Nevada Update: Regulation of Internet Poker

On June 21, 2012, the Nevada Gaming Commission approved the first interactive gaming licenses pursuant to the recently enacted regulations governing Internet gaming. Specifically, within a span of a couple of hours, Bally Technologies and International Game Technology (IGT) each received unanimous approvals from the commission to be licensed as a manufacturer of interactive gaming systems and as an interactive gaming service provider. These are the first such approvals issued in the United States by a regulatory authority.

In the upcoming months, many more interactive gaming applications will appear before Nevada’s Gaming Control Board and the Nevada Gaming Commission. However, there is still much work to be done before Internet poker “goes live” in Nevada.

By way of background, in December 2011, the Nevada Gaming Commission adopted several new regulations intended to govern Internet poker in Nevada. These regulations set forth three new classifications of license:

1. A manufacturer of interactive gaming systems license
2. An operator of interactive gaming license
3. A service provider license

The first two categories of licensure are rather self-explanatory. A manufacturer’s license allows the holder to manufacture, assemble or produce an interactive gaming system, whereas an operator’s license lets the holder run an online gambling establishment and take bets online within Nevada. The scope of a service provider’s license, however, is less obvious and is currently a potential cause for confusion.1

A service provider means a person who, in pertinent part:

(i) Acts on behalf of another licensed person who conducts non-restricted gaming operations and who assists, manages, administers or controls wagers or games, or maintains or operates the software or hardware of games on behalf of such a licensed person, and is authorized to share in the revenue from games without being licensed to conduct gaming at an establishment;
(ii) Is an interactive gaming service provider as defined pursuant to Regulation 5A.020;
(iii) Is a cash access and wagering instrument service provider….2

The regulations set forth three classes of service providers. Each class represents a different level of significance as to the activities provided by the service provider and, in turn, guides the level of investigation to be conducted by the State Gaming Control Board. The first class of service provider, known as a “Class 1” service provider, includes: (i) any interactive gaming service provider; (ii) any service provider who receives payments based on earnings or profits from any gambling game; and/or (iii) any other applicant for a service provider license who the chairman of the board determines should be a Class 1 service provider. The term “interactive gaming service provider” is a broad term and means a person who acts on behalf of an operator of interactive gaming and:

(a) Manages, administers or controls wagers that are initiated, received or made on an interactive gaming system;
(b) Manages, administers or controls the games with which wagers that are initiated, received or made on an interactive gaming system are associated;
(c) Maintains or operates the software or hardware of an interactive gaming system;
(d) Provides the trademarks, trade names, service marks or similar intellectual property under which an operator of interactive gaming identifies its interactive gaming system to patrons;
(e) Provides information regarding persons to an operator of interactive gaming via a database or customer list; or
(f) Provides products, services, information or assets to an operator of interactive gaming and therefore receives a percentage of gaming revenue from the establishment’s interactive gaming system.

This category of licensure primarily encompasses companies that administer the gaming sites for the operator to brand with its name and logo. By way of an example, Bally Technologies, as approved by the Nevada Gaming Commission, is able to provide its i-gaming platform technology and content to casino operators to enable them to provide online gaming to their players. A Class 1 service provider is required to obtain a non-restricted gaming license, which is the highest level of licensing in Nevada.

In contrast, a “Class 3” service provider is a probationary licensee who acts on behalf of an operator of interactive gaming as a marketing affiliate. The term “marketing affiliate” is a narrow classification consisting of persons who provide interactive gaming operators with personal information via databases or customer lists, as well as persons who 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. The intent is to recognize the distinct marketing nature of online sites, as well as to allow operators to partner with brands outside the gaming industry. A Class 3 service provider undergoes the simplest licensing process of all interactive gaming license applicants but can be required to undergo full licensure at the discretion of the chairman of the board.

The final category of service provider, and the one subject to the greatest intrigue and angst, is the catch-all grouping known as a “Class 2” service provider. This classification encompasses any person who is a service provider other than a Class 1 or Class 3 service provider. The lack of a definition of a Class 2 service provider creates confusion. For instance, such third parties as payment processors, geo-location companies, age and identification verification companies, site security services, loyalty and marketing management software and service providers, etc., may or may not all have to be licensed. As a result, the intended scope of a Class 2 service provider license is currently unclear and could possibly encompass many third-party providers that were not necessarily envisaged as having to undergo licensure when the legislation permitting Internet poker was originally enacted. Moreover, the Gaming Control Board has indicated that if an applicant for a Class 2 license has control of a player’s funds, even if only temporarily, or retains player information, it may be elevated to a Class 1 licensee. A Class 2 service provider is required to obtain a restricted gaming license. The application and investigation process for such a license is less intrusive and less expensive than that for a non-restricted license.

The different thresholds of licensing are important to note because certain companies are not willing, and can’t afford, to undergo a full non-restricted gaming license investigation. As a result, the regulations need to provide greater clarity, particularly with regard to the distinctions between Class 1 and Class 2 service providers, so that prospective applicants can identify the level of licensing that they will be subject to and, consequently, make informed business decisions as to whether to enter the Nevada market. This concern has been recognized by the Nevada Gaming Commission, which as of this writing had scheduled a meeting on July 26, 2012, to discuss various revisions to the regulations, including to define additional types of service providers and to clarify the level of investigation conducted by the Gaming Control Board with regard to the specific types of service providers based on the significance of the activities to be provided and the regulatory risk of the service provider.

Finally, it is important to note that, in addition to the licensing thresholds, certain interactive gaming systems and components will have to be tested by a licensed testing laboratory in Nevada and subsequently approved by the commission. However, at the time of writing, the Gaming Control Board had not released any guidelines setting forth what systems have to be tested and what systems do not have to be tested. As a result, it is unknown whether, for example, payment processing systems or geo-location systems used by third-party service providers will have to be tested. This threatens to delay the go-live date because companies may hold the necessary licenses although their systems may still have to undergo testing.

In conclusion, the recent approvals for Internet licenses issued by the Nevada Gaming Commission indicates the future in regulated gaming is now upon us. However, greater clarification is still required with regard to who has to be licensed and the applicable licensing process in order to ensure that Nevada achieves the same success with its regulation of Internet gaming as it has had with its regulation of brick-and-mortar casinos.

1 This article is written as of June 28, 2012.
2 NGC Reg. 5.240(2)(d).