ABA Section of Business Law
Business Law Today
They call it gaming...
...and you can bet it's changed a lot
By Sean McGuinness
I never planned for a career in gaming law. It just kind of happened.
Growing up in Denver, the earliest memory I have of a casino is from the
Elvis Presley movie "Viva Las Vegas," which was
partially filmed at the Flamingo. I was really into Elvis when I was
10-12 years old. Many years later, it is sometimes hard to imagine that I
have actually represented the Flamingo and that one
of the named partners of my firm was in-house with the International
Hotel, which was where Elvis made his Vegas comeback in 1969. Of course,
now there is even an Elvis-themed slot machine.
It almost seems predestined in a way that I would find my way to gaming law.
As luck would have it, my graduation from Drake University Law School in 1989 corresponded with the legalization of riverboat casinos in Iowa. The legal job market was tight at the time. I was fortunate to get a job with the Iowa Racing & Gaming Commission, which was charged with regulating the riverboats. In that capacity, I was involved in drafting Iowa's gaming regulations.
This first job began a journey that has taken me from Iowa to Mississippi and finally, in 1997, to Nevada. I have worked for two gaming regulatory agencies (Iowa and Mississippi), law firms and as an in-house counsel to a multi-jurisdictional gaming company. In these settings, I have become exposed to legal issues involving land-based casinos, Indian casinos, riverboat casinos, dockside casinos and small stakes gaming. This article is intended to provide a general overview and observations from my experiences as a gaming lawyer.
Since 1988, the gaming industry has exploded in growth across the United States. Thirty years ago, only Nevada had legal casinos (and the voters in New Jersey had just adopted gaming by referendum). Today, legal casinos can also be found in states as varied and diverse as New Jersey, California, Louisiana, Indiana, Colorado, Michigan and Oklahoma — among others. Indeed, every state, except Utah and Hawaii (and the District of Columbia), has some form of legalized gaming (that is, casino, bingo, lottery, racing, jai lai, pull tabs).
The face of the industry has evolved as well. When gaming started in Nevada, casino licensees were generally comprised of individual entrepreneurs. Originally, in order to finance new ventures, these entrepreneurs would need to take part in one another's deals or loan money to one another. Today, public companies with access to capital from Wall Street dominate the industry. There also is a growing international aspect and involvement with foreign operators looking to do business in the United States, as well as U.S. operators looking at casino opportunities in Europe, Asia and elsewhere.
Casino operators as well as manufacturers of gaming devices are accustomed to operating in a highly regulated environment. Since many of these companies are publicly traded, there already are Securities and Exchange Commission requirements including Sarbanes-Oxley-related disclosures. More significant, however, are the regulatory bodies from which licenses and other approvals must be obtained and maintained in good standing in order to continue doing business. It is this gaming regulatory environment that affects many of the transactional documents and considerations when working on a gaming-related deal.
Today, gaming regulatory bodies in the United States are generally fairly consistent with licensing and operational requirements. While there are some differences from jurisdiction to jurisdiction, there are strong similarities among the Nevada State Gaming Control Board, the New Jersey Division of Gaming Enforcement, the Mississippi Gaming Commission, the Colorado Division of Gaming, and the National Indian Gaming Commission, for example, regarding how license investigations and approvals are handled.
Generally, there are two kinds of licensing that exist in every gaming jurisdiction: mandatory or discretionary licensing. For example, for privately held companies, every shareholder, every officer, every director and every key employee must be licensed. This means that long, detailed applications must be submitted (along with fingerprints).
Then, the applicant pays for all of the investigative fees and costs (including but not limited to actual travel costs and expenses, an hourly rate for work on the file, and per diem — I have seen a Nevada investigation, for example, that cost in excess of $1 million and took more than a year to complete).
The gaming investigative process is very intrusive and has been likened to an unpleasant medical examination by some. That being said, licensees do appreciate the process in that it ensures the integrity of the industry. Generally, the investigators will travel to where the applicants have lived and done business — from the age of adulthood forward. In addition to the criminal background and unsuitable associations review, they will request copies of audited financials, tax returns, bank statements, copies of checks, escrow statements and the like, so as to track income and expenditures. They also inspect safe deposit boxes, home safes, travel records, litigation files, e-mails and computer usage.
Another factor to consider is that each state will do its own separate investigation. It is important to note that the burden is on the applicant at all times to prove suitability and not on the regulators to establish unsuitability. Failure to fully cooperate can result in license denial.
The mandatory licensure standard for public company applicants is different. Generally, every 5 percent or greater shareholder, every officer, every director and every key employee must be licensed. The less than 5 percent shareholders are in the discretionary license category, which means that the gaming authorities can exercise their right to call them forward to be licensed. In addition, there are change-of-control provisions in the gaming laws as to public companies so that prior licensing and approval of the gaming agency is required for a change in control of a licensed public company.
There are exemptions from full licensure that can be applied for by bona fide institutional investors who passively hold stock in a public company for investment purposes only. In Nevada and Mississippi, a limited institutional investor waiver is also available, under specific conditions, to private companies as well, but the private company waivers are rare. Other parties also fall under the category of discretionary licensing, including lenders and landlords who don't receive a percentage of gaming revenue as rent. While rare, it is possible for a gaming regulatory body to call a lender or landlord forward to be found suitable to lend or lease to a gaming licensee.
In addition, most publicly traded companies involved in gaming now have gaming compliance committees, which are different from typical compliance committees. The Nevada Gaming Commission started this trend by requiring its registered public companies to adopt gaming compliance committee programs. In some instances, private companies have these programs as well.
The purpose of these committees is to require gaming licensees to conduct requisite due diligence in all of their activities (even nongaming related) so as to ensure that they do not unwittingly associate with unsuitable individuals or otherwise become involved in an activity that could prove detrimental to the gaming industry.
The programs are similar in scope, but each one is specifically tailored for the needs and size of the licensee in question. Generally, there are certain activities (leases, new ventures, new key employees) that are deemed material, which need to be reviewed and passed on by the compliance committee before the company can go forward with the activity in question. Indeed, some leases with casino companies state that failure to obtain compliance committee approval renders the lease null and void.
An additional requirement is that at least one member of the committee must be an individual, not previously affiliated with the company, who has gaming regulatory experience and knowledge. This ensures that there is a regulatory eye in the compliance committee process.
This review often requires the completion of a background investigation form and disclosure of financial information. The committees will then conduct their own background investigation and provide a report. The minutes of the committee meetings, as well as the background reports, are required to be forwarded to the Nevada State Gaming Control Board, even if the activities are outside of the state of Nevada. Other gaming jurisdictions also require the minutes to be sent to them as well. So here you have an additional layer of regulatory oversight and review, albeit being conducted by the licensees themselves.
Slot machines and other gaming devices, as well as software that tracks gaming revenue, are required to be inspected and approved by gaming laboratories. The purpose of the testing is threefold:
While the first thought many may have about gaming law is related to either the licensing process or the fairness of the games, as can be seen, the statutory and regulatory framework also frequently applies to the transactional realm applicable to business lawyers.
Private placements and public offerings — Gaming applicants and licensees need to properly consider and address gaming law disclosures and the approval process when working on a private placement or public offering. In many jurisdictions, the prior approvals of the applicable gaming regulatory agencies are required for private placements and public offerings. In addition, most jurisdictions also require a disclaimer be placed on the cover page to affirmatively state that the accuracy of the offering has not been endorsed by any gaming jurisdiction and any representation to the contrary is unlawful. Gaming jurisdictions also want to see that the "regulation and licensing" section of the offering memorandum is adequate and complete.
Taking a public company private — I was involved as Colorado counsel to a public gaming company that was going "private." This necessitated a great amount of communication with the Colorado Division of Gaming to make sure that all of the proper steps were being taken as the transaction moved forward. The difficulty was that the regulations in Colorado (and similarly in other jurisdictions) expressed in great detail the steps for a private company to go public, but did not explicitly have the converse. As such, it was necessary to determine with the regulators, while reviewing the statutory and regulatory requirements applicable to both public and private companies, which approvals needed to be applied for and received (and in what order), in order for the transaction to close successfully.
Loans to licensee reporting — Many jurisdictions require licensees to report loans that they receive. This would include providing the applicable gaming regulatory agency with details of the loan transaction, the terms, the parties, personal information of individuals (officers, directors, key employees) and copies of all loan-related documentation. In Nevada and Mississippi, for example, the gaming regulatory agencies reserve the power to order that a loan be rescinded. As such, it is important in loan transactions involving gaming companies to have specific language and provisions to adequately address applicable gaming law requirements for the jurisdictions involved.
Stock pledges and negative covenants — According to gaming law requirements in most states, prior approval must first be obtained from the applicable gaming regulatory agencies before a stock pledge and certain negative covenants are deemed to be enforceable. Failure to get these approvals renders the purported stock pledge or negative covenants void and ineffectual. Accordingly, when drafting documents, it is prudent to add a provision where the parties agree to apply for these approvals on an expeditious basis and to fully cooperate with the applicable gaming regulatory agencies, as well as acknowledging that these provisions will not be enforceable unless and until all required approvals are received.
Gaming device collateral and bankruptcy related considerations — In order for a lender to take possession and foreclose on gaming collateral (that is, slot machines) as a remedy of default, in some jurisdictions it is first necessary for the lender to apply for and receive a license to dispose of the gaming devices. The investigative process is very lengthy, expensive and burdensome for an unlicensed lender. Likewise, an individual or company cannot be placed in control of a casino's operations without first having obtained a license or other approval from the applicable gaming regulatory agency. That is why it is rare to see court-appointed receivers or bankruptcy trustees taking control of casino operations, except for those rare instances where there are significant operational matters facing the property (that is, the debtor walking away). It is much more common to allow the casino to be operated by the debtor-in-possession, while working toward either an auction sale or plan of reorganization.
— Sean McGuinness
While serving as compliance director for the Mississippi Gaming Commission in the early 1990s, I was involved in several administrative work-permit denial hearings. The most unusual involved an individual who lied on his application by stating that he had never been arrested, when in fact, he had been arrested about 25 times or so and had some convictions. Unfortunately, the gaming agent who issued the denial was new to the job and thought that he merely had to state on the denial form the best reason for denial, as opposed to all reasons for denial.
As such, the only stated reason for denial was a felony drug conviction, which is a mandatory disqualifier in Mississippi. The applicant appealed the denial asserting that the conviction was actually a misdemeanor conviction, which turned out to be the case. Since the denial was not for lying on the application or for any of the other arrests and convictions, we were not able to affirmatively argue that the denial should stand for these other reasons once the automatic disqualifying event was tossed out.
Fortunately, once the administrative law judge determined, during the hearing, that the drug conviction was not a felony; the applicant began a stream of consciousness commentary about how law enforcement officials always seemed to have it out for him. He then recounted, by memory, each of his 25 arrests, in chronological order, and in great detail with explanations (that is, "those girls weren't working for me," "the drugs belonged to my roommate," "I didn't know it was stolen property," etc.), which brought these issues into the record and into the realm of the administrative law judge's consideration.
I then asked him why, since he had such a good recollection of his criminal history, he answered the question about arrests and convictions in the negative. He responded that he didn't think anyone would check and admitted lying on his application. The administrative law judge denied his work permit appeal and found in favor of the Mississippi Gaming Commission. From that point forward, Mississippi's gaming agents began stating every reason for denial on the denial forms.
A public-company applicant was on the agenda just before my client. During the public-company presentation, there was much focus on the consistent branding of the casino, its restaurants and amenities. It was stated that this was related to a specific theme so as to create an exciting atmosphere that would help make the casino successful. The public company received its approval.
Then, it was my client's turn. After making our affirmative presentation on my client's project, one of the gaming commissioners asked my client what his theme was. The response was "Gambling — and if you do that right, you don't need a theme." My client ended up operating the most profitable casino in his market.
It almost seems predestined in a way that I would find my way to gaming law.
As luck would have it, my graduation from Drake University Law School in 1989 corresponded with the legalization of riverboat casinos in Iowa. The legal job market was tight at the time. I was fortunate to get a job with the Iowa Racing & Gaming Commission, which was charged with regulating the riverboats. In that capacity, I was involved in drafting Iowa's gaming regulations.
This first job began a journey that has taken me from Iowa to Mississippi and finally, in 1997, to Nevada. I have worked for two gaming regulatory agencies (Iowa and Mississippi), law firms and as an in-house counsel to a multi-jurisdictional gaming company. In these settings, I have become exposed to legal issues involving land-based casinos, Indian casinos, riverboat casinos, dockside casinos and small stakes gaming. This article is intended to provide a general overview and observations from my experiences as a gaming lawyer.
Since 1988, the gaming industry has exploded in growth across the United States. Thirty years ago, only Nevada had legal casinos (and the voters in New Jersey had just adopted gaming by referendum). Today, legal casinos can also be found in states as varied and diverse as New Jersey, California, Louisiana, Indiana, Colorado, Michigan and Oklahoma — among others. Indeed, every state, except Utah and Hawaii (and the District of Columbia), has some form of legalized gaming (that is, casino, bingo, lottery, racing, jai lai, pull tabs).
The face of the industry has evolved as well. When gaming started in Nevada, casino licensees were generally comprised of individual entrepreneurs. Originally, in order to finance new ventures, these entrepreneurs would need to take part in one another's deals or loan money to one another. Today, public companies with access to capital from Wall Street dominate the industry. There also is a growing international aspect and involvement with foreign operators looking to do business in the United States, as well as U.S. operators looking at casino opportunities in Europe, Asia and elsewhere.
Casino operators as well as manufacturers of gaming devices are accustomed to operating in a highly regulated environment. Since many of these companies are publicly traded, there already are Securities and Exchange Commission requirements including Sarbanes-Oxley-related disclosures. More significant, however, are the regulatory bodies from which licenses and other approvals must be obtained and maintained in good standing in order to continue doing business. It is this gaming regulatory environment that affects many of the transactional documents and considerations when working on a gaming-related deal.
Today, gaming regulatory bodies in the United States are generally fairly consistent with licensing and operational requirements. While there are some differences from jurisdiction to jurisdiction, there are strong similarities among the Nevada State Gaming Control Board, the New Jersey Division of Gaming Enforcement, the Mississippi Gaming Commission, the Colorado Division of Gaming, and the National Indian Gaming Commission, for example, regarding how license investigations and approvals are handled.
Generally, there are two kinds of licensing that exist in every gaming jurisdiction: mandatory or discretionary licensing. For example, for privately held companies, every shareholder, every officer, every director and every key employee must be licensed. This means that long, detailed applications must be submitted (along with fingerprints).
Then, the applicant pays for all of the investigative fees and costs (including but not limited to actual travel costs and expenses, an hourly rate for work on the file, and per diem — I have seen a Nevada investigation, for example, that cost in excess of $1 million and took more than a year to complete).
The gaming investigative process is very intrusive and has been likened to an unpleasant medical examination by some. That being said, licensees do appreciate the process in that it ensures the integrity of the industry. Generally, the investigators will travel to where the applicants have lived and done business — from the age of adulthood forward. In addition to the criminal background and unsuitable associations review, they will request copies of audited financials, tax returns, bank statements, copies of checks, escrow statements and the like, so as to track income and expenditures. They also inspect safe deposit boxes, home safes, travel records, litigation files, e-mails and computer usage.
Another factor to consider is that each state will do its own separate investigation. It is important to note that the burden is on the applicant at all times to prove suitability and not on the regulators to establish unsuitability. Failure to fully cooperate can result in license denial.
The mandatory licensure standard for public company applicants is different. Generally, every 5 percent or greater shareholder, every officer, every director and every key employee must be licensed. The less than 5 percent shareholders are in the discretionary license category, which means that the gaming authorities can exercise their right to call them forward to be licensed. In addition, there are change-of-control provisions in the gaming laws as to public companies so that prior licensing and approval of the gaming agency is required for a change in control of a licensed public company.
There are exemptions from full licensure that can be applied for by bona fide institutional investors who passively hold stock in a public company for investment purposes only. In Nevada and Mississippi, a limited institutional investor waiver is also available, under specific conditions, to private companies as well, but the private company waivers are rare. Other parties also fall under the category of discretionary licensing, including lenders and landlords who don't receive a percentage of gaming revenue as rent. While rare, it is possible for a gaming regulatory body to call a lender or landlord forward to be found suitable to lend or lease to a gaming licensee.
In addition, most publicly traded companies involved in gaming now have gaming compliance committees, which are different from typical compliance committees. The Nevada Gaming Commission started this trend by requiring its registered public companies to adopt gaming compliance committee programs. In some instances, private companies have these programs as well.
The purpose of these committees is to require gaming licensees to conduct requisite due diligence in all of their activities (even nongaming related) so as to ensure that they do not unwittingly associate with unsuitable individuals or otherwise become involved in an activity that could prove detrimental to the gaming industry.
The programs are similar in scope, but each one is specifically tailored for the needs and size of the licensee in question. Generally, there are certain activities (leases, new ventures, new key employees) that are deemed material, which need to be reviewed and passed on by the compliance committee before the company can go forward with the activity in question. Indeed, some leases with casino companies state that failure to obtain compliance committee approval renders the lease null and void.
An additional requirement is that at least one member of the committee must be an individual, not previously affiliated with the company, who has gaming regulatory experience and knowledge. This ensures that there is a regulatory eye in the compliance committee process.
This review often requires the completion of a background investigation form and disclosure of financial information. The committees will then conduct their own background investigation and provide a report. The minutes of the committee meetings, as well as the background reports, are required to be forwarded to the Nevada State Gaming Control Board, even if the activities are outside of the state of Nevada. Other gaming jurisdictions also require the minutes to be sent to them as well. So here you have an additional layer of regulatory oversight and review, albeit being conducted by the licensees themselves.
Slot machines and other gaming devices, as well as software that tracks gaming revenue, are required to be inspected and approved by gaming laboratories. The purpose of the testing is threefold:
- to make sure that the game is fair and operates in a manner that cannot be manipulated or altered;
- to ensure that the game itself is authorized by the applicable statutes and regulations for the jurisdiction in question; and
- to confirm that revenue will be properly tracked and accounted for so that all taxes are paid.
While the first thought many may have about gaming law is related to either the licensing process or the fairness of the games, as can be seen, the statutory and regulatory framework also frequently applies to the transactional realm applicable to business lawyers.
Special transactional considerations
Federal maritime law — Even though a dockside or riverboat casino can have extensive land-based improvements and amenities, a major portion of a riverboat or dockside casino's assets for collateral purposes are located on casino vessels or casino barges, which are subject to provisions of federal maritime law. In order for a lender to perfect a lien on these assets, a preferred ship's mortgage needs to be properly filed with the U.S. Coast Guard. Admiralty and maritime law is its own specialty and gaming lawyers defer to lawyers experienced in such matters.Private placements and public offerings — Gaming applicants and licensees need to properly consider and address gaming law disclosures and the approval process when working on a private placement or public offering. In many jurisdictions, the prior approvals of the applicable gaming regulatory agencies are required for private placements and public offerings. In addition, most jurisdictions also require a disclaimer be placed on the cover page to affirmatively state that the accuracy of the offering has not been endorsed by any gaming jurisdiction and any representation to the contrary is unlawful. Gaming jurisdictions also want to see that the "regulation and licensing" section of the offering memorandum is adequate and complete.
Taking a public company private — I was involved as Colorado counsel to a public gaming company that was going "private." This necessitated a great amount of communication with the Colorado Division of Gaming to make sure that all of the proper steps were being taken as the transaction moved forward. The difficulty was that the regulations in Colorado (and similarly in other jurisdictions) expressed in great detail the steps for a private company to go public, but did not explicitly have the converse. As such, it was necessary to determine with the regulators, while reviewing the statutory and regulatory requirements applicable to both public and private companies, which approvals needed to be applied for and received (and in what order), in order for the transaction to close successfully.
Loans to licensee reporting — Many jurisdictions require licensees to report loans that they receive. This would include providing the applicable gaming regulatory agency with details of the loan transaction, the terms, the parties, personal information of individuals (officers, directors, key employees) and copies of all loan-related documentation. In Nevada and Mississippi, for example, the gaming regulatory agencies reserve the power to order that a loan be rescinded. As such, it is important in loan transactions involving gaming companies to have specific language and provisions to adequately address applicable gaming law requirements for the jurisdictions involved.
Stock pledges and negative covenants — According to gaming law requirements in most states, prior approval must first be obtained from the applicable gaming regulatory agencies before a stock pledge and certain negative covenants are deemed to be enforceable. Failure to get these approvals renders the purported stock pledge or negative covenants void and ineffectual. Accordingly, when drafting documents, it is prudent to add a provision where the parties agree to apply for these approvals on an expeditious basis and to fully cooperate with the applicable gaming regulatory agencies, as well as acknowledging that these provisions will not be enforceable unless and until all required approvals are received.
Gaming device collateral and bankruptcy related considerations — In order for a lender to take possession and foreclose on gaming collateral (that is, slot machines) as a remedy of default, in some jurisdictions it is first necessary for the lender to apply for and receive a license to dispose of the gaming devices. The investigative process is very lengthy, expensive and burdensome for an unlicensed lender. Likewise, an individual or company cannot be placed in control of a casino's operations without first having obtained a license or other approval from the applicable gaming regulatory agency. That is why it is rare to see court-appointed receivers or bankruptcy trustees taking control of casino operations, except for those rare instances where there are significant operational matters facing the property (that is, the debtor walking away). It is much more common to allow the casino to be operated by the debtor-in-possession, while working toward either an auction sale or plan of reorganization.
— Sean McGuinness
A work permit is denied
Casino employees are required to be fingerprinted and to apply for work permits, which are issued by the applicable gaming regulatory agency. So long as the information submitted by the applicant does not raise any concerns, a temporary work permit can be issued so the individual can start work immediately. If the background check comes back OK, then the temporary status is removed and the work permit becomes permanent (until it is time for periodic renewal). Should the background check come back with concerns, the agency then denies the work permit.While serving as compliance director for the Mississippi Gaming Commission in the early 1990s, I was involved in several administrative work-permit denial hearings. The most unusual involved an individual who lied on his application by stating that he had never been arrested, when in fact, he had been arrested about 25 times or so and had some convictions. Unfortunately, the gaming agent who issued the denial was new to the job and thought that he merely had to state on the denial form the best reason for denial, as opposed to all reasons for denial.
As such, the only stated reason for denial was a felony drug conviction, which is a mandatory disqualifier in Mississippi. The applicant appealed the denial asserting that the conviction was actually a misdemeanor conviction, which turned out to be the case. Since the denial was not for lying on the application or for any of the other arrests and convictions, we were not able to affirmatively argue that the denial should stand for these other reasons once the automatic disqualifying event was tossed out.
Fortunately, once the administrative law judge determined, during the hearing, that the drug conviction was not a felony; the applicant began a stream of consciousness commentary about how law enforcement officials always seemed to have it out for him. He then recounted, by memory, each of his 25 arrests, in chronological order, and in great detail with explanations (that is, "those girls weren't working for me," "the drugs belonged to my roommate," "I didn't know it was stolen property," etc.), which brought these issues into the record and into the realm of the administrative law judge's consideration.
I then asked him why, since he had such a good recollection of his criminal history, he answered the question about arrests and convictions in the negative. He responded that he didn't think anyone would check and admitted lying on his application. The administrative law judge denied his work permit appeal and found in favor of the Mississippi Gaming Commission. From that point forward, Mississippi's gaming agents began stating every reason for denial on the denial forms.
Old-time operators vs. public company operators
While in private practice in Mississippi, I had the opportunity to represent one of the original downtown Las Vegas casino operators regarding a Mississippi gaming project. The license hearing demonstrated the evolution of the gaming industry over the years and the differences between the older operators and today's public-company operators.A public-company applicant was on the agenda just before my client. During the public-company presentation, there was much focus on the consistent branding of the casino, its restaurants and amenities. It was stated that this was related to a specific theme so as to create an exciting atmosphere that would help make the casino successful. The public company received its approval.
Then, it was my client's turn. After making our affirmative presentation on my client's project, one of the gaming commissioners asked my client what his theme was. The response was "Gambling — and if you do that right, you don't need a theme." My client ended up operating the most profitable casino in his market.
McGuinness is a shareholder at Beckley Singleton, Chtd., in Las
Vegas. He is chair of the Gaming Law Committee of the ABA's Business Law
Section. His e-mail is smcguinness@beckleylaw.com.
