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An Opening To the US Internet Market: How Can I Line Up To Get An Internet Poker License In Nevada and Why Should I?

November 2, 2011 News & Reports

by Anthony Cabot

The debate over Internet poker in the United States no longer appears to be a question of whether it will become legal, but rather when and how it will become legal. Legalizing Internet gambling is being considered at both the state and Federal levels. Legislation before Congress proposes a Federal scheme for licensing and regulating poker and games of chance. Realistically, however, if Congress passes legislation, it will likely permit Internet poker only. This is because poker, a game with a high-skill component, is perceived as different–both historically and practically–from games of chance. A poker-only Federal regulation scheme would likely leave it up to the states to determine how to legalize, license and regulate games of chance and lottery-style games. Meanwhile, states would be limited if poker is regulated at the Federal level; more than likely, the new Federal laws would preempt each state from adopting its own approach to legalizing, licensing and regulating Internet poker.

Confident Predictions about Federal Legislation for Internet Poker

So, what does this mean if you are a company looking to get into the United States’ Internet poker market? Most important, you should first turn your attention to Federal legislation. Based on the Senate discussion draft from the last session, we have a good idea of what the Federal legislation will look like and how it may affect Internet poker.

First, prior Federal proposals have identified two different types of licenses: an operator’s license and a significant vendor’s license. An operator’s license will be reserved for commercial land-based casinos, tribal casinos, race tracks and card rooms that meet certain size requirements, such as a minimum of 500 gaming devices. Everyone else will need a significant vendor’s license; this includes those who manufacture the site’s software, manage the Internet gaming sites for a licensee, provide databases or customer lists, license their trade name, or otherwise receive a percentage of the gaming site’s revenues.

Second, these licenses or certifications will only be issued by a qualified regulatory agency. The number of qualified regulatory bodies is going to be very small–at least initially. Under the last version of the Senate discussion draft, a qualified regulatory agency was limited, among other things, to an state agency that has responsibility to regulate gaming establishments that represent at least 5 percent of the total gross gaming revenues in the United States for 3 of the last 5 years. As such, Nevada will have one of the few qualified regulatory agencies.

Nevada’s Proactive Preparation for Regulating Internet Poker

What makes Nevada even more unique is that it is the only state actively preparing for the challenge of regulating Internet poker. In 2011, the Nevada legislature adopted a bill that required the Nevada Gaming Commission to adopt regulations governing interactive poker by January 31, 2012. To this end, the gaming regulators have drafted regulations and are in the process of accepting comments and holding hearings. Unlike every other state, Nevada will be first in the position to issue licenses for operators and licenses or certifications for significant vendors before or when Federal legislation passes permitting Interstate poker. Adding to the appeal is that the state is the headquarters of most major qualified operators and has superior Internet connectivity and co-location facilities. Given this, Nevada becomes a natural choice for a company seeking to obtain a license.

Likely, Nevada’s regulations will recognize at least three different types of interactive licenses. The first is an operator’s license. Only Nevada casinos of a certain size may apply for and be licensed as an operator of interactive gaming. Therefore, foreign operators will be excluded from applying as an operator unless they decide to purchase a Nevada casino. The size requirements for eligible casino operators will vary based on where the casinos are located. If the foreign operator decides to buy a rural casino, the size requirements will likely be low. Before purchasing a sawdust joint in small-town Nevada, foreign operators should keep in mind that Federal law is likely to be even more restrictive on who may qualify for an interactive license. The last draft of the regulations, for example, limited licensure to casinos with at least 500 slot machines. It included other restrictions as well.

The second type of licensing is for a manufacturer of an interactive gaming system. Under existing law, the definition of a manufacturer includes these elements: (a) to produce, program, design, control the design of, maintain a copyright over or make modifications to an interactive gaming system; (b) to direct, control or assume responsibility for the methods and processes used to design, develop, program, assemble, produce, fabricate, compose and combine the components and other tangible objects of any interactive gaming system; or (c) to assemble, or control the assembly of, a gaming device, cashless wagering system, mobile gaming system or interactive gaming system. The proposed regulations define an “Interactive gaming system” as “a gaming device and means the collective hardware, software, communications technology, proprietary hardware and software used by an operator of interactive gaming to operate interactive gaming.”

The third type of licensing is really a catch-all category that encompasses a variety of persons or companies that do business with the licensed operator. This would likely include:

  • A business-to-business (B2B) operator that provides a turnkey operation to the licensed operator and provides all the services necessary to operate the site.

  • Affiliated marketers, many of whom drive significant player traffic to poker sites.

  • Companies or persons that provide the trademarks, trade names, service marks or similar intellectual property under which an operator of interactive gaming identifies its interactive gaming system to patrons. (This is intended to capture previously U.S.-facing sites that may want to monetize their brands through a licensing agreement with a US-based operator.)

  • Companies or persons that provide player information via a database or customer list to an interactive gaming operator.

  • Those who provide products, services, information or assets to an operator of interactive gaming and receives a percentage of revenue from the establishment’s interactive gaming system.

So, Nevada licensing will be critical to certain service providers, particularly those seeking to form relationships with Nevada-based licensed operators either on a joint venture business-to-consumer (B2C) model or to service multiple licensed operators with a B2B model. The expectation is that largest gaming companies will either 1) buy an existing Internet operator without partnering with anyone, or 2) will partner with an existing operator on an exclusive basis. Still, this could leave a hundred or more eligible Internet poker operators without the ability or player liquidity to compete with the major companies. These eligible licensed operators will likely look to licensed service providers for opportunities to share liquidity with other eligible operators. Whether the foreign operator decides to proceed under a B2C or B2B model, those who obtain their licenses first will have distinct market advantages as they are likely to be able to access the US market earlier than those who will be waiting for licensing approval. The same market advantage can apply to other service providers such as super affiliates who obtain licenses early in the process.

Act Now or Face Consequences of Waiting

Here is where timing becomes critical. A service provider who waits to begin the licensing process until after the Federal legislation passes could be disadvantaged in two major ways. The first disadvantage would be if the potential service provider fails to obtain a license when Internet poker operations begin. By the end of January 2012, Nevada could very well have a complete regulatory scheme including internal control and technical standards in place; if this happens–and pending Federal legislation–the state could begin to issue internet poker licenses as early as the summer of 2012 to those existing licensees that are not using third-party service providers or manufacturers. Moreover, some potential service providers have already filed applications for general suitability or other licensing with the specific intent to convert their applications into a request to be approved as an Internet service provider. This is a calculated gamble because these companies are incurring the cost of being investigated without assurance that federal legislation is going to pass. The second disadvantage centers on potential service providers that have not yet undergone a suitability review. Those in this category may be considered a less desirable partner to a casino company that is eligible for an Internet operators license for the simple reason that a potential operator may be hesitant to partner with a company that may not ultimately qualify for licensure.

Companies willing to take the gamble to become pre-qualified for licensure now have a vehicle. In the last Nevada legislature, a bill was passed allowing a company to file for a finding of suitability without having to identify the type of license being sought. This clears the company to later apply for any available license without having to get recertified for general suitability. Simply, this means a company could file now and then amend its application for a service provider or manufacture’s license after Nevada adopts its regulations. Because the licensing process may take 9-12 months, these companies are buying insurance, under the most favorable timeline, that they will be eligible for licensing at the earliest launch date for Internet poker in the U.S. This would put these companies on par with the major Nevada casinos that are intending to operate without service providers.

Companies that wait until Federal legislation passes before applying for a license may suffer a disadvantage. In Nevada, applications are typically processed in the order received. Just filling out the licensing applications–which are voluminous–may take a month or so to complete. The Nevada Gaming Control Board may face a deluge of applications, especially given that many companies will likely want to enter the market under one of the many categories of service providers,. The first few applications filed either before or immediately after the Federal legislation passes will have a favorable position in the queue. Because of manpower constraints, applications submitted after those initial few may take much longer to process. Companies in this position may lose the race to market simply because they were slow to recognize the process and timing.

If you are interested in learning more about the licensing process in Nevada, you can download from our website a free booklet titled, “Obtaining a Non-Restricted Gaming License in Nevada.” (http://www.lrlaw.com/files/Uploads/Documents/Obtaining%20Nonrestricted%20Gaming%20License.pdf)


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