Internet Gaming: Piecing Together the Puzzle

It finally happened. Internet gaming is up and running in Nevada and the go-live date in New Jersey is Nov. 26, subject to extension. This article provides some background and sets forth the nuts and bolts of the application processes in both jurisdictions.

Nevada has two distinct Internet gaming license application and investigation processes.

The Easy Process
A relatively easy process (by Nevada standards) is used for companies that provide services for Internet gaming operations including geolocation, patron identification, information technology and payment processing, those that provide information regarding potential customers to an operator of Internet gaming via a database or customer list, as well as companies that provide the trademarks, trade names, service marks or similar intellectual property under which an operator of Internet gaming identifies its Internet gaming system to patrons.

This process is designed more to bring such companies, and the individuals who have significant control over them, under the jurisdiction of the State Gaming Control Board and Nevada Gaming Commission than to thoroughly investigate the companies. Individuals with more than 10 percent beneficial ownership of the company, along with those who perform the duties of a chief executive officer, chief financial officer, chief operating officer or chief technology officer must submit applications with personal information, including any history of arrest or questioning by any governmental agency; 10 years of residence and employment history; and gaming and licensing.

A simple personal income statement and balance sheet will also be required. Application and investigation fees are capped at $10,500, though fees may be less. During the course of the application investigation, some additional information is usually requested regarding business plans and history, contracts with Nevada licensees, and the duties and responsibilities of individual applicants.

The applications are currently processed and approved six to seven months after they are submitted. At least one of the individual applicants will be required to appear on behalf of the company when the board and commission consider that company’s application. Once licensed, companies can begin to do business and remain licensed so long as they pay their annual fees. No license renewal applications are required.

The Complex Process
Ultimate responsibility for Internet gaming rests with operators and, to a lesser extent, service providers that manage, administer, control or maintain the Internet games, wagers, software or hardware for such operations or provide products, services, information or assets to an operator of Internet gaming based on earnings or profits from any gambling game.

Nevada only requires these companies to be licensed and investigated once. There is no renewal process. It employs the same comprehensive investigative process used for manufacturers and casino resort hotels, a process that is arguably the most detailed and intensive in the industry. Testing of the Internet gaming systems are conducted by the same independent testing labs that test gaming devices and now Internet gaming for other jurisdictions. Once a company is licensed in Nevada, it is ready for the gaming application and investigative process of almost any other gaming jurisdiction.

Nevada’s process has served as the model for many jurisdictions. As it is well documented and is too broad of a subject to detail in this article, the following briefly summarizes some of its requirements. Individual and entity applicants are required to provide:

Five years of tax returns and supporting documents;
15 years of litigation documents in which the applicant was named as a party or a company for which he served as an officer, director or manager was named as a party (there is some flexibility here);
Business organization and financial statements and supporting documents for entities in which applicants have a material interest;
Five years of bank and brokerage account statements;
Access to e-mail records;
And perhaps much more.
Individuals fulfilling the roles of chief executive officer, chief financial officer, chief operating officer and chief technology officer have to file an application. Owners and directors may also have to file applications, depending on the ownership structure of the company.

Here are a few things to remember: Internet gaming operator licenses may only be issued to licensed brick-and-mortar gaming establishments that meet a range of requirements that vary by county. Servers for Internet gaming operations must be located in Nevada unless the board chairman permits otherwise. At this point, only poker can be offered, but this could change quickly. Service providers and operators must be licensed before they can do business in Nevada.

The board and commission are working diligently with operators and service providers to make Internet gaming successful in Nevada.

New Jersey
The Basic Framework
Internet gaming is defined in New Jersey as “the placing of wagers with a casino licensee at a casino located in Atlantic City using a computer network of both federal and non-federal interoperable packet-switched data networks through which the casino licensee may offer authorized games to individuals who have established a wagering account with the casino licensee and who are physically present in this state.”

First and foremost, Internet gaming can only be conducted by a New Jersey casino licensee or its Internet gaming affiliate (which also obtains a casino license) after they obtain an Internet gaming permit issued by the New Jersey Casino Control Commission. New Jersey’s belief is that by tying Internet gaming to land-based casinos, jobs will be protected and casino and tax revenue will be directly increased. Casinos will then have funds to enhance their product and cross market to draw the Internet player to an improved Atlantic City.

Secondly, wagers must be placed “at a casino.” All primary equipment must be physically located at an approved area in the casino. Backup equipment is temporarily allowed outside of the casino, but only: (i) for up to 60 days; (ii) in New Jersey; and (iii) in the event of a catastrophic event that renders the primary location inoperable.

Thirdly, all “authorized” games may be offered. This not only all table games and slot machine games currently offered, but also includes games that could be authorized. This provision will permit New Jersey to authorize and therefore monetize games that, to date, have only been played in social media. This is a much broader authorization than in Nevada.

Additionally, the customer must establish a wagering account. It does not need to be established in person, but numerous authentication processes are used to ensure identity, age and geolocation verification. The ability to detect the physical location of a customer is necessary because—per the last part of the Internet gaming definition—the player must be physically present in New Jersey. This verification must occur upon log in and every hour thereafter.

Who Needs Licensure?
In addition to the Internet gaming permit referenced above, companies that provide services in connection with Internet gaming operations are subject to one of three categories of licensing or registration. These licenses are granted by the New Jersey Division of Gaming Enforcement. We note that at the time of press for this issue the Internet gaming regulations in New Jersey are merely “proposed” and some of the following categories may be modified. We also note that the division can, at its discretion, call anyone forward to a higher licensure level.

Casino Service Industry Enterprise (CSIE): Companies providing Internet gaming software or systems; vendors who manage, control, or administer games and associated wagers through the Internet; and providers of customer lists of persons who have placed wagers through the Internet must be licensed as a CSIE, the same licensure as a gaming equipment manufacturer. All 5 percent or more shareholders and outside directors, as well as certain other principals (such as sales representatives to casinos), must submit the Multi-Jurisdictional Personal History Disclosure Form and the New Jersey Supplement and be investigated. The type of disclosure and ensuing investigation is similar to what was described earlier in this article for Nevada. The application fee is $5,000 for a five-year license, with the same fee due upon resubmission, but unlike non-Internet companies, Internet CSIEs will be billed for all actual investigative costs. Additionally, most of these entities will have a revenue-sharing arrangement with the casino licensee that will require prior approval by the division.

Ancillary Casino Service Industry Enterprise (Ancillary CSIE): Marketing affiliates and enterprises providing other services in connection with Internet gaming, such as payment processing and related money-transmitting services, customer identity, age verification and geo-location verification, must be licensed as an Ancillary CSIE. The cost is $2,000 for a five-year license and for resubmission. Shareholders in excess of 5 percent and the same principals as with CSIEs are required to complete personal forms and be investigated as well. While still lengthy, and while the personal forms require financial disclosure, they are less detailed than those required of a CSIE. There is currently robust discussion about the categorization of certain of the entities listed herein as Ancillary CSIEs and, by publication, certain of these providers may be subject to a new, less complex form of licensure.

Vendor Registration Form (VRF): Enterprises providing other services including—but not limited to—telecommunications not specifically designed for Internet gaming are required to register as a vendor just like other non-gaming entities who conduct business with casinos. The VRF and its supplement are short forms, there is no fee and no separate personal disclosure forms are required.

Investigations of CSIEs will be comprehensive and can be compared to that of a gaming manufacturer. We are not yet certain of the scope of the Ancillary CSIE investigation although it certainly will be comprehensive. Vendors are generally only subject to basic background checks, but under new proposed regulations, the division can request vendors to provide additional information, even if they do not require them to apply for a level of licensure.

Good News
You can start before you are licensed, but hopefully you filed by now.

Licensure is not required for an entity to begin to do Internet gaming business with a casino licensee. All that is needed is a filed application deemed complete by the division, a proposed transaction with a casino and a transactional waiver granted by the division. The process to receive a transactional waiver is relatively straightforward and they are routinely granted.

The deadline for all application submissions to the division to be considered for the go-live date was July 29. The division will not guarantee that all those who applied by the deadline will meet the go-live date, but applications will be processed to achieve that goal. Entities that do not meet this deadline may still make the go-live date, but they will be processed after those that met the deadline. Product submissions were also due on that date, as all hardware, software and related equipment must be approved by the division’s Technical Services Bureau, even if the same equipment was approved elsewhere.

Expanding Beyond Nevada and New Jersey
Although both Nevada and New Jersey have high hopes for Internet gaming, there is concern because of the limited player pool for each. Both Nevada and New Jersey have provisions in their laws that permit for reciprocal agreements (New Jersey) and compacting (Nevada) with other jurisdictions. It is too soon to see how and if such compacts and agreements can be implemented and how licensing will be handled, so we look forward to giving you a future update.