On May 30, 2011, Governor Sandoval signed Assembly Bill No 213 into law, which allows both individuals and entities to file applications for a “preliminary finding of suitability,” even if the party is not otherwise required to be licensed by the Nevada Gaming Commission (the “Commission”). As a result, a party without an existing involvement with Nevada’s gaming industry or an agreement that gives it a right to such involvement, is now provided the opportunity to apply for a preliminary finding of suitability, thereby providing the party with a means to address and resolve licensing risks prior to entering into a major transaction or assuming an employment position requiring licensing.

This is in contrast to prior law that reigned for three decades where any party seeking to file an application for a Nevada gaming license or a finding of suitability first had to be in a position in which licensing is mandatory under the Nevada Gaming Control Act.

Historically, the Nevada State Gaming Control Board (the “Board”) and the Commission have striven to ensure that all gaming applications considered by them would, if approved by the Commission, materialize into actual gaming deals and ventures. Regulators did not want to expend their limited time and resources reviewing, investigating and considering applications for deals not likely to proceed.

Thus, for an individual applicant to be found suitable by the Commission, he/she first had to be employed in a capacity that required licensure or a finding of suitability, such as a director or principal officer of a gaming licensee. Similarly, in order for an entity applicant to apply for and obtain a gaming license, it had to be party to an agreement that would place it in a position that required licensure by the Commission.

The effectiveness of this regulatory stance during the boom years when the gaming industry in Nevada was expanding rapidly and the Regulators were inundated with gaming applications cannot be questioned. The recent global economic recession and its damning consequences upon Nevada’s gaming industry, however, has spurred a focus upon making the market more accessible to both investors and qualified personnel in an attempt to attract greater investment back into the state and its gaming industry.

Accordingly, the enactment of A.B. 213 allows parties to be preliminarily found suitable by the Commission without having to take a position or consummate a transaction that would require licensing by the Commission. In short, this concept seeks to allow new parties to enter the Nevada gaming market more readily.

Assembly Bill 213

A.B. 213 begins by proclaiming that the Commission may, with the advice and assistance of the Board, adopt regulations governing the issuance of a preliminary finding of suitability to a party[1]. Furthermore, if such regulations are adopted, the Bill mandates that the regulations must:

  • Provide that a party must demonstrate to the satisfaction of the Commission that the party has the suitability to become involved as a licensee but has not otherwise entered into a position or transaction which would require licensing pursuant to this Chapter 463 of the NRS;
  • Provide that a preliminary finding of suitability expires not more than 2 years after issuance by the Commission but may be renewed for additional periods of not more than 2 years as the Commission deems appropriate;
  • Set forth standards for a party to be issued a preliminary finding of suitability that are as stringent as the standards for a party to be issued a nonrestricted license;
  • Establish the fees for a party to apply for, to be investigated for and to hold a preliminary finding of suitability;
  • Provide that no party may be issued a preliminary finding of suitability unless the party agrees that, for the duration of the period in which the party holds the preliminary finding of suitability, the party will not seek or in any way engage in a corporate acquisition opposed by management[2]; and
  • Define the term “preliminary finding of suitability[3]”.

Proposed Commission Regulation 4.100

In accordance with A.B. 213, the Board and Commission have recently begun to revise Nevada Gaming Commission Regulation 4, the regulation that addresses application procedures for gaming licenses[4], to adopt the implementing regulations required under the bill. As currently proposed, a “preliminary finding of suitability” is defined as “the commission grant of an application by a person who has not entered into a position or transaction which would require a licensing, finding of suitability, or registration by the commission pursuant to NRS Chapter 463 but wishes to submit to the jurisdiction of the board and commission for the purposes of obtaining a preliminary determination of whether or not the party is suitable to hold a nonrestricted license under NRS Chapter 463[5]”.

Along with defining a “preliminary finding of suitability,” the proposed regulation section would specify the requirements for preliminary findings of suitability, including but not limited to, persons who may apply and persons who may not apply, the form of the application, the fees and costs associated with the application, the standards of review concerning an application, the effect of the Commission denying or rejecting an application, the duration of the Commission’s grant of the application, the procedure for obtaining renewals thereof, and would allow the Commission to take disciplinary action for any cause it deems reasonable against a person who has obtained a preliminary finding of suitability.

In particular, the application for preliminary finding of suitability will be in the same form as if the party was applying for a nonrestricted gaming license, although the use of an abbreviated two-page application form has been proposed by the Board and was distributed at the public workshop on these proposed amendments to Regulation 4 that it held in Las Vegas on July 27, 2011[6]. For each application, the Board and Commission shall determine whether the applicant is suitable to hold a nonrestricted license even if the applicant intends to make an application for something other than a nonrestricted license after applying for a preliminary finding of suitability[7]. Moreover, it is the applicant’s responsibility to determine which other individuals and entities associated with the applicant are required to apply for preliminary findings of suitability[8]. Each application must be accompanied by a nonrefundable application fee in the amount of $500.00[9].

The draft regulation also states that any preliminary finding of suitability is a revocable privilege and no holder acquires any vested right therein or thereunder[10]. Acting upon a recommendation of the Board, the Commission shall have full authority to grant, deny, reject, limit, condition, restrict, revoke or suspend any preliminary finding of suitability required or permitted or take other disciplinary action[11]. However, the Commission’s determination is limited solely to the application for preliminary finding of suitability before it and shall not constitute an actual or implied approval of any future applications for a gaming license, finding of suitability, or registration[12]. Unless otherwise limited or conditioned by the Commission, a preliminary finding of suitability shall expire two years after the date of the Commission’s determination if not administratively extended by the Board Chairman for additional periods of two years each[13]. A person who desires an administrative extension of the person’s preliminary finding of suitability shall file such request at least 90 days prior to the expiration of the current preliminary finding of suitability[14].

Equally important, if the Commission denies an application for preliminary finding of suitability, such denial is a denial under the act. However, if the Commission rejects an application for a preliminary finding of suitability, such rejection shall not be considered a denial under the act[15]. Moreover, no person may be issued a preliminary finding of suitability unless the person agrees that for the duration of the period in which the person holds the preliminary finding of suitability, the person will not seek or in any way engage in a corporate acquisition opposed by management[16]. Finally, a preliminary finding of suitability may not be sold, assigned, transferred, or disposed of in any manner[17].

Ramifications of Assembly Bill 213 and Proposed Commission Regulation 4.100

As stated in our introduction, historically the Nevada gaming market has not been a market amenable to investors that seize upon deals when an opportunity arises. Instead, prior law created significant transaction risk that after a party spent the often-significant time, effort and expense to negotiate and execute an agreement regarding a transaction that would require licensure or a finding of suitability, such party may thereafter be unable to obtain such licensure or a finding of suitability. There were also the added potential costs and expenses of such a process, on top of the costs and expenses of the transaction itself, without any assurance that such licensing or finding of suitability would be available. A.B. 213 will therefore allow investors and others desiring to enter into the gaming industry to be able to do so without having to commit to a particular property or transaction.

A.B. 213 should also expand the competitiveness of companies not otherwise licensed who are desirous of entering the Nevada market to purchase existing properties, including the purchase of properties as part of a bankruptcy or other reorganization. Prior to A.B. 213, an entity that did not know whether it would be able to obtain a license or finding of suitability on a timely basis or at all was at a competitive disadvantage (both in terms of time to close and in terms of substantive risk of not being able to close) if it was competing for a gaming opportunity against an entity that was already licensed. Now, with the ability to gain such a preliminary finding of suitability, these risks can be minimized. The only restriction in A.B. 213 is the requirement that any entity seeking such a preliminary finding of suitability agrees not to attempt to acquire control of a publicly traded corporate affiliate by means of a tender offer opposed by the board of directors of the affiliated company (defined as a “corporate acquisition opposed by management”).

In addition, A.B. 213 should also be beneficial to lenders attempting to foreclose on security interests in gaming assets and operations. Dawn Cica, a Lewis and Roca partner involved in both the gaming and the creditor's rights practice group, recently testified before the Commission and the Board to explain how this proposed regulation can be used to assist lenders holding gaming related collateral. As with most industries, collateral consisting of an operating business in the gaming industry is much more valuable if its enterprise value can be preserved. As lenders are subject to the same licensing constraints as any other entrant into the industry if they seek to own and operate a gaming business, there was a significant barrier to lenders being able to realize upon their collateral. This often resulted in the unfortunate and unnecessary closure of otherwise profitable businesses. Now there will likely be a much larger number of gaming operators or managers that can step in as a receiver to assist lenders with such operations until the gaming assets or businesses can be sold.

Finally, A.B. 213 presents an intriguing opportunity to current (or would-be) Internet gaming operators. Specifically, such operators can request a finding of suitability and upon being found suitable, are well positioned to act should the U.S. Congress legalize Internet gaming and utilize the regulatory services of Nevada.

Conclusion

In conclusion, the enactment of A.B. 213 and its implementing regulation not only demonstrates Nevada’s commitment to encouraging investment in its traditional gaming industry while not diminishing the stringent requirements for suitability, but also will position Nevada and its Regulators at the forefront of the interactive gaming industry in the U.S., should Congress legalize Internet gaming.