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APPENDIX B (CONFIDENTIAL) – FURTHER CONSIDERATIONS

The Exchange has identified songwriters, publishers, musical artists, music studios, record

labels, social media platforms, streaming platforms, and retail market participants such as social

media influencers and independent artists as having business lines that are materially affected by

whether or not a new Kanye West album is released. After initial production costs have already

been incurred, an album not being released by a given date can result in the loss of production

investment, reducing net income. Members of the music-related economy can utilize the

Contract to hedge the risk of an album release that they spent a large amount of advertising

dollars promoting and targeting to their customer base not occurring by a given date. Investors

can use the Contract to hedge the risk of music-facing transactions they may have participated in,

such as the purchase of an artist’s music rights.

Retail market participants can utilize the Contract to hedge the risk of a particular album not

being released. One category of retail participants with a direct financial incentive to trade the

Contract are social media influencers, who generate income through attention economy-driven

advertising on platforms such as Instagram and TikTok. These influencers may be part of small

and medium enterprises such as digital ads agencies but they are typically individuals operating

their own online businesses that capitalize on promoting merchandise and content such as music

videos and popular songs. Albums by Kanye West that have already been released are extremely

popular, and a new one would have high virality potential. Creators use popular albums to

generate follower engagement, leading to additional advertising revenue and merchandising

agreements. However, there is also a significant amount of risk: if social media creators invest

substantial time, effort and resources to promote albums that are never released/discussing only

the hype surrounding a Kanye album that never comes, their engagement and revenue can suffer

compared to a world where they focused on an album that does come out. Considering that a

long delay of an album could result in decreased fan enthusiasm or fan frustration with the artist

themselves, a delay or cancellation of the album has a strong relationship with the eventual

commercial failure of the album. Thus, retail influencers can utilize the Contract to hedge the

risk of poor musical content decision-making. The digital platform Pearpop pays social media

influencers with cash compensation based on the number of views and impressions that their

promotion of specific artists’ music generates on social media. This means that an album’s

popularity (related to whether it is released, obviously) is directly connected to the financial

interests of retail market participants such as social media influencers.1If influencers dependent

on Pearpop for revenue choose to promote Kanye, who never follows up on his album promise,

that could result in lost income for the influencer. The Contract thus allows such influencers to

hedge the risk that the artist they choose is unpopular. Opportunities such as the Creator Fund,

Pearpop, and other platforms connect the overall creator economy to the music industry.

According to Rolling Stone, “in recent years, TikTok has proven a breeding ground for stars,

1 https://pearpop.com/

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with music labels prowling the app for promising acts to add into their ranks.”2 For example, a

TikTok influencer that hopes and plans to generate engagement and advertising/merchandising

revenue through alignment with a Kanye West content can utilize the contract to hedge against

the risk of his album not being available for use in their content.

A second class of market participants that can utilize the Contract’s hedging utility are

individuals and companies involved in the marketing and sale of Kanye related merchandise,

such as clothing, footwear, collectibles, and memorabilia. Merchandise is an important

revenue-generating component of the overall music industry, and the sale of merchandise can

often make or break an artist or musical group’s bottom line. An estimate from the UK metalcore

group While She Sleeps calculated that the sale of a single band T-shirt is equivalent to 5,000

Spotify streams in monetary terms.3 Companies that specialize in music-related merchandising

often strike exclusive deals with musical artists to supply their merchandise. For example, in

June 2021, Sony Music UK’s merchandising company Kontraband struck an exclusive deal with

the George Michael Estate to supply his music-related merchandise worldwide.

Music merchandising enterprises such as Kontraband are thus exposed to the financial risk

associated with the underlying artist’s popularity at any given moment, including new

opportunities for merchandise like a new album release. Artists with new albums are likely to

sell more merchandise, and conversely, artists without are likely to see a decrease in their

merchandise sales. These revenue declines pose a material financial risk not just to the

merchandising enterprise itself, but also its suppliers, partners, and employees, who can purchase

the “No” side of the Contract to hedge the risk that Kanye’s album does not come out in a given

period of time and results in material financial losses to the artist’s merchandising operation.

Furthermore, merchandising operations have to prepare products well in advance of need in

order to ensure their ability to accommodate a surge in customer demand. Thus, any unexpected

delayed release of an album would result in wasted resources and the loss of startup investments.

Moreover, the merchandising-related hedging utility of the Contract is not limited to large

enterprises such as Sony Music UK and Kontraband. Retail market participants can also utilize

the Contract to hedge risks associated with the correlation between Kanye’s new album release

and the sale of their merchandise. The rise of platforms such as Etsy and Shopify has led to

millions of independent creators and SMEs creating online storefronts to offer unique

merchandise directly to consumers. For context, Etsy had 4.3 million independent sellers on its

platform in 2020, up from 2.7 million in 2019.4 Many of these sellers focus on musical

merchandise - searches on Etsy for merchandise related to “Beyonce” and “Drake” return close

to 6,000 and 10,000 results, respectively, showing that there are thousands of independent retail

sellers that generate revenue from the sale of musical artist-related merchandise.5

5 https://www.etsy.com/se-en/search?q=beyonce and https://www.etsy.com/se-en/search?q=drake

4 https://www.statista.com/statistics/409374/etsy-active-sellers/

3 https://www.digitalmusicnews.com/2021/06/22/sony-music-kontraband-george-michael-merchandise/

2 https://www.rollingstone.com/pro/news/tiktok-creator-fund-1032824/.

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Like larger merchandising companies such as Kontraband, the revenue of these creators and

SMEs is tightly linked to the relevance/popularity of the musical artists that inspire their

merchandise - participants in this independent creator economy can purchase the “No” side of

the Contract to hedge the risk of no new album, reducing Kanye’s relevance and the resulting

impact it may have on their merchandise sales.

More generally, the roots of the derivatives industry lie in agriculture, and the first derivative

products helped grain farmers manage their pricing risks. The modern American economy looks

quite a bit different than it did back then. Computing and the Internet have revolutionized almost

every aspect of commerce, and the music industry is no exception. Platforms such as Etsy are

allowing retail market participants to sell merchandise directly to consumers through online

storefronts, and digital streaming consumption is the dominant force in music revenue generation

today. Just as grain farmers took advantage of novel derivative products to usher in a new era of

price stability, the participants of today’s new-age media economy need risk hedging tools to

protect their revenue and material financial interests from a new set of risks that are constantly

evolving.6

The various use cases for the Contract discussed above demonstrate that a music artist’s

consumption popularity affects a diverse array of market participants, from the largest record

labels to a retail independent seller who generates income from the sale of their custom-made

Beyonce coffee mugs. The Contract will allow these market participants to make future

economic decisions with more confidence than ever before. Instead of making highly risky

investments beholden to the erratic release schedule of West, independent artists, record labels,

social media influencers, and e-commerce merchants can use the Contract to cover their potential

downside and allocate capital and effort more intelligently. Within the context of the music

industry and creator economy, the Contract can expand the horizon of risk-hedging by extending

the benefits of derivatives that grain farmers have enjoyed for decades to a new class of

participants in the American economy.

Price basing/price discovery utility of the Contract: The Contract will provide a market-based

probability of the album launching in a given time period. Economists and academics can utilize

the market data to inform forward-looking models of the music industry. In particular,

independent artists may use the market-based probability to make decisions surrounding the

timing of their own release--whether because they want to ride a wave of momentum in the genre

of an album’s music or because they fear that the coverage surrounding his album’s release might

overshadow their own. Getting high week-one sales can be make-or-break for an artist--having a

market-based probability could thus allow them to make informed decisions with important

implications for their eventual career success.

6 https://www.cftc.gov/PressRoom/SpeechesTestimony/opastump9

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Similarly, music platforms like Spotify and Apple Music can utilize the market data to optimize

recommendations, advertisements, etc., in order to increase revenue. If a certain artist’s album is

expected to be released in that week, the aforementioned platforms (along with others) will be

able to feature that artist’s album more prominently in order to capitalize on their popularity, and

also recommend it more often to users of their service.

As described in detail above, the Contract has important risk mitigation and price basing/price

discovery utility. The Contract does not relate to the enumerated categories of contracts listed in

Section 5c(c)(i) of the Act. Additionally, the Exchange has not determined such contracts to be

contrary to the public interest and there has been no determination by the Commission that such

contracts would be contrary to the public interest. The Contract provides a means for managing

and assuming price risks, discovering prices, and disseminating price information on the

Exchange’s fair and financially secure trading facility.

The Contract has bona fide risk mitigation and price basing utility for participants with

underlying economic exposure, as described above. The Contract is not merely recreational, as

the discussion of risk mitigation and price basing/price discovery utility demonstrates. The

outcome of the Contract is not predominantly determined by chance and depends on a variety of

factors. Finally, it is possible for traders to use skill and effort to gain knowledge and information

about the likelihood of the event. For example, traders can gain information about the likelihood

of the event by following communications from the music press.

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APPENDIX C (CONFIDENTIAL) – SOURCE AGENCY

Spotify is a digital music streaming service that offers users access to millions of songs,

podcasts, and videos from artists all around the world; it is the most used music streaming

platform, with more than 200 million paid users. If an artist were to release an album in a given

period, it would be listed on Spotify in tandem. Spotify operates as a neutral platform, providing

a service to both artists and listeners without typically engaging in manipulation of content. Their

business model relies on trust and transparency. The Exchange will obtain this data directly from

Spotify’s music platform.

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APPENDIX D (CONFIDENTIAL) – COMPLIANCE WITH CORE PRINCIPLES

Compliance with Core Principles

The Exchange has conducted a comprehensive analysis of the designated contract market core

principles (“Core Principles”) as set forth in Part 38 of the Act. The Core Principles relevant to

the Contract are outlined and discussed in further detail below:

Core Principle 2 - Compliance with Rules and Impartial Access: The Exchange has adopted

the Rulebook, which provides the requirements for accessing and trading on the Exchange.

Pursuant to Chapter 3 of the Rulebook, Members must utilize the Exchange’s services in a

responsible manner, comply with the rules of the Rulebook (“Rules”), cooperate with Exchange

investigations, inquiries, audits, examinations and proceedings, and observe high standards of

integrity, market conduct, commercial honor, fair dealing, and equitable principles of trade.

Chapter 3 of the Rulebook also provides clear and transparent access criteria and requirements

for Exchange Members. Trading the Contract will be subject to all the rules established in the

Rulebook, which are aimed at enforcing market integrity and customer protection.

In particular, Chapter 5 of the Rulebook sets forth the Exchange’s Prohibited Transactions and

Activities and specifically prescribes the methods by which Members trade contracts, including

the Contract. Pursuant to Rule 3.2, the Exchange has the right to inspect Members and is

required to provide information concerning its business, as well as contracts executed on the

Exchange and in related markets. Chapter 9 of the Rulebook sets forth the Exchange’s Discipline

and Rule Enforcement regime. Pursuant to Rule 9.2, each Member is required to cooperate with

an Exchange investigation by making their books and records available to the Exchange. The

Exchange’s Market Regulation Department performs trade practice surveillance, market

surveillance, and real-time market monitoring to ensure that Members adhere to the Rules of the

Exchange. The Market Surveillance Department reserves the authority to exercise its

investigatory and enforcement power where potential rule violations are identified.

Core Principle 2 also stipulates that an exchange shall establish means to provide market

participants with impartial access to the market. Chapter 3 of the Rulebook, and Rule 3.1 in

particular, provides clear and transparent access criteria and requirements for Members. The

Exchange will apply access criteria in an impartial manner, including through the application

process described in Rule 3.1.

Core Principle 3 - Contract not Readily Subject to Manipulation:

Core Principle 3 and Rule 38.200 provide that a DCM shall not list for trading contracts that are

readily susceptible to manipulation. The Exchange’s marketplace and contracts, including this

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Contract, have been designed in accordance with this fundamental principle. The Exchange

maintains various safeguards against outcome manipulation and other forms of manipulation,

including, (i) automatic trade surveillance and suspicious behavior detection, (ii) Rulebook

prohibition, Member certification, and notification, (iii) Member monitoring and

know-your-customer verification, and (iv) sanctions. These safeguards render the Contract not

readily susceptible to manipulation.

(i) Automatic trade surveillance and suspicious behavior detection: The Exchange’s trade

monitoring and market surveillance systems compute statistics using information from all trades

that occur on the Exchange over a range of timeframes, ranging from per trade to the full history

of trading activity. These statistics are geared towards identifying unusual trading activity and

outlier behaviors. If the trade monitoring and market surveillance system identifies behavior

deemed to be unusual, the Exchange’s compliance personnel have the ability to investigate and

determine applicable sanctions, including limits to or suspension of a Member’s access to the

Exchange.

(ii) Rulebook prohibition, member certification and notification: The Exchange’s Rulebook

includes various provisions that prohibit manipulative behaviors. As noted above in the

discussion of Core Principle 2, the Exchange’s Rulebook gives the Exchange the authority to

investigate potential violations of its rules. Pursuant to Rule 3.2, the Exchange has the right to

inspect Members’ books and records, as well as contracts executed on the Exchange and in

related markets. Pursuant to Rule 9.2, each member is required to cooperate with an Exchange

investigation by making their books and records available to the Exchange for investigation. The

Exchange’s Market Regulation Department performs trade practice surveillance, market

surveillance, and real-time market monitoring to ensure that Members adhere to the Exchange’s

rules. The Rulebook also imposes sanctions on Members who break rules. Potential penalties

include fines, disgorgement, and revocation of membership in Kalshi. Only Members are

allowed to trade on the Exchange, and the Exchange requires its Members to strictly comply with

the Rulebook. Members cannot complete the account creation process and trade on the Exchange

until they certify that they have read the Exchange’s rules and agree to be bound by them.

In addition, the Exchange requires applicants for membership to represent and covenant that the

applicant will not trade on any contract where they have access to material non-public

information, may exert influence on the market outcome, or are an employee or affiliate of the

Source Agency. In order to further reduce the potential for manipulation, the Exchange maintains

a dedicated page on the trading portal that lists all the source agencies and their associated

contracts, together with a warning that employees of those companies, persons with access to

material non-public information, and persons with an ability to exert influence on the underlying

of a contract are prohibited from trading on those contracts. This page is intended to serve as an

effective means of raising Members’ awareness of these rules and prohibitions, further reducing

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the potential for manipulation. Similarly, the Exchange places a prominent notice on each

contract page that notifies Members of the prohibition on trading the Contract while employed

by its Source Agency, trading the Contract on the basis of non-public information, and trading

the Contract while having the ability to exert influence on the Contract’s Market Outcome.

(iii) Member monitoring and know-your-customer verification (“KYC”): The Exchange has

a robust KYC process. The KYC process is an important tool that helps flag and uncover higher

risk traders before they become Members of the platform. The Exchange’s KYC process

leverages technology to develop a clear and proper understanding of its members, and the

various risks they may pose with respect to market integrity and fairness, including

manipulation. During the application process, applicants are required to share personally

identifiable information, such as their full legal name, identification number, date of birth, and

address with the Exchange. Applicant information is run through a comprehensive set of

databases that are actively compiled and maintained by an independent third party. The

databases are utilized by the Exchange to identify applicants that are employees or affiliates of

various governments and other agencies. Moreover, the databases can identify known close

relatives and associates of such people as well. Applicants that are flagged go through enhanced

due diligence, including manual review, as part of the onboarding process.

Additionally, as part of the KYC process, the Exchange runs applicants through adverse media

databases. The adverse media dataset is a real-time structured data feed of companies and

individuals subject to adverse media. Monitoring thousands of news sources, business and trade

journals, in addition to local, regional and national newspapers, the adverse media feed isolates

and highlights any entities or individuals subject to a range of adverse media. The Exchange

utilizes the database to trigger enhanced due diligence, because applicants with adverse media

may be more likely to engage in certain types of unlawful activity including market

manipulation.

The Exchange engages in active and continuing KYC checks. The KYC checks are initially

performed upon application, and the Exchange then monitors its Members on an ongoing basis

by running member information through the KYC databases. If material new information

concerning an existing Member is at some point added to a database, the Exchange’s system will

flag the Member even if the cause for the flag was not extant at the time of the Member’s

application. That Member will then go through enhanced due diligence.

(iv) Sanctions: Exchange Members must agree to the terms and conditions of the Exchange’s

Rulebook before being allowed to trade. As a result, Members are subject to disciplinary actions

and fines for engaging in improper market conduct that is prohibited by the Exchange’s

Rulebook. In the event that suspicious trading activity is detected and results in an investigation

initiated by the Exchange, market participants are required to provide the Exchange with

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information relevant to the scope of the investigation under Rule 3.2. Chapter 9 of the

Exchange’s Rulebook details the process for discipline and rule enforcement. Disciplinary action

can range from a letter of warning to fines to referral to governmental authorities that can result

in criminal prosecution.

In addition to these global policies and safeguards, there are a number of contract specific

attributes and considerations that render the Contract not readily susceptible to manipulation.

It is not plausible for Spotify to manipulate the value of the Contract by, for example, not listing

a Kanye West album that has been released. Any manipulation or withholding of high-profile

content like a Kanye West album would pose a significant reputational risk to Spotify, potentially

damaging its relationships with both artists and users. It would also be a massive risk

competitively, as other platforms list his new album. West is a massively successful artist and a

new album by him could command billions of streams. The only other actor who could affect the

value of the Contract is West himself, who is prohibited from trading.

Core Principle 4 - Prevention of Market Disruption: Trading in the Contracts will be subject

to the Rules of the Exchange, which include prohibitions on manipulation, price distortion, and

disruption to the cash settlement process. Trading activity in the Contract will be subject to

monitoring and surveillance by the Exchange’s Market Surveillance Department. In particular,

the Exchange’s trade surveillance system monitors the trading on the Exchange to detect and

prevent activities that threaten market integrity and market fairness including manipulation, price

distortion, and disruptions of the settlement process. The Exchange also performs real-time

market surveillance. The Exchange sets position limits, maintains both a trade practice and

market surveillance program to monitor for market abuses, including manipulation, and has

disciplinary procedures for violations of the Rulebook.

Core Principles 7 and 8 - Availability of General Information and Daily Publication of

Trading Information: Core Principles 7 and 8, implemented by Regulations Sections

Subsections 38.400, 38.401, 38.450, and 38.451, require a DCM to make available to the public

accurate information regarding the contract terms and conditions, daily information on contracts

such as settlement price, volume, open interest, and opening and closing ranges, the rules,

regulations, and mechanisms for executing transactions on or through the facilities of the

contract market, and the rules and specifications describing the operation of the contract market's

electronic matching platform.

Rule 2.17 of the Rulebook sets forth the rules for publicizing information. The Rulebook and the

specifications of each contract are made public on the Exchange website and remain accessible

via the platform. The Exchange will post non-confidential materials associated with regulatory

filings, including the Rulebook, at the time the Exchange submits such filings to the

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Commission. Consistent with Rule 2.17 of the Rulebook, the Exchange website will publish

contract specifications, terms, and conditions, as well as daily trading volume and open interest

for the Contract. Each contract has a dedicated “Market Page” on the Kalshi Exchange platform,

which will contain the information described above as well as a link to the Underlying used to

determine the Expiration Value of the Contract. Chapter 5 sets forth the rules, regulations and

mechanisms for executing transactions, and the rules and specifications for Kalshi’s trading

systems.

Core Principle 11 - Financial Integrity of Transactions: Each Member must be in good

standing and in compliance with the Member eligibility standards set forth in Chapter 3 of the

Rulebook. All contracts offered by the Exchange, including the Contract, are cleared through the

Clearinghouse, a Derivatives Clearing Organization (“DCO”) registered with the CFTC and

subject to all CFTC Regulations related thereto. The Exchange requires that all trading be fully

cash collateralized. As a result, no margin or leverage is permitted, and accounts must be

pre-funded. The protection of customer funds is monitored by the Exchange and ensured by the

Clearinghouse as “Member Property.”

All Remaining Requirements: All remaining Core Principles are satisfied through operation of

the Exchange’s Rules, processes, and policies applicable to the other contracts traded thereon.

Nothing in this contract requires any change from current rules, policies, or operational

processes.

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