- within Intellectual Property, Food, Drugs, Healthcare, Life Sciences and International Law topic(s)
The federal government’s approach to regulating prediction markets is beginning to take shape, and companies – particularly those in life sciences and health care – should take note. Since we first wrote about prediction markets and the associated insider trading risks in April 2026, these novel markets have grown in both popularity and controversy. According to the Pew Research Center, trading volumes on major platforms Kalshi and Polymarket reached nearly US$24 billion in April 2026 – nearly five times what they were just six months prior – and news of suspected insider trading on the platforms continues to make headlines.
As courts across the country divide over whether prediction markets offering event contracts are subject to the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC) or remain subject to state gambling regulation as well – a question that seems bound for the Supreme Court – federal regulators and enforcement authorities have ramped up efforts to understand and police these markets, clarifying the path forward for public companies. In recent months, the CFTC and the Securities and Exchange Commission (SEC) have sought public comment on rulemaking initiatives as they work to understand and set appropriate limits on prediction market activity. Simultaneously, federal enforcement authorities have begun to investigate and charge insider trading on these markets under existing laws and theories.
But increasing attention from federal regulators has not chilled the rapid development of prediction markets, as the platforms continue to expand their event contract offerings into new and potentially risky territory. In July 2026, Kalshi launched a “pilot suite of prediction markets on clinical trial outcomes and FDA regulatory decisions.” Though Kalshi frames these new markets as an attempt “to help solve drug development's information silo problem,” they pose unique and heightened insider trading and data integrity risks for life sciences and health care companies.
Companies across sectors should take proactive steps to evaluate and, as appropriate, adjust or enhance existing policies and contractual controls to address the risks posed by prediction markets.
Regulatory landscape continues to evolve – and public companies are responding
In June 2026, the CFTC announced proposed amendments to existing regulations to establish a structured framework for determining when event contracts involving terrorism, assassination, war, gaming, or unlawful activity may be contrary to the public interest. According to CFTC Chairman Michael S. Selig, the proposed rules “give[] the Commission a durable, transparent framework to identify the contracts Congress directed [it] to scrutinize while letting legitimate markets move forward”. Whether these regulations are extended to the life sciences industry remains to be seen, given the significant public interest in having safe and effective drugs supported by trials without improper financial interests among investigators and sponsors.
That same month, the SEC and CFTC issued a joint request for public comment related to the commissions’ efforts to harmonize regulations on a number of prediction market-related issues. Importantly for public companies, the CFTC and SEC are attempting to define when an event contract constitutes a securities-based swap such that it falls within the SEC’s jurisdiction.
Although SEC Chairman Paul Atkins has previously acknowledged concerns about prediction markets, the joint request for comment is the SEC’s first official foray into regulation in this arena. And some lawmakers are pushing for the SEC to take a more active role. A group of House Democrats recently wrote to Chairman Atkins seeking additional clarification from and urging intervention by the SEC in the prediction markets, particularly in relation to event contracts that reference individual securities or securities indexes.
As the SEC mulls its role, some public companies are considering whether their existing policies adequately address the use of confidential corporate information in connection with prediction market activity. Some public companies have updated their Codes of Conduct, insider trading policies, or other internal company policies to address prediction market risks, and we expect practices in this area will continue to develop.
CFTC and SDNY have made good on their promises of insider trading enforcement
While federal regulators consider what new regulations may be necessary to account for the risks posed by prediction markets, federal enforcement authorities are leveraging existing laws and legal theories to prosecute insider trading on these platforms. When we first wrote about prediction market-related insider trading risks in April 2026, federal enforcement was not a certainty; it was a forecast, informed by increasing public outcry and pointed statements of interest by top prosecutors. That forecast has since become reality. In the intervening months, the CFTC and the U.S. Attorney’s Office for the Southern District of New York (SDNY) – an office with a long tradition of groundbreaking securities and commodities fraud prosecutions – have launched the first insider trading enforcement actions targeting prediction markets.
In April 2026, the CFTC and SDNY announced parallel civil and criminal actions against an active-duty U.S. Army Special Forces sergeant. They charged the defendant with using classified, nonpublic information about the mission to capture Nicolás Maduro to trade in Polymarket event contracts, netting over US$400,000 in profits.
More importantly for public companies, in May 2026, the CFTC and SDNY turned their attention to trades related to public company confidential information, charging an employee at a public technology company with misappropriating confidential corporate information to make nearly US$1.2 million in profit on company-related Polymarket trades. The indictment charges the defendant with commodities fraud under the Commodity Exchange Act (CEA), wire fraud, and money laundering. In its parallel civil action, the CFTC charged the defendant with violations of the CEA and is seeking injunctive relief, as well as disgorgement, civil penalties, and restitution.
Both the CFTC and SDNY rely on a misappropriation theory of insider trading, alleging that the defendant misappropriated confidential corporate information in breach of a duty of trust to profit on prediction market trades. Although the misappropriation theory is a common one in traditional securities-based insider trading cases, because event contracts are classified as derivatives, not securities, the defendant is not charged under Section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5. The company itself is not facing liability.
Facing increased public and government scrutiny, major prediction markets like Kalshi and Polymarket are redoubling their efforts to root out insider trading on their platforms and are cooperating with law enforcement to refer and prosecute violations. In April 2026, Polymarket announced a partnership with blockchain intelligence provider Chainalysis to identify and investigate insider trading on its platform. And in June 2026, Kalshi launched new market integrity initiatives, including enhanced whistleblower mechanisms and employment verification controls requiring traders to input employment information before purchasing certain company-related event contracts. These new initiatives could generate additional investigation and enforcement activity from federal authorities, increasing the risk that public companies could face enforcement-related inquiries.
New – and heightened – risks for health care and life sciences companies
Federal regulation and enforcement efforts are ramping up, but major prediction market platforms are not backing away from high-risk event contract offerings. In July 2026, Kalshi announced a partnership with public intelligence company AppliedXL to introduce a pilot group of event contracts tied to clinical trial endpoints and Food and Drug Administration (FDA) approvals. Polymarket also lists FDA approval-related event contracts. These new biopharma event contracts raise both insider trading and clinical study data integrity risks that merit close attention from life sciences companies sponsoring clinical trials and pursuing new product approvals.
Kalshi’s new biopharma event contracts principally fall into two types – trial readout (or “endpoint”) contracts and regulatory approval contracts – which are the focus of a white paper Kalshi and AppliedXL published with the launch of the pilot.
An endpoint event contract asks whether a named trial will meet its specified primary endpoint, with statistical significance, by a certain date. Kalshi and AppliedXL nominally recognize that interpreting clinical trial results is often nuanced. To address this, they have committed to adjudicating trial success based on “all prespecified primary endpoints met with statistical significance, confirmed against the registered protocol on ClinicalTrials.gov rather than against the sponsor’s characterization of its own results.” And, if “the picture is ambiguous, incomplete, or inconsistent with the registered protocol,” the resolution is “NO,” the event was not met. In practice, it’s unclear how events will be adjudicated in a timely manner, as sponsors are generally not required to post full protocols to ClinicalTrials.gov until well after trial completion (up to three years).
A regulatory approval event contract asks whether the FDA will issue a qualifying approval letter for a named drug and indication by a specified date. The pilot covers novel drugs and, as STAT reports, full approval decisions. A complete response letter or withdrawn application resolves an event contract against approval immediately. Kalshi says it hopes to extend these markets to accelerated approvals later.
Kalshi has established some guardrails on its initial pilot offerings to protect trial integrity and deter insider trading. The pilot focuses initially on selected late-stage trials run by larger companies – generally, companies with above US$500 million in market capitalization. Event contracts are listed only once enrollment in the specified trial is substantially complete. The pilot also requires traders to enter their employment information before buying and selling these event contracts, and Kalshi’s rules bar trading by anyone with access to material nonpublic information about a contract’s subject or with any influence over its outcome. Patients enrolled in a listed trial are barred as well.
As Kalshi and AppliedXL observe in their white paper, although the scope of potential insiders in these new markets is broad, the most significant insider trading risk is concentrated in a narrower population. Consistent with past clinical trial-related insider trading enforcement actions, exposure is greatest for individuals with visibility across the whole trial – including unblinded statisticians, data monitoring and adjudication committee members, lead investigators, and data managers with the complete dataset. Some of these individuals may know more about how a trial is trending than the sponsor itself. Given recent indictments of individual physicians for manipulation of patient outcome data in clinical trials, this risk potentially extends to all individuals involved in handling or analyzing any trial-related data.
Perhaps the more serious risk for trial sponsors is not that an insider profits from buying and selling trial-related event contracts, but that the trial itself is called into question. Some of the people with the fullest view of the data – including individual patient data – can also affect the outcome, and a trader positioned against a product need only introduce enough noise to degrade a close study. Even absent misconduct, an outcome-linked interest is a conflict that might invite questions about the data, turning a trading problem into a product development problem. Where such an interest raises a serious question about data integrity, including the introduction of possible bias, FDA’s investigator financial disclosure and bioresearch monitoring rules may allow the agency to audit that investigator’s data, require further analyses or confirmatory studies, or decline to treat the study as a basis for agency action.
The risks go further, yet, beyond the small group of individuals with access to unblinded or trial-wide data. In large, multi-site global studies, prediction markets may create incentives for market participants to seek confidential information from investigators, study staff, clinical research organization (CRO) personnel, vendors, or even study subjects through informal contacts, phishing campaigns, or other cybersecurity threats. Even where no information is successfully obtained or misused, if a sponsor learns about attempts to collect such information, the sponsor may be forced to investigate potential information leakage and assess whether disclosure obligations or regulator notifications are warranted. The sponsor may also need to conduct additional analysis to determine if bias was introduced into the study and the result could have been impacted.
Moreover, a trader need not possess a complete view of trial data to affect outcomes. Individuals with financial interests tied to an event contract may attempt to influence recruitment, retention, endpoint assessment, regulatory timelines, or other study activities at one or more sites, raising questions about trial conduct even where no single actor has visibility across the entire study.
Prediction market pricing and related activity may invite questions about trial integrity and generate product approval risks unrelated to any conduct by those with access to confidential information. Significant market movements, rumors, or speculative analyses disseminated through social media could affect patient enrollment and retention, patient-reported outcomes, investigator behavior, or broader stakeholder perceptions. If market pricing comes to reflect strong expectations regarding a trial result or FDA decision, regulators may scrutinize trial governance, oversight, conflict-management procedures, and controls designed to prevent information leakage, even where no apparent misconduct occurred.
How should companies respond
With federal regulators and enforcement authorities increasingly focused on prediction markets, public companies across sectors should take steps to ensure that employees understand their obligations to maintain company confidentiality and the risks associated with trading on prediction markets. Life sciences and health care companies – both public and private – face additional risks related to new markets offering event contracts tied to clinical trial outcomes and FDA approvals and should account for those risks in both policies and contracts.
All public companies
Companies should review their existing policies and assess their adequacy to prohibit employees from using company information to trade in prediction markets. Though this is a developing area and risk of direct corporate liability may be low, public companies whose employees trade company-related event contracts may face inquiries or subpoenas from enforcement authorities. Responding to these inquiries requires resources and diverts attention away from day-to-day business, and any ensuing prosecutions have the potential to damage a company’s reputation. Companies could also face shareholder complaints or litigation if they ignore prediction market-related risks.
Even where a company’s existing policies prohibit the misappropriation of confidential corporate information for personal gain, some public companies have updated their Codes of Conduct/Ethics, insider trading policies, or other internal policies to address the use of confidential corporate information in connection with prediction-market activity. Companies considering making such updates should work with counsel to determine the approach best suited to their existing policies and circumstances.
Companies should also consider addressing prediction market risks in employee training on ethics and/or insider trading, emphasizing that trading based on confidential company information on prediction markets is prohibited.
Life sciences and health care companies – both public and private
For life sciences and health care companies, one of the primary levers is contractual. In addition to revisiting their insider trading policies, Codes of Conduct, and trainings as described above, companies sponsoring clinical trials should consider expressly prohibiting trading in event contracts tied to a trial’s outcome or a product’s approval in the agreements governing trial conduct, such as clinical trial agreements, confidentiality agreements, CRO master services agreements, and agreements with central laboratories, randomization vendors, and biostatistics firms. Flow-down provisions in these agreements deserve close attention because the sponsor otherwise has no contract with those who may have broad data access. A prohibition in the master services agreement binds the CRO; it reaches a subcontractor of the CRO only if that services agreement requires the CRO to impose the same terms downstream.
To that end, a list of roles barred from trading contracts on the trial – maintained by the sponsor to enforce its own agreements – may be more useful than a list keyed to organizations. The exposure in endpoint contracts may attach to anyone who has access to data from an ongoing study. Approval contracts turn on whether the FDA acts by a specified date, so those in roles that give them visibility into progress with respect to regulatory milestones may have access to material information. A list assembled from vendor relationships alone will miss a subcontractor the sponsor never contracted with, and it will not cover the sponsor’s own staff, who fall instead under the company’s insider trading policy and/or Code of Conduct or Ethics.
The controls above are aimed at what trial design does not reach, namely the small number of people who see across the whole trial or can influence how an event is classified – and, on the approval side, where design offers no protection at all, those with visibility into the regulatory track. FDA’s own financial disclosure rules also recognize that blinding, objective endpoints, multiple investigators (most of whom lack a disclosable interest), and endpoint measurement by someone other than the investigator may adequately protect against bias from a disclosable financial interest. These features describe most late-stage trials, which are the only trials these prediction markets currently cover.
Beyond contracts, study sponsors should treat outcome-linked trading as not only a compliance training topic, but also a data integrity risk in monitoring and quality plans. Among other things, that means revisiting who can see unblinded and interim results – and how tightly that access is walled off – and routing any report of suspected trading to clinical, regulatory, and quality at the same time it reaches legal and compliance, because the company may need to weigh an audit and what, if anything, to tell FDA. Prediction markets may effectively impose an additional layer of governance and oversight expectations, requiring sponsors to implement procedures capable of identifying, escalating, and responding to potential conflicts, information-leakage concerns, unusual market activity, and related trial-integrity questions.
Lastly, private and pre-IPO developers should not assume these risks pass them by. The market capitalization threshold for Kalshi’s initial pilot offerings means listed contracts currently track public companies, but Kalshi and AppliedXL state in their white paper that smaller programs are expected to be added as safeguards mature. A private company sponsor has none of the securities architecture that public companies rely on, so contractual controls will be even more important. The same outlook applies across the sector. The white paper contemplates earlier-phase trials and label expansions, and nothing in the model is specific to prescription drugs. Therefore, device, diagnostic, and biologics companies should now be asking which of their programs could become tradeable, and whether the agreements governing them would sufficiently mitigate the risk.
Our cross-practice team at Hogan Lovells Cadwalader stands ready to advise companies across sectors as they consider policy and contract updates and evaluate enforcement risks in this rapidly evolving area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]