Individual vs. Entity Licensing: What Gaming Investors Need to Understand
Investing in a gaming company isn’t the same as investing in a regular company. Gaming regulators may look beyond the business itself and look at the people or entities that own or control it. A gaming attorney can help investors determine which licensing requirements may apply before money changes hands or an ownership structure is finalized.
Why Do Regulators Look Beyond the Gaming Company?
Gaming regulation focuses heavily on who owns or controls regulated businesses. A company may need a license or other approval to operate a casino or supply regulated gaming products. Regulators may also require certain owners or controlling parties to qualify separately.
Some jurisdictions use the term “principal” for people who have an ownership or control relationship with a gaming applicant or licensee. Depending on the applicable rules and type of gaming business, a principal can include an officer or director. It can also include an owner or another person who has the ability to control the business.
This means obtaining approval for the operating company may be only one part of the licensing process.
When Can an Investor Need Individual Licensing?
An investor may have to obtain an individual license or other approval if the investment creates the type of ownership or control relationship covered by applicable gaming laws or regulations.
The answer is not based only on the dollar amount invested. Voting rights and ownership percentages can affect the analysis. So can the investor’s ability to influence management or appoint people to a governing board.
Different rules can apply depending on the jurisdiction and business involved, as well as how the ownership is held. Direct ownership may be treated differently from an interest held through another company or investment fund.
For that reason, an investor should not assume that staying outside the daily operation of the business automatically avoids licensing.
How Is Entity Licensing Different?
The gaming business itself may need a license based on what it does. Gaming jurisdictions commonly have licensing structures for casino operators as well as manufacturers and suppliers. Other forms of regulated gaming have their own requirements.
Separate entities within the ownership structure may also need regulatory approval. Regulators may require applications from intermediary or holding companies as well as entities that must qualify as principals.
That creates an important distinction. One company may hold the operational license while another entity in the ownership chain has its own licensing or qualification obligation. An investor may also face an individual requirement.
A gaming attorney can review the proposed structure before an investment is completed and identify which participants may have to apply.
What Do Regulators Review During Licensing?
Licensing can involve a significant background investigation. In general, the applicants must demonstrate that they are eligible and suitable under the applicable regulatory standards.
Disclosures for an individual applicant may include personal history and previous licensing. Fingerprints may be required as well. Regulators can ask for more information in their review.
Entity applicants have their own disclosure requirements. Regulators can look at ownership and financial information to know who is behind the company.
Investors have to take note of these disclosures. Gaming regulators will expect applications to be comprehensive and accurate. A complicated ownership structure may not be a roadblock to approval, but it can raise questions that need to be answered.
Are Institutional Investors Treated Differently?
Sometimes. Some jurisdictions recognize that certain institutional investors may hold interests in gaming companies without exercising the type of control associated with an active owner.
Some regulators offer a notice or waiver process for certain qualifying institutional investments. In some situations, that process can be used instead of completing the full licensing or qualification process.
Private investment funds may also be subject to special rules. Whether there is an exemption or a different process is contingent upon voting rights and ownership structure. The ability to influence management can also influence the result.
Investors should not assume that a fund structure will automatically provide an exemption and should check that they satisfy the relevant conditions.
Why Should Licensing Be Reviewed Before a Transaction?
Gaming licenses can affect how a transaction is structured and when it closes. The proposed investment may create new licensing requirements for a person or entity. Notice or approval may also be required for a change of ownership.
Finding that out after an agreement has been signed can create delays. It may also require changes to the transaction documents or ownership structure.
Licensing review is therefore useful during the planning stage. Investors can identify which applications may be required and account for regulatory timing before the deal moves forward.
Hensel Grad advises investors and gaming businesses nationwide on licensing as well as regulatory approval of corporate transactions. If you are considering an investment in a gaming company, speak with a gaming attorney about the licensing consequences before completing the transaction. Call Hensel Grad at (215) 422-3745 or reach out online to discuss your plans.
