On January 21, 2010 the Nevada Gaming Commission adopted amendments to Nevada Gaming Commission Regulation (Regulation) 16. Regulation 16 pertains to Publicly Traded Corporations and Public Offerings of Securities. The purpose of the amendments was to increase the percentage of voting securities an institutional investor may own in a publicly traded corporation holding a Nevada gaming license (PTC) without requiring the institutional investor and its principals to apply for a finding of suitability with the Nevada Gaming Commission (Commission).

Generally, Nevada Revised Statute (NRS) 463.643(4) requires entities and individuals owning more than 10 percent of the voting securities of a PTC to be found suitable by the Commission. For those not familiar with the gaming licensing process in Nevada, a finding of suitability requires applicants to submit detailed application material to the State Gaming Control Board (Board) and to undergo an in-depth investigation which may take up to one year to complete.

In the case of institutional investors, which the Regulations define as banks, insurance companies, investment companies, investment advisors, employee benefit plans or pension funds, and other similar entities, the finding of suitability process would be two-pronged as both the company itself and the company’s principals would need to be investigated and found suitable. (See Reg. 16.010(14).) For a company seeking a finding of suitability, the Board requires that all pertinent documentation related to the entity, which may include formation documents, employment contracts, stock, bonus or profit sharing plans, and financial statements, be submitted to the Board. Additionally, certain individuals affiliated with the entity, such as officers, directors, members, or stockholders, may be required to be found suitable. Suitability determinations for individuals are incredibly onerous and examine all aspects of an applicant’s personal life and finances. The personal history disclosure form alone totals 66 pages. Suitability investigations are not only burdensome in their scope, but they can cost applicants upwards of $100,000 depending on the applicant’s background.

Given the nature of the gaming licensing process in Nevada, the Commission has established a waiver process under which certain institutional investors can hold in excess of 10 percent of any class of voting securities in a PTC without triggering the finding of suitability requirement. Under Regulation 16.430, these institutional investors may apply for a waiver of the finding of suitability requirement of NRS 463.643(4) so long as the institutional investor’s beneficial ownership of a PTC’s securities do not exceed certain threshold percentages.

The recent amendments to Regulation 16 increase the threshold ownership percentages for institutional investors applying for a waiver of the finding of suitability requirement. Now, an institutional investor may own up to and including 25 percent of the voting securities issued by a PTC. Previously, the ownership threshold was 15 percent. The amendments also allow an institutional investor to own between 25 percent and 29 percent of a PTC licensee “if such additional ownership results from a stock repurchase program” and if the “institutional investor does not purchase or otherwise acquire any additional voting securities of the publicly traded corporation that would result in an increase in the institutional investor’s ownership percentage.”

The former version of Regulation 16.430 allowed an increase in stock ownership attributable to a stock repurchase program from 15 percent to 19 percent and required the institutional investor to reduce its ownership percentage in the PTC to 15 percent or less within one year from the date the institutional investor received notice that it had exceeded the 15 percent ownership threshold. This mandatory reduction requirement was eliminated as part of the recently adopted amendments to Regulation 16.

The institutional investor waiver process interplays with other requirements in Regulation 16. For instance, Regulation 16.200 requires prior approval from the Commission before a publicly traded corporation may acquire control of a PTC or an affiliated company and before a person may acquire control of a publicly traded corporation which is an affiliated company. Under the Nevada Gaming Control Act (Chapter 463 of the NRS), an affiliated company is “a subsidiary company, holding company, intermediate company or any other form of business organization that . . . controls, is controlled by or is under common control with a licensee which is a corporation or limited-liability company . . . and [which] is involved in gaming activities in this state or involved in the ownership of property in this state upon which gaming is conducted.” (NRS 463.4825.)

The recently enacted amendments to Regulation 16 expand the applicability of the prior approval requirements of Regulation 16.200. Now, in addition to an institutional investor being required to apply for an exemption to the prior approval requirements of Regulation 16.200 when the proposed acquisition of securities “would give the institutional investor, directly or indirectly, the power to direct or cause the direction of the management and policies of the publicly traded corporation,” an institutional investor must also apply for the exemption when it “intends to increase its beneficial ownership to more than 20 percent but not more than 25 percent of the voting securities of the” PTC. (Reg. 16.430(7)(a)-(b).) This requirement of seeking an exemption to Regulation 16.200 even applies if the institutional investor seeking the waiver of the finding of suitability requirements under NRS 463.643(4) does not intend to increase its ownership beyond 20 percent of the voting securities at the time of applying for the waiver but only subsequently intends to increase its ownership to more than 20 percent but not more than 25 percent. (See Reg. 16.430(7)(b).)

Lastly, the amendments to Regulation 16 allow an institutional investor that does not apply for a waiver of the finding of suitability requirement in NRS 463.643(4) to hold more than 10 percent of the voting securities of a PTC in one limited instance. The institutional investor “may beneficially own more than 10 percent, but not more than 11 percent, of the voting securities of such publicly traded corporation, only if such additional ownership results from a stock repurchase program conducted by the publicly traded corporation . . . .” (Reg. 16.430(10).) In this instance, the institutional investor is not required to apply to the Commission for a finding of suitability but would only be subject to reporting requirements if requested by the Chairman of the Board.

The amendments to Regulation 16 became effective on January 21, 2010.

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