bhfs.comBrownstein Hyatt Farber Schreck, LLP Online Gaming in Nevada – What You Should Know Jennifer L. Carleton Andrew D. Moore Association of Corporate Counsel Luncheon February 28, 2012

bhfs.comBrownstein Hyatt Farber Schreck, LLP 2 Interactive Gaming Legislation in Nevada  Nevada Assembly Bill (“AB”) 466 was enacted in Allowed the Nevada Gaming Commission (“Commission”) to adopt interactive gaming regulations upon the advice and assistance of the Nevada Gaming Control Board (“Board”) after a determination by the Commission as to whether interactive gaming is legal.  “Interactive gaming” is defined in NRS 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 Board pursuant to regulations adopted by the Commission to accept wagers originating within this state for races or sporting events.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 3 Interactive Gaming Legislation (continued)  In late 2010 and early 2011, internet gaming issues dominated national and state gaming law discussions. Harry Reid led federal efforts in December 2010 to pass internet poker bill during lame duck session in Congress. Casino companies in Nevada announced partnerships with online gaming companies (e.g. Caesars with 888, Wynn with Poker Stars and Station Casinos with Full Tilt Poker)  In this environment, the Nevada legislature took action. The initial draft of AB 258 (published in March 2011) 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.”  April 15, 2011, U.S. Attorney for the Southern District of New York issued a press release detailing the release of an indictment charging eleven defendants, including the founders of PokerStars, Full Tilt Poker and Absolute Poker with bank fraud, money laundering and illegal gambling offenses. The U.S. Attorney also filed a civil money laundering and in rem forfeiture action against the defendants and their assets.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 4 Nevada Interactive Gaming Regulation  AB 258 amended substantially in April, 2011: “[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.”  AB 258 amended NRS to require the Commission to adopt regulations re the licensing of interactive gaming and amended NRS to specifically included internet poker in definition of interactive gaming.  On August 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, Board Chairman 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.”

bhfs.comBrownstein Hyatt Farber Schreck, LLP 5 Department of Justice Opinion – December 2011  One of the main obstacles to passing effective state legislation to regulate internet gaming is existing federal law. Since the Wire Act was enacted in 1961, it has been viewed generally as the federal statute prohibiting online gambling. Other laws (e.g. the Illegal Gambling Business Act (1968) and UIGEA (2006) were more reliant on state law.  There has been debate among courts in various jurisdictions and legal experts about whether the Wire Act applied to gambling-related interstate communications that do not involve a “sporting event or contest.”  On December 23, 2011, the DOJ’s Office of Legal Counsel issued a memorandum opinion addressing the legality of proposals by both the Illinois and New York state-run lottery agencies. Noting that the DOJ’s Criminal Division “has uniformly taken the position that the Wire Act is not limited to sports wagering and can be applied to other forms of interstate gambling,” the Office of Legal Counsel ultimately found that the Wire Act is limited to only sports betting.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 6 Intrastate Interactive Wagering  If a bet or wager is placed over the Internet from a state where such a wager is legal, and received in the same state, such activity is no longer deemed a violation of the Wire Act regardless of the electronic pathway traversed by the wagering information.  In order to enable intrastate interactive wagering, a state must authorize the placing and receiving of such wagers and can establish regulatory restrictions and require internal controls necessary to ensure that participants are located in the state at the time the wager is placed and accepted.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 7 Nevada Intrastate Regulation  Nevada’s interactive gaming regulations adopted in December 2011 authorize the licensure of operators, service providers and manufacturers of “interactive gaming systems,” which are currently limited to Internet poker. The Commission’s regulations also address the registration of players, player accounts, problem gambling, player disputes, suspicious and criminal wagering activity, and the minimum standards and controls necessary to offer Internet poker.  The core components of an interactive gaming system (including servers and databases running the games on the interactive gaming system and storing game and interactive gaming account information) must be located in the State of Nevada except as otherwise permitted by the Chairman of the Board. (Commission Regulation (10)).

bhfs.comBrownstein Hyatt Farber Schreck, LLP 8 Interstate (State to State) Interactive Wagering  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.  States will still need to grapple with complicated issues relating to the regulation and licensing of, and the taxation of the revenues generated from, interstate Internet wagering.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 9 Nevada Interstate Regulation  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.” (NRS (7))  “To the extent that players of Internet poker are located in jurisdictions other than [Nevada], the licensee shall pay the license fee based on gross revenue at the rate of 4 percent on the gross revenue resulting from the play of players located in such other jurisdictions.” (NRS (4))

bhfs.comBrownstein Hyatt Farber Schreck, LLP 10 Interstate Wagering – Nevada and...?  Nevada is currently the only state that has adopted final regulations and developed a licensing procedure for interactive wagering, and that authorization is limited to poker.  Washington D.C. enacted legislation that was subsequently repealed; California, New Jersey, and Massachusetts are all exploring the possibility of authorizing online gaming.  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 DOJ that federal law permits the operation of that specific type of interactive gaming (Commission Regulation 5A.240(1)).

bhfs.comBrownstein Hyatt Farber Schreck, LLP 11 Interstate Wide Area Progressives  A “wide area progressive” gaming device is a gaming device that has an increasing jackpot based on a function of credits that are wagered. This includes games that award progressive jackpots or a pool based on criteria other than obtaining winning symbols on a machine.  The placing, transmitting or receiving of a bet or wager on a system of interconnected wide area progressive gaming devices located in multiple jurisdictions in which such devices are authorized is no longer deemed to be a violation of the Wire Act.  States permitting interstate wagering, including progressive wagering, will need to negotiate the applicable standards for regulation, licensing and taxation.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 12 Nevada Interactive Gaming Regulations  Creation of Regulation 5A (Operation of Interactive Gaming) Provides a comprehensive framework to regulate the operation of internet gambling in Nevada.  Amendment of Regulation 5 (Operation of Gaming Establishments) - Adds provisions pertaining to service providers.  Amendments to Regulation 3, Regulation 4, Regulation 8, and Regulation 14 - Includes provisions related to interactive gaming and service providers.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 13 Service Providers  The amendments to Regulation 5 define the term “service provider” to include a person who acts on behalf of another licensed person who conducts nonrestricted 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 licensed person, and is authorized to share in the revenue from games without being licensed to conduct gaming at an establishment.  A class 1 service provider includes any interactive service provider. Applications for a class 1 service provider license shall be made, processed, and determined in the same manner as applications for nonrestricted gaming licenses, using such forms as the chairman may require or approve.  An employee of a service provider who is connected directly with the operations of the service provider or who, on behalf of a licensee or on behalf of the service provider, performs the duties of a gaming employee is a gaming employee subject to the provisions of NRS and and Regulations through

bhfs.comBrownstein Hyatt Farber Schreck, LLP 14 Operation of Interactive Gaming – Regulation 5A  Poker is defined 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.”  Comprehensive house rules must be available for review at all times by authorized players through a conspicuously displayed link, including a clear and concise explanation of all fees, the results of play of the game, any wagering limits, and any time limits pertaining to play.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 15 Authorized Players - Regulation 5A (continued)  An operator of interactive gaming may register an individual as an authorized player only if the 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 operator, and (6) that the individual is not on Nevada’s list of excluded persons.  Before opening an account, an individual must report his or her social security number and that the operator establish that the individual had not previously self-excluded with the operator. The individual must be informed and acknowledge that, if the operator is unable to verify his or her information within 30 days of registration, any winnings attributable to the individual will be retained by the operator and the individual shall have no rights to such winnings.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 16 Interactive Gaming Accounts - Regulation 5A (continued)  To establish and maintain an interactive gaming account: (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 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 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 operator is awaiting actual receipt of such funds in the ordinary course of business.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 17 Operator Percentages and Poker Networks - Regulation 5A (continued)  Any compensation received by an operator for conducting any game in which the operator is not a party to a wager “shall be no more than 10% of all sums wagered in each hand.”  An 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.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 18 State Taxes and Fees - Regulation 5A (continued)  Gross revenue received from the operation of interactive gaming is subject to the same license fee provisions of NRS as the games and gaming devices of the licensee.  Gross revenue received from the operation of interactive gaming by an interactive gaming operator is attributed to the nonrestricted licensee and counted as part of the gross revenue of the nonrestricted licensee for the purpose of computing the license fee.  For each game in which the operator is not a party to the wager, gross revenue equals all money received by the operator as compensation for conducting the game.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 19 “Social” Gaming  Due to legal obstacles for viable multi-state online games and the growth of social media sites such as Facebook, multi-player social games have grown tremendously in the past few years.  Some examples:  Zynga Poker – Over 33 million monthly active users. Zynga recently added Zynga Bingo to create Zynga Casino.  IGT purchased Double Down Interactive for $500 million; Double Down has approximately 4.7 million users for its Facebook application.  Caesars announced acquisition of Playtika (developer of Slotomania in 2011) for approximately $80 million (over 6.1 million monthly users).

bhfs.comBrownstein Hyatt Farber Schreck, LLP 20 “Social” Gaming (continued)  All 50 states have statutes that prohibit lotteries, except those that are state-run. The general rule is that a lottery has three elements: (1) prize, (2) chance and (3) consideration.  Legal sweepstakes contain elements of prize and chance; consideration must be eliminated to make a promotion legal.  State rules vary on issues of what constitutes consideration, required disclosures, etc.  Most social games allow players to purchase and win only Facebook credits, the social network’s virtual currency that can’t be redeemed for cash.

bhfs.comBrownstein Hyatt Farber Schreck, LLP 21 Our Contact Information Jennifer L. Carleton Shareholder Brownstein Hyatt Farber Schreck, LLP 100 North City Parkway, Suite 1600 Las Vegas, NV tel fax Andrew D. Moore Associate Brownstein Hyatt Farber Schreck, LLP 100 North City Parkway, Suite 1600 Las Vegas, NV tel fax