MoFo Perspectives
Above Board: What Boards Need to Know About Prediction Markets
Why It Matters
Prediction markets are projected to exceed $50 billion by 2025, making them a significant new venue for corporate risk management and speculation. Boards must understand the regulatory landscape and enforce insider‑trading policies to avoid costly enforcement actions and reputational damage, especially as the CFTC and SEC intensify oversight of these platforms.
Key Takeaways
- •Prediction markets projected $50B size by 2025.
- •CFTC requires DCM and DCO licenses for US platforms.
- •Insider trading rules extend to prediction market contracts.
- •Boards must update policies to cover prediction‑market activity.
- •Employee misuse can cause severe reputational and stock impact.
Pulse Analysis
Prediction markets—trading venues where participants wager on binary outcomes—are rapidly expanding, with industry forecasts topping $50 billion by 2025. In the United States, every lawful platform operates under a dual‑license framework: a Designated Contract Market (DCM) authorizes the exchange of event contracts, while a Derivatives Clearing Organization (DCO) safeguards the fully collateralized trades. Because contracts are settled on a yes/no basis—ranging from CPI releases to Super Bowl halftime acts—participants must post the entire trade amount upfront, eliminating margin risk. The CFTC’s oversight of both the exchange and clearinghouse ensures rigorous consumer‑protection standards and transparent market operations.
The intersection of prediction markets and insider trading has drawn heightened scrutiny from both the CFTC and the SEC. Although event contracts are not traditional securities, the Commodity Exchange Act now mirrors Section 10b‑5, granting the CFTC authority to pursue fraudulent trading based on non‑public information. Recent speeches from the CFTC enforcement director and a notice of proposed rulemaking signal an aggressive enforcement posture, especially when insiders trade on undisclosed corporate data such as earnings language or product launch dates. Parallel SEC investigations reinforce that anti‑fraud provisions apply, creating a dual‑regulatory risk environment for market participants.
For public‑company boards, the practical implication is clear: prediction‑market activity must be woven into existing insider‑trading policies and employee handbooks. Companies should conduct a policy audit, add explicit language prohibiting the use of non‑public material on any prediction platform, and deliver targeted training to younger staff who are most likely to engage with these venues. Proactive compliance not only mitigates potential civil or criminal liability but also shields the firm from reputational damage that can erupt when an employee’s illicit trade makes headlines. By treating prediction markets as a legitimate hedging tool while enforcing strict conduct standards, boards protect shareholder value and maintain regulatory goodwill.
Episode Description
In this episode of the Above Board podcast, hosts Scott Lesmes and Haima Marlier are joined by Morrison Foerster partners Trevor Levine and Ryan Adams to examine the rapid rise of prediction markets and the governance, compliance, and enforcement questions they raise for public companies. Trevor explains how prediction markets operate, why they fall under CFTC jurisdiction, and the regulatory safeguards built into these markets. Ryan then explores the insider trading and anti-fraud risks prediction markets create for public companies, particularly where employees may trade on confidential or non-public information tied to corporate events. The discussion closes with practical guidance for boards and legal teams, including why companies should proactively update insider trading policies, codes of conduct, and employee training to expressly address prediction market activity.
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