Underdog sues Tennessee over prediction market regulation
Sports betting and prediction market operator Underdog has sued Tennessee after receiving a cease-and-desist letter last week from state regulators ordering it to cease prediction market activity in the state.
According to The Tennessee Journal, the suit was filed in the US District Court for the Middle District of Tennessee in Nashville and targets state attorney general Jonathan Skrmetti and members of the Tennessee Sports Wagering Council.
Tennessee is the seventh state in which Underdog has sued following tightened restrictions on prediction markets from some states. Last month, the operator had sued state regulators in Massachusetts, New Mexico, Washington, Wisconsin, Connecticut and Ohio.
Underdog’s suit against Tennessee follows a ruling made by the Sixth Circuit late last month that found regulators in both Tennessee and Ohio could impose state gaming regulations on prediction markets. The court determined that sports event contracts did not qualify as financial swaps and therefore did not fall under federal regulation.
Following that decision, Tennessee’s Sports Wagering Council ordered Underdog to cease its prediction market operations in the state.
Underdog has therefore asked the court to grant it a permanent injunction against state regulators to allow it to continue offering its sports-event contracts in the state. It also asks the court for a declaratory judgment stating that Tennessee violated the Supremacy Clause of the US Constitution by enforcing its gaming laws on its event contracts.
“The threat of Defendants’ attempted enforcement of Tennessee law poses a direct and imminent threat to Underdog’s business and its users, and leaves Underdog with a ‘Hobson’s choice’ wherein both its options will cause irreparable harm,” the filing stated.
Underdog, along with other prediction markets, maintains that its sports-event contracts are federally regulated by the Commodity Futures Trading Commission and therefore do not fall under state gaming laws.
Tennessee had previously sent cease-and-desist letters to Kalshi, Polymarket and Crypto.com in January.
Charlotte Capewell brings her passion for storytelling and expertise in writing, researching, and the gambling industry to every article she writes. Her specialties include the US gambling industry, regulator legislation, igaming, and more.
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The Backstory
Underdog’s Tennessee fight follows a rapid regulatory turn
Underdog’s lawsuit against Tennessee is the latest escalation in a dispute that has moved quickly from a technical debate over derivatives law into a state-by-state fight over who controls sports-linked prediction markets. The company is asking a federal court in Nashville to block Tennessee officials from enforcing sports betting laws against its event contracts, arguing those products are regulated at the federal level by the Commodity Futures Trading Commission.
The case lands after a major setback for prediction market operators in the Sixth Circuit, which found that sports event contracts did not qualify as financial swaps under the relevant federal framework and therefore could be subject to state gaming regulation. That ruling changed the legal posture in Tennessee and Ohio, giving regulators a clearer path to pursue companies offering contracts tied to sports outcomes without state sports wagering licenses.
For Underdog, the timing is consequential. The company has built a broader strategy around prediction markets, not just daily fantasy sports, and now faces enforcement threats in multiple jurisdictions. Tennessee’s cease-and-desist letter forced the company into a choice it says would damage either its business model or its legal position: stop offering the products or risk penalties for continuing.
A business model built for convergence
Underdog’s legal exposure is tied to a larger commercial pivot. The company moved deeper into prediction markets after buying Aristotle Exchange, a derivatives business, while cutting more than 20% of its workforce as it shifted resources toward prediction markets and artificial intelligence. That move positioned Underdog as one of the most visible gaming-adjacent companies trying to use federally regulated market infrastructure to offer sports-linked contracts.
The strategy became more significant after London-based IG Group agreed to buy Underdog in a deal valued at as much as US$1.3 billion. The transaction, described in IG Group’s Underdog acquisition plan, is designed to add more than 1 million US customers to IG’s existing US base and give the derivatives trading company a consumer-facing platform at the intersection of trading, sports and entertainment.
IG has framed Underdog as a way to expand beyond sports into crypto, financial, macroeconomic, cultural and political outcomes. That is the core promise of prediction markets: a single interface where users trade contracts on the probability of events. But the same convergence that makes the model attractive to financial firms also alarms state gambling regulators, who see sports contracts as wagers regardless of the legal architecture surrounding them.
The acquisition is not expected to close until late 2026 or early 2027 and remains subject to regulatory approvals and due diligence. The more states move to classify sports event contracts as gambling, the more complicated that path becomes. Legal clarity, or the lack of it, could affect Underdog’s addressable market and the growth assumptions underpinning the deal.
Tennessee has been tightening its perimeter
Tennessee’s move against Underdog did not emerge in isolation. The state has been aggressively policing what it sees as unauthorized sports wagering in the nation’s largest online-only sports betting market. Licensed sportsbooks handled US$5.6 billion in wagers during the last tax year, making the integrity of the regulated market a central concern for state officials.
The Tennessee Sports Wagering Council has repeatedly argued that consumer protection, tax compliance and market fairness depend on keeping unlicensed operators out. In recent months, the council has fined offshore sportsbook BUSR US$50,000 for operating without a license, part of a broader enforcement campaign described in Tennessee’s action against unauthorized sportsbooks. The regulator has said illegal operators do not offer the safeguards required of licensed entities.
The council has also pursued sweepstakes-style operators. Sportzino shut down its Tennessee sports betting operations after receiving a cease-and-desist order, according to the state’s action against the sweepstakes operator. The agency warned consumers that access to a platform does not mean it is operating legally in Tennessee, a message that also applies to prediction market companies whose products are available online across state lines.
That enforcement record helps explain why Tennessee acted quickly after the Sixth Circuit decision. From the state’s view, sports event contracts compete with licensed sportsbooks while avoiding the taxes, licensing standards and compliance obligations imposed on regulated operators. From Underdog’s view, Tennessee is attempting to apply gambling law to federally regulated contracts, raising a Supremacy Clause dispute.
Kalshi cases set the legal backdrop
Underdog’s lawsuit follows earlier litigation involving Kalshi, the federally regulated prediction market that became a test case for whether sports event contracts fall under federal commodities law or state gambling law. In Tennessee, Kalshi initially won a preliminary injunction after US District Judge Aleta Trauger concluded that its sports event contracts qualified as swaps under the Commodity Exchange Act, temporarily blocking state enforcement.
That ruling, detailed in the Tennessee injunction for Kalshi, offered prediction market operators a favorable reading of federal preemption. It also diverged from other courts and underscored why the issue was likely to move through appellate channels. The debate turned on whether contracts tied to sports outcomes are financial instruments overseen by the CFTC or gaming products that states can license and restrict.
The Sixth Circuit’s later decision shifted momentum back toward state regulators in Tennessee and Ohio. By rejecting the idea that sports event contracts were protected as swaps, the appeals court undercut the foundation on which Kalshi and similar operators had relied. Tennessee’s cease-and-desist letter to Underdog followed that appellate ruling, showing how quickly regulatory agencies can convert courtroom victories into enforcement action.
The split in outcomes across jurisdictions matters because prediction markets operate nationally. A platform can design a federally compliant product but still face state-by-state restrictions if courts allow local gambling laws to apply. That creates a fragmented map for companies whose business models depend on scale, liquidity and broad user access.
Ohio’s parallel crackdown raises the stakes
Ohio moved in tandem with Tennessee after the Sixth Circuit decision. The Ohio Casino Control Commission sent cease-and-desist letters to 10 companies, including Underdog Predict, Polymarket, Robinhood Derivatives, Coinbase and Webull, saying sports event contracts violate state law when offered without a sports gaming license.
The Ohio action, covered in the regulator’s cease-and-desist letters to prediction markets, gave companies 14 days to remove contracts or face potential penalties. Ohio officials said the Sixth Circuit made clear that sports event contracts are subject to the state’s gambling laws. Gov. Mike DeWine was more direct, saying the products were gambling no matter what operators called them.
Underdog has responded by suing regulators in several states, including Massachusetts, New Mexico, Washington, Wisconsin, Connecticut and Ohio, before adding Tennessee. The widening litigation shows that operators are not treating these enforcement letters as isolated compliance disputes. They are trying to preserve the legal theory that underpins the national prediction market business: federal oversight should preempt state gambling regulation.
The stakes extend beyond Underdog. If states prevail, prediction market operators may need sports betting licenses, geofencing systems, market-by-market approvals or product withdrawals. If operators prevail, states could lose authority over a fast-growing category of sports-linked wagering substitutes. For licensed sportsbooks, the outcome could determine whether a new class of competitors can offer sports exposure without the same regulatory costs. For consumers, it will shape which products remain available and what protections apply when they trade on sports outcomes.
