign-up is instant - usually just an email and phone number after which players receive “Gold Coins” for free entertainment and “Sweep Coins” as promotional credits that can ultimately be redeemed for cash.

This structure allows operators to classify their products as promotional contests, rather than gambling - a distinction that radically changes their marketing power. They have greater freedom on advertising channels like Meta, Google, and TikTok. Licensed operators are often locked out of these channels, blocked by state-specific compliance requirements, geofencing mandates, and responsible gambling disclosures.

Consequently acquisition costs are substantially lower, and growth is faster. Optimove data shows active-player growth at about 16%, more than triple the growth pace recorded in regulated iGaming. Conversion to first purchase is lower - roughly 12% versus 51% for licensed platforms - but those who do pay tend to stick. Wagering frequency nearly triples after the first month, and long-term retention converges with licensed operators.

The product is built for mobile. Most players access sweepstakes via apps, and the experience borrows heavily from mobile gaming. To compete with TikTok and other distractions, operators lean into familiar mechanics: narrative quests, streak bonuses, loot boxes, and social features all contribute to an experience that is akin to Candy Crush.

With no tax burden or licensing fees, sweepstakes operators can reinvest aggressively into user experience, bonus optimisation, and product iteration - mirroring the approach taken by crypto casinos.

Players generally fall into two camps. Some are seeking familiar IGT or Aristocrat titles which are unavailable in their state; the second engages for the game loop itself, chasing levels, achievements and social status rather than pure cash-out value. As iGaming expands into more states, the question will be whether these users migrate to regulated platforms.

If It Walks Like a Duck...

Sweepstakes operators rely on the legality of their “promotional contest” model, which requires a free method of entry to preserve their claim to non-gambling status. While only 12% of users convert to a first purchase, those players spent an estimated $8.5 billion on Gold Coins in 2024, pushing sweepstakes revenue above regulated iGaming for the first time. Advertising leans heavily on jackpots and cashouts, and the mechanics, UI, and user flow often closely resemble those of licensed online casinos.

The oft-cited McDonald’s-Monopoly analogy doesn’t really carry. At McDonald’s, the sweepstakes element is tacked onto the product. Whereas here, the contest is the product. This disconnect between legal theory and consumer and economic reality is what’s now driving the scrutiny.

Regulatory Heat

Regulatory pressure is mounting - and it’s no surprise. In 2024, U.S. states collected a record $15.9 billion in gaming tax revenue, all built on a system of licensed operators who follow strict rules. To incumbents - both land-based and online, the frustration is obvious. Every untaxed Gold Coin sale feels like lost revenue, and a challenge to the integrity of the licensed market.

Montana was first to act, with a full ban taking effect on October 1, 2025. Connecticut and Louisiana are set to follow with bills having passed both chambers, and awaiting enactment. Cease-and-desist notices and warnings have been issued in multiple states. VGW exited Michigan and New York quietly, anticipating regulatory action. High 5 Games paid a US$24.9 million fine in Washington and settled separately with Connecticut for US$1.5 million. These quiet exits and fast settlements suggest operators aren’t interested in fighting battles where friendlier markets are still wide open.

What to Expect

Despite mounting scrutiny, many states remain open terrain. Enforcement takes time, and in jurisdictions where regulation is slow or fragmented, sweepstakes casinos continue to operate with little friction.

A range of outcomes is now in play. More states will move to ban the model entirely, with a likely domino effect to follow. Others may pursue light-touch licensing, introduce taxation frameworks, or establish new regulatory categories. Rising compliance costs will drive consolidation, favoring the scale players over the opportunists. And many states may choose to do nothing - at least for now.

For operators, a fork in the road is fast approaching - double down on short-term growth, or pivot toward long-term legitimacy. Just as daily fantasy helped open the door for legal sports betting, sweepstakes could end up accelerating broader iGaming reform. As lawmakers confront the scale of untaxed, unregulated gambling, formal regulation may start to look like the simplest and most lucrative solution.

The Opportunity

When regulated markets stall, grey markets emerge - and the gap between them becomes fertile ground for innovation. One theme we’re actively exploring is AI-driven solutions that combat turnover leakage to offshore operators - a multi-billion-dollar challenge in mature regulated markets. It’s a clear example of how friction breeds opportunity, and where we see the next wave of value being built.