There has been some confusion on at least one major topic contained within the currently-circulating Reid bill (via @Kevmath), and that is surrounding the licensing of \’bad actors\’ (see below on this), which is my shorthand for entities operating US-facing Internet poker sites.
Questions of Interest:
1. Can a \’bad actor\’ who operated knowing it was serving US customers be licensed under the Reid bill?
2. Do the \’bad actors\’ specified in the bill include owners of Internet gambling facilities and not just Internet poker facilities?
3. If they can be licensed, will \’bad actors\’ be able to participate in asset sales (not just share sales)?
4. Does it matter if a US-facing site is currently transacting business with US residents or only did so historically?
In trying to answer these questions, and to keep things relatively simple, I am going to analyze the example of a US casino, otherwise licensable, that wants to purchase a corporation that is today accepting US bets or wagers with full knowledge of that fact.
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Section 104(c)(1)(B)(i) of the Reid Bill expressly allows \”a person described in clause (ii)\” to apply for and receive a license under the new poker licensing regime. Such an applicant may only apply to one of the qualified bodies that is a qualified body by operation of law – i.e., without application for designation as a qualified body – pursuant to s. 105(a)(1)(A). That effectively means the gaming commission in Nevada, Mississippi, or (just maybe) Missouri. It could also be part of the New Jersey Casino Control Commission, perhaps one or two other state bodies, or applicable tribal regulators.
The people described in clause (ii) are the so-called \’bad actors\’ I referred to above – shorthand for people that have been US-facing. This is a term of art. Section 104(c)(1)(B)(ii) reads as follows:
A person described in this clause is any person who –
(I) at any time before applying for a license under this title, owned, in whole or in significant part, an Internet gambling facility or an entity that operated an Internet gambling facility that (aa) accepted bets or wagers from persons located in the United States; and (bb) acted with knowledge of the fact that such bets or wagers involved persons located in the United States;
(II) was a significant vendor with respect to the bets or wagers from persons located in the United States for a person described in subclause (I) and acted with knowledge of the fact that such bets or wagers involved persons located in the United States;
(III) purchased or acquired, directly or through an affiliate or intermediary (aa) in whole or in significant part, a person described in subclause (I) or (II); or (bb) the assets, tangible or intangible and in whole or in part, of such person; or
(IV) will use as a significant vendor a person described in subclause (I), (II), or (III).
So, hypothetically at least, current (or historical) US-facing operators or owners, or purchasers of their assets, may be licensed under the proposed regime. We know from s. 104(f)(2) that licenses may only be issued to applicants that are one of the following: an applicant that is the owner or controller of a casino gaming facility or a qualified racetrack for 5 years pre-application; an applicant that is owned or controlled by the owner or controller of a casino gaming facility or qualified racetrack for 5 years pre-application; or, a licensed manufacturer and supplier of slot machines or qualified mobile gaming systems to casino gaming facilities with not fewer than 500 gaming devices that has done so for 5 years pre-application.
Technically, \”[s]uch other applicants as the Secretary [of Commerce] determines appropriate\” may also be licensed – this is the 2-year blackout period that people have been discussing. Let\’s ignore this for now. Again hypothetically, a person that is a casino otherwise licensable pursuant to s. 104(f)(2) that purchases a foreign Internet poker operator (see s. 104(c)(1)(B)(ii)(III), above) is permitted to be licensed under the Reid bill after the initial blanket 15-month post-enactment blackout period (completely separate and distinct from the 2-year blackout referenced above) described in s. 118(a).
Unfortunately, the s. 118 orderly transition provisions are where the confusion crops up. Section 118(b)(1) essentially says that the bad actors shall cease offering services with respect to bets or wagers from persons in the United States within 30 days of the bill\’s enactment and that, thereafter, they shall follow a regime designed to refund balances to US players. Then, in s. 118(c)(1), the bill specifies that a license (among other things) \”may not be issued by any qualified body to a person described in subclause (I), (II), or (III) of section 104(c)(1)(B)(ii) under this title if such person has not comlpied with subsection (b)(1), to the extent applicable to the person.\” [Emphasis added.] This is a key term. It says that bad actors that haven\’t ceased operations and refunded players can\’t ever be licensed.
What about the bad actors that have turned off US players and refunded them in accordance with the bill? We already know that they generally can be licensed, and we think we\’ve established that they can be purchased by a casino who could then seek licensure. But then comes s. 118(c)(2), which states as follows: \”A license or certificate of suitability may not be issued by any qualified body to a person that purchased or acquired, directly or through an affiliate or intermediary, in whole or in significant part, a person described in paragraph (1), or the assets, tangible or intangible and in whole or in part, of a person described in paragraph (1).\” What does s. 118(c)(2) mean?
Some have interpreted this such that \”a person described in paragraph (1)\” refers to any bad actor, e.g., if a US casino buys up a US-facing Internet poker facility, then the purchaser cannot ever be licensed by a qualified body, irrespective of whether that Internet poker facility complied with s. 118(b)(1) or not. Dave Behr (@ftrainpoker), a very smart and pleasant guy, seemed to take such a view in his blog post. (Note: Dave, to his enduring credit, said earlier today that he thinks I\’ve convinced him. He\’s not the only one holding this view, though.) However, on that (original) reading, s. 118(c)(2) would directly contradict s. 104(c)(1)(B)(i) of the bill, which expressly provides for possible licensure. The bill in a very real way wouldn\’t make sense.
My view is that \”a person described in paragraph (1)\” refers not to all bad actors but only to bad actors that did not cease taking US bets or wagers and issue refunds. Section 118(c)(1) describes a bad actor \”if such person has not complied with subsection (b)(1).\” This kind of reference in s. 118(c)(1) is unfortunate; the conditional \”if\” in s. 118(c)(1) necessarily leads to the question of how to read s. 118(c)(2) if the bad actor did comply. On balance, however, I think that if the bad actor did comply with subsection (b)(1), that person simply isn\’t \”a person described in paragraph (b)(1).\”
The drafters could have worded this better and more consistently. For example, the closing words of s. 118(d) refer to \”an entity that has violated subsection (b)(1).\” If they had substituted \”a person described in subclause (I), (II), or (III) of section 104(c)(1)(B)(ii) under this title that has violated subsection (b)(1)\” for \”a person described in paragraph (1),\” then the confusion would be minimized.
The bottom line is that it should be theoretically possible under this version of the bill for currently US-facing Internet poker facilities to be purchased by land-based casinos in the US and then used in the casino\’s Internet poker operations under a licence issued by a qualified body after the 15-month blackout period.
All of this might be academic. Even if I\’m right about the interpretation of the relevant provisions, the key question is whether an applicable qualified body will grant a licence to a casino that bought a currently US-facing poker site. Nevada regulators, for example, have clearly indicated that they will not look kindly upon persons that have not been operating within the four corners of what Nevada regulators believe to be controlling US law when the US market is liberalized. On May 28th of this year, Randall Sayre, a member of the Nevada Gaming Control Board, sent a letter (you can read it here: http://gaming.nv.gov/documents/pdf/internet_gaming_response.pdf) concerning the extent to which nonrestricted state land-based licensees may do business with Internet poker companies. The letter states, in part: \”[T]he Board has an interest in past and present compliance efforts and will look favorably upon those companies that are currently operating within compliance of not just U.S. law, but international laws, as they pertain to internet gaming. Clearly, those internet companies that have not complied with state and federal law, especially after the passage of UIGEA, and have demonstrated no interest in voluntary compliance will be looked upon less favorably.\”
Perhaps Nevada is an outlier and other regulators will be more accommodating, but I doubt it. Maybe other structures can be designed to get to the same result for US acquirors that will still satisfy state and/or Tribal regulators. It seems the door should at least be technically open to certain deals and transactions that some may now be assuming are off the table.