Legal Gambling: Going Private

#129 © Copyright 2007, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose,

The latest fads in casino financing are M&As (mergers and acquisitions) and going private.
These trends follow, at least in part, the normal evolution of all businesses in modern America, whenever there is a radical new development. The invention of the automobile and the legalization of casino gaming created the same business arc.
The first to get involved are individual entrepreneurs. Financing comes out of their own pockets, with help from family, friends and other “angels.” With such limited financing, the first businesses are small “mom-and-pop” shops, run by the entrepreneurs themselves. It is not surprising that some of the first legal casinos in Nevada had names like Harrahs and Harveys.
The more successful mom-and-pop shops grow into businesses, small by corporate standards, but large enough to require outside managers. The more courageous financiers become interested. Venture capital and unconventional financing is required to create and grow even the largest of these small businesses, because conservative financial institutions are too adverse to risk.
As recently as 15 years ago, what would become one of the most successful casinos in the world, Foxwoods, had to go to Indonesia for financing.
The next stage is conventional corporate growth. Going public, issuing bonds and obtaining financing from banks can lead to giant companies. National names go international.
The final stage is consolidation. Where once there were 100 operators, there may eventually be only two or three, if state and federal antitrust laws allow.
The takeover of existing gaming companies by other gaming companies normally does not raise any unusual issues for the parties, investors or regulators. The federal government is only concerned with federal securities laws, requiring truthful statements, and antitrust laws.
The standards of what constitutes an unlawful concentration of power in an industry changes with each administration in Washington, DC. The definition of the relevant market also changes over time, for example, should government only look at competition among casinos within Atlantic City or include the new casinos in Pennsylvania? But, even near-monopolies can often be tolerated, if additional competitors can enter the market at any time.
The states are the primary regulators of gaming and are interested in antitrust issues, but much more. Given the gaming industry’s past infiltration by organized crime, statutes and regulations are designed to be prophylactic. Jurisdictions differ on the extent of their investigations. But all agree that they want to know where the money is coming from and they want to look at the backgrounds of anyone who will own or have significant influence over the gaming operation.
Prior to the 1960s, everyone who had any ownership interest in a casino in Nevada, then the only casino state, had to be licensed. Howard Hughes changed that. Once he started buying up casinos, publicly traded companies started looking at gaming as a legitimate investment. In 1960, no hotel chains owned casinos. Today, hotel companies make a majority of their revenue from gaming.
Since the owner of a single share of stock is technically an owner, the Nevada Legislature had to change the law. Extensive backgrounds checks were limited to individuals who owned a significant percent of the company or exercised control. Everyone owning at least 5% had to be reported to the state’s regulators. Owners of more than 10% had to apply for findings of suitability.
The states and other jurisdictions that legalized casinos in the last 30 years adopted this part of Nevada’s system. There is a strong presumption that anyone owning 10% of a casino should be licensed, with very few exceptions. Of course, a person who owns less, but controls the operation, will also have to go through licensing.
Today, gaming operations are owned by all manner of financial structures, including limited partnerships, holding companies, or even trusts. Financial relationships include leases, management contracts and various forms of debt. But the general rules hold: state and other regulators want to examine the backgrounds of individuals who will get significant portions of the gaming revenues or who can exercise control.
There are no ways around this inspection. If a casino is owned by a limited partnership, with a corporation as the general partner, then regulators want to look at 10% owners of that corporation.
There is nothing comparable to buying a licensed gaming company. Regulators have virtually unlimited power, limited only by state statutes and their own regulations. The Nevada Supreme Court has declared that even the U.S. Constitution does not apply.
And regulators use that power, demanding almost unbelievable information. The questions range from the merely burdensome – list every address where you have ever lived – to the intrusive – list all your income, including gifts. Then do the same for your spouse. And children.
Investigations like this take time. Even approvals can take over a year. And when things go wrong…
In January 2007, I testified as an expert witness for the Arizona Department of Gaming in a hearing to deny state certification to Jerry Simms, who had first applied in July 2000.
I was also an expert witness for the Illinois Gaming Board, in its successful attempt to deny a license renewal to the owners of the Emerald Casino. The order was issued in December 2005. Briefs on the appeal are due this year. The court record is 24,000 pages long.
And private equity funds should be aware that once the investigations start, they may be unstoppable. When Simms realized that he would not be approved by the Department of Gaming, he tried to withdraw his application. The Arizona Court of Appeals ruled that the Department could deny the request to withdraw.
Being found unsuitable not only can ruin your day, it can prevent you from being involved in legal gaming in other jurisdictions around the world.
© Copyright 2007. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website,