The rush is on for a Nevada Internet gaming license (or interactive gaming, as it is referred to in Nevada). As of the end of 2012, there were eight companies that were licensed by the Nevada Gaming Commission (the Commission) to operate interactive gaming, with 10 more companies with applications in the process of investigation and review. At the same time, there were eight licensed manufacturers of interactive gaming systems with 14 applicants still pending, one licensed manufacturer of associated interactive gaming equipment and three applicants still pending, 11 licensed interactive service providers and 19 service provider applicants pending, three licensed interactive gaming distributors and six distributor applicants pending, and three licensed interactive gaming independent test laboratories. Interactive poker websites could launch in Nevada by the spring of 2013 once the technology is approved by testing laboratories and the Nevada gaming regulators. Many of these licensees are new to Nevada and its gaming regulatory regime.

Interactive gaming was initially introduced in Nevada in 2001. Nevada Assembly Bill 466 allowed the Commission to adopt interactive gaming regulations upon the advice and assistance of the Nevada Gaming Control Board (the Board) after a determination by the Commission on whether interactive gaming was legal. In March 2011, the Nevada legislature introduced AB 258, which instructed the Commission to adopt regulations and “grant licenses to operators of Internet poker and to manufacturers of interactive gaming systems, manufacturers of equipment associated with interactive gaming and interactive gaming service providers who provide services, software or equipment to operators of Internet poker.”1 After several defendants were indicted by the U.S. attorney on April 15, 2011, for bank fraud, money laundering and illegal gambling offenses related to Internet wagering in the U.S., AB 258 was amended substantially. As adopted, AB 258 provides that: “[A]ny license to operate interactive gaming does not become effective until: (1) A federal law authorizing interactive gaming is enacted; and (2) The United States Department of Justice notifies the Board or Commission in writing that it is permissible under federal law to operate interactive gaming.”2

On Aug. 24, 2011, the Board issued draft regulations for the establishment of a regulatory framework for the state regulation of Internet poker pursuant to AB 258. In a statement pertaining to the draft regulations, then-Chairman of the Board Mark Lipparelli noted that “[t]he technology supporting [Internet poker], while not perfect, has improved dramatically since its introduction. Similar to our land-based requirements, Nevada will establish high standards, giving players as much confidence as possible in the entities and technologies that might eventually gain approval.”3

Nevada was the first state to adopt regulations and develop a licensing procedure for interactive wagering, which is currently limited to poker. There are lingering questions regarding the potential success of Nevada-based Internet poker websites because of the relatively small size of the potential player pool. Should multiple states adopt legislation authorizing Internet wagering, it would be possible for participants in one state to place or receive wagers from another state over the Internet. In this event, states will still need to grapple with complicated issues relating to the regulation and licensing of, and taxation of, the revenues generated from interstate Internet wagering. Nevada’s interactive gaming statutes provide that the Commission “may enter into compacts with other jurisdictions where interactive gaming is not prohibited, setting forth the manner in which the state of Nevada and such other jurisdictions will regulate and share tax revenues from interactive gaming operations between such jurisdictions and enforce criminal laws related to cheating, tax evasion or unlicensed interactive gaming, and authorizing the commingling of games and pots between such jurisdictions. Such compacts may be limited to Internet poker.”4 To the extent that players of Internet poker are located in jurisdictions other than Nevada, the Nevada fee is 4 percent of the gross revenue resulting from the play of players located in such other jurisdictions.”5

A Nevada-licensed operator of interactive gaming may only offer such gaming to individuals located outside the state of Nevada if the Commission determines that a federal law has been enacted that authorizes that specific type of interactive gaming, or if the Board or the Commission is notified by the U.S. Department of Justice that federal law permits the operation of that specific type of interactive gaming.6 In a bill draft submitted to the Legislature in January 2013, the Board has proposed an amendment to this language that would allow Nevada’s governor to enter agreements with other states that legalize Internet poker.7

In Nevada, interactive gaming is defined as:

[T]he conduct of gambling games through the use of communications technology that allows a person, utilizing money, checks, electronic checks, electronic transfers of money, credit cards, debit cards or any other instrumentality, to transmit to a computer information to assist in the placing of a bet or wager and corresponding information related to the display of the game, game outcomes or other similar information. The term does not include the operation of a race book or sports pool that uses communications technology approved by the [Nevada Gaming Control] Board pursuant to regulations adopted by the Commission to accept wagers originating within this state for races or sporting events.8

An interactive gaming system is “the collective hardware, software, communications technology, and proprietary hardware and software specifically designed or modified for, and intended for use in, the conduct of interactive gaming.”9 Nevada-licensed interactive gaming operators (IG operators), manufacturers of interactive gaming systems (IGS manufacturers), manufacturers of associated interactive gaming equipment (AE manufacturers), interactive service providers, interactive gaming distributors and interactive gaming independent test laboratories have ongoing reporting and suitability requirements in Nevada.

Fees

A licensed IG operator must file an Annual License Fee Report with a license renewal fee of $250,000 every year after its license was issued or previously renewed.10 Both licensed IGS manufacturers and AE manufacturers must file an Annual License Fee Report with a license renewal fee of $25,000,11 and interactive service providers must file an Annual License Fee Report with a license renewal fee of $1,000.12 Unless federal law otherwise provides for a similar fee or tax, all gross revenue from the operation of interactive gaming received by an IG operator, regardless of whether any portion of the revenue is shared with another person, must be attributed to the licensee and counted as part of the gross revenue of the licensee.13 An IGS manufacturer who is authorized by an agreement to receive a share of the revenue from an interactive gaming system from an IG operator is liable for 6.75 percent of the amount of revenue to which the IGS manufacturer is entitled pursuant to the agreement.14 The IG operator must provide in writing to each participating licensed establishment its method for determining the pro rata share of a system payout for purposes of gross revenue deductibility and its method for determining the proportionate share of gaming taxes and fees owed by the IG operator to the licensed establishment.15

Interactive Gaming Regulations
On Dec. 22, 2011, the Commission adopted regulations applicable to the operation of interactive gaming. Regulation 5A governs the operation of interactive gaming:

Regulation 5A.020 defines, amongst other things, the requirements for an “interactive gaming account,” and which activities fall within the scope of an “interactive gaming service provider” and “operator of interactive gaming.” Poker is defined in Regulation 5A.020 as “the traditional game of poker, and any derivative of the game of poker as approved by the chairman and published on the Board’s website, wherein two or more players play against each other and wager on the value of their hands. For purposes of interactive gaming, poker is not a banking game.”
Regulation 5A.070 outlines the minimum internal controls required for IG operators, including administrative, accounting and audit procedures, system security, player identification, verification and registration, confidentiality of player accounts and player information, system testing and responsible gaming.
Regulation 5A.080 requires licensees to implement procedures designed to prevent criminal activity and money laundering.
Regulation 5A.090 addresses access to records by the regulators and the establishment of a revolving investigative fund in the amount of $20,000 by each licensee.
Regulation 5A.100 requires that comprehensive house rules be approved by the chairman of the Board and available for review at all times by authorized players through a conspicuously displayed link, including a clear and concise explanation of all fees, the rules of play of the game, any wagering limits, and any time limits pertaining to play.
Regulation 5A.110 outlines the process for registering and verifying an authorized player. An IG operator may register an individual as an authorized player only if the IG operator establishes: (1) the identity of the individual, (2) that the individual is 21 years of age or older, (3) the physical location where the individual resides, (4) the social security for the individual, if a U.S. resident, (5) that the individual has not previously self-excluded with the IG operator and (6) that the individual is not on Nevada’s list of excluded persons.

This regulation contains a requirement that the individual be informed, and acknowledge, that if the IG operator is unable to verify his or her information within 30 days of registration, the individual cannot deposit more than $5,000 in their interactive gaming account, any winnings attributable to the individual will be retained by the IG operator and the individual shall have no rights to such winnings.

Regulation 5A.120 sets forth the requirements for establishing and maintaining interactive gaming accounts. These requirements include the following: (1) an authorized player cannot hold more than one account; (2) an authorized player cannot occupy more than one position at a game at any given time; (3) the IG operator cannot allow the use of anonymous interactive gaming accounts or accounts in fictitious names; (4) players may not transfer funds to another player; and (5) player’s accounts cannot be overdrawn, nor can an IG operator extend credit to a player. Credit shall not be deemed to have been extended where—although funds have been deposited into an interactive gaming account—the IG operator is awaiting actual receipt of such funds in the ordinary course of business.
Regulation 5A.125 addresses the reserve requirements applicable to interactive gaming accounts. An IG operator must maintain a reserve in an amount equal to the sum of all authorized players’ funds held in the interactive gaming accounts. The IG operator must also maintain cash equal to (a) 25 percent of the total amount of the authorized players’ funds held in interactive gaming accounts, excluding those funds that are not redeemable for cash, and (b) the full amount of any progressive jackpots related to interactive gaming.
Regulation 5A.130 addresses the process for a player to self-exclude.
Regulation 5A.135 states that any compensation received by an IG operator for conducting any game in which the IG operator is not a party to a wager “shall be no more than 10 percent of all sums wagered in each hand.”
Regulation 5A.140 places limitations on the ability of an IG operator to accept or facilitate certain wagers. An IG operator may not accept a wager using an inter-operator poker network except as otherwise allowed by the Commission. An “inter-operator poker network” is defined as a pool of authorized players from two or more operators collected together to play the game of poker on one interactive gaming system.
Regulation 5A.145 addresses the posting, rate of progression and limits on progressive payoff schedules.
Regulation 5A.155 provides that IG operators must be truthful and non-deceptive in all aspects of its interactive gaming advertising and promotions.
Regulation 5A.160 requires the licensee to report “suspicious wagers.”
Regulation 5A.170 addresses the tax and license fees applicable to gross revenue. Gross revenue received from the operation of interactive gaming is subject to the same license fee provisions of NRS 463.370 as the games and gaming devices of the licensee. Gross revenue received from the operation of interactive gaming by an IG operator shall be attributed to the non-restricted licensee and counted as part of the gross revenue of the non-restricted licensee for the purpose of computing the license fee. For each game in which the IG operator is not a party to the wager, gross revenue equals all money received by the IG operator as compensation for conducting the game.
Regulation 5A.220 outlines the licensure requirements for an interactive gaming service provider. Interactive gaming service providers must pay a $1,000 annual license fee. Employees of the interactive gaming service provider whose duties include the operational or supervisory control of the interactive gaming system are subject to the provisions of NRS 463.335 and 463.337 and regulations 5.100 through 5.109 to the same extent as gaming employees.

Standard Conditions
The Commission has imposed the following conditions to licensure on IG operator applicants:

(1) Prior to commencement of interactive gaming operations, the licensee must submit an adequate written system of internal control pursuant to the provisions of NGC Regulation 5A.070.

(2) Prior to commencement of interactive gaming operations, an interactive gaming reserve must be established pursuant to Regulation 5A.125 and submitted to the Board for approval.

(3) Prior to commencing interactive gaming, the licensee shall submit a detailed business plan of operation for administrative approval by the chairman of the GCB or his designee.16

(4) A key employee application must be filed within 60 days of issuance of the state gaming license, and thereafter be refilled within 60 days of any change in the person occupying that position.

(5) Prior to commencement of interactive gaming operations, the attestation letters required pursuant to NGC Regulation 6.090(2)(D) and (E) in regard to the written system of internal control must be received from the applicant and the independent accountant.17

The following conditions to licensure have been imposed on IGS manufacturers and interactive gaming distributors:

(1) A key employee application must be filed within 60 days of issuance of the state gaming license, and thereafter be refilled within 60 days of any change in the person occupying that position.

(2) [IGS manufacturer] shall establish and maintain an interactive gaming compliance plan for the purpose of, at a minimum, performing due diligence, determining the suitability of relationships with other entities and individuals, and to review and ensure compliance by [IGS manufacturer] and any affiliated entities, with the Nevada Gaming Control Act, the Commission’s regulations and the laws and regulations of any other jurisdiction in which [IGS manufacturer] and any affiliated entities operate. The plan, any amendments thereto, and the members of the Gaming Compliance Committee, one such member who shall be independent and knowledgeable of the Act and regulations, shall be administratively reviewed and approved by the chairman of the board or his designee. [IGS manufacturer] shall amend the plan, or any element thereof, and perform such duties as may be requested or assigned by the chairman of the board or his designee related to a review of activities relevant to the continuing qualifications of [IGS manufacturer] under the provisions of the Act and regulations.

(3) The distributor’s license is limited to the distribution of interactive gaming systems manufactured under [IGS manufacturer’s] license as a manufacturer of interactive gaming systems.18

Finally, the following limitations have been placed on licensed interactive gaming service providers:

[Interactive gaming service provider’s] interactive gaming service provider license is limited to only:

(1) Managing, administering or controlling wagers that are initiated, received or made on an interactive gaming systems, pursuant to NRS 463.677(5)(A)(1) and NGC Regulation 5A.020(4)(A).

(2) Managing, administering or controlling the games with which wagers that are initiated, received or made on an interactive gaming system are associated, pursuant to NRS 463.677(5)(A)(2) and NGC Regulation 5A.020(4)(B).

(3) Maintaining or operating the software or hardware of an interactive gaming system, pursuant to NRS 463.677(5)(A)(3) and NGC Regulation 5A.020(4)(C).

(4) Providing the trademarks, trade names, service marks or similar intellectual property under which an establishment licensed to operate interactive gaming identifies its interactive gaming system to patrons, pursuant to NRS 463.677(5)(A)(4) and NGC Regulation 5A.020(4)(D).

(5) Providing information regarding persons to an operator of interactive gaming via database or customer list, pursuant to NRS 463.677(5)(A)(5) and NGC Regulation 5A.020(4)(E).

Individual Responsible for Board Inquiries

Each IGS manufacturer, AE manufacturer or IG operator must employ an individual who understands the design and function of each of its interactive gaming systems, and is responsible for responding to any inquiries from the Board concerning the interactive gaming system. The IGS manufacturer, AE manufacturer or IG operator must report in writing the name of the individual designated pursuant to this section and shall report in writing any change in the designation within, 15 days of the change.20

Ongoing Reporting Requirements

Each licensee agrees to be bound by all of the regulations of the Commission, and it is the responsibility of the licensee to keep itself informed of the content of all such regulations.21 Each IGS manufacturer, AE manufacturer and interactive gaming distributor must keep a written list of the date of each distribution, the serial numbers of the devices, the board approval number, or if the device has been modified since initial approval of the device, the modification approval number and the name, state of residence, addresses and telephone numbers of the person to whom the gaming devices have been distributed, and shall provide such list to the chairman immediately upon his request.22 These records must be maintained for five years.23

Conclusion
Nevada remains on the forefront of the development of U.S. interactive gaming licensing and regulation standards. Once wagering and site technology is approved by testing laboratories and the Nevada gaming regulators, licensed interactive poker websites could launch in Nevada by the spring of 2013. The passage of AB 5 will allow the governor of Nevada to negotiate interstate gaming compacts with other states, so that Nevada-based Internet poker sites can accept bets from gamblers located in states with similar interactive gaming laws.

1 AB 258, Section 7, as introduced.
2 (emphasis supplied). AB 258 amended NRS 463.750 to require the Commission to adopt regulations re: the licensing of interactive gaming and amended NRS 463.01425 to specifically include Internet poker in definition of interactive gaming.
3 Board press release (Aug. 24, 2011).
4 NRS 463.750(7).
5 NRS 463.770(4).
6 Commission Regulation 5A.240(1)(emphasis supplied).
7 AB 5
8 NRS 463.016425.
9 Commission Regulation 14.010(10).
10 NRS 463.765(4). Annual License Fee Report for Operator of Interactive Gaming (Commission Form NGC-19O).
11 NRS 463.760(3). Annual License Fee Report for Manufacturer or Interactive Gaming Systems (Form NGC-19M), Annual License Fee Report for Manufacturer of Equipment Associated with Interactive Gaming Systems (Commission Form NGC-19A).
12 Commission Regulation 5A.220(4)(a). Annual License Fee Report for Interactive Gaming Service Provider (Commission Form NGC-19P).
13 NRS 463.770(1).
14 NRS 463.770(2).
15 Commission Regulation 5.180(2)(g).
16 Commission Disposition, Dec. 20, 2012, N12-0348 and N12-0374.
17 Commission Disposition, Nov. 11, 2012, N12-0415.
18 Commission Disposition, Nov. 11, 2012, N12-0606 and N12-0609.
19 Commission Disposition, Oct. 18, 2012, N12-0413 and N12-0538.
20 Commission Regulation 14.060.
21 Commission Regulation 5.030.
22 Commission Regulation 14.170(3).
23 Commission Regulation 14.310.

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