A federal appeals court has ruled that Ohio and Tennessee have the authority to regulate Kalshi’s event contracts under their state gambling laws, delivering a significant legal setback to the prediction market company. The decision from the 6th U.S. Circuit Court of Appeals, issued on Friday, focused primarily on Kalshi’s sports-related event contracts, which have been a major source of the company’s revenue.

Kalshi, a New York-based startup led by CEO Tarek Mansour, markets its wagers as financial instruments—specifically “event contracts” and “swaps”—arguing that they fall exclusively under the jurisdiction of the federal Commodity Futures Trading Commission (CFTC). This interpretation would shield Kalshi from state gambling regulations. However, the court ruled that Kalshi had not adequately demonstrated that its sports-event contracts meet the legal definition of “swaps,” which would grant exclusive regulatory authority to the CFTC.

In its ruling, the court emphasized that even if the contracts were considered swaps, the federal Commodity Exchange Act does not explicitly or implicitly prohibit states such as Ohio and Tennessee from enforcing their gambling laws. This decision affirms states’ power to regulate or potentially ban these contracts, especially in jurisdictions with strict gambling restrictions.

The case is part of a broader legal dispute involving Kalshi, which is engaged in multiple lawsuits filed by over a dozen states challenging the legality of its business model. Additionally, several Native American tribes have initiated lawsuits seeking to prevent Kalshi from operating on tribal lands, further complicating the company’s legal landscape.

The ruling could signal a tougher regulatory environment for Kalshi and other prediction-market operators, who have thus far benefited from relatively light oversight from the CFTC. It may also open the door for states with prohibitive sports betting laws, including large markets like California, to impose bans on prediction-market-based sports betting.

Kalshi did not immediately respond to requests for comment following the court’s decision. The outcome adds to ongoing challenges for the company as it navigates a complex intersection of federal and state gambling regulations.